Note 7. Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies Disclosure [Text Block]

7.   COMMITMENTS AND CONTINGENCIES

Operating Leases

Fuel Tech leases office space, automobiles and certain equipment under agreements expiring on various dates through 2019.  Future minimum lease payments under non-cancellable operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2011 are as follows:

Year of Payment	Amount
2012	$	565
2013		499
2014		333
2015		290
2016		290
Thereafter		870
Total	$	2,847

For the years ended December 31, 2011, 2010 and 2009, rent expense approximated $879, $897, and $1,025, respectively.

Fuel Tech has a sublease agreement with American Bailey Corporation (ABC) that obligates the sub-lessee to make future payments to the Company.  ABC will reimburse Fuel Tech for its share of lease and lease-related expenses under Fuel Tech’s February 1,2010 lease of its executive offices in Stamford, Connecticut.  Please refer to Note 9 to the consolidated financial statements for a discussion of the relationship between Fuel Tech and ABC.  The future minimum lease income under this non-cancellable sublease as of December 31, 2011 is as follows:

Year of Payment	Amount
2012	$	124
2013		124
2014		124
2015		133
2016		133
Thereafter		399
Total	$	1,037

The terms of the Company’s four primary lease arrangements are as follows:

- The Stamford, Connecticut building lease term, for approximately 6,440 square feet, runs from February 1, 2010 to December 31, 2019.  The facility houses certain administrative functions such as Investor Relations and certain APC sales functions.

- The Beijing, China building lease term, for approximately 5,800 square feet, runs from September 1, 2011 to August 31, 2012.  This facility serves as the operating headquarters for our Beijing Fuel Tech operation.  Fuel Tech has the option to extend the lease term at a market rate to be agreed upon between Fuel Tech and the lessor.

- The Durham, North Carolina building lease term, for approximately 16,000 square feet, runs from November 1, 2005 to April 30, 2014.  Fuel Tech has no option to extend the lease.

- The Gallarate, Italy building lease term, for approximately 1,300 square feet, runs from July 1, 2005 to April 30, 2013.  This facility serves as the operating headquarters for our Italy operations.

Performance Guarantees

The majority of Fuel Tech’s long-term equipment construction contracts contain language guaranteeing that the performance of the system that is being sold to the customer will meet specific criteria.  On occasion, performance surety bonds and bank performance guarantees/letters of credit are issued to the customer in support of the construction contracts as follows:

-   in support of the warranty period defined in the contract; or

-   in support of the system performance criteria that are defined in the contract.

As of December 31, 2011, Fuel Tech had outstanding performance surety bonds in the amount of $2,742 and bank performance guarantees and letters of credit in the amount of $2,124 in support of equipment construction contracts that have not completed their final acceptance test or that are still operating under a warranty period.  The performance guarantees expire in dates ranging from January 2012 through January 2015. The expiration dates may be extended if the project completion dates are extended. Fuel Tech’s management believes it is probable that these projects will be successfully completed and that there will not be a materially adverse impact on Fuel Tech’s operations from these bank performance guarantees and letters of credit.  As a result, no liability has been recorded for these performance guarantees.

Product Warranties

Fuel Tech issues a standard product warranty with the sale of its products to customers. Our recognition of warranty liability is based primarily on analyses of warranty claims experience in the preceding years as the nature of our historical product sales for which we offer a warranty are substantially unchanged. This approach provides an aggregate warranty accrual that is historically aligned with actual warranty claims experienced. Changes in the warranty liability in 2011, 2010 and 2009 are summarized below:

	2011			2010			2009
Aggregate product warranty liability at beginning of year	$	215		$	199		$	265
Net aggregate expense related to product warranties		650			170			60
Aggregate reductions for payments		(552	)		(154	)		(126	)
Aggregate product warranty liability at end of year	$	313		$	215		$	199

Contingent Consideration from Business Acquisition

In 2009, the Company recorded a contingent consideration accrual representing the fair value of the potential future consideration to be paid in connection with its acquisition of substantially all of the assets of Advanced Combustion Technology, Inc. (ACT).  The contingent consideration earnout arrangement required the Company to pay ACT a pro rata amount of up to $4,000 annually for the achievement of a minimum annual gross margin dollar level (the Hurdle) of $10,000, $11,000, and $12,000 in fiscal 2009, 2010, and 2011, respectively.  In addition, the agreement required the Company to pay ACT thirty-five percent of all qualifying gross margin dollars above the annual Hurdle rate for each of the three years.  The potential undiscounted amount of all future payments that the Company could be required to make is between $0 and $4,000 in any one year, and $0 and $12,000 in total, not including the amount related to the thirty-five percent sharing of qualifying gross margin dollars above the pre-determined Hurdle.  The fair value of the contingent consideration at inception was $2,307, which was recorded as a liability when the business combination was initially recorded.

The Company periodically evaluates the probability that payment of the contingent consideration accrual is probable based on a range of outcomes and assumptions used to develop the fair value estimate.  Based upon this analysis, management concluded during each of the years ended December 31, 2011, 2010, and 2009 that the payout was not probable of being made.  Thus, the Company recorded a gain of $758 from the revaluation of the contingent liability in 2011.  A similar adjustment was made in the two preceding years for $768 and $781, respectively. There is no contingent liability accrual remaining as of December 31, 2011.