10-Q 1 zoltek_10q-033112.htm FORM 10-Q zoltek_10q-033112.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC   20549

FORM 10-Q
(Mark one)
[X] 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the three months ended March 31, 2012
OR

[  ] 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ 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.
Yes  x    No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes __ No __

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 Filer ____ Accelerated Filer     X    Non-accelerated Filer ____ Smaller Reporting Company ____

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __ No   x                         

Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date:  As of May 3, 2012, 34,355,192 shares of Common Stock, $.01 par value, were outstanding.

 
 

 

ZOLTEK COMPANIES, INC.
 INDEX
 
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited) 1
     
  Condensed Consolidated Balance Sheets – March 31, 2012 and September 30, 2011 1
     
 
Condensed Consolidated Statements of Operations – Three Months and Six Months Ended March 31, 2012 and 2011
2
     
 
Condensed Consolidated Statement of Changes in Shareholders’ Equity – Six Months Ended March 31, 2012
3
     
  Condensed Consolidated Statements of Cash Flows –Six Months Ended March 31, 2012 and 2011 4
     
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
     
Item 4. Controls and Procedures 22
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 23
     
Item 5. Other Information 23
     
Item 6. Exhibits 23
     
SIGNATURES 24
   
EXHIBIT INDEX 25
 
 
i

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
 
ZOLTEK COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except share data)
 
   
(Unaudited)
       
   
March 31,
   
September 30,
 
   
2012
   
2011
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 9,854     $ 16,980  
Accounts receivable, less allowance for doubtful accounts of $65 and $110
    35,944       30,350  
Inventories, net
    60,371       47,882  
VAT Receivable
    5,955       5,970  
Other current assets
    6,288       5,968  
Total current assets
    118,412       107,150  
Property and equipment, net
    215,445       215,083  
Other assets
    187       63  
Total assets
  $ 334,044     $ 322,296  
                 
Liabilities and shareholders' equity
               
Current liabilities:
               
Borrowings under credit lines
  $ -     $ 8,394  
Current maturities of long-term debt
    611     $ -  
Trade accounts payable
    12,819       13,643  
Accrued expenses and other liabilities
    9,176       7,925  
Construction payables
    1,671       1,027  
Total current liabilities
    24,277       30,989  
Long-term debt
    9,389       -  
Hungarian grant - allowance against future depreciation
    7,145       7,765  
Deferred tax liabilties
    1,753       1,855  
Liabilities carried at fair value
    -       140  
Total liabilities
    42,564       40,749  
Commitments and contingencies (See Note 7)
               
Shareholders' equity:
               
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued and outstanding
    -       -  
Common stock, $.01 par value, 50,000,000 shares authorized, 34,355,192 and 34,368,192 shares issued and outstanding at March 31, 2012 and September 30, 2011
    344       344  
Additional paid-in capital
    481,503       480,893  
Accumulated other comprehensive loss
    (45,267 )     (41,549 )
Accumulated deficit
    (145,100 )     (158,141 )
Total shareholders' equity
    291,480       281,547  
Total liabilities and shareholders' equity
  $ 334,044     $ 322,296  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
1

 
 
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except share and per share data)
(Unaudited)
 
   
Three months ended March 31,
   
Six months ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net sales
  $ 47,014     $ 37,099     $ 94,060     $ 69,961  
Cost of sales
    36,046       34,652       69,914       63,444  
Gross profit
    10,968       2,447       24,146       6,517  
Application and development costs
    1,931       2,162       3,623       4,132  
Selling, general and administrative expenses
    3,326       3,577       6,603       6,875  
Operating income (loss)
    5,711       (3,292 )     13,920       (4,490 )
Other (expense) income:
                               
Interest expense, net
    (16 )     (3 )     (50 )     (42 )
(Loss) gain on foreign currency transactions
    (1,859 )     (1,497 )     311       (1,071 )
Other expense, net
    (42 )     (54 )     (230 )     (265 )
Loss on liabilities carried at fair value
    (160 )     (277 )     (170 )     (533 )
Income (loss) from operations before income taxes
    3,634       (5,123 )     13,781       (6,401 )
Income tax expense (benefit)
    296       (16 )     740       268  
                                 
Net income (loss)
  $ 3,338     $ (5,107 )   $ 13,041     $ (6,669 )
                                 
Basic income (loss) per share
  $ 0.10     $ (0.15 )   $ 0.38     $ (0.19 )
Diluted income (loss) per share
  $ 0.10     $ (0.15 )   $ 0.38     $ (0.19 )
                                 
Weighted average common shares outstanding – basic
    34,361,542       34,382,414       34,354,818       34,385,967  
Weighted average common shares outstanding – diluted
    34,410,015       34,382,414       34,392,305       34,385,967  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
2

 
 
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
   
Three months ended March 31,
   
Six months ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Net income (loss)
  $ 3,338     $ (5,107 )   $ 13,041     $ (6,669 )
Foreign currency translation adjustment
    12,308       14,604       (3,718 )     10,021  
                                 
Comprehensive income
  $ 15,646     $ 9,497     $ 9,323     $ 3,352  
 
 
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)

   
Total Shareholders’ Equity
   
Common Stock
   
Additional Paid-In Capital
   
Accumulated Other Comprehensive Loss
   
Accumulated Deficit
 
Balance, September 30, 2011
  $ 281,547     $ 344     $ 480,893     $ (41,549 )   $ (158,141 )
                                         
Net income
    13,041                               13,041  
Foreign currency translation adjustment
    (3,718 )                     (3,718 )        
Stock option expense
    618               618                  
Exercise of Stock Options
    4               4                  
Difference between compensation and change in liability for restricted stock awards
    (12 )             (12 )                
                                         
Balance, March 31, 2012
  $ 291,480     $ 344     $ 481,503     $ (45,267 )   $ (145,100 )

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
3

 
 
ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
   
Six months ended March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income (loss)
  $ 13,041     $ (6,669 )
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation
    8,851       8,495  
Deferred taxes
    -       (235 )
Loss on liabilities carried at fair value
    170       533  
Foreign currency transaction loss
    157       1,923  
Stock compensation expense
    738       697  
Loss on disposal of assets
    15       239  
Changes in assets and liabilities:
               
Increase in accounts receivable
    (5,960 )     (1,779 )
(Increase) decrease in inventories
    (13,123 )     891  
Increase in other current assets and other assets
    (622 )     (880 )
Increase (decrease) in trade accounts payable
    (605 )     302  
Increase in accrued expenses and other liabilities
    552       833  
Net cash provided by operations
    3,214       4,350  
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (12,227 )     (2,886 )
Increase (decrease) in construction payables
    653       (509 )
Proceeds from sale of fixed assets
    -       24  
Proceeds received from Hungarian grant
    -       22  
Net cash used in investing activities
    (11,574 )     (3,349 )
                 
Cash flows from financing activities:
               
Payment of financing fees
    (126 )     -  
Proceeds from exercise of stock options
    4       -  
Repayment of credit lines
    (8,394 )     (981 )
Borrowings of notes payable
    10,000       -  
Cash settlement of restricted shares
    (114 )     (143 )
Cash settlement of stock options
    -       (34 )
Net cash used in financing activities
    1,370       (1,158 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (136 )     (720 )
Net (decrease)  increase in cash and cash equivalents
    (7,126 )     (877 )
Cash and cash equivalents at beginning of period
    16,980       21,534  
Cash and cash equivalents at end of period
  $ 9,854     $ 20,657  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
4

 
 
ZOLTEK COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. 
ORGANIZATION AND BASIS OF PRESENTATION
 
Zoltek Companies, Inc. is a holding company, which operates through wholly-owned subsidiaries, Zoltek Corporation, Zoltek Zrt., Zoltek de Mexico SA de CV, Zoltek de Occidente SA de CV, Engineering Technology Corporation (“Entec Composite Machines”), Zoltek Properties, Inc., and Zoltek Automotive, LLC. Zoltek Corporation (“Zoltek”) develops, manufactures and markets carbon fibers and related products, including carbon fibers preimpregnated with resin known as “prepreg,” 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. Technical fibers are an intermediate product used in heat- resistant applications such as aircraft brakes. Zoltek Zrt. is a Hungarian subsidiary that manufactures and markets carbon fibers and technical fibers and manufactures acrylic fiber precursor raw material used in production of carbon fibers and technical fibers. Zoltek de Mexico SA de CV and Zoltek de Occidente SA de CV are Mexican subsidiaries that manufacture carbon fiber and precursor raw material. Entec Composite Machines manufactures and markets 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; however, the Company has an increasing presence in Asia. Unless the context otherwise indicates, references to the “Company” are to Zoltek Companies, Inc. and its subsidiaries.
 
Certain prior year amounts have been reclassified to conform to the current year presentation.

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 regulations 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, 2011, 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. All significant inter-company transactions and balances have been eliminated in consolidation. Adjustments resulting from the currency translation of financial statements of the Company’s foreign subsidiaries are reflected in the condensed consolidated balance sheets as “Accumulated other comprehensive loss” within shareholders’ equity. Gains and losses from foreign currency transactions are included in the condensed consolidated statements of operations as “Other income (expense).”

Adoption of New Accounting Standards

See Note 11 of the Notes to Condensed Consolidated Financial Statements.

 
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2. 
INVENTORIES
 
Inventories, net of reserves, consist of the following (in thousands):
 
   
March 31,
   
September 30,
 
   
2012
   
2011
 
Raw materials
  $ 11,570     $ 7,447  
Work-in-process
    13,321       11,025  
Finished goods
    31,548       26,626  
Consigned inventory
    3,522       2,488  
Supplies and other
    410       296  
    $ 60,371     $ 47,882  
 
Inventories are valued at the lower of cost or market and are removed from inventory under the first-in-first-out method (“FIFO”). Cost of inventory includes material, labor and overhead. The Company recorded inventory valuation reserves of $0.7 million as of March 31, 2012 and September 30, 2011, to reduce the carrying value of inventories to a net realizable value. Consigned inventory represents contractually required finished goods inventory levels for certain key customers. If future demand or market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required and would be reflected in cost of sales on the Company’s statement of operations in the period in which the determination is made.

3.
SEGMENT INFORMATION
 
The Company’s strategic business units are based on product lines and are comprised of three reportable segments: carbon fibers, technical fibers and corporate/other products. The carbon fibers segment manufactures commercial carbon fibers used as reinforcement material in composites and related products, including prepregs. The technical fibers segment manufactures oxidized acrylic fibers and specialty carbon fibers used to manufacture aircraft brake pads and for other 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. The carbon fibers and technical fibers segments’ production facilities are located geographically in the United States, Hungary and Mexico. The remaining business represented in the corporate/other products segment relates to water treatment and electrical services provided by the Hungarian operations and costs associated with the corporate headquarters.
 
 
6

 
 
Management evaluates the performance of its segments on the basis of operating income (loss) contribution. The following tables present financial information on the Company’s segments as of March 31, 2012 and September 30, 2011, and for the three and six months ended March 31, 2012 and 2011 (in thousands):
 
   
Three months ended March 31, 2012
 
   
Carbon Fibers
 
Technical Fibers
 
Corporate/ Other
 
Total
 
Net sales
  $ 37,944     $ 8,480     $ 590     $ 47,014  
Cost of sales
    30,084       5,376       586       36,046  
Gross profit
    7,860       3,104       4       10,968  
Operating income (loss)
    6,145       2,777       (3,211 )     5,711  
Depreciation
    3,959       339       129       4,427  
Capital expenditures
    4,903       44       251       5,198  
                                 
                                 
   
Three months ended March 31, 2011
 
   
Carbon Fibers
 
Technical Fibers
 
Corporate/ Other
 
Total
 
Net sales
  $ 30,122     $ 6,493     $ 484     $ 37,099  
Cost of sales
    28,439       5,956       257       34,652  
Gross profit
    1,683       537       227       2,447  
Operating income (loss)
    (503 )     383       (3,172 )     (3,292 )
Depreciation
    3,622       345       337       4,304  
Capital expenditures
    1,242       300       190       1,732  
                                 
                                 
   
Six months ended March 31, 2012
 
   
Carbon Fibers
 
Technical Fibers
 
Corporate/ Other
 
Total
 
Net sales
  $ 75,623     $ 17,314     $ 1,123     $ 94,060  
Cost of sales
    57,745       11,105       1,064       69,914  
Gross profit
    17,878       6,209       59       24,146  
Operating income (loss)
    14,463       5,526       (6,069 )     13,920  
Depreciation
    7,945       661       245       8,851  
Capital expenditures
    11,513       251       463       12,227  
                                 
                                 
   
Six months ended March 31, 2011
 
   
Carbon Fibers
 
Technical Fibers
 
Corporate/ Other
 
Total
 
Net sales
  $ 55,189     $ 13,794     $ 978     $ 69,961  
Cost of sales
    51,007       11,942       495       63,444  
Gross profit
    4,182       1,852       483       6,517  
Operating income (loss)
    20       1,533       (6,043 )     (4,490 )
Depreciation
    7,130       692       673       8,495  
Capital expenditures
    1,989       449       448       2,886  
                                 
                                 
   
Total Assets
 
   
Carbon Fibers
 
Technical Fibers
 
Corporate/ Other
 
Total
 
March 31, 2012
  $ 291,344     $ 29,537     $ 13,163     $ 334,044  
September 30, 2011
  $ 272,397     $ 28,789     $ 21,110     $ 322,296  
 
 
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4. 
EARNINGS PER SHARE

In accordance with Accounting Standards Codification (“ASC”) 260, the Company has evaluated its diluted income (loss) per share calculation. The Company had outstanding warrants and stock options at March 31, 2012 and 2011 which were not included in the determination of diluted income (loss) per share because they were anti-dilutive.
 
Net income (loss) per share for the three and six months ended March 31, 2012 and 2011, respectively was as follows (in thousands, except per share amounts):

   
Three months ended March 31,
   
Six months ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Numerators:
                       
Net income (loss)
  $ 3,338     $ (5,107 )   $ 13,041     $ (6,669 )
                                 
Denominators:
                               
Average shares outstanding – basic
    34,362       34,382       34,355       34,386  
Impact of stock options
    48       -       37       -  
Average shares outstanding – diluted
    34,410       34,382       34,392       34,386  
                                 
Basic income (loss) per share
  $ 0.10     $ (0.15 )   $ 0.38     $ (0.19 )
Diluted income (loss) per share
  $ 0.10     $ (0.15 )   $ 0.38     $ (0.19 )
 
5. 
FINANCING TRANSACTIONS

HUNGARIAN GRANT
 
The Hungarian government has pledged a grant of 2.9 billion HUF to Zoltek’s Hungarian subsidiary, which translated at the March 31, 2012 exchange rate, is approximately $13.1 million. The grant has provided a portion of the capital resources to modernize the subsidiary’s facility, establish a research and development center, and support buildup of manufacturing capacity of carbon fibers. As of March 31, 2012, Zoltek’s Hungarian subsidiary has received approximately 2.6 billion HUF in grant funding. These funds have been recorded as a liability on the Company’s consolidated balance sheets. The liability is being amortized over the life of the assets procured by the grant funds, offsetting the depreciation expense from the assets 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 repay all or a portion of the grant if, among other things, the Hungarian subsidiary:  fails to obtain revenue targets; fails to employ an average annual staff of at least 1,200 employees; fails to utilize regional suppliers for at least 45% of its purchases; fails to obtain consent from the Hungarian government prior to selling assets created with grant funds; fails to use grant funds in accordance with the grant agreement; fails to provide appropriate security for the grant; makes or made an untrue statement or supplies or supplied false data in the grant agreement, grant application or during the time of the grant; defaults on its obligations by more than 30 days; withdraws any consents it gave in the grant agreement; or causes a partial or complete failure or hindrance of the project that is the subject of the grant. These targets must be achieved during a five-year measurement period from October 2012 to October 2017. Although there can be no assurance, the Company anticipates it will comply with the requirements of the grant agreement when the measurement period begins.

FINANCING ACTIVITY
 
Term Loan
 
On March 30, 2012, Zoltek Companies, Inc. entered into a $10 million term loan with Enterprise Bank & Trust (the “Enterprise Loan”) secured by the real property associated with its facilities in the St. Louis, Missouri area,.  The Enterprise Loan is a seven-year, secured term loan maturing March 30, 2019. Principal of the Enterprise Loan is payable monthly with a balloon payment due at maturity. The Enterprise Loan bears interest at a one-month LIBOR rate, plus 3%. The Company entered into a swap agreement that fixes the interest rate on the Enterprise Loan at 4.75% per annum. The Loan Agreement contains customary representations and warranties, and contains a requirement that the Company, on a consolidated basis, maintain minimum fixed charge coverage and leverage ratios, along with other customary covenants.

 
8

 
 
The Company utilized the proceeds of the Enterprise Loan to repay all outstanding balances under the Company's U.S. revolving credit facility with BMO Harris Bank N.A., and for other general corporate purposes
 
Revolving Credit Facility
 
U.S. Operations – On April 27, 2012, Zoltek Companies, Inc. entered into a $15 million revolving credit agreement with JPMorgan Chase, N.A., with interest based on LIBOR plus 2.5%, adjusted monthly.  The revolving credit facility is subject to a borrowing base and financial covenants and expires on April 27, 2015.  The revolving credit facility will be utilized to fund working capital needs and general corporate purposes.  For additional information, see “Item 5, Other Information” in Part II of this Quarterly Report on Form 10-Q.
 
Hungarian Operations – The Company’s Hungarian subsidiary has a credit facility with a Hungarian bank, which expires May 30, 2012. The overdraft facility has a total commitment of the lesser of 1.9 billion HUF ($8.7 million as of March 31, 2012) or a borrowing base ($7.3 million as of March 31, 2012). There were no borrowings under this credit facility at March 31, 2012. There are no financial covenants associated with this facility
 
The Company intends to extend its existing Hungarian line of credit before expiration. Based on the history of relationships with its banks and its current financial position, the Company expects it will be able to successfully extend its lines of credit.

6.
STOCK 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 but unissued shares, as the Company has no treasury stock. The Company has the option, in its sole discretion, to settle awards under its 2008 incentive plans in cash, in lieu of issuing shares.

The Company has two Long-Term Incentive Plans under which equity-based awards may be granted. At March 31, 2012, there were an aggregate of 2.0 million shares authorized for issuance under these plans. Approximately 0.4 million and 0.1 million shares remained available for future issuance under the 2008 Employee Long-Term Incentive Plan and the 2008 Directors Long-Term Incentive Plan, respectively.

Stock option awards.  During the first quarter of fiscal 2012 the Company awarded performance-based based stock options with separate performance conditions in fiscal years 2012, 2013, and 2014, to named executive officers and other key employees. The Company will recognize compensation expense related to each separate service period during the respective period. The maximum number of performance-based options available to vest subject to certain operating performance targets is 1,158,750. The number of options available to vest are subject to the performance measures in a given fiscal year.   The Company determined that a grant date, for purposes of measuring compensation expense in accordance with US GAAP, has been established for all three performance years as a mutual understanding of key terms and conditions was demonstrated.  The Company also granted 105,000 stock options with a vesting period through December 2012 to certain key employees.
 
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 such options vest immediately at time of grant. During the second quarter of fiscal 2012, the Directors were issued options to purchase 37,500 shares of common stock at an exercise price of $14.58.

The following table summarizes information for options currently outstanding and exercisable at March 31, 2012:
 
   
Options Outstanding
   
Options Exercisable
 
Range of Exercise Prices
 
Number
 
Wtd. Avg.
Remaining Life
 
Wtd. Avg.
Exercise Price
   
Number
   
Wtd. Avg.
Exercise Price
 
 $ 2.07-5.72
    1,293,750  
 9 years
  $ 5.71       30,000     $ 5.47  
 8.40-8.60
    80,087  
 3 years
    8.53       80,087       8.53  
 11.94-24.12
    122,500  
 5 years
    15.73       111,250       15.22  
 31.07-36.73
    75,000  
 3 years
    33.33       75,000       33.33  
 $ 2.07-36.73
    1,571,337                 296,337          
 
 
9

 
 
Presented below is a summary of stock option plans activity for the six months ended March 31, 2012:
 
   
Shares
 
Outstanding at September 30, 2011
    414,587  
Granted
    1,301,250  
Exercised
    (2,000 )
Cancelled
    (142,500 )
Outstanding at March 31, 2012
    1,571,337  
Exercisable at March 31, 2012
    296,337  
 
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 2012
 
Fiscal 2011
 
Fiscal 2010
 
Fiscal 2009
 
Fiscal 2008
Expected life of option
 
3-5 years
 
5 years
 
3.8 years
 
3.8 & 4 years
 
4 & 7.5 years
Risk-free interest rate
    0.4%-0.8 %     2.4 %     0.4 %     0.5 %     1.8 %
Volatility of stock
    72%-79 %     73 %     77 %     79 %     66 %
Forfeiture rate
    0%-16 %     0 %     0 %     0%-25 %     0%-30 %
 
Volatility, expected term and dividend yield assumptions were based on the Company’s historical experience. The risk-free rate was based on a U.S. treasury note with a maturity similar to the option grant’s expected term. The number of options used to recognize expense for performance-based shares is based on the probable established performance target expected to be achieved as of the end of the period.

Restricted stock awards. Under the Company’s equity incentive plans, employees and directors may be granted restricted stock awards with participation rights which are valued based upon the fair market value on the date of the grant. The balance of restricted stock shares outstanding was 15,000 shares as of March 31, 2012.
 
During the first quarter of fiscal 2012, 15,000 restricted shares became subject to vesting.   The Company opted to settle the shares in cash of $0.1 million in lieu of issuing shares. In accordance with ASC 718, the Company determined its practice of settling vested restricted shares in cash resulted in a modification from equity to liability accounting in fiscal 2010 for the remaining unvested restricted shares. The fair value of the modified liability award is measured each reporting date through settlement and any adjustments to increase or decrease the liability are recorded either as compensation cost or a charge to equity.
 
The Company recorded into selling and general administrative expense for its corporate/other products segment 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 ASC 718, which was $0.7 million and $0.7 million for the three and six months ended March 31, 2012, and $0.5 million and $0.7 million for the three months and six months ended March 31, 2011. There were no recognized tax benefits during the six months ended March 31, 2012 or 2011, as any benefit is offset by the Company's full valuation allowance on its net deferred tax asset.

7. 
COMMITMENTS AND CONTINGENCIES

CONCENTRATION OF CREDIT RISK
 
Zoltek's carbon fiber products are primarily sold to customers in the wind energy and composite industries and its technical fibers are primarily sold to customers in the aerospace industry. Entec Composite Machines’ 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 March 31, 2012 and 2011, the Company reported aggregate sales of $21.9 million and $11.4 million, respectively, to Vestas Wind Systems, a leading wind turbine manufacturer. In the six months ended March 31, 2012 and 2011, the Company reported aggregate sales of $40.0 million and $17.1 million, respectively, to Vestas Wind Systems.  In the three and six months ended March 31, 2011, the Company reported aggregate sales of $5.0 million and $9.6 million, respectively, to Saertex GMBH & Co, a manufacturer of fabrics for the composite industry, including materials for production of wind turbines. In the three and six months ended March 31, 2011, the Company reported aggregate sales of $5.1 million and $9.1 million, respectively, to Cuming Corporation, a manufacturer of composite materials for the offshore oil and gas industries.  These were the only customers that represented greater than 10% of consolidated net sales in these periods.
 
 
10

 

ENVIRONMENTAL
 
The Company's operations generate various hazardous wastes, including gaseous, liquid and solid materials. The operations of the Company's carbon fibers and technical fibers business segments utilize thermal oxidation of various by-product streams designed to comply with applicable laws and regulations. The plants produce air emissions that are regulated and permitted by various environmental authorities. The plants are required to verify by performance tests that certain emission rates are not exceeded. The Company does not believe that compliance by its carbon fibers and technical fibers operations with applicable environmental regulations will have a material adverse effect upon the Company's future capital expenditure requirements, results of operations or competitive position. There can be no assurance, however, as to the effect of interpretation of current laws or future changes in federal, state or international environmental laws or regulations on the business segment's results of operations or financial condition.

SOURCES OF SUPPLY
 
As part of its growth strategy, the Company has developed and manufactures 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.
 
8. 
INCOME TAXES
 
The Company currently has net operating loss carryforwards available to offset future tax liabilities. The Company has recorded a full valuation allowance against its deferred tax assets in Hungary, the United States and Mexico because it is more likely than not that the value of the deferred tax assets will not be realized. In the consolidated balance sheets, the Company classifies its deferred tax assets and liabilities as either current or non-current, according to the expected reversal date of the temporary differences as of the reporting date.

As of March 31, 2012, we had uncertain tax positions which may change as a result of the outcomes of audits. The Company tracks uncertain tax positions under the guidance of ASC 740-10.  Income tax expense was $0.3 million and $0.7 million for the three and six months ended March 31, 2012 compared to a benefit  of $0.02 million and an expense of $0.3 million for the three and six months ended March 31, 2011. In fiscal 2012, an expense of $0.7 million was incurred related to the local Hungarian municipality tax and less than $0.1 million was recorded related to U.S. and Mexico minimum tax payments.  During the first quarter of fiscal 2011, the Company recognized a $0.3 million expense as we adjusted our Hungarian effective tax rate to reflect a change to tax law which makes effective a flat 10% corporate rate for fiscal years beginning after January 1, 2013. Income tax expense of $0.5 million was incurred related to the local Hungarian municipality tax and U.S. income taxes. A tax benefit of approximately $0.2 million was recorded related to an increase in Hungary’s deferred tax position.
 
9. 
FAIR VALUE MEASUREMENT OF INSTRUMENTS
 
Zoltek adopted ASC 820 on October 1, 2008.  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The fair value hierarchy for disclosure of fair vale measurements under ASC 820 is as follows:
 
Level 1 – Valuations based on quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
 
Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. 
 
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement

Interest Rate Swap

On March 30, 2012, the Company entered into an interest rate swap agreement that fixes the interest rate on its term loan in order to manager the risk associated with changes in interest rates.  This interest rate derivative instrument has been designated as a cash flow hedge of our expected interest payments. This instrument effectively converts variable interest payments on the term loan into fixed payments. In a cash flow hedge, the effective portion of the change in fair value of the hedging derivative is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings.    As of March 31, 2012, the interest rate swap had no value and no change in fair value was recorded to accumulated other comprehensive income (loss) or earnings during the period.
 
 
11

 

Warrants and Restricted Shares
 
The Company adopted ASC 815-40 on October 1, 2009.  In connection with the adoption, the Company determined that its outstanding warrants as of the adoption date, which include warrants issued in May 2006, July 2006, October 2006, and December 2006, are not indexed to the Company’s own stock.  Accordingly, these warrants should be treated as a fair value liability, which requires separate accounting pursuant to ASC 815-40.  The fair value of the warrants was reclassified from equity to a fair value liability on October 1, 2009.
 
The Company used a Black-Scholes pricing model to determine the fair value of the warrants.  Fair values under the Black-Scholes model are partially based on the expected remaining life of the warrants, which is an unobservable input.  Therefore, we have deemed the fair value liability associated with the outstanding warrants to have Level 3 inputs.  If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The fair value of the warrants is determined using the Black-Scholes option-pricing model with the following weighted average assumptions as of March 31, 2012:
 
Outstanding Warrant Issuances
 
       
   
December 2006
 
Warrants issued
 
827,789 shares
 
Expiration of warrants
 
December 2012
 
Per share exercise price of warrants
  $ 28.06  
Expected remaining life of warrants (in years)
    0.71  
Risk-free interest rate
    0.14%  
Stock volatility
    72.65%  
Dividend yield
    0.00%  
 
The fair value of the restricted shares is determined using the current market price for the shares and an estimated forfeiture rate, an unobservable input.  At each balance sheet date, the Company adjusts unobservable inputs.  Although the market price of the shares is based on quoted market prices in an active market, the forfeiture rate is considered to be a significant input and therefore we have deemed the liability associated with the restricted shares to be Level 3.

The fair value of warrants and restricted shares as of March 31, 2012 and September 30, 2011, was as follows (amounts in thousands, except per share amounts):

         
Fair Value Measurement
 
Description
 
Fair Value
Per Share
   
Shares Issuable Upon Exercise
   
Total
   
Level 1
   
Level 2
   
Level 3
 
                                     
Warrants --December 2006 Issuance
                               
                                     
As of March 31, 2012
  $ 0.32       827,789     $ 264     $ -     $ -     $ 264  
As of September 30, 2011
    0.11       827,789     $ 94     $ -     $ -     $ 94  
                                                 
Restricted Shares
                                               
                                                 
As of March 31, 2012
                  $ 111     $ -     $ -     $ 111  
As of September 30, 2011
                  $ 92     $ -     $ -     $ 92  
 
 
12

 
 
During the first quarter of fiscal 2012, 102,835 warrants expired. The fair value liability balance of warrants increased by $0.2 million  during the second quarter and first six months of fiscal 2012, respectively, related to an increase in fair value due to an increase in stock price during the first six months of fiscal 2012. The restricted shares balance increased by less than $0.1 million related to an increase in fair value offset by the settlement of $0.1 million (15,000 shares) that vested during the quarter, for a total balance of $0.1 million at March 31, 2012, from $0.1 million at September 30, 2011. The balance of restricted stock outstanding was 15,000 shares at March 31, 2012.
 
10.
FOREIGN CURRENCY TRANSLATION
 
The Company’s Hungarian subsidiary, Zoltek Zrt. has a functional currency of the Hungarian Forints (HUF). As a result, the Company is exposed to foreign currency risks related to this investment. The consolidated balance sheet of Zoltek Zrt. was translated from HUF to U.S. dollars, at the exchange rate in effect at the applicable balance sheet date, while its consolidated statements of operations were translated using the average exchange rates in effect for the periods presented.  The related translation adjustments are reported as other comprehensive income (loss) within shareholders’ equity.  Gains and losses from foreign currency transaction of Zoltek Zrt. are included in the results of operations as other income (expense). The HUF weakened by 2.9% against the U.S. dollar during the first six months of fiscal 2012.   This currency fluctuation caused an increase of $3.7 million in our accumulated other comprehensive loss for the six months ended March 31, 2012.
 
The functional currency of Zoltek de Mexico is the U.S. dollar.
 
11. 
RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (“IFRS”). The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. The adoption of this amended guidance did not result in any material change to disclosure in the notes to the Company’s consolidated financial statements (see Note 9 for the disclosures required by this guidance).

               In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220):  Presentation of Comprehensive Income.” This amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement (statement of comprehensive income), or (2) in two separate but consecutive financial statements (consisting of an income statement followed by a separate statement of other comprehensive income). Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. The Company adopted this provision in the second quarter of fiscal 2012.
 
 
13

 

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

General

Zoltek Companies, Inc. is an applied technology and advanced materials company. Our mission is to lead 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, a stabilized and oxidized acrylic fiber used in flame- and heat-resistant applications which we sell under the Pyron® trade name. We were founded in 1988 and incorporated in Missouri.
 
We led the development of the carbon fiber commercialization concept and we believe we are the largest manufacturer primarily focused on producing low-cost carbon fibers for commercial applications. We have spent over 15 years developing and refining our proprietary technology and manufacturing processes and building capacity. Until fiscal 2004, the high cost of carbon fibers tended to preclude all but the most demanding applications, limiting carbon fiber use primarily to aerospace and sporting goods applications.
 
From 2005 to 2007, demand for carbon fibers used in aerospace and commercial manufacturing applications increased significantly. Airbus and Boeing initiated production of new generation aircraft utilizing carbon fiber composites in critical primary airframe structures (e.g., fuselage and wings). At about the same time, the adoption of carbon fibers in longer wind turbine blades created a new demand for commercial carbon fibers. The combination of these two developments triggered a significant divergence of the aerospace and commercial carbon fibers applications.
 
The adaptation of carbon fibers in wind turbine applications led to a dramatic increase in demand for our carbon fibers in fiscal 2006 and 2007. For a short time we strained to meet all of the demand from our wind energy customers and projections for growth were very optimistic. When we were capacity-constrained, potential customers understandably would not commit to new large-scale applications without demonstrated assurance of adequate future supplies. In view of these projections and the general carbon fiber supply shortages, we embarked on an expedited capacity expansion which we substantially completed in fiscal 2008. As a result we now have sufficient capacity to meet demand from current wind energy customers and produce carbon fibers for additional large-scale applications.
 
Zoltek’s mission to commercialize carbon fibers has proven successful over the past several years, but the development of large volume applications has been constrained because converting commercial carbon fibers to a finished product depends to a large degree on a fragmented and inefficient supply chain. Consequently, we are taking the next step in the commercialization process. We are designing new equipment and developing new processing methods to support the commercialization strategy. We are expanding our downstream processing capacity with the goal of ultimately becoming the leading carbon fiber prepreg manufacturer over the next few years. The goal is to develop higher-throughput, lower-cost conversion methods designed to consolidate the supply chain and open new market applications. These value-added, or “composite intermediate” products and processes, are being developed by Zoltek’s research and development (R&D) group.
 
In April 2010, Zoltek announced the formation of Zoltek Automotive, a subsidiary established to accelerate the incorporation of carbon fiber products into automotive applications. Zoltek Automotive seeks to lead the commercialization effort in the automotive applications, which we believe will ultimately be the largest user of carbon fibers. We anticipate that this group will incorporate new developments in process equipment and manufacturing techniques into the automotive manufacturing applications.
 
As a part of this effort, on March 27, 2012, Zoltek annonced collaboration with Magna Exteriors and Interiors, an operating unit of Magna International, Inc.to develop carbon fiber sheet molding compounds for the automotive industry.  Magna  Incorporated, based in Aurora, Ontario, Canada, is the largest automotive parts manufacturer in North America.  The newly developed carbon fiber material will combine Zoltek’s Panex 35 commercial carbon fiber with Magna’s EpicBlendSMC sheet molding compound formulations.  The new material will allow Magna to offer an expanded range of lightweight parts and sub-systems for automotive, commercial truck and other markets. Magna Exteriors and Interiors will sell the sheet molding compound directly to molders.
 
We are aggressively marketing to obtain new business in both existing and new applications. New applications tend to require relatively long sales cycles due to the qualification of carbon fibers into new product development manufacturing and engineering. Targeted application areas include wind energy, deep sea drilling, infrastructure, aerospace secondary structures, automotive and aircraft brakes. During 2010, we added additional sales personnel in Asia, focusing on markets in China, India and Korea and have begun to see some success through new customers and sales in those regions.
 
In order to manage our business, we focus on two separate business segments: carbon fibers and technical fibers (oxidized acrylic fibers). We also manage the corporate/other segment which consists of ancillary activities not directly related to the carbon fiber or technical fiber operations.
 
 
14

 

KEY PERFORMANCE INDICATORS
 
Our management monitors and analyzes several key performance indicators within each of these segments to manage our business and evaluate our financial and operating performance, including:
 
Revenue. In the short-term, management closely reviews the volume of product shipments and indicated customer requirements in order to forecast revenue and cash receipts. In the longer-term, management believes that revenue growth through new product applications is the best indicator of whether we are achieving our objective of commercializing carbon fiber. We expect that new applications, including those we are attempting to facilitate, will positively affect demand for our products.
 
Gross profit.  Our consolidated gross profit margins for the second quarter of fiscal 2012 and 2011 were 23.3% and 6.6%, respectively. Our consolidated gross profit margins for the first six months of fiscal 2012 and 2011 were 25.7% and 9.3%, respectively. Management focuses on improving the gross profit over the long-term while leading the commercialization of carbon fiber and controlling associated costs. Consequently, the Company has maintained available unused capacity to remain poised to capture opportunities in emerging markets. Gross margin was positively impacted during fiscal 2012 by several factors. Production levels increased with improved sales as we brought our Mexican operation online and increased production output in Hungary. We also improved the efficiency of our operations which decreased production costs. During the first six months of fiscal 2012, gross margin was negatively impacted by $1.4 million of available unused capacity cost compared to $6.6 million during the first six months of fiscal 2011. Costs of our primary raw material, ACN, also decreased by approximately 18% from the second quarter of fiscal 2011.
 
Operating expenses.  Our operating expenses are driven by headcount and related administrative costs, marketing costs, and research and development costs. We monitor headcount levels in specific geographic and operational areas.  We believe that research and development expenditures will be the primary means by which we can facilitate new product applications.
 
Cash flow from operating activities.  Operating activities generated cash of $3.2 million and $4.4 million in the first six months of fiscal 2012 and 2011, respectively. Decreased cash resulted from growth in accounts receivables and inventory to support sales expansion. Management believes that operating cash flow is meaningful to investors because it provides a view of Zoltek with respect to sustainability of our ongoing operations and the extent to which we may or may not require external capital. It also provides meaningful insight into the management of our working capital.
 
Liquidity and cash flows.  Due to the variability in revenue, our cash position varies. We closely monitor our expected cash levels, particularly as they relate to operating cash flow, days’ sales outstanding, days’ payables outstanding and inventory turnover.

BUSINESS TRENDS
 
Zoltek management has focused its efforts on building on the long-term vision of Zoltek as the leader in commercialization of carbon fibers as a low-cost but high performance reinforcement for composites. Management primarily emphasizes the following areas:

 
·
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 Asia. Indications are that global customer demand appears stronger for fiscal 2012.
 
 
·
Business Development in Emerging Applications.  We have identified emerging applications for our products with high growth potential across a variety of industries and regions. We have taken a major step toward growing our carbon fiber prepreg capabilities by opening a new 135,000 square foot facility outside of St. Louis, Missouri in November 2011. One of our goals is to leverage our leadership in commercial carbon fibers to become the leading provider of carbon fiber prepreg in the global marketplace over the next few years.  Our research and development center, to support our targeted applications with high volume manufacturing and processing technologies, will also be located at this new facility.
 
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 certain 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.
 
 
·
Operating Cash Flow and Cash Management.   Due to a 34.4% increase in sales, we reported positive operating cash flow of $3.2 million during the first six months of fiscal 2012.  We reported positive operating cash flow of $4.4 million during the first six months of fiscal 2011.  Cash was used to build working capital in anticipation of increased sales during fiscal 2012.  We also built raw materials inventories in anticipation of increased acrylonitrile prices. Cash used for inventory was $13.1 million and increased accounts receivable used cash of $6.0  million during the first six months of fiscal 2012.  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 reported $12.2 million of capital expenditures during the first six months of fiscal 2012. The Company intends to utilize operating cash flow, currently existing credit lines and term loans and increase debt in order to accommodate increases in working capital and capital expenditure requirements for the remainder of fiscal 2012.
 
 
·
Foreign Currency Volatility.  The HUF weakened against the U.S. dollar by  12.2% and the Mexican Peso weakened against the U.S. dollar by 8.9% during the first six months of fiscal 2012 as compared to the first six months of fiscal 2011. This resulted in lower processing cost and devaluation of inventory in the respective countries. The Euro weakened against the U.S. dollar by 2.4% during the first six months of fiscal 2012 compared to the first six months of fiscal 2011, resulting in decreased revenue. The Company’s financial statements will continue to be impacted by foreign currency volatility.
 
 
 
15

 
 
 RESULTS OF OPERATIONS
 
THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THREE MONTHS ENDED MARCH 31, 2011
 
The Company's sales increased 26.7%, or $9.9 million, to $47.0 million in the second quarter of fiscal 2012 from $37.1 million in the second quarter of fiscal 2011.  During the second quarter of fiscal 2012, volume of product shipments increased 28% compared to the second quarter of 2011, which accounted for an increase in revenue of approximately $11.2 million. Carbon fiber sales increased 26.0%, or $7.8 million, to $37.9 million in the second quarter of fiscal 2012 from $30.1 million in the second quarter of fiscal 2011 due to increased shipments to wind customers. Technical fiber sales increased 30.6%, or $2.0 million, to $8.5 million in the second quarter of fiscal 2012 from $6.5 million in the second quarter of fiscal 2011 due to increased shipments to aircraft brake customers. Other revenues increased from $0.5 million to $0.6 million during the second quarters of fiscal 2012 and 2011.

The Company's cost of sales increased by 4.0%, or $1.3 million, to $36.0 million in the second quarter of fiscal 2012 from $34.7 million in the second quarter of fiscal 2011. The increase in cost of sales reflected increased sales of 26.7% discussed above and decreased raw material costs as lower cost ACN was used in production.  Carbon fiber cost of sales increased by 5.8%, or $1.7 million, to $30.1 million for the second quarter of fiscal 2012 from $28.4 million for the second quarter of fiscal 2011. The increase in carbon fiber cost of sales reflected increased sales of 26.0% as discussed above and decreased raw material costs as lower cost ACN was used. Technical fiber cost of sales decreased by 9.7% or $0.6 million, to $5.4 million for the second quarter of fiscal 2012 from $6.0 million for the second quarter of fiscal 2011 as a result of improved efficiencies and lower cost ACN. The cost of sales of the corporate/other products segment increased for the second quarter ended fiscal 2012 to $0.6 million compared to $0.3 million for the second quarter ended fiscal 2011.

The Company's gross profit increased by $8.6 million, to $11.0 million, or 23.3% of sales in the second quarter of fiscal 2012 from $2.4 million, or 6.6% of sales in the second quarter of fiscal 2011. During the second quarter of 2012, available unused capacity costs decreased to $0.7 million compared to the second quarter of 2011 when gross margin was negatively impacted by $4.3 million of available unused capacity cost. Carbon fiber gross profit percentage increased to 20.7% for the second quarter of fiscal 2012 compared to 5.6% for the second quarter of fiscal 2011. Carbon fiber gross profit increased to $7.9 million from $1.7 million during these respective periods. The increases in carbon fiber gross profit and gross profit margin resulted primarily from increased production levels with improved sales as we brought our Mexican operation online and increased output in Hungary. We also improved the efficiency of our operations which decreased production costs. Costs of our primary raw material, ACN, also decreased by approximately 18% from the second quarter of fiscal 2011. Technical fiber gross profit increased to $3.1 million, or 36.6% of sales, in the first quarter of fiscal 2012 from $0.5 million, or 8.3% of sales, in the second quarter of fiscal 2011. The increases in technical fiber gross profit and margin resulted from increased production output in Hungary and lower cost ACN. The corporate/other products segments reported gross profit of less than $0.1 million for the second quarter of fiscal 2012 compared to $0.2 million for the second quarter of fiscal 2011.
 
Application and market development costs were $1.9 million for the second quarter of fiscal 2012 and $2.2 million for the second quarter of fiscal 2011. These costs included product development efforts, product trials and operational improvement design. Targeted emerging applications include automobile components, offshore oil and gas drilling, fire/heat barrier and alternate energy technologies.
 
Selling, general and administrative expenses decreased to $3.3 million in the second quarter of fiscal 2012 compared to $3.6 million in the second quarter of fiscal 2011. The Company recorded $0.7 million for the cost of employee and director services received in exchange for equity instruments under ASC 718 during the second quarter of fiscal 2012, an increase of $0.2 million from the expense of $0.5 million in the second quarter of fiscal 2011. Audit fees decreased by $0.1 million and legal fees decreased reduced by $0.1 million.  The weakened Hungarian Forint also caused a $0.1 million cost savings.
 
Operating income from the second quarter of fiscal 2012 was $5.7 million, an improvement from an operating loss of $3.3 million incurred during the second quarter of fiscal 2011. This increase resulted primarily from an increase in gross profit of $8.6 million, as discussed above.  Carbon fiber operating income increased to $6.1 million in the second quarter of fiscal 2012 from a loss of $0.5 million in the second quarter of fiscal 2011. The increase resulted from an increase in gross profit as discussed above.  Operating income from technical fibers increased to $2.8 million in the second quarter of fiscal 2012 from $0.4 million in the second quarter of fiscal 2011. The increase in technical fiber operating income resulted primarily from the increase in gross profit described above. Other products/ headquarters operating loss was $3.2 million in the second quarter of fiscal 2012 .
 
Loss on foreign currency translations was $1.9 million for the second quarter of fiscal 2012, compared to a loss of $1.5 million for the second quarter of fiscal 2011. During the three months ended March 31, 2012 and 2011, the Euro and the U.S. dollar strengthened in value against the HUF.  As most of the Company’s Hungarian accounts receivables are denominated in Euros and U.S. dollars, the strengthening in value of the Euro and U.S. dollar resulted in a gain recognized in our Hungarian subsidiary.  The translation of the Hungarian subsidiary’s financial statements from its functional currency (HUF) 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.
 
 
16

 
 
Other expense, net, was $0.04 million in the second quarter of fiscal 2012 compared to $0.1 million in the second quarter of fiscal 2011. Other expense, net consists primarily of non-operating costs and losses from the disposal of fixed assets.
 
Loss on liabilities carried at fair value was $0.2 million in the second quarter of fiscal 2012 compared to a $0.3 million in the second quarter of fiscal 2011 (see   “ Liquidity and Capital Resources – Fair Value Measurement of Instruments ").
 
Income tax expense was $0.3 million for the second quarter of fiscal 2012 compared to a benefit of less than $0.1 million for the second quarter of fiscal 2011.  In fiscal 2012, this expense related to the local Hungarian municipality tax and less than $0.1 million was recorded related to U.S. and Mexico minimum tax payments.  During the second quarter of fiscal 2011, $0.2 million of expense related to the local Hungarian municipality tax and less than $0.1 million of expense was recorded related to U.S. and Mexico minimum tax payments. A tax benefit of approximately $0.3 million was recorded related to an increase in Hungary’s deferred tax position.
 
The foregoing resulted in net income of $3.3 million for the second quarter of fiscal 2012 compared to a loss of $5.1 million for second quarter of fiscal 2011. Similarly, the Company reported income per share of $0.10 and loss per share of $0.15 per share on a basic and diluted basis for the second quarter of fiscal 2012 and 2011, respectively.

SIX MONTHS ENDED MARCH 31, 2012 COMPARED TO SIX MONTHS ENDED MARCH 31, 2011
 
The Company's sales increased 34.4%, or $24.1 million, to $94.1 million in the first six months of fiscal 2012 from $70.0 million in the first six months of fiscal 2011.During the first six months of fiscal 2012, volume of product shipments increased 30% compared to the first six months of 2011, which accounted for an increase in revenue of approximately $24.3 million. Carbon fiber sales increased 37%, or $20.4 million, to $75.6 million in the first six months of fiscal 2012 from $55.2 million in the first six months due to increased shipments to wind customers. Technical fiber sales increased 25.5%, or $3.5 million, to $17.3 million in the first six months of fiscal 2012 from $13.8 million in the first six months of fiscal 2011 due to increased shipments to aircraft brake customers. Other revenues were $1.1 million during the first six months of fiscal 2012 compared to $1.0 million during the first six months of fiscal 2011.

The Company's cost of sales increased by 10.2%, or $6.5 million, to $69.9 million in the first six months of fiscal 2012 from $63.4 million in the first six months of fiscal 2011. The increase in cost of sales reflected increased sales of 34.4% discussed above and decreased raw material costs as lower cost ACN was used in production.  Carbon fiber cost of sales increased by 13.2%, or $6.8 million, to $57.8 million for the first six months of fiscal 2012 from $51.0 million for the first six months of fiscal 2011. The increase in carbon fiber cost of sales reflected increased sales of 37% as discussed above and decreased raw material costs as lower cost ACN was used. Technical fiber cost of sales decreased 7.0% or $0.8 million, to $11.1 million for the first six months of fiscal 2012 from $11.9 million for the first six months of fiscal 2011 as a result of improved efficiencies and lower cost ACN. The cost of sales of the corporate/other products segment increased for the first six months of fiscal 2012 to $1.1 million compared to $0.5 million for the first six months of fiscal 2011.

The Company's gross profit increased by $17.6 million, to $24.1 million, or 25.7% of sales in the first six months of fiscal 2012 from $6.5 million, or 9.3% of sales in the first six months of fiscal 2011. During the first six months of 2012, available unused capacity costs decreased to $1.4 million compared to the first six months of 2011 when gross margin was negatively impacted by $6.6 million of available unused capacity costs. Carbon fiber gross profit percentage increased to 23.6% for the first six months of fiscal 2012 compared to 7.6% for the first six months of fiscal 2011. Carbon fiber gross profit increased to $17.9 million from $4.2 million during these respective periods. The increases in carbon fiber gross profit and gross profit percentage resulted primarily from increased production levels with improved sales as we brought our Mexican operation online and increased output in Hungary. We also improved the efficiency of our operations which decreased production costs. Costs of our primary raw material, ACN, also decreased by approximately 16% from the first six months of fiscal 2011. Our gross margins have also benefited from price increases as market demand has increased. Technical fiber gross profit increased to $6.2 million, or 35.9% of sales, in the first six months of fiscal 2012 from $1.9 million, or 13.4% of sales, in the first six months of fiscal 2011. The increases in technical fiber gross profit and margin resulted from increased production output in Hungary and lower cost ACN. The corporate/other products segments reported gross profit of less than $0.1 million for the first six months of fiscal 2012 compared to $0.5 million for the first six months of fiscal 2011.
 
Application and market development costs were $3.6 million for the first six months of fiscal 2012 and $4.1 million for the first six months of fiscal 2011. These costs included product development efforts, product trials and operational improvement design. Targeted emerging applications include automobile components, offshore oil and gas drilling, fire/heat barrier and alternate energy technologies.
 
Selling, general and administrative expenses were $6.6 million in the first six months of fiscal 2012 and $6.9 million the first six months of fiscal 2011. The Company recorded $0.7 million for the cost of employee and director services received in exchange for equity instruments under ASC 718 during the first six months of fiscal 2012 and fiscal 2011.  The Company has reduced its legal and consulting fees by $0.4 million.
 
 
17

 
 
Operating income from the first six months of fiscal 2012 was $13.9 million, an improvement from an operating loss of $4.5 million incurred during the first six months of fiscal 2011. This increase resulted primarily from an increase in gross profit of $17.6 million and a decrease in research and development expenses of $0.5 million. Carbon fiber operating income increased to $14.5 million in the first six months of fiscal 2012 from income of $0.02 million in the first six months of fiscal 2011. The increase resulted from an increase in gross profit as discussed above.  Operating income from technical fibers increased to $5.5 million in the first six months of fiscal 2012 from $1.5 million in the first six months of fiscal 2011. The increase in technical fiber operating income resulted from the increase in gross profit described above. Other products/ headquarters operating loss was $6.0 million in the first six months of fiscal 2012 and 2011.
 
Gain on foreign currency translations was $0.3 million for the first six months of fiscal 2012, compared to a loss of $1.1 million for the first six months of fiscal 2011. During the first six months of fiscal 2012, the Euro and the U.S. dollar strengthened in value against the HUF.  As most of the Company’s Hungarian accounts receivables are denominated in Euros and U.S. dollars, the strengthening in value of the Euro and U.S. dollar resulted in a gain recognized in our Hungarian subsidiary.  During the first six months of fiscal 2011, the Euro and the U.S. dollar weakened in value against the HUF.  The translation of the Hungarian subsidiary’s financial statements from its functional currency (HUF) 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.
 
Other expense, net, was $0.2 million in the first six months of fiscal 2012 compared to $0.3 million in the first six months of fiscal  2011. Other expense, net consists primarily of loss from the disposal of fixed assets.
 
Loss on liabilities carried at fair value was $0.2 million in the first six months of fiscal 2012 compared to a loss of $0.5 million in the first six months of fiscal 2011 (see   “ Liquidity and Capital Resources – Fair Value Measurement of Instruments ").
 
Income tax expense was $0.7 million for the first six months of fiscal 2012 compared to an expense of $0.3 million for the first six months of fiscal 2011.  An expense of $0.7 million was incurred related to the local Hungarian municipality tax and $0.1 million was recorded related to U.S. and Mexico minimum tax payments.  During the first quarter of fiscal 2011, the Company recognized a $0.3 million expense as we adjusted our Hungarian effective tax rate to reflect a change to tax law which makes effective a flat 10% corporate rate for fiscal years beginning after January 1, 2013. Income tax expense of $0.5 million was incurred related to the local Hungarian municipality tax and U.S. income taxes. A tax benefit of approximately $0.2 million was recorded related to an increase in Hungary’s deferred tax position.
 
The foregoing resulted in net income of $13.0 million for the first six months of fiscal 2012 compared to a loss of $6.7 million for first six months of fiscal 2011. Similarly, the Company reported income per share of $0.38 and loss per share of $0.19 per share on a basic and diluted basis for the first six months of fiscal 2012 and 2011, respectively.

Liquidity and Capital Resources
 
The Company believes its cash currently on hand, cash flow from operations, and existing and anticipated credit facilities should be sufficient to fund its identified liquidity needs during fiscal 2012.
 
Cash Provided By (Used In) Continuing Operating Activities
 
Operating activities provided $3.2 million of cash for the first six months of fiscal 2012. Inventory levels used $13.1 million during the first six months of fiscal 2012 in anticipation of  increased sales levels, including increases in consigned inventory, which represents contractually required finished goods inventory levels for certain key customers.  Cash flows were positively affected by depreciation of $8.9 million for the first six months of fiscal 2012, which was included in the operating income of $13.9 million.  Increased sales increased accounts receivables by $6.0 million during the first six months of fiscal 2012.
 
Operating activities provided $4.3 million of cash for the first six months of fiscal 2011. The change in inventory levels provided $0.9 million during the first six months of fiscal 2011. Cash flows were positively affected by depreciation of $8.5 million for the first six months of fiscal 2011, which was included in the operating loss of $4.5 million. Accounts receivables increased by $1.8 million during the first six months of fiscal 2011 reflecting sales growth. Payables and accrued expenses increased by $1.1 million.         
 
Cash Used In Investing Activities
 
Net cash used in investing activities for the first six months of fiscal 2012 was $11.6 million, which primarily consisted of capital expenditures on existing production lines and new equipment.  Approximately $3.0 million of the decline in property and equipment, net was caused by the decline in value of the HUF, which is the functional currency of our Hungarian operations. The change in property and equipment, net was also impacted by $12.2 million of capital expenditures and depreciation expense of $8.9 million. Capital expenditures included $5.4 million related to the purchase of the building in St. Peters, Missouri and the related move of our prepreg operations.  We expect to continue our capital investment programs in the second half of fiscal 2012 primarily with respect to prepreg capacity, fabrics capacity and production efficiencies for carbon and technical fibers manufacturing.
 
Net cash used in investing activities for the first six months of fiscal 2011 was $3.3 million, which consisted of capital expenditures on existing production lines and new equipment. Approximately $6.7 million of the increase in property and equipment, net was caused by the increase in value of the HUF, which is the functional currency of our Hungarian operations.Historically, cash used in investing activities has been expended for equipment additions and the expansion of the Company’s carbon fiber and technical fiber production capacity.
 
 
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Cash Used In Financing Activities
 
Net cash provided by financing activities was $1.4 million for the first six months of fiscal 2012.  During the second quarter, the Company entered into a $10 million term loan secured by the Company’s facilities in the St. Louis, Missouri area.   The Company utilized the proceeds of the loan to repay all outstanding balances under the Company's previous revolving credit facility and for other general corporate purposes. The Company plans to enter into a new U.S. revolving credit facility in addition to the Enterprise Loan.
 
Net cash used by financing activities was $1.1 million for the first six months of fiscal 2011 resulting from repayment of notes payable and cash settlement of restricted shares.
 
Earnings Per Share
 
In accordance with ASC 260, the Company has evaluated its diluted income (loss) per share calculation. The Company had outstanding warrants and stock options at March 31, 2012 and 2011 which were not included in the determination of diluted loss per share because they were anti-dilutive.

Net income (loss) per share for the three months ended March 31, 2012 and 2011, respectively is as follows (in thousands, except per share amounts):
 
   
Three months ended March 31,
   
Six months ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Numerators:
                       
Net income (loss)
  $ 3,338     $ (5,107 )   $ 13,041     $ (6,669 )
                                 
Denominators:
                               
Average shares outstanding – basic
    34,362       34,382       34,355       34,386  
Impact of stock options
    48       -       37       -  
Average shares outstanding – diluted
    34,410       34,382       34,392       34,386  
                                 
Basic income (loss) per share
  $ 0.10     $ (0.15 )   $ 0.38     $ (0.19 )
Diluted income (loss) per share
  $ 0.10     $ (0.15 )   $ 0.38     $ (0.19 )
 
Hungarian Grant
 
The Hungarian government has pledged a grant of 2.9 billion HUF to Zoltek’s Hungarian subsidiary, which translated at the March 31, 2012 exchange rate, is approximately $13.1 million. The grant has provided a portion of the capital resources to modernize the subsidiary’s facility, establish a research and development center, and support buildup of manufacturing capacity of carbon fibers. As of March 31, 2012, Zoltek’s Hungarian subsidiary has received approximately 2.6 billion HUF in grant funding. These funds have been recorded as a liability on the Company’s consolidated balance sheets. The liability is being amortized over the life of the assets procured by the grant funds, offsetting the depreciation expense from the assets 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 repay all or a portion of the grant if, among other things, the Hungarian subsidiary:  fails to obtain revenue targets; fails to employ an average annual staff of at least 1,200 employees; fails to utilize regional suppliers for at least 45% of its purchases; fails to obtain consent from the Hungarian government prior to selling assets created with grant funds; fails to use grant funds in accordance with the grant agreement; fails to provide appropriate security for the grant; makes or made an untrue statement or supplies or supplied false data in the grant agreement, grant application or during the time of the grant; defaults on its obligations by more than 30 days; withdraws any consents it gave in the grant agreement; or causes a partial or complete failure or hindrance of the project that is the subject of the grant. These targets must be achieved during a five-year measurement period from October 2012 to October 2017. Although there can be no assurance, the Company anticipates it will comply with the requirements of the grant agreement when the measurement period begins.

 
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FINANCING ACTIVITY
 
Term Loan
 
Zoltek Companies, Inc. entered into a $10 million term loan secured by its facilities in the St. Louis, Missouri area, dated as of March 30, 2012, with Enterprise Bank & Trust (the “Enterprise Loan”).  The Enterprise Loan is a seven-year, secured term loan maturing March 30, 2019. Principal of the Enterprise Loan is payable monthly with a balloon payment due at maturity. The Enterprise Loan bears interest at a one-month LIBOR rate, plus 3%. The Company entered into a swap agreement that fixes the interest rate on the Enterprise Loan at 4.75% per annum. The Loan Agreement contains customary representations and warranties, and contains a requirement that the Company, on a consolidated basis, maintain minimum fixed charge coverage and leverage ratios, along with other customary covenants.
 
The Company utilized the proceeds of the Enterprise Loan to repay all outstanding balances under the Company's U.S. revolving credit facility with BMO Harris Bank N.A., and for other general corporate purposes
 
Revolving Credit Facility
 
U.S. Operations – On April 27, 2012, Zoltek Companies, Inc. entered into a $15 million revolving credit agreement with JPMorgan Chase, N.A., with interest based on LIBOR plus 2.5%, adjusted monthly.  The revolving credit facility is subject to a borrowing base and financial covenants and expires on April 27, 2015.  The revolving credit facility will be utilized to fund working capital needs and general corporate purposes.
 
Hungarian Operations – The Company’s Hungarian subsidiary has a credit facility with a Hungarian bank, which expires May 30, 2012. The overdraft facility has a total commitment of the lesser of 1.9 billion HUF ($8.7 million as of March 31, 2012) or a borrowing base ($7.3 million as of March 31, 2012). There were no borrowings under this credit facility at March 31, 2012. There are no financial covenants associated with this facility
 
The Company intends to extend its existing Hungarian line of credit before expiration. Based on the history of relationships with its banks and its current financial position, the Company expects it will be able to successfully extend its lines of credit.
 
Stock Compensation Expense

The Company has two Long-Term Incentive Plans, under which equity-based awards may be granted, including restricted shares of common stock, performance awards, stock options and stock units. At March 31, 2012, there were an aggregate of 2.0 million shares authorized for issuance under these plans. Approximately 0.4 million and 0.1 million shares remained available for future issuance under the 2008 Employee Long-Term Incentive Plan and the 2008 Directors Long-Term Incentive Plan, respectively. See Note 6 of the Notes to Condensed Consolidated Financial Statements.

New Accounting Pronouncements

See Note 11 of the Notes to Condensed Consolidated Financial Statements (Unaudited).

Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
Foreign Currency Risk
 
The consolidated balance sheets of the Company's international subsidiaries, Zoltek Zrt. and Zoltek de Mexico, were translated from Hungarian Forints and Mexican Pesos to U.S. dollars, respectively, at the exchange rates in effect at the applicable balance sheet date, while its consolidated statements of operations were translated using the average exchange rates in effect for the periods presented. The related translation adjustments are reported as other comprehensive income (loss) within shareholders' equity. Gains and losses from foreign currency transactions of Zoltek Zrt. are included in the results of operations in other expenses.  The Company views as long-term its investments in Zoltek Zrt. and Zoltek de Mexico. Zoltek Zrt. has a functional currency of the HUF. As a result, the Company is exposed to foreign currency risks related to this investment. The HUF weakened by 2.9% against the U.S. dollar during the first six months of fiscal 2012. This currency fluctuation caused an increase of $3.7 million in our accumulated other comprehensive loss for the six months ended March 31, 2012.
 
The functional currency of Zoltek de Mexico is the U.S. dollar. The Company does not currently employ a foreign currency hedging strategy related to the sales from Hungary or Mexico. Neither Hungary nor Mexico is considered to be a highly inflationary or deflationary economy.
 
As of March 31, 2012, the Company had a long-term loan of $108.0 million to its Zoltek Zrt. subsidiary denominated in U.S. dollars. The potential loss in value of the Company's net foreign currency investment in Zoltek Zrt. resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rate of the HUF against the U.S. dollar at March 31, 2012 and 2011 amounted to $10.8 million and $10.8 million, respectively.  The Company does not expect repayment of the loan in the foreseeable future. As such, the Company considers this loan as a permanent investment.  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 HUF. Also, Zoltek Zrt. has debt that is denominated in foreign currencies other than the HUF.
 
 
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As of March 31, 2012, the Company had a long-term loan to its Zoltek de Mexico subsidiary. There is no potential loss in value of the Company's net foreign currency investment in Zoltek de Mexico resulting from an adverse change in quoted foreign currency exchange rate of the Mexican Peso against the U.S. dollar at March 31, 2012 because Zoltek de Mexico’s functional currency is the U.S. dollar.  The Company does not expect repayment of the loan in the foreseeable future. As such, the Company considers this loan as a permanent investment.
 
Commodity Price Risk
 
We are exposed to commodity price risk arising from changes in the market price of certain raw materials and other production inputs, such as ACN and utilities.  Due to competition and market conditions, volatile price increases cannot always be passed on to our customers. Management assesses commodity price trends on a regular basis and seeks to adjust purchasing accordingly. The Company does not currently utilize derivative instruments to hedge purchases of commodities.

Interest Rate Risk
 
We are exposed to various market risks, including fluctuations in interest rates. We use interest rate swap agreements to manage our interest costs and reduce our exposure to increases in floating interest rates. Using interest rate swap agreements, we agree to exchange, at specified intervals through 2017, the difference between fixed and variable interest amounts calculated by reference to agreed-upon notional principal amounts.
 
We do not hold or issue derivative instruments for speculative trading purposes. We have interest rate derivative instruments that have been designated as cash flow hedging instruments. Such instruments effectively convert variable interest payments on certain debt instruments into fixed payments. For qualifying hedges, realized derivative gains and losses offset related results on hedged items in the consolidated statements of operations. We formally document, designate and assess the effectiveness of transactions that receive hedge accounting.  As of March 31, 2012, there was no cash flow hedge ineffectiveness on interest rate swap agreements.

*  *  *
Special Note Regarding Forward-Looking Statements
 
This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  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.

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 and substantial volatility in order rates from our wind energy customers; (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, prepregs and precursor raw materials and meet our obligations under long-term supply agreements; (5) operate profitably; (6) increase or maintain our borrowing at acceptable costs; (7) manage changes in customers’ forecasted requirements for our products; (8) continue investing in application and market development for a range of applications; (9) manufacture low-cost carbon fibers and profitably market them despite fluctuations in raw material and energy costs; (10) successfully operate our Mexican facility to produce acrylic fiber precursor and carbon fibers; (11) successfully continue operations at our Hungarian facility if natural gas supply disruptions occur; (12) successfully prosecute patent litigation; (13) successfully facilitate adoption of our carbon fibers by the auto industry for use in high-volume applications; (14) establish prepreg capacity; and (15) speed development of low-cost carbon fiber sheet molding compounds for the automotive industry pursuant to our global collaborative partnership with Magna Exteriors and Interiors; and (16) manage the risks identified under "Risk Factors" in our filings with the SEC.

*  *  *

 
21

 

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 and Chief Financial 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 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 Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
 
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as of March 31, 2012, were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.
 
There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
22

 

ZOLTEK COMPANIES, INC.

PART II. 
OTHER INFORMATION
 
Item 1. 
Legal Proceedings.

None.

Item 5. 
Other Information

 
(a)
On April 27, 2012, the Company entered into a Credit Agreement (the “Credit Agreement”) by and among the Company, as borrower, the Company’s U.S. subsidiaries, as obligors, and JPMorgan Chase Bank, N.A. (the “Lender”) pursuant to which the Lender committed to make revolving loans to, and to issue letters of credit for the account of, the Company up to an aggregate amount of $15 million.  The Company intends to utilize the revolving credit facility for general corporate purposes. Under the Credit Agreement, the Company’s U.S. subsidiaries guarantee the payment of all of the indebtedness, liabilities and obligations of the Company under or in respect of the Credit Agreement and any related agreements.

Pursuant to the Credit Agreement, the revolving credit facility is a three-year asset based revolving credit facility pursuant to which up to $15 million will be available, subject to the Company and its domestic subsidiaries meeting certain borrowing base conditions. Borrowings under the revolving credit facility bear interest, at the Company’s option, at a base rate or a LIBO rate, plus, in each case, an applicable margin set forth in the Credit Agreement equal to 0.25% for base rate borrowings and 2.50% for LIBO borrowings. The Company must also pay a commitment fee to the Lender equal to 0.20% per annum on the unused portion of the revolving credit facility along with other standard fees.
 
The Credit Agreement contains customary representations and warranties applicable to the Company and its subsidiaries. It also contains a requirement that the Company, on a consolidated basis, maintain a minimum monthly fixed charge coverage ratio and leverage ratio, along with other customary restrictive covenants. These restrictive covenants include limitations on the ability of the Company and its subsidiaries to, among other things, incur indebtedness, create liens, dispose of assets, pay dividends, cause or permit a change of control, make investments, and enter into affiliate transactions.
 
The Credit Agreement also contains customary events of default including, without limitation, non-payment of obligations, non-performance of covenants and obligations, material judgments, bankruptcy or insolvency, default on other material debt, breaches of representations and warranties, impairment of security or invalidity or unenforceability of documentation or liens related to the Credit Agreement.
 
The obligations under the Credit Agreement are secured by a first priority security interest in the Company’s and its domestic subsidiaries’ accounts receivable, chattel paper, documents, general intangibles, instruments, inventory, investment property, cash and cash equivalents, letters of credit, deposit accounts and commercial tort claims, and by a first priority security interest in the equity interests owned by the Company in each of its domestic subsidiaries.

Item 6. 
Exhibits.

See Exhibit Index
 
 
23

 

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:  May 3, 2012
By:
/s/ ZSOLT RUMY  
    Zsolt Rumy  
    Chief Executive Officer  
 
 
 
24

 

EXHIBIT INDEX

Exhibit Number
Description of Document

10.1
Business Loan Agreement dated March 30, 2012 by and among Zoltek Companies, Inc., Zoltek Corporation, Engineering Technology Corporation, Zoltek Properties, Inc. and Enterprise Bank & Trust.
 
10.2
Promissory Note, dated March 30, 2012, in the original principal amount of $10 million, executed by Zoltek Companies, Inc., Zoltek Corporation, Engineering Technology Corporation, and Zoltek Properties, Inc. in favor of Enterprise Bank & Trust.
 
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.
 
101.INS**
XBRL Instance
 
101.SCH**
XBRL Taxonomy Extension Schema
 
101.CAL**
XBRL Taxonomy Extension Calculation
 
101.DEF**
XBRL Taxonomy Extension Definition
 
101.LAB**
XBRL Taxonomy Extension Labels
 
101.PRE**
XBRL Taxonomy Extension Presentation
 
** XBRL
information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 
 
25