ZOLTEK™ began as an industrial equipment and services company. We entered the carbon fiber business with an acquisition in 1988. The acquired operation was in poor financial condition, but it had a technology that was the basis for the new jumbo airplane brakes. It also appeared to have the inside track on a piece of NASA business — namely, the supply of carbon fibers for rocket nozzles. Thus, like every other carbon fiber producer, we focused on high-priced, low-volume aerospace applications.

Slow development in the aircraft brake business and our failure to land the NASA contract led to a major review of the newly acquired carbon fiber business. We did pilot studies to determine the feasibility of manufacturing carbon fibers from inexpensive, textile-type acrylic fibers. When this proved practicable, we knew that we could duplicate the properties of the most commonly used aerospace carbon fibers at a substantially lower cost. In other words, we could reduce the cost and price of this exceptionally strong, lightweight material – taking it from an out-of-this-world level, where it was restricted to aerospace used, down to a point where it would begin to make sense for many commercial and industrial applications.

That is the central insight that has guided this company from our initial public offering in 1992 to the present time. Our IPO raised $4 million, and we used most of that to build our first continuous carbonization line for the textile-type precursor.

Since then, we have taken further steps to reduce the cost of our principal raw material. In 1995, using the proceeds of a secondary stock offering, we purchased Magyar Viscosa, a Hungarian producer of acrylic and other fibers for the European textile market. The acquisition supported our carbon fiber business in two ways. First, it gave us a further means of driving down the cost and price, by enabling us to produce precursor from acrylic in-house and to use the acquired technology and expertise to develop other sources. Second, it ensured a plentiful supply of this raw material to meet a rapid increase in demand for carbon fibers.

In 1996, as the price of our stock soared, we completed another secondary stock offering. This time we earmarked the proceeds to finance an accelerated five-year strategic plan – ZOLTEK 2000 – which included the installation of new continuous carbonization lines in Abilene, Texas and in Hungary.

While we succeeded in developing our infrastructure to become the low-cost producer, the large volume applications were slower to develop than anticipated. From 1998 to mid-2003 total carbon fiber usage did not grow significantly and aerospace applications actually declined. This situation resulted in substantial overcapacity and destructive pricing in the industry. Much of the new carbon fiber business was captured by the aerospace fibers as certain manufacturers sold their aerospace-grade fibers on the commercial markets at prices that did not cover their total costs, undermining our commercialization strategy.

Even during these lean years from 1999 to 2003 – when carbon fiber sales did not materialize and financial losses mounted – we predicted, and continued to work toward, a future predicated on explosive growth for our low-cost, high-performance carbon fibers.

In 2004, there was a sudden upsurge in orders, and demand has continued to increase ever since.

During 2006, we completed our transformation from primarily a development business to an operational business and continued our expansion plans that were first announced in 2005. Also during 2006, the demand for commercial carbon fibers continued to increase tremendously and the divergence of the aerospace and commercial markets continued to evolve. We believe that this divergence will persist over a long period and validates our commercialization strategy.