Note 12 - Fair Value Measurement of Instruments

12 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

12. 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.

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 swap 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. Because the significant input is 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 include warrants issued in May 2006, July 2006, October 2006 and December 2006, were not indexed to the Company’s own stock. Accordingly, these warrants were treated as a liability carried at fair value, which requires separate accounting pursuant to ASC 815-40. The fair value of the warrants was reclassified from equity to a liability carried at fair value 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 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 the warrants is determined using the Black-Scholes option-pricing model with the following weighted average assumptions as of September 30, 2012:

Outstanding Warrant Issuances
Warrants issued, shares	827,789
Expiration of warrants	December 2012
Per share exercise price of warrants	$	28.06
Expected remaining life of warrants (in years)		0.21
Risk-free interest rate		0.09	%
Stock volatility		71.44	%
Dividend yield		0.00	%

A liability carried at fair value of $3.1 million was established related to the warrants as of October 1, 2009. The adoption of ASC 815-40 also resulted in a cumulative adjustment to accumulated deficit of $12.6 million and a cumulative adjustment to additional paid-in capital of $15.6 million. The warrants were remeasured and adjusted to fair value at the end of each reporting period.

As the warrants expired during fiscal 2013, the Company reversed the outstanding warrant liability. As a result of the reversal, the Company recorded a change in fair value associated with these warrants as a gain totaling less than $0.1 million for fiscal 2013.

Beginning in the quarter ended June 30, 2010, the Company determined that liability classification of its restricted shares is appropriate based on the recent practice of settling restricted shares in cash. The unamortized fair value of the restricted shares was reclassified from equity to a liability carried at fair value on April 1, 2010. 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 are based on quoted 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. As of September 30, 2013, there were no restricted shares outstanding.

The fair value of warrants, restricted shares, and the interest rate swap as of September 30, 2013, 2012 and 2011 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
As of September 30, 2012	-	827,789		-		-		-		-
As of September 30, 2013	-	-		-		-		-		-
Restricted Shares
As of September 30, 2012	7.33	15,000		110		-		-		110
As of September 30, 2013	-	-		-		-		-		-
Interest Rate Swap
As of September 30, 2012	-	-		384		-		384		-
As of September 30, 2013	-	-		122		-		122		-

During fiscal 2013, 827,789 warrants expired. The fair value liability balance of warrants decreased by less than $0.1 million during fiscal 2013 related to their expiration. The restricted shares balance decreased by $0.1 million related to their settlement of 15,000 shares that vested during fiscal 2013. Both the warrant and restricted stock fair value balances were recorded as short-term liabilities in “Accrued expenses and other liabilities” on the balance sheet. The interest rate swap balance decreased by $0.3 million related to a decrease in fair value. The interest rate swap balance is recorded as a long-term liability in “Liabilities carried at fair value” on the balance sheet.

Derivatives designated as hedging instruments	Change in Unrealized Gain (Loss) Recognized in Accumulated Other  Comprehensive Loss
Interest Rate Swap
Twelve months ended September 30, 2013	$	262
Twelve months ended September 30, 2012	$	(384	)

As of September, 2013, no deferred gains or losses are expected to be reclassified from accumulated other comprehensive income (loss) into earnings as interest expense related to the interest rate swap over the next twelve months as its critical terms matched those of the term loan at inception and through September 30, 2013.

The recorded amounts of cash, accounts receivable, debt and accounts payable approximate their fair values at both September 30, 2013 and 2012.