Note 9 - Fair Value Measurement of Instruments

3 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Text Block]

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 value 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.

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.  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.

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 manage 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 under the FASB’s ASC Topic 815, “Derivatives and Hedging.” 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. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings. The fair value of the interest rate swap is determined using an internal valuation model which relies on the expected LIBOR yield curve as the most significant input.  Additionally included in the model are estimates of counterparty and the Company’s non-performance risk as the most significant inputs. Because each of these inputs are directly observable or can be corroborated by observable market data, we have categorized the interest rate swap as Level 2 within the fair value hierarchy.

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 included warrants issued in May 2006, July 2006, October 2006, and December 2006, were not indexed to the Company’s own stock. These warrants were 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 warrants, restricted shares and swap as of December 31, 2012 and September 30, 2012, was as follows (amounts in thousands, except per share amounts):

Description	Wtd. Avg Fair Value Per Share		Shares Issuable Upon Exercise		Total		Level 1		Level 2		Level 3
Warrants -- December 2006 Issuance
As of December 31, 2012		-		-		-		-		-		-
As of September 30, 2012		-		827,789		-		-		-		-
Restricted Shares
As of December 31, 2012		-		-		-		-		-		-
As of September 30, 2012		7.33		15,000		110		-		-		110
Interest Rate Swap
As of December 31, 2012						358		-		358		-
As of September 30, 2012						384		-		384		-

During the first quarter of fiscal 2013, warrants to purchase 827,789 shares expired. The restricted shares balance increased by less than $0.1 million related to an increase in fair value which was offset by the settlement of $0.1 million (15,000 shares) that vested during the quarter.  There was no balance outstanding at December 31, 2012, as compared to a $0.1 million balance at September 30, 2012. There were no shares of restricted stock outstanding as of December 31, 2012.

Derivatives designated as hedging instruments	Change in Unrealized Gain
Interest Rate Swap
Three months ended December 31, 2012	$	26
Three months ended December 31, 2011	$	-

We did not record any ineffectiveness in earnings related to the interest rate swap for the three months ended December 31, 2012 and 2011. As of December 31, 2012, no deferred gains or losses are expected to be reclassified into earnings as interest expense related to the interest rate swap over the next twelve months as we expect the hedging relationship will remain unchanged.