Note 10 - Income Taxes

12 Months Ended

Sep. 30, 2011

Income Tax Disclosure [Text Block]

10.   INCOME TAXES

The components of income tax expense (benefit) for the fiscal years ended September 30, 2011, 2010 and 2009 are as follows (amounts in thousands):

	2011		2010			2009
From continuing operations:
Current:
Federal	$	128	$	121		$	130
State		3		12			-
Non - U.S.		611		849			1,285
		742		982			1,415
Deferred:
Federal		-		-			-
State		-		-			(179	)
Non - U.S.		169		(2,823	)		869
		169		(2,823	)		690
Total operations	$	911	$	(1,841	)	$	2,105

Deferred income taxes reflect the tax impact of carryforwards and temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Cumulative carryforwards and temporary differences giving rise to the net deferred income tax liability at September 30 are as follows (amounts in thousands):

	September 30,
	2011			2010
Deferred tax assets:
Accrued employee compensation	$	103		$	116
Reserves		151			278
Other assets		18			29
Net operating loss and credit carryforwards		31,341			33,910
		31,613			34,333
Deferred tax liabilities:
Property, plant and equipment		(10,034	)		(12,365	)
Prepaid expenses		(165	)		(106	)
Other liabilities		-			-
		(10,199	)		(12,471	)
Total deferred taxes		21,414			21,862
Less: valuation allowance		(21,792	)		(22,053	)
Net deferred tax liability	$	(378	)	$	(191	)
Classification of deferred taxes:
Current deferred tax asset (included in other current assets)	$	1,477		$	601
Long-term deferred tax liability		(1,855	)		(792	)
	$	(378	)	$	(191	)

 In the consolidated balance sheets, these deferred tax assets and liabilities are classified as either current or non-current based on the classification of the related liability or asset for financial reporting. A deferred tax asset or liability that is not related to an asset or liability for financial reporting, including deferred taxes related to carryforwards, is classified according to the expected reversal date of the temporary differences as of the end of the year.

 Zoltek Zrt. incurred unrealized foreign currency losses from its US denominated intercompany loan during fiscal 2009, 2010 and 2011.  These losses have been recorded as a tax decreasing item on these years’ tax returns.

The provision for income taxes at September 30 differs from the amount using the statutory federal income tax rate (34%) as follows (amounts in thousands):

	2011			2010			2009
At statutory rate:
Income tax (benefit) expense on (loss) income from continuing operations	$	(905	)	$	(2,781	)	$	(713	)
Increases (decreases):
Lower effective tax rate on non-U.S. operations		(175	)		1,253			1,744
Change in valuation allowance on net operating loss		165			959			(4,034	)
State taxes, net of federal benefit		33			149			(545	)
Local taxes, non-U.S.		611			711			1,101
Change of uncertain tax positions		(46	)		(2,173	)		2,440
Reflection of tax rate change – non-U.S.		1,748			527			370
Amortization of warrant discount		-			65			1,718
Fair market value of warrants		(422	)		(596	)		-
R&D Credits		(186	)		-			-
Other		88			45			24
	$	911		$	(1,841	)	$	2,105

The change in valuation allowance is impacted by both the unrealized excess tax benefits on stock based compensation reflected in the net operating loss as well as changes in the expected realization of net operating losses.

The consolidated income (loss) from continuing operations before income taxes by domestic and foreign sources for the years ended September 30, 2011, 2010 and 2009 was as follows (amounts in thousands):

	2011			2010			2009
Domestic	$	3,041		$	5,760		$	13,352
Foreign		(5,704	)		(13,940	)		(15,449	)
Loss from operations before income taxes	$	(2,663	)	$	(8,180	)	$	(2,097	)

The Company currently has domestic net operating loss carryforwards of approximately $66.7 million available to offset future tax liabilities, which expire between 2021 and 2029.  Included in the net operating loss carry-forwards are stock option deductions of approximately $19.9 million.  The benefits of these tax deductions, referred to as excess tax benefits, will be credited to additional paid-in capital upon being realized or recognized.  The Company has recorded a full valuation allowance against its deferred tax asset because it is more likely than not that the value of the deferred tax asset will not be realized.

The Company currently has a foreign net operating loss carryforward of approximately $83.6 million. $21.9 million expires between 2017 and 2021 and $61.7 million has unlimited carryforward.

Income tax expense was $0.9 million for fiscal 2011 compared to a tax benefit of $1.8 million for fiscal 2010. During fiscal 2011, income tax expense of $0.6 million was incurred related to the local Hungarian municipality tax.  An additional income tax expense of $0.1 million was recorded during fiscal 2011 related to increasing the valuation allowance against the deferred tax asset for the Hungarian subsidiary. Local and federal alternative minimum taxes in the U.S. and Mexico were $0.2 million. During fiscal 2010, income tax expense of $0.8 million was incurred related to the local Hungarian municipality tax. This expense was offset by the release of the $2.2 million reserve on the Company’s uncertain tax positions due to a favorable resolution of a tax position with the Hungarian Tax Authority. Local and federal alternative minimum taxes in the U.S. and Mexico were $0.2 million.