Note 7 - Financing Transactions

12 Months Ended

Sep. 30, 2011

7. 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 September 30, 2011 exchange rate, is approximately $13.5 million. The grant is intended to provide 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. Zoltek’s Hungarian subsidiary received approximately less than HUF 0.1 billion, HUF 0.1 billion and HUF 0.3 billion in grant funding during fiscal 2011, 2010 and 2009, respectively. These funds have been recorded as a liability on the Company’s consolidated balance sheet. 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 pay back 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

Revolving Credit Facility

U.S. Operations – The Company’s U.S. subsidiary has a credit facility with a U.S. bank, the term of which expires January 1, 2012. There were $8.4 million in borrowings as of September 30, 2011, with $1.6 million of availability. There are no financial covenants associated with this facility.

Hungarian Operations – The Company’s Hungarian subsidiary has a credit facility with a Hungarian bank, which expires December 30, 2011. The overdraft facility has a total commitment of the lesser of 1.9 billion HUF ($9.0 million as of September 30, 2011) or a borrowing base ($5.5 million as of September 30, 2011). There were no borrowings under this credit facility at September 30, 2011. There are no financial covenants associated with this facility.

The Company intends to extend its existing lines 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.

Convertible Debt

In September 2005, Zoltek entered into an agreement for new financing; a convertible debenture package of up to $50 million in a private placement with a group of institutional investors.

In April 2010, the Company repaid all remaining convertible debt. There was no conversion of convertible debt during fiscal 2010 and 2011.

Amortization of Financing Fees and Debt Discount

Convertible debt issued in May 2006, July 2006 and October 2006 was considered to have beneficial conversion features because the adjusted conversion price after allocating a portion of the proceeds to the warrants issued in connection with the convertible debt was less than the market price of the Company’s common stock at date of issue. The beneficial conversion was recorded as a reduction in the carrying value of the convertible debt security and accreted to its face value over the life of the convertible security and expensed into the Company’s income statement.

At the time of issuance of convertible debt securities with warrants, the Company recorded the fair value associated with the warrants using the Black-Scholes option-pricing model. This fair value discount was recorded as a reduction in the carrying value of the convertible debt security that was accreted to its face value over the life of the convertible security and expensed into the Company’s income statement.

The table below shows the impact of amortization of financing fees and debt discount on the financial results for the fiscal years ended September 30, 2011, 2010 and 2009 (in thousands):

Fiscal year ended September 30,	Warrants		Conversion Features		Deferred Financing Costs		Total
2011	$	-	$	-	$	-	$	-
2010		87		105		97		289
2009		2,108		2,945		311		5,364
Total	$	2,195	$	3,050	$	408	$	5,653