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Article by DailyStocks_admin    (08-20-08 06:25 AM)

Zoltek Companies Inc. CEO RUMY ZSOLT bought 50000 shares on 8-15-2008 at $16.86

BUSINESS OVERVIEW

Overview
We are an applied technology and advanced materials company. We are a leader in the commercialization of carbon fibers through our development of a price-competitive, high-performance reinforcement for composites used in a broad range of commercial products. In addition to manufacturing carbon fibers, we produce an intermediate product that we refer to as technical fiber, a stabilized and oxidized acrylic fiber used in flame and heat-resistant applications. We have spent over 10 years developing our proprietary technology and manufacturing processes. We believe that we are the largest manufacturer primarily focused on producing low-cost carbon fibers for commercial applications.
We operate manufacturing plants in Hungary, Texas and Missouri. Our plant in Hungary is our major carbon fiber manufacturing facility. Our Hungarian plant also manufactures acrylic fiber precursor, the raw material that we use to make carbon fibers and intermediate oxidized acrylic fibers. Our Texas plant produces carbon fiber and has value-added processing capabilities. Our Missouri facility is primarily dedicated to the production of technical fibers for aircraft brake and other friction applications and also produces limited quantities of carbon fibers.
Since fiscal 2005, there has been a structural shift in the carbon fiber market. Strong demand from the higher-cost aerospace applications has caused a shortage in supply for the commercial applications that we supply. During this period, we have experienced rapid growth due to sharply increased demand for commercial carbon fibers, primarily from producers of large composite blades used in wind turbines. We believe that, over the past two years, there has been increased interest in and usage of carbon fibers in the oil exploration, automotive and construction end markets. Our revenue has increased from $34.5 million in fiscal 2004 to $150.9 million in fiscal 2007. To support this growth, we expanded our manufacturing capacity from two continuous carbonization lines in operation at the beginning of fiscal 2004 to our current 18 lines.
We believe that our existing capacity will be sufficient to satisfy our obligations under our current long-term supply agreements. To meet increasing demand from current commercial application customers and provide carbon fibers for emerging applications, we have developed and are executing plans to further expand our capacity by building additional capacity at our existing facilities and by acquiring a new facility. We are installing additional production capacity in Hungary that we expect to be operating during the second quarter of fiscal 2008. In addition, in October 2007, we announced that we had purchased the Guadalajara, Mexico-based Crysel acrylic fiber manufacturing assets of Cydsa, a large publicly traded Mexican chemical and industrial company. We estimate our total investment will be approximately $100 million to purchase the facility, retool and modify the plant, produce acrylic precursor and install the initial carbon fiber production lines. The Company expects that precursor production will begin by the end of fiscal 2008. We plan to install carbon fiber lines during the first quarter of fiscal 2009 at the Mexico facility. We believe the acquisition of the Mexico plant gives us the opportunity to increase our manufacturing capacity of precursor and increase our carbon fiber lines at favorable costs.
Historically, the most significant application for our products had been for aircraft brakes that incorporate our technical fibers as base materials for the carbon/carbon composite brake systems used in aircraft. During fiscal 2006, wind energy surpassed aircraft brakes as our leading application in terms of sales, validating our commercialization strategy. Other applications, such as infrastructure, oil and gas and other commercial composite reinforcement have emerged which we believe have long-term growth potential. See “— Industry Overview.”
Beginning in 2002, we have concentrated on certain application categories for carbon fibers that we believe offer the highest potential for substantial sales over the coming years. In fiscal 2004 and 2005, we entered into long-term supply arrangements with two large manufacturers of wind turbines. We partnered with a Norwegian oil and gas firm to integrate Zoltek’s carbon fiber products as the material of choice for the commercial umbilical systems that link the architecture on the seafloor to the host platform in deep-sea drilling operations in the Gulf Coast of the United States. We have been working with BMW AG under an exclusive arrangement to produce structural parts for automobiles. As a result of this arrangement, structural parts using Zoltek carbon fibers are currently used in BMW M-3 and M-6 models. Based on these initiatives, we believe that carbon fibers will be introduced more broadly in series production cars over the next several years.
Company Operations
We operate manufacturing plants in Nyergesujfalu, Hungary, Abilene, Texas and St. Charles, Missouri. Our plant in Hungary is our major carbon fiber manufacturing facility. Our Hungarian plant also manufactures acrylic fiber precursor, the raw material that we use to make carbon fibers and intermediate oxidized fibers. Our Texas plant has houses carbon fiber manufacturing lines and value-added processing capabilities. Our Missouri facility is primarily dedicated to the production of technical fibers for aircraft brake and other friction applications and also produces limited amounts of carbon fibers. In addition, we have a facility in Salt Lake City, Utah where we design and build composite manufacturing equipment and can produce resin pre-impregnated carbon fibers, called prepregs. Our facility in Guadalajara,

Mexico was acquired in October 2007. After our retooling effort is complete, the facility will supply Zoltek’s North American operations with low-cost precursor and will serve as a site for additional carbon fiber production lines.
Acrylic fiber precursor comprises a significant part of the total cost of producing carbon fibers. During 2000, we began to manufacture quantities of precursor at our Hungarian facility and currently all of our carbon fibers are produced from this precursor. During 2004 and 2005, we converted all of our acrylic fiber capacity to precursor manufacturing and we anticipate that this technology will be transferable to other potential suppliers to assure sufficient cost-competitive supply of raw material to support our long-term carbon fiber growth strategy.
An element of our strategy is to offer customers value-added processing of the fibers that we produce. Our longer-term focus is on creating integrated solutions for large potential end users by working directly with users in the primary market sectors that we target. We perform certain downstream processing, such as weaving, needling, blending with other fibers, chopping and milling, and preparation of pre-form, pre-cut stacks of fabric. In addition, our Salt Lake City-based Entec Composite Machines subsidiary designs and builds composite manufacturing equipment and markets the equipment along with manufacturing technology and materials.
We also provide composite design and engineering for development of applications for carbon fiber reinforced composites. We recorded research and development expenses of $7.2 million, $4.9 million and $3.3 million in fiscal 2007, fiscal 2006 and fiscal 2005, respectively. For historical financial information regarding our various business segments, see Note 11 of the accompanying Notes to Consolidated Financial Statements.
Employees
As of September 30, 2007, we employed approximately 260 persons in our United States operations and approximately 1,015 in our Hungarian operations. Our U.S. employees are not represented by any collective bargaining organizations. By law, most employees in Hungary are represented by at least one labor union. At Zoltek Zrt., our Hungarian subsidiary, there are two active unions (some Zoltek Zrt. employees belong to both unions). Management meets with union representatives on a regular basis and there have not been any problems or major disagreements with either union in the past five years. We believe that overall our employee relations are good.
Customers
In the fiscal 2007, 2006 and 2005, we reported sales of $49.9 million, $19.0 million and $9.0 million, respectively, to a wind turbine manufacturer. The Company reported sales of $25.1 million, $11.7 million and $3.1 million, respectively, to a European manufacturer of prepreg for wind energy applications in fiscal 2007, 2006 and 2005, respectively. These were the only customers that represented greater than 10% of consolidated net sales.
In May 2007, we entered into a new contract with Vestas Wind Systems under which we estimate, based on current prices and minimum purchase commitments, that we will supply approximately $300 million of carbon fibers in increasing volumes over the contract’s five-year term. In August 2007, we entered into a new contract with Gamesa Group under which we estimate, based on current prices and minimum purchase commitments, that we will supply approximately $142 million of carbon fibers over the contract’s five-year term. In June 2007, we also entered into a contract with DeWind Incorporated under which we estimate, based on current prices, that we will supply approximately $30 million of carbon fibers over the contract’s three-year term. The actual sales under any of these contracts may be greater or less than the amounts identified above.
Business Strategy
We believe that our business strategy has positioned us as a leader in developing commercial markets for carbon fibers. Our business model focuses on low and sustainable pricing facilitated by low production costs, rapidly scalable capacity and a product line that offers various value-added product and process enhancements.
The principal elements of our business strategy include the following:
Sustainable Price Leadership. We market carbon fibers for use as a base reinforcement material in composites at sustainable price levels resulting in predictable composite costs per unit of strength and stiffness that compare favorably with alternative base construction materials. We believe our proprietary process and equipment design technology enable us to produce carbon fibers at costs substantially lower than those generally prevailing in the industry and to supply carbon fibers for applications that are not economically viable for our higher-cost competitors. In the past, there have been cycles of carbon fiber oversupply resulting in selling prices that we believe were below the costs of higher-cost competitors, followed by supply shortages accompanied by price increases. These cycles inhibited the development of new applications. We believe that, with our targeted cost structure, we can maintain sustainable pricing that makes it attractive for customers to commit to high-volume applications.
Support New Commercial Markets and Applications Development. To further accelerate the commercialization of carbon fibers and carbon fiber composites across a broad range of mass-market applications, we have pursued various initiatives, including partnerships with potential users of carbon fibers to act as catalysts in the development of new low-cost, high-volume products. We believe that our supply relationships with customers for wind energy and automotive applications are the direct result of these development efforts.
Capacity Leadership to Keep Pace with Increasing Demand. We believe that our decision to build and maintain significant available capacity has directly resulted in long-term supply arrangements with high-volume customers. We have pursued an aggressive capacity expansion program and have substantial capital resources to fund further expansion of our capacity. We have developed, and are continually seeking to improve, a proprietary continuous carbonization line design in order to increase efficiency and shorten lead time from the time of the decision to add lines to the time when the lines become operational. The ability to increase capacity in response to the growth of the commercial markets is essential to encouraging development of large-volume applications.
Industry Overview
Carbon fiber composite materials are suited for a diverse range of applications based on their distinctive combination of physical and chemical properties. Carbon fibers are used as reinforcements in composite materials that combine reinforcement carbon fibers with resins or other matrix materials to form a substance with high strength, light weight, high stiffness and resistance to corrosion and fatigue. Carbon fibers most often are manufactured from acrylic fiber precursor, which is desirable due to the linear orientation of its molecular structure and high carbon content (approximately 60%). While most other producers of carbon fibers utilize custom-made acrylic raw material, we utilize less costly textile-type acrylic fiber.
We believe there are seven major producers of carbon fiber, five of which principally manufacture higher-cost carbon fibers for aerospace and other high-end applications. We focus primarily on commercial applications. Carbon fiber production requires substantial capital expenditures for manufacturing plants and specialized equipment, know-how to economically manufacture carbon fibers to meet technical specifications and the ability to qualify carbon fibers for acceptable performance in downstream applications.
Until a few years ago, the high cost of carbon fibers precluded all but the most demanding applications, limiting carbon fiber use primarily to aerospace and sporting goods applications. While the basic technology to manufacture commercial and aerospace carbon fibers is the same and fiber-to-fiber properties are equivalent, demands for specific fabrication methods, level of quality documentation and certification costs make the aerospace fibers significantly more costly to produce than carbon fiber suitable for commercial applications.
For years prior to fiscal 2004, as additions of new capacity occasionally outpaced demand from aerospace applications, manufacturers sold excess production at significantly reduced prices into specialty sporting goods and industrial applications. As a result, the distinctive characteristics of carbon fibers and the techniques for fabricating carbon fiber composites became more broadly understood and some new and diverse transitional applications developed. The strength-to-weight ratio, stiffness, rapid damping and fatigue resistance characteristics of carbon fibers have made them a desirable and affordable material for a wide range of products such as wind turbine blades and reinforced service umbilical systems for sub-sea oil and natural gas production.
During 2006, the Airbus A-380 and Boeing 787 airplanes entered production phase, utilizing carbon fibers for a substantial portion of their structural components and requiring substantial amounts of carbon fibers. We believe the demand for carbon fibers for these two programs has eliminated the excess capacity of manufacturers for aerospace applications and triggered the divergence of the aerospace and commercial demand for carbon fibers.
We believe that widespread commercialization of carbon fibers is only possible at carbon fiber prices lower than those that historically prevailed for aerospace applications. To support the long-term growth of commercial carbon fiber markets, we believe it is important to maintain attractive and predictable pricing and bring capacity on line quickly enough to support application development. Wind technology, in particular, has demonstrated significant growth for the commercial grade carbon fiber industry.
In addition to wind energy, we have identified what we believe to be emerging applications for carbon fibers across a variety of industries. Among them are:
• Oil Exploration and Production — Deep sea drilling platforms, buoyancy, umbilical, choke and kill lines and drill pipes

• Construction and Infrastructure — Lightweight, pre-cast construction reinforced with carbon fibers that protect the structure from earthquakes

• Alternative Energy — Compressed natural gas storage and fuel cells

• Fuel-Efficient Automobiles — Many technologies for increasing vehicle mileage involve reducing weight and incorporating high-strength composites

Competition
Our carbon fibers and technical fibers business segments compete with various other producers of carbon fibers, many of which have substantially greater research and development, marketing, financial and managerial resources than we do and represent significant competition for us. We are aware of no single manufacturer of carbon fiber products that competes across all of our product lines and applications. We believe our business plan distinguishes us from other carbon fiber manufacturers in supporting the long-term growth of the commercial carbon fiber market, while other carbon fiber manufacturers are focused on the aerospace industry.
SGL Carbon competes with us in the United States and Europe. SGL Carbon and we use a textile-type precursor which costs significantly less to produce than the precursor used by manufacturers of carbon fibers for aerospace applications. SGL currently is our principal competitor in the oxidized fiber market.
To varying degrees, depending on market conditions and supply, we also compete with aerospace grade carbon fiber producers, such as Hexcel Corporation and Cytec Industries in the United States and Toray Group, Toho Tenax and Mitsubishi Rayon in Japan. These carbon fibers producers tend to market higher cost products than our products, with a principal focus on aerospace structural applications. These manufacturers, while unable to sustain low pricing, have tended to enter into direct competition with us primarily when they engage in significant discounting. We believe that, with the introduction of Airbus A-380 and Boeing 787 airplanes, aerospace applications have significantly affected demand for carbon fibers and caused shortages for the commercial applications we supply. At least one other aerospace brake manufacturer has announced plans to build facilities to manufacture carbon fiber for commercial applicants.
The principal areas of competition for the carbon fibers and technical fibers business segments are sustainable price, quality, development of new applications and ability to reliably meet the customer’s volume requirements and qualifications for particular programs.
International
The Company conducts its carbon fiber products operations primarily in the United States and Europe. In October 2007, the Company acquired assets in Mexico which should become operational by the end of the fiscal year 2008. The Company sells its carbon fibers globally. There are additional risks attendant to the Company’s foreign operations, such as currency fluctuations. For additional information regarding our international operations, see Note 11 of the accompanying Notes to Consolidated Financial Statements.
Sources of Supply
As part of its growth strategy, the Company has developed its own precursor acrylic fibers, which are used as the principal raw material for all of its carbon fibers. The primary source of raw material for the precursor is ACN (acrylonitrile), which is a commodity product with multiple sources.
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 in Abilene, Texas, St. Charles, Missouri and Hungary 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.
The Company has received two notices of enforcement action, dated March 2, 2007 and June 8, 2007, respectively, from the Texas Natural Resource Conservation Commission concerning alleged air permit violations and excessive emissions at the Company’s Abilene, Texas manufacturing facility. The Company has submitted written responses, including a corrective action plan, to the Texas Natural Resource Conservation Commission and has substantially implemented the actions identified in the corrective action plan. The Company has received a notice from the Texas Natural Resource Conservation Commission dated August 21, 2007 for civil fines associated with the alleged violations in the amount of $21,590. The Company is currently appealing the assessed penalty.
AVAILABLE INFORMATION
The Company regularly files periodic reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K and quarterly reports on Form 10-Q, as well as, from time to time, current reports on Form 8-K and amendments to those reports. These filings are available free of charge on the Company’s website at www.zoltek.com, as soon as reasonably practicable after their electronic filing with the SEC. All of the Company’s filings may be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
This Annual Report on Form 10-K for fiscal 2007 and the documents incorporated by reference herein contain forward-looking statements, which are inherently subject to risks and uncertainties. See “—Special Note Regarding Forward Looking Statements.”

CEO BACKGROUND

Zsolt Rumy, age 65, is the founder of our company and has served as our Chairman, Chief Executive Officer and President and as a Director since 1975. Prior to founding the company, Mr. Rumy served as Process Engineer and Industrial Marketing Manager for Monsanto Company, Accounts Manager for General Electric Company and Technical Sales Representative for W.R. Grace Company.

Charles A. Dill, age 68, has served as a director of our company since 1992. He is currently a principal of Two Rivers Associates, LLC, a private equity firm, which is the successor to Gateway Associates, LP, where Mr. Dill was a General Partner since 1995. He served as Chief Executive Officer of Bridge Information Systems, Inc. (a provider of online data and trading systems to institutional investors) from 1990 to 1995. Mr. Dill was President of AVX Corporation (a NYSE-listed manufacturer of electronic components) from 1987 to 1990, after spending his earlier career in a number of executive positions with Emerson Electric. Mr. Dill serves as a Director of Stifel Financial Corp., the parent of Stifel, Nicolaus & Company (a securities brokerage and investment banking firm) and TransAct Technologies (a manufacturer of transaction-based printers), as well as several private companies.

Linn H. Bealke, age 63, has served as a director of our company since 1992. For more than five years prior to October 2002, he was President and Director of Mississippi Valley Bancshares, Inc. (a bank holding company) and Vice Chairman of Southwest Bank of St. Louis (a commercial bank). In October 2002, Mississippi Valley Bancshares, Inc. was merged into Marshall and Ilsley Corporation. Mr. Bealke continued to serve as Vice Chairman of Southwest Bank of St. Louis until his retirement in December 2004.

George E. Husman, age 62, has served as a director of our company since 2007. Mr. Husman was appointed Chief Technology Officer of our company February 2007. Prior to joining us, Mr. Husman was the Associate Director for Engineering Research at the University of Alabama at Birmingham since 2004. From 1993 to 2004, Mr. Husman served as the Vice President, Engineering Division, at the Southern Research Institute in Birmingham, Alabama. Prior to 1993, Mr. Husman spent six years with BASF Structural Materials, Inc. in various positions, including Vice President for Business Development and Vice President for Research & Development, and he spent 18 years at the Materials Directorate at Wright-Patterson Air Force Base in various research and management positions.

James W. Betts, age 70, has served as a director of our company since 1992. In 2000, he retired as Vice President Raw Materials of Great Lakes Carbon Corp. (a producer of carbon products) in which capacity he had served for more than the preceding five years.

Michael D. Latta, age 66, has served as a director of our company since 2007. Mr. Latta serves as Chairman of the Board of Universe Corporation (a construction engineering and materials distributor) and Chairman of the Board of Res Q Tek, Inc. (a manufacturer of hydraulic and pneumatic rescue equipment). He has served in these positions from 1997 and 1995, respectively. Prior to 1995 he was President of Safety Equipment (a manufacturer of emergency vehicle warning equipment) from its founding in 1974.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, commonly referred to as MD&A, is intended to help the reader understand Zoltek, our operations and our business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes. This overview summarizes the MD&A, which includes the following sections:
Our Business — a general description of the key drivers that affect our business, the industry in which we operate and the strategic initiatives on which we focus.
Results of Operations — an analysis of our overall results of operations and segment results for the three years presented in our financial statements. We operate in two segments: Carbon Fiber and Technical Fiber. Other miscellaneous and corporate are combined into a third business segment called Headquarters/Other.
Liquidity and Capital Resources — an analysis of cash flows, sources and uses of cash, off-balance sheet arrangements, contractual obligations, the potential impact of currency exchange and an overview of our financial position.
Critical Accounting Estimates — a description of accounting estimates that require critical judgments and estimates.
OUR BUSINESS
We are an applied technology and advanced materials company. We are a leader in the commercialization of carbon fibers through our development of a price-competitive, high-performance reinforcement for composites used in a broad range of commercial products. In addition to manufacturing carbon fibers, we produce an intermediate product that we refer to as technical fiber, a stabilized and oxidized acrylic fiber used in flame and heat-resistant applications. We have spent over 10 years developing our proprietary technology and manufacturing processes. We believe that we are the largest manufacturer primarily focused on producing low-cost carbon fibers for commercial applications.

The Company’s primary business segments are based on product lines and include Carbon Fibers and Technical Fibers. The Carbon Fibers segment manufactures low-cost carbon fibers used as reinforcement material in composites, carbon fiber composite products and filament winding equipment used in the composite industry. The Technical Fibers segment manufactures oxidized acrylic fibers used to manufacture aircraft brake pads for heat/fire barrier applications. These two segments also facilitate development of product and process applications to increase the demand for carbon fibers and technical fibers and seek to aggressively market carbon fibers and technical fibers. The Carbon Fiber and Technical Fiber segments are located geographically in the United States and Hungary.

We operate manufacturing plants in Hungary, Texas and Missouri. Our plant in Hungary is our major carbon fiber manufacturing facility. Our Hungarian plant also manufactures acrylic fiber precursor, the raw material that we use to make carbon fibers and intermediate oxidized acrylic fibers. Our Texas plant produces carbon fiber and has value-added processing capabilities. Our Missouri facility is primarily dedicated to the production of technical fibers for aircraft brake and other friction applications and it also produces limited quantities of carbon fibers.

Since fiscal 2005, there has been a structural shift in the carbon fiber market. Strong demand from the higher-cost aerospace applications has caused a shortage in supply for the commercial applications that we supply. During this period, we have experienced rapid growth due to sharply increased demand for commercial carbon fibers, primarily from producers of large composite blades used in wind turbines. We believe that, over the past two years, there has been increased interest in and usage of carbon fibers in the oil exploration, automotive and construction end markets. Our revenue has increased from $34.5 million in fiscal 2004 to $150.9 million for fiscal 2007. To support this growth, we expanded our manufacturing capacity from two continuous carbonization lines in operation at the beginning of fiscal 2004 to our current 18 lines.

The following factors have affected the net sales of our Carbon Fiber segment in recent years: (1) the growth in emerging applications using carbon fiber such as wind turbines; (2) increases in our manufacturing capacity; and (3) the significant price increases that we have successfully implemented. We would expect that our net sales in future periods will continue to be affected by the first and second of these factors. We cannot predict whether we will be able to implement in the future price increases similar to those we implemented in the recent past. The net sales of our Technical Fiber segment have been affected in the past, and we expect will continue to be affected in the foreseeable future, by available manufacturing capacity and the demand resulting from aircraft brake manufacturers and heat and flame resistant applications.

The primary cost components of our Carbon Fiber and Technical Fiber segments are: (1) acrylonitrile, which is a propylene-based by-product and our primary raw material for the production of acrylic fiber precursor used in our carbon fiber and technical fiber production; (2) energy; and (3) labor. Acrylic fiber precursor comprises approximately 50% of the total cost of producing carbon fibers. In addition, since fiscal 2006, we have incurred substantial litigation costs, which we expect will not continue at prior levels. We expect that new applications, including those we are attempting to facilitate, will continue to positively affect demand for our products. Any reduction in the use of carbon fiber in aerospace applications could increase the supply of carbon fibers and the competition we face for commercial applications.

For the fiscal 2007, four customers accounted for approximately 63% of our revenue and our largest customer represented approximately 33% of our revenue. We expect this customer concentration will continue for the foreseeable future.

We have recently entered into long-term supply contracts with several of our key customers. In May 2007 we entered into a new contract with Vestas Wind Systems under which we estimate, based on current prices and minimum purchase commitments, that we will supply approximately $300 million of carbon fibers in increasing volumes over the contract’s five-year term. In August 2007, we entered into a new contract with Gamesa Group, under which we estimate, based on current prices and minimum purchase commitments, that we will supply approximately $142 million of carbon fibers over the contract’s five-year term. In June 2007, we entered into a contract with DeWind Incorporated under which we estimate, based on current prices, that we will supply approximately $30 million of carbon fibers over the contract’s three-year term.

We believe that our existing capacity will be sufficient to satisfy our obligations under our current long-term supply agreements. To meet increasing demand from current commercial application customers and provide carbon fibers for emerging applications, we have developed and are executing plans to further expand our capacity building additional capacity at our existing facilities and by acquiring a new facility. We are installing additional production design capacity in Hungary that we expect to be operating during the second quarter of fiscal 2008. In addition, in October 2007, we announced that we have purchased the Guadalajara, Mexico-based Crysel acrylic fiber manufacturing assets of Cydsa, a large publicly traded Mexican chemical and industrial company. We estimate the total investment will be approximately $100 million to purchase the facility, to retool and modify the plant, to produce acrylic precursor and to install the initial four carbon fiber lines. We expect that precursor production will begin by the end of fiscal 2008. We plan to install four continuous carbonization lines during the first quarter of fiscal 2009 at the Mexico facility. We believe the acquisition of the Mexico plant gives us the opportunity to increase our manufacturing capacity of precursor and increase our carbon fiber lines at favorable costs.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2007 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2006
The Company’s sales increased 63.4%, or $58.5 million, to $150.9 million in fiscal 2007 from $92.4 million in fiscal 2006. Carbon fiber sales increased 77.2%, or $50.7 million, to $116.4 million in fiscal 2007 from $65.7 million in fiscal 2006 as production and sales of wind energy orders continued to grow. The Company’s carbon fiber sales benefited from a price increase on January 1, 2007, the newly added capacity in Hungary of seven carbon fiber lines since June 30, 2006 and the continued improvement in the operations of the Abilene facility. Technical fiber sales increased 25.8%, or $6.5 million, to $31.7 million in fiscal 2007 from $25.2 million in fiscal 2006. Technical fiber sales increased as the Company experienced a significant increase in orders from its aircraft brake customers and added a technical fiber production line in its facility in Hungary. Sales of other products and services increased $1.3 million to $2.8 million during fiscal 2007 from $1.5 million during fiscal 2006 related to our Energy sales division.
The Company’s cost of sales increased by 53.6%, or $37.5 million, to $107.5 million in fiscal 2007 from $70.0 million in fiscal 2006. Carbon fiber cost of sales increased by 66.5%, or $32.8 million, to $82.2 million for fiscal 2007 from $49.4 million for fiscal 2006. The increase in carbon fiber cost of sales reflected increased sales of 77.2% discussed above offset by increased margins due to greater volumes and improved efficiencies of the installed carbon fiber lines at the Abilene, Texas facility. Technical fiber cost of sales increased $4.5 million, or 23.3%, to $23.7 million for fiscal 2007 from $19.2 million for fiscal 2006. The increase in technical fiber cost of sales resulted from the increased sales of 25.8% discussed above. The cost of sales of the other products increased for fiscal 2007 to $1.6 million compared to fiscal 2006 of $1.4 million.
Application and market development costs were $7.2 million in fiscal 2007 and $4.9 million in fiscal 2006. These costs included product and market development efforts, product trials and sales and product development personnel and related travel. Targeted emerging applications include automobile components, fire/heat barrier and alternate energy technologies. The increase included expenses associated with application development of the towpreg product at the Company’s prepreg facility in Utah.
A charge of $5.4 million was recorded in the fourth quarter of 2007 related to the investment banker litigation. The expenses included $0.8 million for legal fees. A special non-recurring charge of $22.8 million was recorded in the fourth quarter of 2006 related to the SP Systems case. The expenses included $1.0 million legal fees incurred in fiscal 2006, $0.7 million for estimated legal fees for the appeal process and $21.1 million estimated damages.
Selling, general and administrative expenses for continuing operations were $12.6 million in fiscal 2007 compared to $10.4 million in fiscal 2006. The increase related to staffing of management positions that have been filled to meet the new demands of the growing sales and production volume, particularly at our Hungarian operations. The Company also recorded $1.3 million for the cost of employee services received in exchange for equity instruments under SFAS 123-(R) during fiscal 2007, an increase of $0.3 million above fiscal 2006 expense.
Operating income from fiscal 2007 was $18.1 million, an increase of $33.8 million from the operating loss of $15.7 million incurred during fiscal 2006. This improvement resulted primarily from an increase in gross margin of $21.0 million and a litigation charge of $22.8 million related to the SP Systems case recorded during fiscal 2006, partially offset by a litigation charge of $5.4 million related to the investment banker case recorded during fiscal 2007. Carbon fiber operating income improved from $10.4 million in fiscal 2006 to $26.5 million in fiscal 2007. The improvement related to the increase in production and sales as the Company added new capacity at its Hungarian facility, increased prices and improved production efficiency at its Abilene facility. Operating income from technical fibers improved from $4.6 million in fiscal 2006 to $7.4 million in fiscal 2007 due to increased orders from the European aircraft brake customers and new sales within the automotive heat resistance applications. Other products/ headquarters operating loss decreased from a loss of $30.7 million in fiscal 2006 to a loss of $15.8 million in fiscal 2007 due to a litigation charge of $22.8 million related to the SP Systems case recorded during fiscal 2006, offset by increases during fiscal 2007 in administrative headcount and salaries in Hungary to support the production growth and an increase of $0.3 million during fiscal 2007 for the cost of employee services received in exchange for equity instruments under SFAS 123-(R).
Interest expense was approximately $2.3 million in fiscal 2007 compared to $2.6 million in the corresponding period of fiscal 2006. Due to the limited variable rate debt, the impact of the increase in market interest rates was immaterial.
Amortization of financing fees and debt discounts, which are non-cash expenses, were approximately $9.8 million for fiscal 2007 compared to $16.5 million for fiscal 2006. The decrease in amortization resulted from the expensing of $6.8 million of a beneficial conversion feature related to a partial conversion in June 2006 of the September 2005 issuance and full conversion in May 2006 of the February 2005 issuance and the $3.3 million discount related to the issuance of 111,113 warrants to purchase the Company’s shares at $0.01 per share during the fiscal year 2006 (see “—Liquidity and Capital Resources”). During fiscal 2007, an additional $6.4 million warrant issue expense was recorded as the Company entered into an amendment of its previously announced convertible debt financing package with institutional investors under which the Company issued the investors warrants to purchase 827,789 shares of common stock with an exercise price of $28.06 per share.
Interest income was $1.8 million in fiscal 2007 compared to $0.3 million in fiscal 2006. The increase was primarily a result of interest earned on cash received from our public offering in August 2007 and interest earned on a $10 million loan from the Company’s Chief Executive Officer used to finance a bond required in connection with an appeal of certain litigation.
Loss on value of warrants and conversion feature, which is a non-cash item, decreased $29.0 million from $29.3 million in fiscal 2006 to $0.3 million in fiscal 2007 (see “—Liquidity— Financing”). The reduction in the loss was attributable the exercise of the majority of outstanding warrants and convertible debt during fiscal 2006.
Other expense, net, was of $1.1 million in fiscal 2007 compared to $1.0 million for fiscal 2006. The increase in the foreign currency transactional loss during fiscal 2007 was due to the Hungarian Forint becoming stronger compared to the Euro and Pound Sterling in which the Company buys most raw materials.
Income tax expense was $2.0 million for fiscal 2007 compared to $0.9 million for the corresponding period in the prior year. A valuation allowance was recorded against the income tax benefit resulting from the pre-tax loss in fiscal 2006 due to uncertainties in the Company’s ability to utilize net operating loss carryforward in the future. An income tax expense of $0.8 million was recorded for fiscal 2007, as we established a deferred tax liability for book to tax differences within the Hungarian operation. An expense of $1.2 million and $0.9 million was recorded in fiscal 2007 and 2006, respectively, related to local taxes for the Hungarian operations.
The foregoing resulted a loss from continuing operations of $2.0 million for fiscal 2007 compared to a loss of $65.8 million for fiscal 2006. Similarly, the Company reported loss from continuing operations per share of $0.07 and $2.91 on a basic and diluted basis for fiscal 2007 and 2006, respectively. The weighted average common shares outstanding were 28.5 million and 22.6 million for fiscal 2007 and 2006, respectively.
The loss from discontinued operations of $0.5 million for fiscal 2007 compares to a loss of $0.04 million for fiscal 2006. The decrease in sales was offset by a significant decrease in cost during fiscal 2007 as the Company liquidated existing inventory balances. The Company reported a loss from discontinued operations per share of $0.02 and $0.00 on a basic and diluted basis for fiscal 2007 and 2006, respectively.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations
Three months ended June 30, 2008 compared to three months ended June 30, 2007
The Company’s sales increased 11.6%, or $4.6 million, to $45.0 million in the third quarter of fiscal 2008 from $40.3 million in the third quarter of fiscal 2007. Carbon fiber sales increased 30.4%, or $8.8 million, to $37.7 million in the third quarter of fiscal 2008 from $28.9 million in the third quarter of fiscal 2007 as production and sales of wind energy and other orders continued to grow. The Company’s carbon fiber sales benefited from a price increase on January 1, 2008 and the newly added capacity in Hungary of eight carbon fiber lines since March 2007. Technical fiber sales decreased 39.0%, or $4.1 million, to $6.5 million in the third quarter of fiscal 2008 from $10.6 million in the third quarter of fiscal 2007. Technical fiber sales decreased as primary aircraft brake customers determined to reduce their inventory which had been at historically high levels. Sales of other products and services increased $0.1 million to $0.8 million during the third quarter of fiscal 2008 from $0.7 million during fiscal 2007 related to our energy, sewer and wastewater treatment plant sales to local Hungarian municipalities.
The Company’s cost of sales increased by 10.5%, or $3.0 million, to $31.3 million in the third quarter of fiscal 2008 from $28.3 million in the third quarter of fiscal 2007. Carbon fiber cost of sales increased by 27.9%, or $5.5 million, to $25.1 million for the third quarter of fiscal 2008 from $19.6 million for the third quarter of fiscal 2007. The increase in carbon fiber cost of sales reflected increased sales of 30.4% discussed above. Technical fiber cost of sales decreased $2.9 million, or 35.0%, to $5.3 million for the third quarter of fiscal 2008 from $8.2 million for the third quarter of fiscal 2007. The decrease in technical fiber cost of sales resulted from the decreased sales of 39.0% discussed above, as well as the resulting unfavorable change in fixed costs absorption. The cost of sales of the other products increased for the third quarter ended fiscal 2008 to $0.9 million compared to the third quarter ended fiscal 2007 of $0.5 million.
The Company’s gross profit increased by 14.2%, or $1.7 million, to $13.6 million in the third quarter of fiscal 2008 from $11.9 million in the third quarter of fiscal 2007. Carbon fiber gross profit percentage increased to 33.3% for the third quarter of fiscal 2008 compared to 32.1% for the third quarter of fiscal 2007. Carbon fiber gross profit increased to $12.6 million from $9.3 million during these same respective periods. The increases in carbon fiber gross profit and gross profit percentage resulted from the January 1, 2008 price increase, greater volumes and improved production efficiencies of the installed carbon fiber lines, overcoming significant increases in ACN and energy costs. Technical fiber gross profit decreased from $2.5 million, or 23.1% of sales, in the third quarter of fiscal 2007 to $1.2 million, or 17.9% of sales, during the corresponding period of fiscal 2008. The decreases in technical fiber gross profit and gross profit percentage resulted from decreased shipments to the primary aircraft brake customers, as discussed above.
Application and market development costs were $2.0 million in the third quarter of fiscal 2008 and $2.0 million in the third quarter of fiscal 2007. These costs included product and market development efforts, product trials and sales and product development personnel and related travel. Targeted emerging applications include automobile components, offshore oil and gas production, secondary aircraft structures, fire/heat barrier and alternate energy technologies.
Selling, general and administrative expenses for continuing operations were $4.4 million in the third quarter of fiscal 2008 compared to $3.3 million reported for the third quarter of fiscal 2007. The Company spent $0.4 million in fiscal 2008 related to an internal accounting investigation described below under — “Internal Accounting Investigation”.
The Company recorded $0.6 million for the cost of employee services received in exchange for equity instruments under SFAS 123(R) during the third quarter of fiscal 2008, an increase of $0.1 million above third quarter fiscal 2007 expense. An additional $0.5 million of the increase to selling, general and administrative expenses was related to staffing of management positions that have been filled to meet the demands of the growing sales and production volume.
Operating income in the third quarter of fiscal 2008 was $7.3 million, an increase of $0.6 million from the operating income of $6.7 million incurred during the third quarter of fiscal 2007. This improvement resulted primarily from an increase in gross profit of $1.7 million, offset by an increase of management headcount to meet the demands of growing sales and production volume and by $0.4 million of costs incurred related to an internal accounting investigation. Carbon fiber operating income improved from $7.4 million in the third quarter of fiscal 2007 to $9.9 million in the third quarter of fiscal 2008. The improvement related to the increase in production and sales as the Company added new capacity at its Hungarian facility and increased prices. Operating income from technical fibers decreased from $2.0 million in the third quarter of fiscal 2007 to $0.7 million in the third quarter of fiscal 2008 due to decreased shipments to aircraft brake customers. Headquarters/other operating loss increased from a loss of $2.7 million in the third quarter of fiscal 2007 to a loss of $3.3 million in the third quarter of fiscal 2008 due to increases in administrative headcount and salaries to support the production growth and a cost of $0.4 million during the third quarter of fiscal 2008 to conduct an internal accounting investigation.
Interest expense was $0.3 million in the third quarter of fiscal 2008 compared to $0.4 million in the corresponding period of fiscal 2007. As investors continue to convert their outstanding convertible debt into shares, the Company’s cost of interest on the related debt has decreased.
Amortization of financing fees and debt discounts, which are non-cash expenses, were approximately $1.6 million for the third quarter of fiscal 2008 compared to $0.4 million for the third quarter of fiscal 2007. The Company expensed $1.3 million as amortization of financing fees during the third quarter of fiscal 2008 as investors converted convertible debt related to the May 2006, July 2006 and October 2006 issuances.
Interest income was $0.6 million in the third quarter of fiscal 2008 compared to $0.2 million in the third quarter of fiscal 2007. The increase was a result of interest earned on short-term investments of cash received from our public offering in August 2007.
Loss on value of warrants and conversion feature was $0.2 million for the third quarter of fiscal 2007 (see “—Liquidity and Capital Resources— Financing”). There were no outstanding warrants or convertible debt with derivative features as of September 30, 2007 or subsequently.
Loss on currency translation increased to $2.1 million for the third quarter of fiscal 2008 compared to $0.3 million for the third quarter of fiscal 2007. During the third quarter of fiscal 2008, both the U.S. dollar and the Euro declined in value by approximately 8% against the Forint. As most of the Company’s accounts receivables are denominated in Euros, the decline in value resulted in a significant loss recognized in the income statement of our Hungarian subsidiary. The translation of the Hungarian subsidiary’s financial statements from its functional currency (forint) to U.S. dollars is not included in determining net income for the period but is recorded in accumulated other comprehensive income in equity. The currency transaction loss in fiscal 2007 was primarily the result of decline in value of the U.S. dollar.
Other expense, net, was $23,000 for the third quarter of fiscal 2008 compared to $0.2 million for the third quarter of fiscal 2007. These expenses were primarily fees incurred at our Hungarian subsidiary.
Income tax expense was $1.5 million for the third quarter of fiscal 2008 compared to $0.3 million for the corresponding period in the prior year. During the three months ended June 30, 2007, the Company utilized a portion of its foreign deferred tax assets, for which no benefit had been previously recorded, to offset current foreign income taxes. As of June 30, 2007, due to uncertainties in the Company’s ability to utilize its net operating loss carryforward in the future, a valuation allowance was recorded against the income tax benefit resulting from the prior pre-tax losses. During the three months ended September 30, 2007, since the Company’s Hungarian operations had established and expected to continue a strong pattern of operating earnings, the valuation allowance was released resulting in the recognition of net deferred tax assets. During the third quarter of fiscal 2008, the Company amortized the deferred tax asset by $0.7 million, reducing the existing tax net operating loss carryforward. Income tax expense of $0.5 million was recorded for the third quarter of fiscal 2008 as we accrued for a special Hungarian tax of 4% on pre-tax net income. The Company also incurred $0.3 million expense during the third quarter related to the local Hungarian municipality tax.
The foregoing resulted in income from continuing operations of $2.3 million for fiscal 2008 compared to income of $5.0 million for fiscal 2007. Similarly, the Company reported income from continuing operations per share of $0.07 and $0.17 on a basic and diluted basis for the third quarter of fiscal 2008 and 2007, respectively.
The loss from discontinued operations was $24,000 for the third quarter of fiscal 2007. The Company did not report discontinued operations for the third quarter of fiscal 2008 as these operations were immaterial to the Company’s overall operations.

CONF CALL

Zsolt Rumy

Thank you, good morning welcome to our first quarter conference call. Excuse my voice I’m under the weather, probably looking for a little sympathy from you guys. Obviously our last quarter was somewhat of a disappointment, and against a great quarter we have fourth quarter last year. Just want to make one thing clear is that this is no reflection of any changes in the market or any future [infestation].

Basically our revenue for Carbon Fiber was more or less the same as the fourth quarter we missed several significant orders due to some of our customers reducing their inventory as they became more confident they were able to supply them on a continuous basis. One single customer reduced their purchase last year, last month by 100 plus tons.

Other sales were affected by a small customers, [andre season] and so on, so there’s nothing structural, nothing long term that is indicated by our shortfall or disappointing revenue. [Technical] fiber, some of our great customer over built inventory last year, primarily because of bankruptcy of the supplier, the precursor that we use to use and they reserved some material for qualification of our [modolyn] based product and so that cause some catching up and in general arms so I can say nothing that I would consider to be a long term.

Gross margin certainly got affect when the sales aren’t there but at the same time we’re building inventory, the tendency is for the gross margin on sales to go down and of course we recapture that on the sale of the next product. So that basic overview let me turn the call over to Kevin, Kevin Schott our CFO for giving you the disclaimer and then followed by some detailed financial information, then I’ll come back with some comments and reserve a lot of time for questions and answers at the end.

Kevin Schott

Thanks Zsolt, real quickly as usual go through our disclaimer, this conference call contains statements that are based on the current expectations of our company, you’re cautioned at any such forward looking statements are not guaranteed future performance and all risk and uncertainties. Of these factors, includes things as successfully resolving our pending litigation, continuing to improve the efficiency of our manufacturing facilities, continued investing application market development, manufacture carbon fiber and properly market them and then successfully recommending a recently acquired Mexican facility manufacturing carbon fiber precursor and carbon fiber production line.

There are other risk factors if you would like to go to our 10K and read them you are more than welcome to. I think Zsolt basically covered the revenue and margin side. You know a couple of other areas our SG&A was up a little bit over the entire fourth quarter. So of that is a little cyclical that our first does get impacted somewhat from professional fees related our auditors [serving doc this week], so you will see that come down a little bit.

Also we did have about a $200,000 increase in our non cash costs related to FAS 123R due to some options that were issued as of October 1st going forth so that $200,000 will be an additional cost but it is a non cash cost. During the quarter we had about $3 million worth of debt that converted out and that basically ended up at about $2.1 million worth of cost related to convertible debt expense which is down from both the fourth quarter and for the prior 1st quarter of last year.

Related to that, on the cash flow side, nothing real significant there, we continue to spend on expansion we spend about $13 million on cap ex building the new four carbon fiber lines over in our Hungarian operation and started to see some cap ex down in Mexico operation as we start to retrofit them there. During the quarter we have acquired the Mexican facility that for approximately $35 million that all shows up in the since it was an asset acquisition shows up in our property equipment line item in our financial statement and you know the capital related to those expansions is obviously going to continue at fairly higher rate of $13 - $14 million a quarter going forward.

With that being said, that’s about all I have for the quarter and still kind of cover the revenue and the margin issues and I’ll throw it back to Zsolt.

Zsolt Rumy

Okay, thanks Kevin, I want to cover a little bit about, say a few comments about sales. Our current long term contracts cover approximately 50+% of our capacity. We continue to negotiate new annual and long term contracts. As we have said in the past, we like to bring that up to 70+%. We expect to meet our sales goals for 2008 and 9 and 10 which nothing then has changed for long term outlook. We’re making significant effort in Asia and we are ready booked 700 tons of business and we’re continuing to our activity and establish a personnel in Asia which we do not have at the moment.

I think there’s a huge opportunity there and we have more or less stayed away from them as we were not able to supply them as we’re capacity restrained now because we have capacity so we’re looking to get very active and aggressive in that area.

We’re adding more staff, sales staff globally both in Asia, Europe and in the US as well. The technical fiber sales by year end we expect to actually exceed the fiscal 2007 sales so that will recover as well. Our outlook, talking about our operations in Hungary, all projects are essentially completed at the end of January. We’re starting out all the lines and everything’s seems to be fine so our expansion activity in Hungary will top at this moment in whatever we may do related to value added business opportunities such as we’re increasing our [sales effort] and increasing our production capacity for fabrics with recently for the job short fiber line and Hungary which is also started up.

And so we see that kind of activity going on but the capital expenditure for those items are not that significant. [Evelyn] has stabilized and constantly improving. We’ll be bringing Mexican crew for training within the next 30 to 45 days. I believe the foreman and supervisors will be coming over and then shortly thereafter some of the actual operators. We also have some ongoing short fiber projects in [Evelyn] to increase our capabilities and capacity in processing short fibers which is also fairly significant part of our business and is growing.

And one other item, I’ll talk about personnel in a few minutes but we have a new general manager and for global prefab sales and operations in Salt Lake city, a guy named [Rolls John] and he’s coming to his Zoltek for the significant amount of experience in [prefag] business and we’re welcoming him and again we’re concentrating on value added business increase our revenue and margins and so he should be a significant addition to our management team.

Mexico the projects are proceeding reasonably on schedule, peekers are expected to be actually coming up the line in not only in June and carbon fiber expected to start no later than July. The joint venture that we talked about in the past we’re assembling our transfer team and we’re actually preparing instrument documentation for our process to be able to be ready to act upon accomplishing our signing contract and continuous interest from potential partners.

I want to just touch on the general market conditions. Demand continues to be strong. New capacity including ours gives industry confidence of to build business and new projects. I mean this was on concern I had last year is that the carbon fiber availability was so tight that people were getting turned off and I think they’re getting back on and they’re getting energized and I hope that we’ll never be in that kind of a schedule or that type of a production globally so that this start, stop and start on the new developments is kind of a stressful and it can too negative impression about our carbon fiber business, not just ours but in general of the market.

Currently there are some small quantities of carbon fibers are more readily available that somebody wants to buy 10, 20,000 pounds of carbon fibers I think they can get it like last year they couldn’t. On the other hand, if somebody wants to buy a half a million pounds or more, they can’t, there’s nobody out there who’s supplying.

Back to the market to absorb our added capacity without any problem I think we’re continuing to be bolstered by adding capacity. On the personnel side it’s the last part of my comments we have negotiated the, they have a new COO come on board, her name is Karen Bomba, she was with [Mesa Begoti] and she was the CEO of [Mesa Begoti], US and I think she was going to be an fantastic addition. We’re not 100% sure exact starting date but it’s the, her leaving was announced within [Mesa Begoti] on Monday or yesterday so we’re trying to figure out what the timing is and conclude the discussions and all the bringing her on board.

I mentioned the GM for our preferry operations, again is a senior guy that has had a lot of experience, he was the CEO of a preferry operation in Salt Lake City, so he’s also bring a not only a vast knowledge but management talents so we’re looking forward to him giving us a boost in that area. We have a supply team manager starting on the 25th, he’s also coming form MEMC and prior to that Intel, so the guy has got a lot of experience and with our objective to reach $500 million revenue base we obviously need to sharpen up our purchasing and supply logistics and so on.

We also have a new young man David [Parcell] he’s in the marketing support area where I think he’s doing some projects right now with the, I think that’s where he’ll probably end up in, in the next 12 months, that will be his primary activity. And then we have a couple of marketing technical support people coming on board as well. One of them is a polymer chemist area and the other one is a project manager. So given all the projects we have coming on I think we’re staffing up in that area and I think that’s also going to be a very instrumental in our long term growth.

So with that those are the quick comments I wanted to make and I want to turn the call over to you for questions and answer. I ask our monitor Chris to give preference to investors, analyst and I hope that everybody can ask their questions before we’re done. Go ahead Chris.

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