UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 [NO FEE REQUIRED]
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For
the fiscal year ended: December 31, 2007
OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 [NO FEE
REQUIRED]
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For
the transition period
from_________________to_______________
Commission
File No. 000-33059
Fuel
Tech, Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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20-5657551
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(State
or other jurisdiction of incorporation of organization)
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(I.R.S.
Employer Identification
Number)
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Fuel
Tech, Inc.
512
Kingsland Drive
Batavia,
IL 60510-2299
630-845-4500
(Address
and telephone number of principal executive offices)
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock $0.01 par value per share
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The
NASDAQ Stock Market, Inc
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(Title
of Class)
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(Name
of Exchange on Which Registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No
x
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes x Noo
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or a smaller reporting company (as
defined in rule 12b-2 under the Securities Exchange Act of
1934)
Large
Accelerated Filer o Accelerated
Filer x Non-accelerated
Filer (Do not check if a smaller reporting company) o Smaller reporting
company o
The
aggregate market value of the voting stock held by non-affiliates of the
registrant based on the average bid and asked prices of June 29, 2007 was
$606,931,000. The aggregate market value of the voting stock held by
non-affiliates of the registrant based on the average bid and asked prices
of
February 4, 2008 was $343,585,000.
Indicate
number of shares outstanding of each of the registered classes of Common Stock
at February 4, 2008: 22,415,064 shares of Common Stock, $0.01 par
value.
Documents
incorporated by reference:
Certain
portions of the Proxy Statement for the annual meeting of stockholders to be
held in 2007 are incorporated by reference in Parts II, III, and IV
hereof.
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TABLE
OF DEFINED TERMS
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Term
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Definition
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ABC
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American
Bailey Corporation
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CAAA
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Clean
Air Act Amendments of 1990
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CAIR
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Clean
Air Interstate Rule
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CAVR
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Clean
Air Visibility Rule
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CDT
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Clean
Diesel Technologies, Inc.
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CFD
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Computational
Fluid Dynamics
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Common
Shares
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Shares
of the Common Stock of Fuel Tech
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Common
Stock
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Common
Stock of Fuel Tech
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EPA
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Environmental
Protection Agency
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EPRI
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Electric
Power Research Institute
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FUEL
CHEM®
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A
trademark used to describe Fuel Tech’s fuel and flue gas treatment
processes, including its TIFI™ Targeted In-Furnace Injection™ technology
to control slagging, fouling, corrosion and a variety of sulfur
trioxide-related issues
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Fuel
Tech
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Fuel
Tech, Inc. and its subsidiaries
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Investors
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The
purchasers of Fuel Tech securities pursuant to a Securities Purchase
Agreement as of March 23, 1998
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Loan
Notes
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Nil
Coupon Non-redeemable Convertible Unsecured Loan Notes of Fuel
Tech
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NOx
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Oxides
of nitrogen
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NOxOUT
CASCADE®
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A
trademark used to describe Fuel Tech’s combination of NOxOUT and
SCR
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NOxOUT®
Process
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A
trademark used to describe Fuel Tech’s SNCR process for the reduction of
NOx
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NOxOUT-SCR®
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A
trademark used to describe Fuel Tech’s direct injection of urea as a
catalyst reagent
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NOxOUT
ULTRA®
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A
trademark used to describe Fuel Tech’s process for generating ammonia for
use as SCR reagent
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Rich
Reagent Injection Technology (RRI)
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An
SNCR-type process that broadens the NOx reduction capability of
the NOxOUT
Process at a cost similar to NOxOUT. RRI can also be applied on
a
stand-alone basis.
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SCR
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Selective
Catalytic Reduction
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SIP
Call
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State
Implementation Plan Regulation
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SNCR
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Selective
Non-Catalytic Reduction
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TCI™
Targeted Corrosion Inhibition™
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A
FUEL CHEM program designed for high-temperature slag and corrosion
control, principally in waste-to-energy boilers
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TIFI™
Targeted In-Furnace Injection™
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A
proprietary technology that enables the precise injection of a
chemical
reagent into a boiler or furnace as part of a FUEL CHEM
program
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Forward
Looking Statements
Statements
in this Form 10-K that are not historical facts, so-called "forward-looking
statements," are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, including those
detailed in Fuel Tech's filings with the Securities and Exchange Commission.
See
"Risk Factors" in Item 1A.
Fuel
Tech
Fuel
Tech, Inc. (“Fuel Tech”) is a fully integrated company that uses a suite of
advanced technologies to provide boiler optimization, efficiency improvement
and
air pollution reduction and control solutions to utility and industrial
customers worldwide. Originally incorporated in 1987 under the laws of the
Netherlands Antilles as Fuel-Tech N.V., Fuel Tech became domesticated in the
United States on September 30, 2006, and continues as a Delaware corporation
with its corporate headquarters at 512 Kingsland Drive, Batavia, Illinois,
60510-2299. Fuel Tech maintains an Internet web site at www.ftek.com.
Fuel
Tech's special focus is the worldwide marketing of its nitrogen oxide (“NOx”)
reduction and FUEL CHEM®
processes. The NOx reduction technology segment, which includes the
NOxOUT®,
NOxOUT
CASCADE®,
NOxOUT
ULTRA®
and
NOxOUT-SCR®
processes, reduces NOx emissions in flue gas from boilers, incinerators,
furnaces and other stationary combustion sources. The FUEL CHEM technology
segment improves the efficiency, reliability and environmental status of
combustion units by controlling slagging, fouling, corrosion, opacity, acid
plume and loss on ignition, as well as the formation of sulfur trioxide,
ammonium bisulfate, particulate matter (PM2.5),
carbon
dioxide and NOx through the addition of chemicals into the fuel or via TIFI™
Targeted In-Furnace Injection™ programs. Fuel Tech has other technologies, both
commercially available and in the development stage, all of which are related
to
the NOxOUT and FUEL CHEM processes or are similar in their technological base.
Fuel Tech's business is materially dependent on the continued existence and
enforcement of worldwide air quality regulations.
American
Bailey Corporation
Ralph
E.
Bailey, Executive Chairman and Director of Fuel Tech, and Douglas G. Bailey,
Deputy Chairman and Director of Fuel Tech, are shareholders of American Bailey
Corporation (“ABC”), which is a related party. Please refer to Note 9 to the
consolidated financial statements in this document for information about
transactions between Fuel Tech and ABC. Additionally, see the more detailed
information relating to this subject under the caption “Certain Relationships
and Related Transactions” in Fuel Tech’s Proxy Statement, to be distributed in
connection with Fuel Tech’s 2008 Annual Meeting of Shareholders, which
information is incorporated by reference.
NOx
Reduction
Regulations
and Markets
The
U.S.
air pollution control market is the primary driver in Fuel Tech’s NOx reduction
technology segment. This market is dependent on air pollution
regulations and their continued enforcement. These regulations are based on
the
Clean Air Act Amendments of 1990 (the “CAAA”), which require
reductions in NOx emissions on varying timetables with respect to various
sources of emissions. Under the SIP (State Implementation Plan) Call, a
regulation promulgated under the Amendments (discussed further below), over
1,000 utility and large industrial boilers in 19 states were required to achieve
NOx reduction targets by May 31, 2004.
In
1994,
governors of 11 Northeastern states, known collectively as the Ozone Transport
Region, signed a Memorandum of Understanding requiring utilities to reduce
their
NOx emissions by 55% to 65% from 1990 levels by May 1999. In 1998, the
Environmental Protection Agency (“EPA”) announced more stringent regulations.
The Ozone Transport SIP Call regulation, designed to mitigate the effects of
wind-aided ozone transported from the Midwestern and Southeastern U.S. into
the
Northeastern non-attainment areas, required, following the litigation described
below, 19 states to make even deeper aggregate reductions of 85% from 1990
levels by May 31, 2004. Over 1,000 utility and large industrial boilers are
affected by these mandates. Additionally, most other states with non-attainment
areas were also required to meet ambient air quality standards for ozone by
2007.
Although
the SIP Call was the subject of litigation, an appellate court of the D.C.
Circuit upheld the validity of this regulation. This court’s ruling was later
affirmed by the U.S. Supreme Court.
In
February 2001, the U.S. Supreme Court, in a unanimous decision, upheld EPA’s
authority to revise the National Ambient Air Quality Standard for ozone to
0.080
parts per million averaged through an eight-hour period from the current 0.120
parts per million for a one-hour period. This more stringent standard provided
clarity and impetus for air pollution control efforts well beyond the then
current ozone attainment requirement of 2007. In keeping with this trend, the
Supreme Court, only days later, denied industry’s attempt to stay the SIP Call,
effectively exhausting all means of appeal.
On
December 23, 2003, the EPA proposed a new regulation affecting the SIP Call
states by specifying more expansive NOx reduction. This rule, under the name
“Clean Air Interstate Rule (CAIR),” was issued by the EPA on March 10, 2005.
Commencing in 2009, CAIR specifies that additional annual NOx reduction
requirements be extended to most SIP-affected units in 28 eastern states, while
permitting a cap and trade format similar to the SIP Call. The Company expects
an additional 1,300 electric generating units using coal and other fuels to
be
affected by this rule. In an action related to CAIR, on June 15, 2005, the
EPA
issued the “Clean Air Visibility Rule (CAVR),” which is a nationwide initiative
to improve federally preserved areas through reduction of NOx and other
pollutants. CAVR expands the NOx reduction market to Western states unaffected
by CAIR or the SIP Call. Compliance begins in 2013 and CAVR will potentially
affect and additional 230 western coal fired units. In addition, CAVR, along
with the EPA rule for revised eight-hour ozone attainment, which was proposed
on
June 20, 2007, have the potential to impact thousands of boilers and industrial
units in multiple industries nationwide for units burning coal and other fuels
starting in 2013.
Fuel
Tech
also sells NOx control systems outside the United
States,
specifically in Europe and in the People's Republic of China (PRC). NOxOUT
systems have long been sold in the traditional markets of Western Europe, but
interest is growing in the newer markets of Eastern Europe as those nations
join
the European Union (EU) and become subject to tighter NOx emission standards.
Under EU Directives, certain waste incinerators and cement plants must come
into
compliance with specified NOx reduction targets by 2008, while certain power
plants must be in compliance by 2010. Fuel Tech was awarded its first air
pollution control project in Romania during 2007.
The
PRC
also
represents attractive opportunities for Fuel Tech as the Government's 11th
Five-Year Economic Plan has set pollution control and energy efficiency and
savings as the top two priorities. Fuel Tech has viable technologies to help
achieve both objectives. The PRC has taken initial steps to reduce NOx emissions
on new electric utility units (principally low NOx burners), and on-going
research and demonstration projects are generating cost performance data for
use
in tightening standards in the near future, both for new and retrofit units.
The
PRC's dominant reliance on coal as an energy resource is not expected to
diminish in the foreseeable future. Clean air has been and will continue to
be a
pressing issue, especially with the PRC’s booming economy (8%-12% annual GDP
increase), expected growth in power production (4%-5% average annual increase
through 2020), and an increasingly expanded role in international events and
organizations. The PRC is the host of the upcoming 2008 Beijing Summer Olympics
and the 2010 Shanghai World Expo. Fuel Tech is looking to establish a market
position in NOx control resulting from the national demonstration projects
utilizing NOxOUT CASCADE technology at Jiangsu Kanshan (two new 600 megawatt
units), NOxOUT Selective Non-Catalytic Reduction (SNCR) technology at Jiangyin
Ligang (four new 600 megawatt units), and NOxOUT ULTRA technology on two
retrofit projects in Beijing. These projects are expected to showcase a wide
spectrum of Fuel Tech capabilities for NOx emission control with the intent
of
gaining immediate penetration within the market for new power units, and
establishing Fuel Tech as the leader for the larger market for retrofit units
later.
Products
Fuel
Tech’s NOx reduction technologies are installed worldwide on over 450 combustion
units, including utility, industrial and municipal solid waste applications.
Products include customized NOx control systems and patented urea-to-ammonia
conversion technology, which can provide safe reagent for use in Selective
Catalytic Reduction (SCR) systems.
Fuel
Tech's NOxOUT process is a Selective Non-Catalytic Reduction process that uses
non-hazardous urea as the reagent rather than ammonia. The NOxOUT process on
its
own is capable of reducing NOx by up to 35% for utilities and by potentially
significantly greater amounts for industrial units in many types of plants
with
capital costs ranging from $5 - $20/kw for utility boilers and with total
annualized operating costs ranging from $1,000 - $2,000/ton of NOx
removed.
Fuel
Tech’s NOxOUT CASCADE process uses a catalyst in addition to the NOxOUT process
to achieve performance similar to SCR. Capital costs for NOxOUT CASCADE systems
can range from $30 - $75/kw which is significantly less than that of SCRs,
which
can range as high as $400/kw, while operating costs are competitive with those
experienced by SCR systems.
Fuel
Tech’s NOxOUT-SCR process utilizes urea as a catalyst reagent to achieve NOx
reductions of up to 85% from smaller stationary combustion sources with capital
and operating costs competitive with equivalently sized, standard SCR
systems.
Fuel
Tech’s NOxOUT ULTRA system is designed to convert urea to ammonia safely and
economically for use as a reagent in the SCR process for NOx reduction. In
this
fashion, Fuel Tech intends to participate in the SCR segment of the United
States SIP Call and CAIR driven markets. Recent local hurdles in the ammonia
permitting process have raised concerns regarding the safety of ammonia storage
in quantities sufficient to supply SCR. In addition, the Department of Homeland
Security recently characterized anhydrous ammonia as a Toxic Inhalation Hazard
(TIH) commodity. This is contributing to new restrictions by rail carriers
on
the movement of anhydrous ammonia and to an escalation in associated rail
transport and insurance rates. Overseas, new coal-fired power plants
incorporating SCR systems are expected to be constructed at a rapid rate in
the
PRC, and Fuel Tech’s NOxOUT ULTRA process is believed to be a market leader for
the safe delivery of ammonia, particularly near densely populated cities, major
waterways, harbors or islands, or where the transport of anhydrous or aqueous
ammonia is a safety concern.
Fuel
Tech
has licensed the Rich Reagent Injection Technology from Reaction Engineering
International and Electric Power Research Institute. The technology has been
proven in full-scale field studies on cyclone-fired units to reduce NOx by
25%-40%. The technology is a generic SNCR process, whose applicability is
outside the temperature range of the NOxOUT process. The technology is seen
as
an add-on to Fuel Tech’s NOxOUT systems, thus potentially broadening the NOx
reduction of the combined system to almost 55% with minimal additional capital
requirement.
Sales
of
the NOx reduction technologies were $47.8 million, $46.4 million and $32.6
million for the years ended December 31, 2007, 2006 and 2005,
respectively.
NOx
Reduction Competition
Competition
with Fuel Tech's NOx reduction products can be expected from combustion
modifications, SCR and ammonia SNCR, as well as from other licensed market
participants. In addition, Fuel Tech experiences competition in the
urea-to-ammonia conversion market.
Combustion
modifications, including low NOx burners, can be fitted to most types of boilers
with cost and effectiveness varying with specific boilers. Combustion
modifications may effect 20% - 50% NOx reduction economically with capital
costs
ranging from $5 - $40/kw and levelized total costs ranging from $300 -
$1,500/ton of NOx removed. The modifications are designed to reduce the
formation of NOx and are typically the first NOx reduction efforts employed.
Such companies as Alstom, Foster Wheeler Corporation, The Babcock & Wilcox
Company, Nalco Mobotec, Inc. and Babcock Power, Inc. are active competitors
in
the low-NOx burner business.
Once
NOx
is formed, then the SCR process is an effective and proven method of control
for
removal of NOx up to 90%. SCR has a high capital cost ranging from $150 -
$400/kw on retrofit coal applications. Such companies as Alstom, The Babcock
& Wilcox Company, Cormetech, Inc., Ceram Environmental, Inc., Foster Wheeler
Corporation, Peerless Manufacturing Company, and Babcock Power, Inc., are active
SCR system providers, or providers of the catalyst itself.
The
use
of ammonia as the reagent for the SNCR process was developed by the ExxonMobil
Corporation. Fuel Tech understands that the ExxonMobil patents on this process
have expired. This process can reduce NOx by 30% - 70% on incinerators, but
has
limited applicability in the utility industry. Ammonia system capital costs
range from $5 - $20/kw, with annualized operating costs ranging from $1,000
-
$3,000/ton of NOx removed. These systems require the use of either anhydrous
or
aqueous ammonia, both of which are hazardous substances.
Other
NOx
reduction competitors include Combustion Components Associates, Inc., which
is a
licensed implementer of NOxOUT SNCR systems, and Reaction Engineering
International, which licenses Rich Reagent Injection Technology to Fuel
Tech.
In
addition to or in lieu of using the foregoing processes, certain customers
may
elect to close or derate plants, purchase electricity from third-party sources,
switch from higher to lower NOx emitting fuels or purchase NOx emission
allowances.
Lastly,
with respect to urea-to-ammonia conversion technologies, a competitive approach
to Fuel Tech’s controlled urea decomposition system is available from Wahlco,
Inc., which manufactures a system that hydrolyzes urea under high temperature
and pressure.
FUEL
CHEM
Product
and Markets
The
FUEL
CHEM technology segment revolves around the unique application of specialty
chemicals to improve the efficiency, reliability and environmental status of
plants operating in the electric utility, industrial, pulp and paper, and
waste-to-energy markets. FUEL CHEM programs are currently in place on over
90
combustion units, treating a wide variety of solid and liquid fuels, including
coal, heavy oil, biomass and municipal waste.
Central
to the FUEL CHEM approach is the introduction of chemical reagents, such as
magnesium hydroxide, to combustion units via in-body fuel application
(pre-combustion) or via direct injection (post-combustion) utilizing Fuel Tech’s
proprietary TIFI technology. By attacking performance-hindering problems, such
as slagging, fouling, corrosion, opacity, acid plume and loss on ignition (LOI),
as well as the formation of sulfur trioxide (SO3),
ammonium bisulfate (ABS), particulate matter (PM2.5),
carbon
dioxide (CO2)
and
NOx, the Company’s programs offer numerous operational, financial and
environmental benefits to owners of boilers, furnaces and other combustion
units.
The
key
market dynamic for this product line is the continued use of coal as the
principal fuel source for global electricity production. Coal accounts for
approximately 49% of all U.S. electricity generation, with U.S. government
projections forecasting an increase to approximately 57% by 2030. Coal’s share
of global electricity generation is forecast to be approximately 45% by 2030.
Major coal consumers include the United States, the PRC and India.
The
principal markets for this product line are electric power plants burning coals
with slag-forming constituents. The slag-forming constituents include sodium,
iron and high levels of sulfur. Sodium is typically found in the Powder River
Basin coals of Wyoming and Montana. Iron is typically found in coals produced
in
the Illinois Basin (IB) region. High sulfur content is typical of IB coals
and
certain Appalachian coals. High sulfur content can give rise to unacceptable
levels of SO3
formation in plants with SCR systems and flue gas desulphurization units
(scrubbers).
The
combination of slagging coals and SO3-related
issues, such as “blue plume” formation, air pre-heater fouling and corrosion,
SCR fouling and the proclivity to suppress certain mercury removal processes,
represents attractive market potential for Fuel Tech.
Internationally,
market opportunities exist in Europe and in the Asia-Pacific region,
particularly the PRC and India, where high-slagging coals are fueling a large
and growing fleet of power plants. To address the PRC market, where particular
emphasis is being placed on energy efficiency, Fuel Tech entered into a one-year
exclusive teaming agreement in June 2007 with ITOCHU Hong Kong Ltd., a
subsidiary of ITOCHU Corporation. Working under this agreement, the first FUEL
CHEM demonstration program in the PRC was announced in January 2008. In
addition, Fuel Tech was awarded its first FUEL CHEM demonstration program in
India in January 2008. TIFI initiatives aimed at energy efficiency improvements
result in reduced CO2
emissions,
which potentially can be monetized under provisions of the Kyoto
Protocol.
A
potentially large fuel treatment market exists in Mexico, where high-sulfur,
low-grade fuel oil containing vanadium and nickel is the primary source for
electricity production. The presence of these metallic constituents promotes
slag build-up, and the fuel properties can result in acid gas and particulate
emissions in local combustion units. Fuel Tech has successfully treated such
units with its TIFI technology.
Sales
of
the FUEL CHEM products were $32.5 million, $28.7 million and $20.3 million
for
the years ended December 31, 2007, 2006 and 2005, respectively.
Competition
Competition
for Fuel Tech's FUEL CHEM product line includes chemicals sold by specialty
chemical and combustion engineering companies, such as GE Infrastructure,
Ashland Inc. and Environmental Energy Services, Inc. No substantive competition
currently exists for Fuel Tech's TIFI technology, which is designed primarily
for slag control and SO3
abatement, but there can be no assurance that such lack of substantive
competition will continue.
PLANT
OPTIMIZATION SERVICES
While
not
a separate technology segment, Fuel Tech
uses its
advanced engineering capabilities to support the sale of its NOx reduction
and
FUEL CHEM systems, particularly through the use of computational fluid dynamics
(“CFD”) tools. These CFD tools assist in the prediction of the behavior of gas
flows, thereby enhancing the design, marketing and sale of Fuel Tech’s NOx
reduction systems and FUEL CHEM product applications. To further aid the
accuracy and expediency with which process solutions could be designed and
delivered to a customer, Fuel Tech internally developed a virtual reality-based
visualization software for
exploring model results and discovering complex process behaviors. Fuel Tech
intends to capitalize on its unique capabilities via offering plant optimization
services to its customer base in conjunction with the NOx reduction and FUEL
CHEM systems.
INTELLECTUAL
PROPERTY
Fuel
Tech’s products are generally protected by U.S. and non-U.S. patents. Fuel Tech
owns 98 granted patents worldwide and has seven patent applications pending
in
the United States and 37 pending in non-U.S. jurisdictions. These patents cover
some 36 inventions, 24 associated with the NOx reduction business; seven
associated with the FUEL CHEM business; and five associated with
non-commercialized technologies. These inventions represent significant
enhancements of the application and performance of the technologies. Further,
Fuel Tech believes that the protection provided by the numerous claims in the
above referenced patents or patent applications is substantial, and affords
Fuel
Tech a significant competitive advantage in its business. Accordingly, any
significant reduction in the protection afforded by these patents or any
significant development in competing technologies could have a material adverse
effect on Fuel Tech’s business.
EMPLOYEES
Fuel
Tech
has 178 employees, 154 in North America, 13 in China and 11 in Europe. Fuel
Tech
enjoys good relations with its employees and is not a party to any labor
management agreements.
Investors
in Fuel Tech should be mindful of the following risk factors relative to Fuel
Tech's business.
(i) Lack
of
Diversification
Fuel
Tech
has two broad technology segments that provide advanced engineering solutions
to
meet the pollution control, efficiency improvement, and operational optimization
needs of energy-related facilities worldwide. They are as follows:
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-
|
The
NOx reduction technology segment, which includes the NOxOUT, NOxOUT
CASCADE, NOxOUT ULTRA and NOxOUT-SCR processes for the reduction
of NOx
emissions in flue gas from boilers, incinerators, furnaces and other
stationary combustion sources, and
|
|
-
|
The
fuel treatment chemicals technology segment, which uses chemical
processes, including TIFI Targeted In-Furnace Injection technology,
to
control slagging, fouling, corrosion, opacity, acid plume and loss
on
ignition, as well as the formation of sulfur trioxide, ammonium bisulfate,
particulate matter (PM2.5),
carbon dioxide and NOx in furnaces and boilers.
|
An
adverse development in Fuel Tech's advanced engineering solution business as
a
result of competition, technological change, government regulation, or any
other
factor could have a significantly greater impact than if Fuel Tech maintained
more diverse operations.
(ii) Competition
Competition in
the
NOx control market will come from processes utilizing low-NOx burners, over-fire
air, flue gas recirculation, ammonia SNCR, SCR and, with respect to particular
uses of urea not infringing Fuel Tech's patents, urea (see Item 1 "Intellectual
Property"). Competition will also come from business practices such as the
purchase rather than the generation of electricity, fuel switching, closure
or
derating of units, and sale or trade of pollution credits. Utilization by
customers of such processes or business practices or combinations thereof may
adversely affect Fuel Tech's pricing and participation in the NOx control market
if customers elect to comply with regulations by methods other than Fuel Tech's
NOxOUT or NOxOUT CASCADE Processes. See above text under the captions
"Products"
and
“NOx
Reduction Competition.”
Competition in
the
FUEL CHEM markets includes chemicals sold by specialty chemical and combustion
engineering companies, such as GE Infrastructure, Ashland Inc. and Environmental
Energy Services, Inc. As noted previously, no substantive competition currently
exists for Fuel Tech's TIFI technology, which is designed primarily for slag
control and SO3
abatement. However, there can be no assurance that such lack of substantive
competition will continue.
(iii) Dependence
on Regulations and Enforcement
Fuel
Tech's business is significantly impacted by the regulatory environment
surrounding the markets in which it serves. Fuel Tech’s business will be
adversely impacted to the extent that regulations are repealed or amended to
significantly reduce the level of required NOx reduction, or to the extent
that
regulatory authorities minimize enforcement. See also the text above under
the
caption “Regulations
and Markets.”
(iv)
Protection of Patents and Proprietary Rights
Fuel
Tech
holds licenses to or owns a number of patents and also has patents pending.
There can be no assurance that pending patent applications will be granted
or
that outstanding patents will not be challenged or circumvented by competitors.
Certain critical technology relating to Fuel Tech's products is protected by
trademark and trade secret laws and by confidentiality and licensing agreements.
There can be no assurance that such protection will prove adequate or that
Fuel
Tech will have adequate remedies for disclosure of its trade secrets or
violations of its intellectual property rights. See Item 1 “Intellectual
Property.”
(v)
Foreign Operations
Fuel
Tech
has recently expanded its operations into the Peoples Republic of China (PRC)
via the establishment of a wholly owned subsidiary in Beijing. The Asia-Pacific
region, particularly the PRC and India, offers tremendous market opportunity
for
Fuel Tech as these nations look to establish regulatory policies for improving
their environment and utilizing fossil fuels efficiently and effectively. The
future business opportunities in these markets are dependent on the
implementation of regulatory policies that will benefit Fuel Tech’s
technologies.
(vi)
Product Pricing and Operating Results
The
onset
of significant competition for either of the technology segments might have
an
adverse impact on product pricing and a resulting adverse impact on realized
gross margins and operating profitability.
(vii)
Raw
Material Supply and Pricing
The
fuel
treatment chemicals technology segment is reliant upon a long-term global supply
of magnesium hydroxide. Any adverse change in the availability of supply for
this chemical will likely have an adverse impact on Fuel Tech’s cost
structure.
(viii)
Changes in Tax and Other Legislation
Income
tax laws and legislation relating to the regulatory environment may be changed
or interpreted in a manner that adversely affects Fuel Tech.
None
Fuel
Tech
and its subsidiaries operate from leased office facilities in Batavia, Illinois;
Stamford, Connecticut; Gallarate, Italy and Beijing, China. Fuel Tech does
not
segregate any of its leased facilities by operating business segment. The terms
of the three material agreements are as follows:
-
The
Batavia, Illinois building lease term, for approximately 18,000 square feet,
runs from June 1, 1999 to May 31, 2009. Fuel Tech has the option to extend
the
lease term for two successive terms of five years each at market rates to be
agreed upon between Fuel Tech and the lessor.
-
The
Stamford, Connecticut building lease term, for approximately 7,000 square feet,
runs from February 1, 2004 to January 31, 2010. Fuel Tech has the option to
extend the lease term for one successive term of five years at a market rate
to
be agreed upon between Fuel Tech and the lessor.
-
The
Beijing, China building lease term, for approximately 4,000 square feet, runs
from September 1, 2007 to August 31, 2009. Fuel Tech has the option to extend
the lease term at a market rate to be agreed upon between Fuel Tech and the
lessor.
In
addition to the above, on November 30, 2007, Fuel Tech purchased an office
building in Warrenville, Illinois which will serve as the new corporate
headquarters for the Company. This facility, with approximately 40,000 square
feet of office space, was purchased for approximately $6,000,000 and will meet
Fuel Tech’s growth requirements for the foreseeable future. Fuel Tech
anticipates moving into this space in the second quarter of 2008.
We
are
from time to time involved in litigation incidental to our business. We are
not
currently involved in any litigation in which we believe an adverse outcome
would have a material effect on our business, financial conditions, results
of
operations, or propects.
During
the fourth quarter of 2007, no matters were submitted to a vote of security
holders.
Market
Fuel
Tech's Common Shares have been traded since September 1993 on The NASDAQ Stock
Market, Inc. The trading symbol is FTEK.
Prices
The
table
below sets forth the high and low sales prices during each calendar quarter
since January 2006.
|
2007
|
High
|
Low
|
|||||
|
Fourth
Quarter
|
$
|
34.48
|
$
|
16.89
|
|||
|
Third
Quarter
|
35.85
|
20.65
|
|||||
|
Second
Quarter
|
38.20
|
21.65
|
|||||
|
First
Quarter
|
29.68
|
22.54
|
|||||
|
2006
|
High
|
Low
|
|||||
|
Fourth
Quarter
|
$
|
27.44
|
$
|
14.40
|
|||
|
Third
Quarter
|
16.45
|
10.07
|
|||||
|
Second
Quarter
|
18.80
|
11.15
|
|||||
|
First
Quarter
|
16.75
|
8.11
|
|||||
Dividends
Fuel
Tech
has not paid dividends on its Common Shares to date and is not expected to
do so
in the foreseeable future.
Holders
Based
on
information from Fuel Tech’s transfer agent, as of February 20, 2008, there were
304 registered holders of Fuel Tech’s Common Shares. Management believes that,
on such date, there were approximately 24,000 beneficial holders of Fuel Tech’s
Common Shares.
Transfer
Agent
The
Transfer Agent and Registrar for the Common Shares is BNY Mellon Shareowner
Services, 480 Washington Boulevard, Jersey City, New Jersey 07310.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information for all equity compensation plans as of
the
fiscal year ended December 31, 2007, under which the securities of Fuel Tech
were authorized for issuance:
|
Plan Category
|
Number of Securities to be
issued upon exercise of
outstanding options, warrants
and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under equity
compensation plans
excluding securities listed in
column (a)
|
|||||||
|
(a)
|
(b)
|
(c)
|
||||||||
|
Equity
compensation plans approved by security holders (1)
|
2,464,325
|
$
|
15.03
|
845,000
|
||||||
|
(1)
|
Includes
Common Shares of Fuel Tech authorized for awards under Fuel Tech’s
Incentive Plan, as amended through June 3,
2004.
|
In
addition to the above, Fuel Tech has a Deferred Compensation Plan for directors
under which 100,000 Common Shares of Fuel Tech stock have been reserved for
issuance as a form of deferred compensation with respect to directors fees
elected to be deferred. At December 31, 2007, 43,130 Common Shares have been
earned as stock units to be granted on a one to one basis in Common Shares
at
the election of the Directors.
Performance
Graph
The
following line graph compares (i) Fuel Tech’s total return to shareholders per
share of Common Stock for the five years ended December 31, 2007 to that of
(ii)
the NASDAQ Composite index, and (iii) the WilderHill Clean Energy Index for
the
period December 31, 2002 through December 31, 2007.
Selected
financial data are presented below as of the end of and for each of the fiscal
years in the five-year period ended December 31, 2007. The selected financial
data should be read in conjunction with the audited consolidated financial
statements as of and for the year ended December 31, 2007, and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
|
|
For
the years ended December 31
|
|||||||||||||||
|
CONSOLIDATED
STATEMENT OF OPERATIONS DATA
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
(in
thousands of dollars, except for share and per-
share data) |
||||||||||||||||
|
Revenues
|
$
|
80,297
|
$
|
75,115
|
$
|
52,928
|
$
|
30,832
|
$
|
35,736
|
||||||
|
Cost
of sales
|
42,471
|
38,429
|
27,118
|
16,566
|
21,789
|
|||||||||||
|
Selling,
general and administrative and other costs and expenses
|
27,087
|
25,953
|
18,655
|
14,130
|
12,978
|
|||||||||||
|
Operating
income
|
10,739
|
10,733
|
7,155
|
136
|
969
|
|||||||||||
|
Net
income
|
7,243
|
6,826
|
7,588
|
1,572
|
1,120
|
|||||||||||
|
Basic
income per Common Share
|
$
|
0.33
|
$
|
0.32
|
$
|
0.38
|
$
|
0.08
|
$
|
0.06
|
||||||
|
Diluted
income per Common Share
|
$
|
0.29
|
$
|
0.28
|
$
|
0.33
|
$
|
0.07
|
$
|
0.05
|
||||||
|
Weighted-average
basic shares outstanding
|
22,280,000
|
21,491,000
|
20,043,000
|
19,517,000
|
19,637,000
|
|||||||||||
|
Weighted-average
diluted shares outstanding
|
24,720,000
|
24,187,000
|
23,066,000
|
22,155,000
|
22,412,000
|
|||||||||||
|
|
December
31
|
|||||||||||||||
|
CONSOLIDATED
BALANCE SHEET DATA
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
(in
thousands of dollars, except for share and per-
share data) |
||||||||||||||||
|
Working
capital
|
$
|
45,143
|
$
|
38,715
|
$
|
19,590
|
$
|
11,292
|
$
|
10,973
|
||||||
|
Total
assets
|
87,214
|
65,660
|
44,075
|
23,828
|
21,598
|
|||||||||||
|
Long-term
obligations
|
1,255
|
500
|
448
|
505
|
299
|
|||||||||||
|
Total
liabilities
|
23,975
|
18,005
|
14,939
|
4,873
|
4,287
|
|||||||||||
|
Shareholders'
equity (1)
|
63,239
|
47,655
|
29,136
|
18,955
|
17,311
|
|||||||||||
|
Net
tangible book value per share (2)
|
$
|
2.43
|
$
|
1.83
|
$
|
1.12
|
$
|
0.70
|
$
|
0.61
|
||||||
Notes:
(1) Shareholders’
equity includes principal amount of nil coupon non-redeemable perpetual loan
notes. See Note 5 to the consolidated financial statements.
(2) Net
tangible book value per share is defined as shareholders’ equity less intangible
assets, divided by weighted-average shares outstanding, and assumes full
conversion of Fuel Tech’s nil coupon non-redeemable perpetual loan notes into
shares of Fuel Tech’s Common Shares.
Background
Fuel
Tech, Inc. (“Fuel Tech”) has two broad technology segments that provide advanced
engineering solutions to meet the pollution control, efficiency improvement,
and
operational optimization needs of energy-related facilities worldwide. They
are
as follows:
Nitrogen
Oxide (“NOx”) Reduction Technologies
The
nitrogen oxide (“NOx”) reduction technology segment includes the NOxOUT, NOxOUT
CASCADE, NOxOUT ULTRA and NOxOUT-SCR processes for the reduction of NOx
emissions in flue gas from boilers, incinerators, furnaces and other stationary
combustion sources. Fuel Tech distributes its products through its direct sales
force, licensees and agents.
Fuel
Treatment Chemicals
The
fuel
treatment chemicals technology segment uses chemical processes, including TIFI
Targeted In-Furnace Injection technology, to control slagging, fouling,
corrosion, opacity, acid plume and loss on ignition, as well as the formation
of
sulfur trioxide, ammonium bisulfate, particulate matter (PM2.5),
carbon
dioxide and NOx in furnaces and boilers. Fuel Tech sells its fuel treatment
chemicals through its direct sales force and agents to industrial and utility
power-generation facilities. FUEL CHEM programs are currently in place on over
90 combustion units, treating a wide variety of solid and liquid fuels,
including coal, heavy oil, biomass and municipal waste. The FUEL CHEM program
improves the efficiency, reliability and environmental status of plants
operating in the electric utility, industrial, pulp and paper, and
waste-to-energy markets and offers numerous operational, financial and
environmental benefits to owners of boilers, furnaces and other combustion
units.
The
key
market dynamic for both technology segments is the continued use of coal as
the
principal fuel source for global electricity production. Coal accounts for
approximately 49% of all U.S. electricity generation, with U.S. government
projections calling for an increase to approximately 57% by 2030. Coal’s share
of global electricity generation is forecast to be approximately 45% by 2030.
Major coal consumers include the PRC, the United States and India.
Critical
Accounting Policies and Estimates
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require
Fuel Tech to make estimates and assumptions. Fuel Tech believes that of its
accounting policies (see Note 1 to the consolidated financial statements),
the
following involve a higher degree of judgment and complexity and are deemed
critical. Fuel Tech discusses its critical accounting policies with the Audit
Committee.
Revenue
Recognition
Fuel
Tech
uses the percentage of completion method of accounting for certain long-term
equipment construction and license contracts that are sold within the nitrogen
oxide reduction business segment. Under the percentage of completion method,
sales and gross profit are recognized as work is performed based on the
relationship between actual construction costs incurred and total estimated
costs at completion. Since the financial reporting of these contracts depends
on
estimates that are assessed continually during the term of the contract,
recognized sales and profit are subject to revisions as the contract progresses
to completion. Revisions in profit estimates are reflected in the period in
which the facts that give rise to the revision become known. Provisions are
made
for estimated losses on uncompleted contracts in the period in which such losses
are determined.
Fuel
Tech’s construction contracts are typically six to twelve months in length. A
typical contract will have three or four critical milestones that serve as
the
basis for Fuel Tech to invoice the customer. At a minimum, the milestones will
include the generation of engineering drawings, the shipment of equipment and
the completion of a system performance test.
As
part
of most of its contractual project agreements, Fuel Tech will agree to
customer-specific acceptance criteria that relate to the operational performance
of the system that is being sold to the customer. These criteria are determined
based on mathematical modeling that is performed by Fuel Tech personnel, which
is based on operational inputs that are provided by the customer. The customer
will warrant that these operational inputs are accurate as they are specified
in
the binding contractual agreement. Further, the customer is solely responsible
for the accuracy of the operating condition information; all performance
guarantees and equipment warranties granted by Fuel Tech are void if the
operating condition information is inaccurate or is not met.
Fuel
Tech
has installed over 450 units with the technology and has never failed to meet
a
performance guarantee when the customer has provided the required operating
conditions for the project. As part of the project implementation process,
Fuel
Tech will perform system start-up and optimization services that effectively
serve as a test of actual project performance. Fuel Tech believes that this
test, combined with the accuracy of the modeling that is performed, enables
revenue to be recognized prior to the receipt of formal customer acceptance.
Allowance
for Doubtful Accounts
Fuel
Tech, in order to control and monitor the credit risk associated with its
customer base, reviews the credit worthiness of customers on a recurring basis.
Factors influencing the level of scrutiny include the level of business the
customer has with Fuel Tech, the customer’s payment history and the customer’s
financial stability. Representatives of Fuel Tech’s management team review all
past due accounts on a weekly basis to assess collectibility. At the end of
each
reporting period, the allowance for doubtful accounts balance is reviewed
relative to management’s collectibility assessment and is adjusted if deemed
necessary. Fuel Tech’s historical credit loss has been
insignificant.
Assessment
of Potential Impairments of Goodwill and Intangible Assets
Effective
January 1, 2002, Fuel Tech adopted FASB (Financial Accounting Standards Board)
Statement No. 142, “Goodwill and Other Intangible Assets.” Under the guidance of
this statement, goodwill and indefinite-lived intangible assets are no longer
amortized, but rather, are required to be reviewed annually or more frequently
if indicators arise, for impairment. The evaluation of impairment involves
comparing the current fair value of the business to the carrying value. Fuel
Tech uses a discounted cash flow model (DCF) to determine the current fair
value
of its two reporting units. A number of significant assumptions and estimates
are involved in the application of the DCF model to forecast operating cash
flows, including markets and market share, sales volumes and prices, costs
to
produce and working capital changes. Management considers historical experience
and all available information at the time the fair values of its reporting
units
are estimated. However, actual fair values that could be realized in an actual
transaction may differ from those used to evaluate the impairment of
goodwill.
Fuel
Tech
reviews other intangible assets, which include a customer list, a covenant
not
to compete and patent assets, for impairment on a recurring basis or when events
or changes in circumstances indicate the carrying amount of an asset may not
be
recoverable. In the event the sum of the expected undiscounted future cash
flows
resulting from the use of the asset is less than the carrying amount of the
asset, an impairment loss equal to the excess of the asset’s carrying value over
its fair value is recorded. Management considers historical experience and
all
available information at the time the estimates of future cash flows are made,
however, the actual cash values that could be realized may differ from those
that are estimated.
Valuation
Allowance for Deferred Income Taxes
Deferred
tax assets represent deductible temporary differences and net operating loss
and
tax credit carryforwards. A valuation allowance is recognized if it is more
likely than not that some portion of the deferred tax asset will not be
realized.
At
the
end of each reporting period, Fuel Tech reviews the realizability of the
deferred tax assets. As part of this review, Fuel Tech will consider if there
are taxable temporary differences that could generate taxable income in the
future, if there is the ability to carryback the net operating losses or
credits, if there is a projection of future taxable income, and if there are
any
tax planning strategies which can be readily implemented.
Stock-Based
Compensation
Fuel
Tech
recognizes compensation expense for employee equity awards ratably over the
requisite service period of the award. Fuel Tech utilizes the Black-Scholes
option-pricing model to estimate the fair value of awards. Determining the
fair
value of stock options using the Black-Scholes model requires judgment,
including estimates for (1) risk-free interest rate - an estimate based on
the
yield of zero-coupon treasury securities with a maturity equal to the expected
life of the option; (2) expected volatility - an estimate based on the
historical volatility of Fuel Tech’s Common Stock for a period equal to the
expected life of the option; and (3) expected life of the option - an estimate
based on historical experience including the effect of employee terminations.
If
any of these assumptions differ significantly from actual, stock-based
compensation expense could be impacted.
Recently
Adopted Accounting Standards
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109,” (FIN 48). FIN 48 prescribes a comprehensive model for
how a company should recognize, measure, present, and disclose in its financial
statements uncertain tax positions that it has taken or expects to take on
a tax
return. On January 17, 2007, the FASB affirmed its previous decision to make
FIN
48 effective for fiscal years beginning after December 15, 2006. Accordingly,
FIN 48 was effective for Fuel Tech on January 1, 2007.
Previously,
Fuel Tech had accounted for tax contingencies in accordance with Statement
of
Financial Accounting Standards 5, Accounting
for Contingencies.
As
required by FIN 48, which clarifies Statement 109, Accounting
for Income Taxes,
Fuel
Tech recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more-likely-than-not threshold,
the amount recognized in the financial statements is the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate settlement
with the relevant tax authority. At the adoption date, Fuel Tech applied FIN
48
to all tax positions for which the statute of limitations remained open. As
a
result of the implementation of FIN 48, Fuel Tech recognized an increase of
approximately $86,000 in the liability for unrecognized tax benefits, of which
$81,000 was accounted for as a reduction to the January 1, 2007 balance of
retained earnings.
In
June
2006, the FASB ratified a consensus opinion reached by the Emerging Issues
Task
Force (EITF) on EITF Issue 06-3, "How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)." The guidance in EITF Issue 06-3
requires disclosure in interim and annual financial statements of the amount
of
taxes on a gross basis, if significant, that are assessed by a governmental
authority that are imposed on and concurrent with a specific revenue producing
transaction between a seller and customer such as sales, use, value added,
and
some excise taxes. Additionally, the income statement presentation (gross or
net) of such taxes is an accounting policy decision that must be disclosed.
The
consensus in EITF Issue 06-3 is effective for interim and annual reporting
periods beginning after December 15, 2006. The Company adopted EITF Issue 06-3
effective January 1, 2007. The Company presents sales tax on a net
basis
in its consolidated financial statements. The adoption did not have a material
effect on the consolidated financial statements.
In
November 2006, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF) in EITF Issue No. 06-9, “Reporting a Change in (or the
Elimination of) a Previously Existing Difference between the Fiscal Year-End
of
a Parent Company and that of a Consolidated Entity or between the Reporting
Period of an Investor and that of an Equity Method Investee” (“EITF 06-9”). EITF
06-9 requires certain disclosures whenever a change is made to modify or
eliminate the time lag used for recording results of consolidated entities
or
equity method investees that have a different fiscal year end than a parent.
EITF 06-9 is effective for changes in the time lag occurring in the interim
or
annual reporting periods beginning after November 29, 2006. The adoption of
EITF
06-9 did not have a material impact on the consolidated financial
statements.
New
Accounting Pronouncements
In
September 2006, the FASB issued Financial Accounting Standard No. 157, “Fair
Value Measurements” (FAS No. 157). FAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. FAS No. 157
applies under other accounting pronouncements that require or permit fair value
measurements, and accordingly, does not require any new fair value measurements.
FAS No. 157 is effective for Fuel Tech beginning January 1, 2008. Fuel Tech
is
currently reviewing the provisions of FAS No. 157, but does not expect the
provisions to have a material impact on its consolidated financial
statements.
In
February 2007, the FASB issued Financial Accounting Standard No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (FAS No. 159). FAS
No. 159 provides the option to report certain financial assets and liabilities
at fair value, with the intent to mitigate volatility in financial reporting
that can occur when related assets and liabilities are recorded on different
bases. This statement is effective for Fuel Tech beginning January 1, 2008.
Fuel
Tech does not expect FAS No. 159 to have a material impact on its consolidated
financial statements.
In
May
2007, the FASB issued FASB Staff Position FIN 48-1 (FSP FIN 48-1), which amends
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” FSP
FIN 48-1 provides guidance on how an enterprise should determine whether a
tax
position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. Fuel Tech does not expect the provisions of FSP
FIN
48-1 to have a material impact on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (SFAS 141R). SFAS 141R establishes principles and requirements
for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS 141R is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the potential impact of adoption of SFAS 141R
on
its consolidated financial statements. However, the Company does not expect
the
adoption of SFAS 141R to have a material impact on its consolidated financial
statements.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Financial Accounting Standard No. 160, (SFAS 160) “Noncontrolling Interests in
Consolidation Financial Statements an amendment of ARB No. 51”. The objective of
SFAS 160 is to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements. SFAS 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for
the
deconsolidation of a subsidiary. SFAS 160 also changes the way the consolidated
income statement is presented, establishes a single method of accounting for
changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation, requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated and expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests
of the parent’s owners and the interest of the noncontrolling owners of a
subsidiary. SFAS 160 is effective for financial statements issued for the fiscal
years beginning on or after December 15, 2008. Fuel Tech does not expect the
provisions to have a material impact on its consolidated financial
statements.
2007
versus 2006
Revenues
for the years ended December 31, 2007 and 2006 were $80,297,000 and $75,115,000,
respectively. The year over year increase of $5,182,000, or 7%, predominantly
reflects moderate increases in both technology segments.
Revenues
for the NOx reduction technology segment were $47,750,000 in 2007, an increase
of $1,296,000, or 3%, over 2006. This segment is positioned well to capitalize
on the next phase of increasingly stringent U.S. air quality standards. With
the
compliance for the Environmental Protection Agency’s (EPA) State Implementation
Plan (SIP) Call regulation beginning to wind down, utilities and industrial
facilities across the country are planning for compliance with the Clean Air
Interstate Rule (CAIR) and the Clean Air Visibility Rule (CAVR), which take
effect in 2009 and 2013, respectively. Thousands of utility and industrial
boilers will be impacted by these regulations and Fuel Tech’s technologies will
serve as an important element in enabling utility and industrial boiler unit
owners to attain compliance. In 2007, Fuel Tech announced new contracts valued
at $60 million which exceeded the previous annual record by almost
40%.
Revenues
for the Fuel Treatment Chemical business segment were $32,547,000 in 2007,
an
increase of $3,886,000, or 14%, over 2006. This segment’s growth is indicative
of the continued market acceptance of Fuel Tech’s patented TIFI™ Targeted
In-Furnace Injection™ technology, particularly on coal-fired units, which
represent the largest market opportunity for the technology, both domestically
and abroad. In 2007, Fuel Tech added 10 new coal-fired units to its customer
base, the largest annual total in the Company’s history.
Cost
of
sales for the years ended December 31, 2007 and 2006 was $42,471,000 and
$38,429,000, respectively. Cost of sales as a percentage of net sales for the
years ended December 31, 2007 and 2006 was 53% and 51%, respectively. The cost
of sales percentage for 2007 for the NOx reduction segment decreased to 54%
from
57% in 2006. The decrease is attributable to the mix of project business. For
the fuel treatment chemical segment, the cost of sales percentage increased
to
51% in 2007 from 42% in 2006. The increase is due to startup costs related
to
the incremental units noted above, without the realization of related revenues
as only two of the 10 new units contributed significant revenues during 2007
due
to customer-related delays impacting the timing of startup.
Selling,
general and administrative expenses for
the
years ended December 31, 2007 and 2006 were
$24,950,000
and $23,901,000, respectively. The
$1,049,000 increase over 2006 is principally attributable to the
following:
- Fuel
Tech
recorded $4,791,000 in stock compensation expense in 2007 in accordance with
Statement 123(R), as discussed in Note 6 to the consolidated financial
statements. This amount was a $2,986,000 increase over 2006. This increase
in
stock compensation expense is attributable to the awarding of stock options
to
all Fuel Tech employees in December 2006 and to an increase in the fair value
of
the options granted, which was driven by an increase in the price of Fuel Tech’s
Common Stock.
- Partially
offsetting this unfavorable variance was a reduction in revenue-related expenses
of $2,100,000 as Fuel Tech aligned the focus of all employees under a common
incentive plan in 2007.
Research
and development expenses were $2,137,000 and $2,052,000 for the years ended
December 31, 2007 and 2006, respectively. Fuel Tech has established a more
focused approach in the pursuit of commercial applications for its technologies
outside of its traditional markets, and in the development and analysis of
new
technologies that could represent incremental market opportunities.
Interest
income increased by $623,000 over 2006 driven
by
higher average cash and short-term investment balances. Further, Fuel Tech
recorded interest expense of $24,000 in 2007 related specifically to a
short-term credit facility that was used to support the start-up of Fuel Tech’s
new office in Beijing, China. Finally,
the moderate increase in other income is due largely to foreign exchange
gains
related to balances denominated in foreign currencies.
For
the
year ended December 31, 2007, Fuel Tech recorded tax expense of $5,187,000,
which predominantly represents deferred tax expense related to taxable income
recognized in 2007. For the year ended December 31, 2006, Fuel Tech recorded
tax
expense of $4,942,000, also representing deferred tax expense related to taxable
income.
2006
versus 2005
Net
sales
for the years ended December 31, 2006 and 2005 were $75,115,000 and $52,928,000,
respectively. The year over year increase of $22,187,000, or 42%, reflects
an
increase of $13,804,000 from the nitrogen oxide (NOx) reduction technology
segment and an increase of $8,389,000 from the fuel treatment chemical
technology segment.
Revenues
for the NOx reduction technology segment were $46,454,000 in 2006, an increase
of $13,804,000, or 42%, over 2005. The increase was driven by enhanced order
flow for Fuel Tech’s NOx reduction technologies. Domestically, orders were
driven by the SIP Call and CAIR regulations while internationally, revenues
were
enhanced by two large Chinese projects that were awarded late in 2005 and
contributed significantly to revenues in 2006.
Revenues
for the Fuel Treatment Chemical business segment were $28,661,000 in 2006,
an
increase of $8,389,000, or 41%, over 2005. The increase was driven by continued
market acceptance of Fuel Tech’s TIFI™ technology, particularly on coal-fired
units in the United States.
Cost
of
sales for the years ended December 31, 2006 and 2005 was $38,429,000 and
$27,118,000, respectively. Cost of sales as a percentage of net sales for the
years ended December 31, 2006 and 2005 was 51%. The cost of sales percentage
for
2006 for the NOx reduction segment increased to 57% from 51% in 2005. The
increase is attributable to the mix of project business. For the fuel treatment
chemical segment, the cost of sales percentage decreased to 42% in 2006 from
50%
in 2005. The decrease is due to the timing of revenue recognition on cost-share
demonstrations and to leveraging fixed costs on higher revenue-generating
coal-fired utility units.
Selling,
general and administrative expenses for
the
years ended December 31, 2006 and 2005 were
$23,901,000
and $17,414,000, respectively. The
$6,487,000 increase over 2005 is attributable to the following:
- Fuel
Tech
recorded $1,805,000 in stock compensation expense in accordance with Statement
123(R), as discussed in Note 6 to the consolidated financial
statements.
- Fuel
Tech
realized an increase in revenue-related expenses in the amount of $1,500,000
as
both technology segments had significantly improved revenue growth versus the
comparable prior-year period.
- Fuel
Tech
recorded an increase in human resource-related expenses of approximately
$1,800,000 as staffing levels were increased in several areas in response to
overall business growth.
- Finally,
Fuel Tech realized incremental expenses related to audit, tax, consulting and
recruiting fees, all in support of achieving business growth. Of specific note
are the costs that were incurred to domesticate Fuel Tech.
Research
and development expenses were $2,052,000 and $1,241,000 for the years ended
December 31, 2006 and 2005, respectively. Fuel Tech has established a more
focused approach in the pursuit of commercial applications for its technologies
outside of its traditional markets, and in the development and analysis of
new
technologies that could represent incremental market opportunities.
Interest
income increase by almost $800,000 year over year, driven
by
higher average cash and short-term investment balances, and market interest
rates versus those experienced in the prior year.
The
increase in other income is due largely to foreign exchange gains
related to balances denominated in foreign currencies.
On
a
full-year basis, Fuel Tech recorded tax expense of $4,942,000. This amount
primarily represents non-cash deferred tax expense related to taxable income
recognized in 2006.
Fuel
Tech’s income tax benefit of $419,000 for 2005 predominantly represented the
recording of the reduction in the deferred tax asset valuation allowance
representing the anticipated utilization of net operating loss and research
and
development tax credit carryforwards. Based on a review of both historical
and
projected taxable income, Fuel Tech concluded in 2005 that it was more likely
than not that the net operating losses and the research and development tax
credits would be utiized in subsequent periods and the valuation allowance
was
no longer required.
Liquidity
and Sources of Capital
At
December 31, 2007, Fuel Tech had cash and cash equivalents and short-term
investments of $32,471,000 and working capital of $45,143,000 versus $32,405,000
and $38,715,000 at the end of 2006, respectively. Operating activities provided
$4,099,000 of cash during 2007, primarily due to the favorable operating results
of the business segments. Investing activities used cash of $3,713,000 during
2007, as short-term investments were decreased $6,002,000 while $9,715,000
was
utilized to support and enhance the operations of the business. Of this amount,
approximately $6,000,000 was used to purchase the future corporate headquarters
for Fuel Tech, with the remainder used principally for equipment related to
the
fuel treatment chemical technology segment. Fuel Tech generated cash from
financing activities in the amount of $5,595,000. Of this amount, $912,000
represents proceeds derived from the exercise price of options exercised in
2007, while $1,482,000 represents the excess tax benefits realized from the
exercise of stock options in 2007. Fuel Tech generated cash in an amount of
$1,150,000 resulting from the issuance of directors’ deferred shares of stock.
Finally, Beijing Fuel Tech borrowed $2,051,000 in funds to meet the short-term
working capital needs of this new legal entity.
Fuel
Tech
has a $25.0 million revolving credit facility expiring July 31, 2009. The
facility is unsecured and bears interest at a rate of LIBOR plus 75 basis
points. Fuel Tech can use this facility for cash advances and standby letters
of
credit.
At
December 31, 2007, the bank had provided standby letters of credit,
predominantly to customers, totaling approximately $6,021,000 in connection
with
contracts in process. Fuel Tech is committed to reimbursing the issuing bank
for
any payments made by the bank under these letters of credit. At December 31,
2007, there were no cash borrowings under the revolving credit facility and
approximately $18,979,000 was available.
Beijing
Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), a newly
formed wholly-owned subsidiary of Fuel Tech, entered into a revolving credit
facility agreement during the third quarter of 2007 for RMB 35 million
(approximately $4.8 million), which expires on July 31, 2009. The facility
is
unsecured and bears interest at a rate of 90% of the People's Bank of China
(PBOC) Base Rate. Beijing Fuel Tech can use this facility for cash advances
and
bank guarantees. At December 31, 2007, Beijing Fuel Tech had borrowings
outstanding in the amount $2,051,000.
Interest
payments in the amount of $24,000 were made during the year ended December
31,
2007, and no payments were made during the years ended December 31, 2006 or
2005.
In
the
opinion of management, Fuel Tech’s expected near-term revenue growth will be
driven by the timing of penetration of the coal-fired utility marketplace via
utilization of its TIFI technology, by utility and industrial entities’
adherence to the NOx reduction requirements of the various domestic
environmental regulations, and by the expansion of both business segments in
non-U.S. geographies. Fuel Tech expects its liquidity requirements to be met
by
the operating results generated from these activities.
Contractual
Obligations and Commitments
In
its
normal course of business, Fuel Tech enters into agreements that obligate Fuel
Tech to make future payments. The operating lease obligations noted below are
primarily related to supporting the operations of the business.
|
Payments
due by period in thousands of dollars
|
||||||||||||||||
|
Contractual
Cash
Obligations |
Total
|
Less than 1
year |
2-3
years
|
4-5
years
|
Thereafter
|
|||||||||||
|
Operating
Leases
|
$
|
1,664
|
$
|
645
|
$
|
684
|
$
|
241
|
$
|
94
|
||||||
Fuel
Tech
has a sublease agreement that obligates the lessee to make future payments
to
Fuel Tech. The sublease obligations noted below are related to a sublease
agreement between Fuel Tech and American Bailey Corporation (ABC). ABC will
reimburse Fuel Tech for its share of lease and lease-related expenses under
Fuel
Tech’s January 29, 2004
lease of its executive offices in Stamford, Connecticut. Please refer to Note
9
to the consolidated financial statements for a discussion of the relation
between Fuel Tech and ABC.
|
Rental
payments due to Fuel Tech by period in thousands of
dollars
|
||||||||||||||||
|
Contractual
Cash
Obligations |
Total
|
Less than 1
year |
2-3
years
|
4-5
years
|
Thereafter
|
|||||||||||
|
Sublease
|
$
|
169
|
$
|
81
|
$
|
88
|
$
|
-
|
$
|
-
|
||||||
Beijing
Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), a
newly
formed wholly-owned subsidiary of Fuel Tech, entered into a revolving credit
facility agreement during the third quarter of 2007 for RMB 35 million
(approximately $4.8 million), which expires on July 31, 2009. The facility
is
unsecured and bears interest at a rate of 90% of the People's Bank of China
(PBOC) Base Rate. Beijing Fuel Tech can use this facility for cash advances
and
bank guarantees. At December 31, 2007, Beijing Fuel Tech had borrowings
outstanding in the amount $2,051,000 as noted in the table below.
|
Commitment
expiration by period in thousands of dollars
|
||||||||||||||||
|
Commercial
Commitments
|
Total
|
Less
than 1 year
|
2-3
years
|
4-5
years
|
Thereafter
|
|||||||||||
|
Short-tern
debt
|
$
|
2,051
|
$
|
2,051
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
Fuel
Tech, in the normal course of business, uses bank performance guarantees
and
letters of credit in support of construction contracts with customers 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
|
In
addition, Fuel Tech uses letters of credit as security for other obligations
as
needed in the normal course of business. As of December 31, 2007, Fuel Tech
has
outstanding bank performance guarantees and letters of credit as noted in the
table below:
|
Commitment
expiration by period in thousands of dollars
|
||||||||||||||||
|
Commercial
Commitments |
Total
|
Less than 1
year |
2-3
years
|
4-5
years
|
Thereafter
|
|||||||||||
|
Standby
letters of credit and bank guarantees
|
$
|
6,021
|
$
|
1,153
|
$
|
4,868
|
$
|
-
|
$
|
-
|
||||||
The
following table summarizes Fuel Tech’s FIN 48 obligations as of December 31,
2007. Please refer to Note
3
to
the
consolidated financial statements in this document for a description of our
FIN
48 obligations.
|
Commitment
expiration by period in thousands of dollars
|
||||||||||||||||
|
Commercial
Commitments
|
Total
|
Less than 1
year |
2-3
years
|
4-5
years
|
Thereafter
|
|||||||||||
|
FIN
48 Obligations
|
$
|
678
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
678
|
||||||
Off-Balance-Sheet
Transactions
There
were no off-balance-sheet transactions during the two-year period ended Decmeber
31, 2007.
Forward-Looking
Information
From
time
to time, information provided by Fuel Tech, statements made by its employees
or
information included in its filings with the Securities and Exchange Commission
(including this Annual Report) may contain statements that are not historical
facts, so-called “forward-looking statements.” These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Fuel Tech’s actual future results may differ
significantly from those stated in any forward-looking statements.
Forward-looking statements involve a number of risks and uncertainties,
including, but not limited to, product demand, pricing, market acceptance,
litigation, risk of dependence on significant customers, third-party suppliers
and intellectual property rights, risks in product and technology development
and other risk factors detailed in the text under the caption “Risk Factors” in
Item 1 “Business” under Part I of this Annual Report and in Fuel Tech’s
Securities and Exchange Commission filings.
Fuel
Tech’s earnings and cash flow are subject to fluctuations due to changes in
foreign currency exchange rates. Fuel Tech does not enter into foreign currency
forward contracts or into foreign currency option contracts to manage this
risk
due to the immaterial nature of the transactions involved.
Fuel
Tech
is also exposed to changes in interest rates primarily due to its long-term
debt
arrangement (refer to Note 8 to the consolidated financial statements). A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not have a materially adverse effect on interest
expense during the upcoming year ended December 31, 2007.
Fuel
Tech
does not believe that the current economic environment in the United States
will
have a material impact on the results of its operations.
Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
The
Board
of Directors and Shareholders of Fuel Tech, Inc.
We
have
audited Fuel Tech, Inc. (a Delaware Corporation) and Subsidiaries’ (the
“Company”) internal control over financial reporting as of December 31, 2007
based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting, included the accompanying
Management’s Report on Internal Control Over Financial Reporting appearing under
Item 9A. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, Fuel Tech, Inc. and Subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on
criteria established
in Internal
Control - Integrated Framework
issued
by COSO.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2007 and 2006 and the related consolidated statements of
income, shareholders’ equity, and cash flows for the years then ended
and our report dated March 5, 2008 expressed an unqualified opinion on those
financial statements.
/s/
GRANT
THORNTON, LLP
Chicago,
Illinois
March
5,
2008
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders of Fuel Tech, Inc.
We
have
audited the accompanying consolidated balance sheets of Fuel Tech, Inc. and
Subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related
consolidated statements of income, shareholders’ equity and cash flows for the
years then ended. Our audit of the basic financial statements included the
financial statement schedule listed in the index appearing under Item 15(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Fuel Tech, Inc. and
Subsidiaries as of December 31, 2007 and 2006 and the results of their
operations and cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Also
in our opinion, the related financial statement schedule, when considered
in
relation to the basic financial statements taken as a whole, presents fairly,
in
all material respects the information set forth therein.
As
discussed in Note 3 to the consolidated financial statements, the Company
adopted FASB Interpretation No. 48 “Accounting
for Uncertainty in Income Taxes an Interpretation of FASB Statement No.
109,”
on
January 1, 2007.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007, based on the criteria
established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
and our report dated March 5, 2008 expressed an unqualified opinion on the
effectiveness of the operation of internal control over financial
reporting.
/s/
GRANT
THORNTON, LLP
Chicago,
Illinois
March
5,
2008
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders of Fuel Tech, Inc. (formerly Fuel-Tech
N.V.)
We
have
audited the consolidated statements of income, shareholders’ equity and cash
flows of Fuel Tech, Inc. for the year ended December 31, 2005. Our audit also
included the financial statement schedule listed in the Index at Item 15(a)
for
the year ended December 31, 2005. These financial statements and schedule are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements and schedule based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated results of Fuel Tech, Inc.’s operations and
cash flows for the year ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule for the year ended December 31, 2005, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
/s/
Ernst
& Young LLP
Chicago,
Illinois
March
8,
2006
Fuel
Tech, Inc.
Consolidated
Balance Sheets
(in
thousands of dollars, except share and per share data)
|
2007
|
2006
|
||||||
|
December
31
|
|||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
30,473
|
$
|
24,405
|
|||
|
Short-term
investments
|
1,998
|
8,000
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts of $150
|
31,856
|
16,724
|
|||||
|
Inventories
|
186
|
203
|
|||||
|
Deferred
income taxes
|
1,589
|
4,972
|
|||||
|
Prepaid
expenses and other current assets
|
1,761
|
1,916
|
|||||
|
Total
current assets
|
67,863
|
56,220
|
|||||
|
Property
and equipment, net of accumulated depreciation of $10,091 and $8,845,
respectively
|
11,302
|
4,051
|
|||||
|
Goodwill
|
2,119
|
2,119
|
|||||
|
Other
intangible assets, net of accumulated amortization of $1,320 and
$1,205,
respectively
|
1,088
|
1,156
|
|||||
|
Deferred
income taxes
|
2,552
|
885
|
|||||
|
Other
assets
|
2,290
|
1,229
|
|||||
|
Total
assets
|
$
|
87,214
|
$
|
65,660
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Short-term
debt
|
$
|
2,051
|
$
|
-
|
|||
|
Accounts
payable
|
13,632
|
7,632
|
|||||
|
Accrued
liabilities:
|
|||||||
|
Employee
compensation
|
2,304
|
4,457
|
|||||
|
Other
accrued liabilities
|
4,733
|
5,416
|
|||||
|
Total
current liabilities
|
22,720
|
17,505
|
|||||
|
Other
liabilities
|
1,255
|
500
|
|||||
|
Total
liabilities
|
23,975
|
18,005
|
|||||
|
Shareholders'
equity:
|
|||||||
|
Common
stock, $.01 par value, 40,000,000 shares authorized, 22,410,064
and
22,086,728 shares issued, respectively
|
224
|
221
|
|||||
|
Additional
paid-in capital
|
111,459
|
103,122
|
|||||
|
Accumulated
deficit
|
(48,882
|
)
|
(56,044
|
)
|
|||
|
Accumulated
other comprehensive income
|
166
|
79
|
|||||
|
Nil
coupon perpetual loan notes
|
272
|
277
|
|||||
|
Total
shareholders' equity
|
63,239
|
47,655
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
87,214
|
$
|
65,660
|
|||
See
notes
to consolidated financial statements.
Fuel
Tech, Inc.
Consolidated
Statements of Income
(in
thousands of dollars, except share and per share data)
|
2007
|
2006
|
2005
|
||||||||
|
For
the years ended December 31
|
||||||||||
|
Revenues
|
$
|
80,297
|
$
|
75,115
|
$
|
52,928
|
||||
|
Costs
and expenses:
|
||||||||||
|
Cost
of sales
|
42,471
|
38,429
|
27,118
|
|||||||
|
Selling,
general and administrative
|
24,950
|
23,901
|
17,414
|
|||||||
|
Research
and development
|
2,137
|
2,052
|
1,241
|
|||||||
|
69,558
|
64,382
|
45,773
|
||||||||
|
Operating
income
|
10,739
|
10,733
|
7,155
|
|||||||
|
Interest
expense
|
(24
|
)
|
-
|
-
|
||||||
|
Interest
income
|
1,634
|
1,011
|
244
|
|||||||
|
Other
income (expense)
|
81
|
24
|
(230
|
)
|
||||||
|
Income
before taxes
|
12,430
|
11,768
|
7,169
|
|||||||
|
Income
tax (expense) benefit
|
(5,187
|
)
|
(4,942
|
)
|
419
|
|||||
|
Net
income
|
$
|
7,243
|
$
|
6,826
|
$
|
7,588
|
||||
|
Net
income per Common Share:
|
||||||||||
|
Basic
|
$
|
0.33
|
$
|
0.32
|
$
|
0.38
|
||||
|
Diluted
|
$
|
0.29
|
$
|
0.28
|
$
|
0.33
|
||||
|
Weighted-average
number of Common Shares outstanding:
|
||||||||||
|
Basic
|
22,280,000
|
21,491,000
|
20,043,000
|
|||||||
|
Diluted
|
24,720,000
|
24,187,000
|
23,066,000
|
|||||||
See
notes
to consolidated financial statements.
Fuel
Tech, Inc.
Consolidated
Statements of Shareholders’ Equity
(in
thousands of dollars)
|
Common Stock
|
Additional
Paid-in
|
Accumulated
|
Accumulated
Other
Comprehensive
|
Treasury Stock
|
Nil Coupon
Perpetual
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Income (Loss)
|
Shares
|
Amount
|
Loan Notes
|
Total
|
||||||||||||||||||||
|
Balance
at January
1, 2005
|
19,530
|
$
|
195
|
$
|
88,600
|
$
|
(70,458
|
)
|
$
|
86
|
-
|
$
|
-
|
$
|
532
|
$
|
18,955
|
|||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
7,588
|
7,588
|
||||||||||||||||||||||||||
|
Foreign
currency translation
adjustments
|
(125
|
)
|
(125
|
)
|
||||||||||||||||||||||||
|
Comprehensive
income
|
7,463
|
|||||||||||||||||||||||||||
|
Exercise
of stock options and warrants
|
856
|
9
|
1,221
|
1,230
|
||||||||||||||||||||||||
|
Conversion
of nil coupon perpetual
loan notes into Common
Shares
|
38
|
250
|
(250
|
)
|
-
|
|||||||||||||||||||||||
|
Tax
benefit from stock compensation
expense
|
1,488
|
1,488
|
||||||||||||||||||||||||||
|
Balance
at December
31, 2005
|
20,424
|
$
|
204
|
$
|
91,559
|
$
|
(62,870
|
)
|
$
|
(39
|
)
|
-
|
$
|
-
|
$
|
282
|
$
|
29,136
|
||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
6,826
|
6,826
|
||||||||||||||||||||||||||
|
Foreign
currency translation
adjustments
|
118
|
118
|
||||||||||||||||||||||||||
|
Comprehensive
income
|
6,944
|
|||||||||||||||||||||||||||
|
Exercise
of stock options
and warrants
|
1,662
|
17
|
3,809
|
3,826
|
||||||||||||||||||||||||
|
Conversion
of nil coupon perpetual
loan notes into Common
Shares
|
1
|
5
|
(5
|
)
|
-
|
|||||||||||||||||||||||
|
Tax
benefit from stock compensation
expense
|
5,944
|
5,944
|
||||||||||||||||||||||||||
|
Stock
compensation expense
|
1,805
|
1,805
|
||||||||||||||||||||||||||
|
Balance
at December
31, 2006
|
22,087
|
$
|
221
|
$
|
103,122
|
$
|
(56,044
|
)
|
$
|
79
|
-
|
$
|
-
|
$
|
277
|
$
|
47,655
|
|||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
7,243
|
7,243
|
||||||||||||||||||||||||||
|
Foreign
currency translation
adjustments
|
87
|
87
|
||||||||||||||||||||||||||
|
Comprehensive
income
|
7,330
|
|||||||||||||||||||||||||||
|
Exercise
of stock options
and warrants
|
322
|
3
|
909
|
912
|
||||||||||||||||||||||||
|
Conversion
of nil coupon perpetual
loan notes into Common
Shares
|
1
|
5
|
(5
|
)
|
-
|
|||||||||||||||||||||||
|
Effect
of FIN 48 adoption
|
(81
|
)
|
(81
|
)
|
||||||||||||||||||||||||
|
Tax
benefit from stock compensation
expense
|
1,482
|
1,482
|
||||||||||||||||||||||||||
|
Stock
compensation expense
|
4,791
|
4,791
|
||||||||||||||||||||||||||
|
Issuance
of deferred shares of stock
|
1,150
|
1,150
|
||||||||||||||||||||||||||
|
Balance
at December
31, 2007
|
22,410
|
$
|
224
|
$
|
111,459
|
(48,882
|
)
|
$
|
166
|
-
|
$
|
-
|
$
|
272
|
$
|
63,239
|
||||||||||||
See
notes
to consolidated financial statements.
Fuel
Tech, Inc.
Consolidated
Statements of Cash Flows
(in
thousands of dollars)
|
For
the years ended December 31
|
2007
|
2006
|
2005
|
|||||||
|
|
||||||||||
|
OPERATING
ACTIVITIES
|
||||||||||
|
Net
income
|
$
|
7,243
|
$
|
6,826
|
$
|
7,588
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
|
2,353
|
1,961
|
1,566
|
|||||||
|
Amortization
|
115
|
118
|
127
|
|||||||
|
Effect
of FIN 48 adoption
|
(81
|
)
|
-
|
-
|
||||||
|
Provision
for doubtful accounts
|
-
|
-
|
26
|
|||||||
|
Loss
on equipment disposals/impaired assets
|
18
|
-
|
32
|
|||||||
|
Deferred
income tax
|
1,716
|
(1,235
|
)
|
(2,978
|
)
|
|||||
|
Stock
compensation expense
|
4,791
|
1,805
|
-
|
|||||||
|
Excess
tax benefit for stock-based compensation
|
-
|
-
|
1,488
|
|||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(15,132
|
)
|
(3,491
|
)
|
(5,901
|
)
|
||||
|
Inventories
|
17
|
155
|
(47
|
)
|
||||||
|
Prepaid
expenses, other current assets and other noncurrent assets
|
(906
|
)
|
(1,046
|
)
|
(439
|
)
|
||||
|
Accounts
payable
|
6,000
|
1,139
|
3,788
|
|||||||
|
Accrued
liabilities and other noncurrent liabilities
|
(2,081
|
)
|
1,927
|
6,278
|
||||||
|
Other
|
46
|
-
|
3
|
|||||||
|
Net
cash provided by operating activities
|
4,099
|
8,159
|
10,043
|
|||||||
|
INVESTING
ACTIVITIES
|
||||||||||
|
Proceeds
from sales of short-term investments
|
6,002
|
-
|
-
|
|||||||
|
Purchases
of short-term investments
|
-
|
(2,000
|
)
|
(3,500
|
)
|
|||||
|
Purchases
of property, equipment and patents
|
(9,715
|
)
|
(2,017
|
)
|
(2,792
|
)
|
||||
|
Net
cash used in investing activities
|
(3,713
|
)
|
(4,017
|
)
|
(6,292
|
)
|
||||
|
FINANCING
ACTIVITIES
|
||||||||||
|
Proceeds
from short-term borrowings
|
2,051
|
-
|
-
|
|||||||
|
Issuance
of deferred shares
|
1,150
|
-
|
-
|
|||||||
|
Proceeds
from exercise of stock options and warrants
|
912
|
3,826
|
1,230
|
|||||||
|
Excess
tax benefit for stock-based compensation
|
1,482
|
5,944
|
-
|
|||||||
|
Net
cash provided by financing activities
|
5,595
|
9,770
|
2,718
|
|||||||
|
Effect
of exchange rate fluctuations on cash
|
87
|
118
|
(125
|
)
|
||||||
|
Net
increase in cash and cash equivalents
|
6,068
|
14,030
|
6,344
|
|||||||
|
Cash
and cash equivalents at beginning of year
|
24,405
|
10,375
|
4,031
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
30,473
|
$
|
24,405
|
$
|
10,375
|
||||
|
Supplemental
Cash Flow Information:
|
||||||||||
|
Cash
paid for:
|
||||||||||
|
Interest
|
$
|
24
|
$
|
-
|
$
|
-
|
||||
|
Income
taxes paid
|
$
|
173
|
$
|
217
|
$
|
326
|
||||
See
notes
to consolidated financial statements.
Notes
to
Consolidated Financial Statements
1. ORGANIZATION
AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Fuel
Tech, Inc. (“Fuel Tech”) is a company that provides advanced engineering
solutions for the optimization of combustion systems in utility and industrial
applications. Fuel Tech’s primary focus is on the worldwide marketing and sale
of its NOxOUT®
Process
and related technologies as well as its FUEL CHEM®
fuel
treatment chemical product line. The NOxOUT Process reduces nitrogen oxide
(“NOx”) emissions from boilers, furnaces and other stationary combustion
sources. Fuel Tech’s FUEL CHEM program is based on proprietary TIFI™ Targeted
In-Furnace Injection™ technology in the unique application of specialty
chemicals to improve the performance of combustion units. Fuel Tech’s business
is materially dependent on the continued existence and enforcement of air
quality regulations, particularly in the United States. Fuel Tech has expended
significant resources in the research and development of new technologies in
building its proprietary portfolio of air pollution control, fuel treatment
chemicals, computer modeling and advanced visualization technologies.
International
revenues were $12.8 million, $17.5 million and $11.2 million for the years
ended
December 31, 2007, 2006 and 2005, respectively. These amounts represented 16%,
23% and 21% of Fuel Tech’s total revenues for the respective periods of time.
Foreign currency changes did not have a material impact on the calculation
of
these percentages. Fuel Tech has foreign offices in Beijing, China and in
Galarate, Italy.
Basis
of Presentation
The
consolidated financial statements include the accounts of Fuel Tech and its
wholly owned subsidiaries. All intercompany transactions have been eliminated.
Originally
incorporated in 1987 under the laws of the Netherlands Antilles as Fuel-Tech
N.V., effective September 30, 2006, Fuel Tech changed its place of incorporation
from the Netherlands Antilles to the State of Delaware in a tax-free
reorganization. In the reorganization, each outstanding share of Fuel-Tech
N.V.
Common Stock held by our stockholders was converted into one share of Fuel
Tech,
Inc. Common Stock. The shares exchanged were all of Fuel Tech, Inc.’s issued and
outstanding shares immediately after the reorganization. The number of shares
of
Fuel Tech, Inc.’s Common Stock outstanding immediately after the reorganization
was the same as the number of shares of Fuel-Tech N.V. Common Stock outstanding
immediately prior to the reorganization. In connection with this reorganization,
all option agreements and warrant rights to purchase shares of Fuel-Tech N.V.
Common Stock were converted into option agreements and warrant rights to
purchase shares of Fuel Tech, Inc. Common Stock.
In
addition to the reorganization, Fuel Tech, Inc. adopted a tax-free plan of
merger whereby two of Fuel Tech, Inc.’s wholly owned United States subsidiaries
were merged with and into Fuel Tech, Inc. as of December 31, 2006.
In
November 2006, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF) in EITF Issue No. 06-9, “Reporting a Change in (or the
Elimination of) a Previously Existing Difference between the Fiscal Year-End
of
a Parent Company and that of a Consolidated Entity or between the Reporting
Period of an Investor and that of an Equity Method Investee” (“EITF 06-9”). EITF
06-9 requires certain disclosures whenever a change is made to modify or
eliminate the time lag used for recording results of consolidated entities
or
equity method investees that have a different fiscal year end than a parent.
EITF 06-9 is effective for changes in the time lag occurring in the interim
or
annual reporting periods beginning after November 29, 2006. The adoption of
EITF
06-9 did not have a material impact on the consolidated financial
statements.
Use
of Estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Fair
Value of Financial Instruments
The
carrying values of cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued liabilities are reasonable estimates
of
their fair value due to their short-term nature. The carrying amount of the
Company’s short-term debt, revolving line of credit and notes
approximate fair value because the majority of the amounts outstanding accrue
interest at variable rates.
Cash
Equivalents and Short-term Investments
Fuel
Tech
includes cash and investments having an original maturity of three months or
less at the time of acquisition in cash and cash equivalents. Short-term
investments consist of highly-liquid investments having an original maturity
of
greater than three months which are recorded at cost, and have been classified
as available for sale securities. Fuel Tech has never incurred realized or
unrealized holding gains or losses on these securities. Income resulting from
short-term investments is recorded as interest income.
At
December 31, 2007, substantially all of Fuel Tech’s cash, cash equivalents and
short-term investments are on deposit with three financial
institutions.
Foreign
Currency Risk Management
Fuel
Tech's earnings and cash flow are subject to fluctuations due to changes in
foreign currency exchange rates. Fuel Tech does not enter into foreign currency
forward contracts or into foreign currency option contracts to manage this
risk
due to the immaterial nature of the transactions involved.
Accounts
Receivable
Accounts
receivable includes unbilled receivables, representing costs and estimated
earnings in excess of billings on uncompleted contracts under the percentage
of
completion method. At December 31, 2007 and 2006, unbilled receivables were
approximately $16,813,000 and $3,615,000, respectively.
Allowance
for Doubtful Accounts
Fuel
Tech, in order to control and monitor the credit risk associated with its
customer base, reviews the credit worthiness of customers on a recurring basis.
Factors influencing the level of scrutiny include the level of business the
customer has with Fuel Tech, the customer’s payment history and the customer’s
financial stability. Representatives of Fuel Tech’s management team review all
past due accounts on a weekly basis to assess collectibility. At the end of
each
reporting period, the allowance for doubtful accounts balance is reviewed
relative to management’s collectibility assessment and is adjusted if deemed
necessary.
Translation
of Foreign Currency
Assets
and liabilities of consolidated foreign subsidiaries are translated into U.S.
dollars at exchange rates in effect at year-end. Revenues and expenses are
translated at average exchange rates prevailing during the year. Gains or losses
on foreign currency transactions and the related tax effects are reflected
in
net income. The resulting translation adjustments are included in stockholders’
equity as part of accumulated comprehensive income.
Comprehensive
Income
Other
comprehensive income is defined as the change in equity resulting from
transactions from non-owner sources. Comprehensive income differs from net
income due to the effects of foreign currency translation.
Research
and Development
Research
and development costs are expensed as incurred. Research and development units
funded by contracts are reported as part of cost of goods sold. Internally
funded research and development expenses are reported as operating
expenses.
Product/System
Warranty
Fuel
Tech
warrants its pollution control products/systems against defects in design,
materials, and workmanship generally for one to two years. A provision for
estimated future costs relating to warranty expense is recorded when the
products/systems become commercially operational.
Goodwill
and Other Intangibles
Fuel
Tech
follows Financial Accounting Standards Board (FASB) Statement No. 142, “Goodwill
and Other Intangible Assets.” Under the guidance of this statement, goodwill and
indefinite-lived intangible assets are required to be reviewed annually, or
more
frequently if indicators arise, for impairment. The evaluation of impairment
involves comparing the current fair value of the business to the recorded value.
Fuel Tech uses a discounted cash flow model (DCF) to determine the current
fair
value of its reporting units. A number of significant assumptions and estimates
are involved in the application of the DCF model to forecast operating cash
flows, including markets and market share, sales volumes and prices, costs
to
produce and working capital changes. Management considers historical experience
and all available information at the time the fair values of its reporting
units
are estimated. However, actual fair values that could be realized in an actual
transaction may differ from those used to evaluate the impairment of
goodwill.
Fuel
Tech
allocates goodwill to reporting units based on the relative excess of fair
value
over carrying value of the reporting units. Fair value is determined as noted
above. The ratio of each reporting unit’s excess of fair value over carrying
value, to the total excess of fair value over carrying value, is used as the
basis for the allocation of the goodwill balance. Fuel Tech’s annual fair value
measurement test revealed no indications of impairment.
Included
with other intangible assets on the consolidated balance sheet are third-party
costs related to the development of patents. As of December 31, 2007 and 2006,
the net patent asset balance was $199,000 and $172,000, respectively. The
third-party costs capitalized during the years ended December 31, 2007 and
2006
were $53,000 and $50,000, respectively. Third-party costs are comprised of
legal
fees that relate to the review and preparation of patent disclosures and filing
fees incurred to present the patents to the required governing
body.
Fuel
Tech’s intellectual property has been the primary building block for the NOx
reduction and fuel treatment chemical technology segments. The patents are
essential to the generation of revenue for Fuel Tech’s businesses and are
essential to protect Fuel Tech from competition in the markets in which it
serves. These costs are being amortized on the straight-line method over a
period of 10 years from the date of patent issuance. Patent maintenance fees
are
charged to operations as incurred.
Fuel
Tech
reviews other intangible assets, which include a customer list, a covenant
not
to compete and patent assets, for impairment on a recurring basis or when events
or changes in circumstances indicate the carrying amount of an asset may not
be
recoverable. In the event the sum of the expected undiscounted future cash
flows
resulting from the use of the asset is less than the carrying amount of the
asset, an impairment loss equal to the excess of the asset’s carrying value over
its fair value is recorded. Management considers historical experience and
all
available information at the time the estimates of future cash flows are made,
however, the actual cash values that could be realized may differ from those
that are estimated. Fuel Tech recorded an impairment loss of $7,000 in 2007.
For
the
years ended December 31, 2006 and 2005 the impact of impairment losses was
zero
and $30,000, respectively. Such amounts are recorded in the “Research and
development” line item in the consolidated statements of income.
The
table
below shows the amortization period and other intangible asset cost by
intangible asset as of December 31, 2007 and 2006, and the accumulated
amortization and net intangible asset value in total for all other intangible
assets.
|
Description
of Other Intangible
|
Amortization
period
|
(in
thousands)
|
||||||||
|
2007
|
2006
|
|||||||||
|
Customer
list
|
15
years
|
$
|
1,198
|
$
|
1,198
|
|||||
|
Patent
asset
|
10
years
|
1,110
|
1,063
|
|||||||
|
Covenant
not to compete
|
6
years
|
100
|
100
|
|||||||
|
Total
cost
|
$
|
2,408
|
$
|
2,361
|
||||||
|
Less
accumulated amortization
|
1,320
|
1,205
|
||||||||
|
Total
net intangible asset value
|
$
|
1,088
|
$
|
1,156
|
||||||
The
estimated amortization expense related to Fuel Tech’s intangible assets is
expected to approximate $120,000 per year for the two-year period ending
December 31, 2009, and $100,000 per year for the three-year period ending
December 31, 2012.
Property
and Equipment
Equipment
is stated at historical cost. Provisions for depreciation are computed by the
straight-line method, using estimated useful lives. The table below shows the
depreciable life and cost by asset class as of December 31, 2007 and 2006,
and
the accumulated depreciation and net book value in total for all classes of
assets.
|
Description
of Property and
Equipment |
Depreciable
life |
(in
thousands)
|
||||||||
|
2007
Cost
|
2006
Cost
|
|||||||||
|
Land
|
$
|
1,440
|
$
|
-
|
||||||
|
Building
|
39
years
|
4,857
|
-
|
|||||||
|
Field
equipment
|
3-4
years
|
10,405
|
8,365
|
|||||||
|
Computer
equipment and software
|
2-3
years
|
2,996
|
2,857
|
|||||||
|
Furniture
and fixtures
|
3-10
years
|
1,673
|
1,652
|
|||||||
|
Vehicles
|
3
years
|
22
|
22
|
|||||||
|
Total
cost
|
$
|
21,393
|
$
|
12,896
|
||||||
|
Less
accumulated depreciation
|
10,091
|
8,845
|
||||||||
|
Total
net book value
|
$
|
11,302
|
$
|
4,051
|
||||||
Revenue
Recognition
Revenues
from the sales of chemical products are recorded when title transfers, either
at
the point of shipment or at the point of destination, depending on the contract
with the customer.
Fuel
Tech
uses the percentage of completion method of accounting for certain long-term
equipment construction and license contracts. Under the percentage of completion
method, sales and gross profit are recognized as work is performed based on
the
relationship between actual construction costs incurred and total estimated
costs at completion. Sales and gross profit are adjusted for revisions in
completion estimates and contract values in the period in which the facts giving
rise to the revisions become known.
In
June
2006, the FASB ratified a consensus opinion reached by the Emerging Issues
Task
Force (EITF) on EITF Issue 06-3, "How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)." The guidance in EITF Issue 06-3
requires disclosure in interim and annual financial statements of the amount
of
taxes on a gross basis, if significant, that are assessed by a governmental
authority that are imposed on and concurrent with a specific revenue producing
transaction between a seller and customer such as sales, use, value added,
and
some excise taxes. Additionally, the income statement presentation (gross or
net) of such taxes is an accounting policy decision that must be disclosed.
The
consensus in EITF Issue 06-3 is effective for interim and annual reporting
periods beginning after December 15, 2006. The Company adopted EITF Issue 06-3
effective January 1, 2007. The Company presents sales tax on a net
basis
in its consolidated financial statements. The adoption did not have a material
effect on the consolidated financial statements.
Distribution
Costs
Fuel
Tech
classifies shipping and handling costs in cost of sales in the consolidated
statement of income.
Income
Taxes
Deferred
tax assets and liabilities are determined based on the differences between
the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
At
the
end of each reporting period, for financial statement purposes, Fuel Tech
reviews the realizability of the deferred tax assets. As part of this review,
Fuel Tech will consider if there are taxable temporary differences that could
generate taxable income in the future, if there is the ability to carryback
the
net operating losses or credits, if there is a projection of future taxable
income, and if there are any tax planning strategies that can be readily
implemented.
Stock-Based
Compensation
Fuel
Tech
has a stock-based employee compensation plan, referred to as the Fuel Tech,
Inc.
Incentive Plan (Incentive Plan), under which awards may be granted to
participants in the form of Non-Qualified Stock Options, Incentive Stock
Options, Stock Appreciation Rights, Restricted Stock, Performance Awards,
Bonuses or other forms of share-based or non-share-based awards or combinations
thereof. Participants in the Incentive Plan may be Fuel Tech’s directors,
officers, employees, consultants or advisors (except consultants or advisors
in
capital-raising transactions) as the directors determine are key to the success
of Fuel Tech’s business. The amount of shares that may be issued or reserved for
awards to participants under a 2004 amendment to the Incentive Plan is 12.5%
of
outstanding shares calculated on a diluted basis. In 2007, 2006 and 2005,
311,000, 1,094,000, and 557,000 options, respectively, were granted to employees
and directors. At December 31, 2007, Fuel Tech has 845,000 stock options
available for issuance under the Incentive Plan.
Prior
to
January 1, 2006, Fuel Tech accounted for the stock options granted under the
Incentive Plan under the recognition and measurement provisions of APB Opinion
No. 25, “Accounting for Stock Issued to Employees” (Opinion 25) and related
Interpretations, as permitted by FASB Statement No. 123, “Accounting for Stock
Based Compensation” (Statement 123). No stock-based employee compensation cost
was recognized in Fuel Tech’s historical Statements of Income prior to January
1, 2006 as all options granted under the Incentive Plan had an exercise price
equal to the market value of the underlying Common Stock on the date of
grant.
Effective
January 1, 2006, Fuel Tech adopted the fair value recognition provisions of
FASB
Statement No. 123(R), “Share-Based Payment” (Statement 123(R)) using the
modified-prospective transition method. Under that transition method,
compensation cost recognized for the year ended December 31, 2007 includes:
(a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated
in
accordance with the original provisions of Statement 123, and (b) compensation
cost for all share-based payments granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of
Statement 123(R). Accordingly, results for prior periods have not been
restated.
Basic
and Diluted Earnings Per Common Share
Basic
earnings per share excludes the dilutive effects of stock options and warrants
and of the nil coupon non-redeemable convertible unsecured loan notes (see
Note
5). Diluted earnings per share includes the dilutive effect of the nil coupon
non-redeemable convertible unsecured loan notes and of stock options and
warrants. The following table sets forth the weighted-average shares used at
December 31 in calculating earnings per share (in thousands):
|
2007
|
2006
|
2005
|
||||||||
|
Basic
weighted-average shares
|
22,280
|
21,491
|
20,043
|
|||||||
|
Conversion
of unsecured loan notes
|
45
|
46
|
59
|
|||||||
|
Unexercised
options and warrants
|
2,395
|
2,650
|
2,964
|
|||||||
|
Diluted
weighted-average shares
|
24,720
|
24,187
|
23,066
|
|||||||
New
Accounting Pronouncements
In
September 2006, the FASB issued Financial Accounting Standard No. 157, “Fair
Value Measurements” (FAS No. 157). FAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. FAS No. 157
applies under other accounting pronouncements that require or permit fair value
measurements, and accordingly, does not require any new fair value measurements.
FAS No. 157 is effective for Fuel Tech beginning January 1, 2008. Fuel Tech
is
currently reviewing the provisions of FAS No. 157, but does not expect the
provisions to have a material impact on its consolidated financial
statements.
In
February 2007, the FASB issued Financial Accounting Standard No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (FAS No. 159). FAS
No. 159 provides the option to report certain financial assets and liabilities
at fair value, with the intent to mitigate volatility in financial reporting
that can occur when related assets and liabilities are recorded on different
bases. This statement is effective for Fuel Tech beginning January 1, 2008.
Fuel
Tech does not expect FAS No. 159 to have a material impact on its consolidated
financial statements.
In
May
2007, the FASB issued FASB Staff Position FIN 48-1 (FSP FIN 48-1), which amends
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” FSP
FIN 48-1 provides guidance on how an enterprise should determine whether a
tax
position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. Fuel Tech does not expect the provisions of FSP
FIN
48-1 to have a material impact on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (SFAS 141R). SFAS 141R establishes principles and requirements
for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS 141R is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the potential impact of adoption of SFAS 141R
on
its consolidated financial statements. However, the Company does not expect
the
adoption of SFAS 141R to have a material impact on its consolidated financial
statements.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Financial Accounting Standard No. 160, (SFAS 160) “Noncontrolling Interests
in Consolidation Financial Statements an amendment of ARB No. 51”. The objective
of SFAS 160 is to improve the relevance, comparability, and transparency of
the
financial information that a reporting entity provides in its consolidated
financial statements. SFAS 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for
the
deconsolidation of a subsidiary. SFAS 160 also changes the way the consolidated
income statement is presented, establishes a single method of accounting for
changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation, requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated and expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests
of the parent’s owners and the interest of the noncontrolling owners of a
subsidiary. SFAS 160 is effective for financial statements issued for the fiscal
years beginning on or after December 15, 2008. Fuel Tech does not expect the
provisions to have a material impact on its consolidated financial
statements.
2. CONSTRUCTION
CONTRACTS IN PROGRESS
The
status of contracts in progress as of December 31, 2007 and 2006 is as
follows:
|
(in
thousands)
|
2007
|
2006
|
|||||
|
Costs
incurred on uncompleted contracts
|
$
|
17,050
|
$
|
18,696
|
|||
|
Estimated
earnings
|
15,247
|
13,810
|
|||||
|
Earned
revenue
|
32,296
|
32,506
|
|||||
|
Less
billings to date
|
16,303
|
31,524
|
|||||
|
Total
|
$
|
15,993
|
$
|
982
|
|||
|
Classified
as follows:
|
|||||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
$
|
16,813
|
$
|
3,615
|
|||
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
(821
|
)
|
(2,633
|
)
|
|||
|
Total
|
$
|
15,993
|
$
|
982
|
|||
Costs
and
estimated earnings in excess of billings on uncompleted contracts are included
in accounts receivable on the consolidated balance sheet, while billings in
excess of costs and estimated earnings on uncompleted contracts are included
in
other accrued liabilities on the consolidated balance sheet.
As
of
December 31, 2007 and 2006, Fuel Tech had no construction contracts in progress
that were identified as loss contracts.
3.
TAXATION
The
components of income (loss) before taxes for the years ended December 31 are
as
follows (in thousands):
|
Origin
of income (loss) before taxes
|
2007
|
2006
|
2005
|
|||||||
|
United
States
|
$
|
13,242
|
$
|
13,279
|
$
|
7,823
|
||||
|
Foreign
|
(812
|
)
|
(1,511
|
)
|
(654
|
)
|
||||
|
Income
before taxes
|
$
|
12,430
|
$
|
11,768
|
$
|
7,169
|
||||
Significant
components of the income tax benefit for the years ended December 31 are as
follows (in thousands):
|
2007
|
2006
|
2005
|
||||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
1,401
|
$
|
144
|
$
|
582
|
||||
|
State
|
588
|
29
|
455
|
|||||||
|
Other
|
-
|
60
|
34
|
|||||||
|
Total
current
|
$
|
1,989
|
$
|
233
|
1,071
|
|||||
|
Deferred:
|
||||||||||
|
Federal
|
3,183
|
4,314
|
2,179
|
|||||||
|
State
|
15
|
180
|
630
|
|||||||
|
Change
in valuation allowance
|
-
|
215
|
(4,299
|
)
|
||||||
|
Total
deferred
|
3,198
|
4,709
|
(1,490
|
)
|
||||||
|
Income
tax expense (benefit)
|
$
|
5,187
|
$
|
4,942
|
$
|
(419
|
)
|
|||
A
reconciliation between the provision for income taxes calculated at the U.S.
federal statutory income tax rate and the consolidated income tax benefit in
the
consolidated statements of income for the years ended December 31 is as follows
(in thousands):
|
2007
|
2006
|
2005
|
||||||||
|
Provision
at the U.S. federal statutory rate
|
$
|
4,351
|
$
|
4,119
|
$
|
2,509
|
||||
|
State
taxes, net of federal benefit
|
405
|
187
|
369
|
|||||||
|
Foreign
losses without tax benefit
|
284
|
588
|
263
|
|||||||
|
Research
credits
|
(63
|
)
|
(229
|
)
|
(339
|
)
|
||||
|
Other
|
210
|
62
|
1,078
|
|||||||
|
Valuation
allowance adjustment
|
-
|
215
|
(4,299
|
)
|
||||||
|
Income
tax expense (benefit)
|
$
|
5,187
|
$
|
4,942
|
$
|
(419
|
)
|
|||
The
table
below depicts the data above on a percentage basis:
|
2007
|
2006
|
2005
|
||||||||
|
Provision
at the U.S. federal statutory rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
State
taxes, net of federal benefit
|
3.3
|
%
|
1.6
|
%
|
5.1
|
%
|
||||
|
Foreign
losses without tax benefit
|
2.3
|
%
|
5.0
|
%
|
3.7
|
%
|
||||
|
Research
credits
|
(.5
|
)%
|
(1.9
|
)%
|
(4.7
|
)%
|
||||
|
Other
|
1.6
|
%
|
.5
|
%
|
15.1
|
%
|
||||
|
Valuation
allowance adjustment
|
-
|
%
|
1.8
|
%
|
(60.0
|
)%
|
||||
|
Income
tax expense (benefit)
|
41.7
|
%
|
42.0
|
%
|
(5.8
|
)%
|
||||
The
deferred tax assets and liabilities at December 31 are as follows (in
thousands):
|
2007
|
2006
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Stock
compensation expense
|
$
|
2,306
|
$
|
526
|
|||
|
Research
and development credit
|
1,302
|
2,296
|
|||||
|
Equipment
|
648
|
379
|
|||||
|
Alternative
minimum tax credit
|
275
|
284
|
|||||
|
Warranty
reserve
|
176
|
180
|
|||||
|
Accounts
receivable
|
57
|
57
|
|||||
|
Vacation
accrual
|
40
|
33
|
|||||
|
Deferred
rent liability
|
33
|
37
|
|||||
|
Effect
of FIN 48 adoption
|
7
|
-
|
|||||
|
Net
operating loss carryforwards
|
-
|
2,116
|
|||||
|
Accrued
liability for compensation
|
-
|
537
|
|||||
|
Charitable
contribution
|
-
|
14
|
|||||
|
Research
and development asset
|
-
|
9
|
|||||
|
Total
deferred tax assets
|
4,844
|
6,468
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Patents
|
(76
|
)
|
(65
|
)
|
|||
|
Goodwill
|
(367
|
)
|
(286
|
)
|
|||
|
Total
deferred tax liabilities
|
(443
|
)
|
(351
|
)
|
|||
|
Net
deferred tax asset before valuation allowance
|
$
|
4,401
|
$
|
6,117
|
|||
|
Valuation
allowances for deferred tax assets
|
(260
|
)
|
(260
|
)
|
|||
|
Net
deferred tax asset
|
$
|
4,141
|
$
|
5,857
|
|||
Net
deferred tax assets and liabilities are recorded as follows within the
consolidated balance sheets:
|
Current
assets
|
$
|
1,589
|
$
|
4,972
|
|||
|
Long-term
assets
|
2,552
|
885
|
|||||
|
Net
deferred tax asset
|
$
|
4,141
|
$
|
5,857
|
For
the
years ended December 31, 2007 and 2006 Fuel Tech recorded tax benefits from
the
exercise of stock options in the amount of $1,482,000 and $5,944,000,
respectively. The amounts were recorded as an increase in additional paid-in
capital on the consolidated balance sheets and as cash from financing activities
on the consolidated statements of cash flows. Fuel Tech recorded tax benefits
from the exercise of stock options in the amount of $1,488,000 for the year
ended December 31, 2005. This amount was recorded as an increase in additional
paid-in capital on the consolidated balance sheet and as cash from operating
activities on the consolidated statement of cash flows. With Fuel Tech’s
adoption of Statement 123(R) on January 1, 2006, all subsequent tax benefits
from the exercise of stock options were recorded as cash flows from financing
activities.
Fuel
Tech’s income tax benefit of $419,000 for 2005 predominantly represents the
recording of the reduction in the deferred tax asset valuation allowance
representing the anticipated utilization of net operating loss and research
and
development tax credit carryforwards. Based on a review of both historical
and
projected taxable income, Fuel Tech concluded that it was more likely than
not
that the net operating losses and the research and development tax credits
would
be utilized in subsequent periods and the valuation allowance was no longer
required.
State
and
Federal Tax payments during the years ended December 31, 2007, 2006, and 2005
were $173,000, $217,000, and $326,000, respectively.
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109,” (FIN 48). FIN 48 prescribes a comprehensive model for how a
company should recognize, measure, present, and disclose in its financial
statements uncertain tax positions that it has taken or expects to take on
a tax
return. On January 17, 2007, the FASB affirmed its previous decision to make
FIN
48 effective for fiscal years beginning after December 15, 2006. Accordingly,
Fuel Tech adopted the provisions of FIN 48 on January 1, 2007.
Previously,
Fuel Tech had accounted for tax contingencies in accordance with Statement
of
Financial Accounting Standards 5, Accounting for Contingencies. As required
by
FIN 48, which clarifies Statement 109, Accounting for Income Taxes, Fuel Tech
recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 % likelihood of
being realized upon ultimate settlement with the relevant tax authority. At
the
adoption date, Fuel Tech applied FIN 48 to all tax positions for which the
statute of limitations remained open. As a result of the implementation of
FIN
48, Fuel Tech recognized an increase of approximately $86,000 in the liability
for unrecognized tax benefits, of which $81,000 was accounted for as a reduction
to the January 1, 2007 balance of retained earnings.
The
following table summarizes Fuel Tech’s unrecognized tax benefit activity during
2007:
|
Description
|
Balance
(in
thousands)
|
|||
|
Balance
at January 1, 2007
|
$
|
744
|
||
|
Increases
in positions taken in a prior period
|
-
|
|||
|
Decreases
in positions taken in a prior period
|
-
|
|||
|
Increases
in positions taken in a current period
|
24
|
|||
|
Decreases
in positions taken in a current period
|
-
|
|||
|
Decreases
due to settlements
|
(35
|
)
|
||
|
Decreases
due to lapse of statute of limitations
|
(55
|
)
|
||
|
Balance
at December 31, 2007
|
$
|
678
|
||
The
amount of unrecognized tax benefits as of December 31, 2007 was $703,000. This
amount included $685,000 of unrecognized tax benefits which, if ultimately
recognized, will reduce Fuel Tech’s annual effective tax rate.
Fuel
Tech
is subject to income taxes in the U.S. federal jurisdiction, and various states
and foreign jurisdictions. Tax regulations within each jurisdiction are subject
to the interpretation of the related tax laws and regulations and require
significant judgment to apply. With few exceptions, Fuel Tech is no longer
subject to U.S. federal, state and local, or non-U.S. income tax examinations
by
tax authorities for the years before 2004.
Fuel
Tech
recognizes interest and penalties accrued related to unrecognized tax benefits
in income tax expense for all periods presented. Fuel Tech had accrued
approximately $25,000 for the payment of interest and penalties at December
31,
2007.
The
management of Fuel Tech periodically estimates the probable tax obligations
of
the Company using historical experience in tax jurisdictions and informed
judgments. There are inherent uncertainties related to the interpretation of
tax
regulations in the jurisdictions in which Fuel Tech transacts business. The
judgments and estimates made at a point in time may change based on the outcome
of tax audits, as well as changes to or further interpretations of regulations.
If such changes take place, there is a risk that the tax rate may increase
or
decrease in any period. Tax accruals for tax liabilities related to potential
changes in judgments and estimates for both federal and state tax issues are
included in current liabilities on the consolidated balance sheet.
At
December 31, 2007, Fuel Tech has tax losses in the amount of $2,902,000
available to offset foreign income. The foreign loss carryforwards begin to
expire in 2008 and at December 31, 2007 a full valuation allowance is recorded
against this amount.
4. COMMON
SHARES
At
December 31, 2007, Fuel Tech had 22,410,064 Common Shares issued, with an
additional 44,787 shares reserved for issuance upon conversion of the nil coupon
non-redeemable convertible unsecured loan notes (see Note 5) and 2,464,325
shares reserved for issuance upon the exercise of stock options, 955,825 of
which are currently exercisable (see Note 6).
5. NIL
COUPON NON-REDEEMABLE CONVERTIBLE UNSECURED LOAN NOTES
At
December 31, 2007, 2006 and 2005, respectively, Fuel Tech had $272,000,
$277,000, and $282,000 principal amount of nil coupon non-redeemable convertible
unsecured perpetual loan notes (the “Loan Notes”) outstanding. The Loan Notes
are convertible at any time into Common Shares at rates of $6.50 or $11.43
per
share. The Loan Notes bear no interest and have no maturity date. They are
generally repayable only in the event of Fuel Tech’s dissolution and,
accordingly, have been classified within shareholders’ equity in the
accompanying balance sheet.
In
2007,
Loan Notes in the principal amount of $5,000 were converted into 769 Common
Shares. Also in 2006, Loan Notes in the principal amount of $5,000 were
converted into 769 Common Shares, while in 2005 Loan Notes in the principal
amount of $250,000 were converted into 38,461 Common Shares.
6. STOCK-BASED
COMPENSATION AND WARRANTS
Fuel
Tech
has a stock-based employee compensation plan, referred to as the Fuel Tech,
Inc.
Incentive Plan (Incentive Plan), under which awards may be granted to
participants in the form of Non-Qualified Stock Options, Incentive Stock
Options, Stock Appreciation Rights, Restricted Stock, Performance Awards,
Bonuses or other forms of share-based or non-share-based awards or combinations
thereof. Participants in the Incentive Plan may be Fuel Tech’s directors,
officers, employees, consultants or advisors (except consultants or advisors
in
capital-raising transactions) as the directors determine are key to the success
of Fuel Tech’s business. The amount of shares that may be issued or reserved for
awards to participants under a 2004 amendment to the Incentive Plan is 12.5%
of
outstanding shares calculated on a diluted basis. In 2007, 2006 and 2005,
311,000, 1,094,000, and 557,000 options, respectively, were granted to employees
and directors. At December 31, 2007, Fuel Tech has 845,000 stock options
available for issuance under the Incentive Plan.
Fuel
Tech
recorded stock-based compensation expense of $4,791,000 ($3,105,000 after tax)
for the year ended December 31, 2007. Fuel Tech recorded $1,805,000 ($1,268,000
after tax) in stock-based compensation expense for the comparable period in
2006.
The
following table illustrates the effect on net income and income per share if
Fuel Tech had applied the fair value recognition provisions of Statement 123(R)
to options granted under Fuel Tech’s stock option plans for 2005. For purposes
of this pro forma disclosure, as noted above, the value of the options is
estimated using a Black-Scholes option pricing model.
|
For
the year ended (in thousands)
|
2005
|
|||
|
Net
income as reported
|
$
|
7,588
|
||
| Deduct: | ||||
|
Total
stock-based compensation expense determined under fair value based
method
for all awards, net of related tax effects
|
952
|
|||
|
Pro
forma net income
|
$
|
6,636
|
||
|
Basic
and diluted income per share:
|
||||
|
Basic
- as reported
|
$
|
.38
|
||
|
Basic –
pro forma
|
$
|
.33
|
||
|
Diluted –
as reported
|
$
|
.33
|
||
|
Diluted –
pro forma
|
$
|
.29
|
||
As
of
December 31, 2007, there was $11.1 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the 1993 Plan. That cost is expected to be recognized over a period of four
years.
The
awards granted under the 1993 Plan have a 10-year life and they vest as follows:
50% after the second anniversary of the award date, 25% after the third
anniversary, and the final 25% after the fourth anniversary of the award date.
Fuel Tech calculates stock compensation expense based on the grant date fair
value of the award and recognizes expense on a straight-line basis over the
four-year service period of the award.
Prior
to
January 1, 2006, Fuel Tech used the Black-Scholes option-pricing model to
estimate the fair value of employee stock options for the required pro forma
disclosure under Statement 123. This model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully
transferable. With the adoption of Statement 123(R) as of January 1, 2006,
Fuel
Tech has continued to use the Black-Scholes option-pricing model to estimate
the
fair value of stock option grants.
The
principal variable assumptions utilized in valuing options and the methodology
for estimating such model inputs include: (1) risk-free interest rate – an
estimate based on the yield of zero-coupon treasury securities with a maturity
equal to the expected life of the option; (2) expected volatility – an
estimate based on the historical volatility of Fuel Tech’s Common Stock for a
period equal to the expected life of the option; and (3) expected life of the
option – an estimate based on historical experience including the effect of
employee terminations.
Based
on
the results of the model, the weighted-average fair value of the stock options
granted during the 12-month periods ended December 31, 2007, 2006 and 2005,
respectively was $14.01, $12.53 and $3.35 per share using the following
assumptions:
|
2007
|
2006
|
2005
|
||||||||
|
Expected
dividend yield
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
||||
|
Risk-free
interest rate
|
4.39
|
%
|
4.64
|
%
|
4.38
|
%
|
||||
|
Expected
volatility
|
57.4
|
%
|
60.7
|
%
|
48.0
|
%
|
||||
|
Expected
life of option
|
5.2
years
|
5.2
years
|
4.0
years
|
|||||||
The
following table presents a summary of Fuel Tech’s stock option activity and
related information for the years ended December 31:
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Number
of
Options
|
Weighted-
Average
Exercise Price
|
Number
of
Options
|
Weighted-
Average
Exercise Price
|
Number
of
Options
|
Weighted-
Average
Exercise Price
|
||||||||||||||
|
Outstanding
at beginning of year
|
2,414,200
|
$
|
13.02
|
2,799,000
|
$
|
4.29
|
2,810,000
|
$
|
3.24
|
||||||||||
|
Granted
|
310,500
|
25.80
|
1,094,000
|
22.06
|
557,000
|
7.84
|
|||||||||||||
|
Exercised
|
(188,875
|
)
|
4.83
|
(1,332,925
|
)
|
2.88
|
(529,250
|
)
|
2.32
|
||||||||||
|
Expired
or forfeited
|
(71,500
|
)
|
20.82
|
(145,875
|
)
|
5.91
|
(38,750
|
)
|
5.97
|
||||||||||
|
Outstanding
at end of year
|
2,464,325
|
$
|
15.03
|
2,414,200
|
$
|
13.02
|
2,799,000
|
$
|
4.29
|
||||||||||
|
Exercisable
at end of year
|
955,825
|
$
|
7.11
|
711,450
|
$
|
5.22
|
1,687,375
|
$
|
2.87
|
||||||||||
|
Weighted-average
fair value of options granted during the year
|
$
|
14.01
|
$
|
12.53
|
$
|
3.35
|
|||||||||||||
The
following table provides additional information regarding Fuel Tech’s stock
option activity for the 12 months ended December 31, 2007.
|
Number
of
Options
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average Remaining Contractual Term |
Aggregate
Intrinsic Value |
||||||||||
|
Outstanding
on January 1, 2007
|
2,414,200
|
$
|
13.02
|
||||||||||
|
Granted
|
310,500
|
25.80
|
|||||||||||
|
Exercised
|
(188,875
|
)
|
4.83
|
$
|
4,367,000
|
||||||||
|
Expired
or forfeited
|
(71,500
|
)
|
20.82
|
||||||||||
|
Outstanding
on December 31, 2007
|
2,464,325
|
$
|
15.03
|
7.70
years
|
$
|
21,719,000
|
|||||||
|
Exercisable
on December 31, 2007
|
955,825
|
$
|
7.11
|
6.14
years
|
$
|
14,998,000
|
|||||||
|
Weighted-average
fair value of options granted during 2007
|
$
|
14.01
|
|||||||||||
The
following table summarizes information about stock options outstanding at
December 31, 2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Range
of
|
Number
of
|
Weighted-
Average Remaining
|
Weighted-
Average |
Number
of
|
Weighted-
Average |
|||||||||||
|
Exercise Prices
|
Options
|
Contractual Life
|
Exercise Price
|
Options
|
Exercise Price
|
|||||||||||
|
$
2.76 - $ 5.51
|
608,575
|
5.31
years
|
$
|
3.86
|
524,575
|
$
|
3.72
|
|||||||||
|
$
5.52 - $ 11.03
|
520,250
|
7.30
years
|
$
|
7.72
|
311,250
|
$
|
7.43
|
|||||||||
|
$
11.04 - $ 22.06
|
290,000
|
8.29
years
|
$
|
13.89
|
60,000
|
$
|
15.95
|
|||||||||
|
$
22.07 - $ 27.57
|
1,045,500
|
9.12
years
|
$
|
25.56
|
60,000
|
$
|
26.26
|
|||||||||
|
$
2.76 - $ 27.57
|
2,464,325
|
7.70
years
|
$
|
15.03
|
955,825
|
$
|
7.11
|
|||||||||
The
weighted-average exercise price per nonvested stock award at grant date was
$25.69 per share for the nonvested stock awards granted in 2007. Nonvested
stock
award activity for all plans for the 12 months ended December 31, 2007 was
as
follows:
|
Nonvested Stock
Outstanding
|
Weighted-Average
Grant Date
Fair Value
|
||||||
|
Outstanding
on January 1, 2007
|
1,702,750
|
$
|
8.90
|
||||
|
Granted
|
310,500
|
14.01
|
|||||
|
Released
|
(433,250
|
)
|
4.47
|
||||
|
Expired
or forfeited
|
(71,500
|
)
|
11.75
|
||||
|
Outstanding
on December 31, 2007
|
1,508,500
|
$
|
11.08
|
||||
At
December 31, 2007, Fuel Tech had 104,500 stock options with an exercise price
of
$27.57 per share that were not dilutive for the purpose of inclusion in the
calculation of diluted earnings per share.
On
November 10, 2005, the FASB issued Staff Position No. 123(R)-3, Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards,
or
Staff Position 123(R)-3. Fuel Tech has elected to adopt the alternative
transition method provided in Staff Position 123(R)-3 for calculating the tax
effects of stock-based compensation pursuant to Statement 123(R). The
alternative transition method simplifies the calculation of the beginning
balance of the additional paid-in-capital pool, or APIC pool, related to the
tax
effect of employee stock-based compensation. This method also has subsequent
impact on the APIC pool and the condensed consolidated statements of cash flows
relating to the tax effects of employee stock-based compensation awards that
are
outstanding upon adoption of Statement 123(R).
In
addition to the Incentive Plan, Fuel Tech has a Deferred Compensation Plan
for
Directors (Deferred Plan). This Deferred Plan, as originally approved, provided
for deferral of directors’ fees in the form of either cash with interest or as
“phantom stock” units, in either case, however, to be paid out only as cash and
not as stock at the elected time of payout. In the second quarter of 2007,
Fuel
Tech obtained stockholder approval for an amendment to the Deferred Plan to
provide that instead of phantom stock units paid out only in cash, the deferred
stock unit compensation may be paid out in shares of Fuel Tech Common Stock.
Under the guidance of Statement 123(R), this plan modification required that
Fuel Tech account for awards under the plan for the receipt of Fuel Tech Common
Stock, as equity awards as opposed to liability awards. In 2007, Fuel Tech
recorded a credit of $1,150,000 to additional paid-in capital representing
the
fair value of the stock awards granted. Of this amount, $150,000 represented
stock based compensation expense incurred in 2007.
In
addition to the above, Fuel Tech has 1,601,043 warrants outstanding to purchase
Common Shares at an exercise price of $1.75. The warrants expire on April 30,
2008.
7. COMMITMENTS
Operating
Leases
Fuel
Tech
leases office space, autos and certain equipment under agreements expiring
on
various dates through 2014. Future minimum lease payments under noncancellable
operating leases that have initial or remaining lease terms in excess of one
year as of December 31, 2007 are as follows (in thousands):
|
Year
of Payment
|
Amount
|
|||
|
2008
|
$
|
645
|
||
|
2009
|
535
|
|||
|
2010
|
149
|
|||
|
2011
|
123
|
|||
|
2012
|
118
|
|||
|
Thereafter
|
94
|
|||
For
the
years ended December 31, 2007, 2006 and 2005, rent expense approximated
$852,000, $829,000 and $778,000, respectively.
Fuel
Tech
has a sublease agreement that obligates the lessee to make future payments.
The
sublease obligations noted below are related to a sublease agreement between
Fuel Tech and American Bailey Corporation (ABC). ABC will reimburse Fuel Tech
for its share of lease and lease-related expenses under Fuel Tech’s January
29, 2004
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
noncancellable sublease as of December 31, 2007 is as follows (in
thousands):
|
Year
of Payment
|
Amount
|
|||
|
2008
|
$
|
81
|
||
|
2009
|
81
|
|||
|
2010
|
7
|
|||
|
2011
|
-
|
|||
|
2012
|
-
|
|||
|
Thereafter
|
-
|
|||
The
terms
of the three primary lease arrangements are as follows:
-
The
Batavia, Illinois building lease term runs from June 1, 1999 to May 31, 2009.
Fuel Tech has the option to extend the lease term for two successive terms
of
five years each at market rates to be agreed upon between Fuel Tech and the
lessor.
-
The
Stamford, Connecticut building lease term runs from February 1, 2004 to January
31, 2010. Fuel Tech has the option to extend the lease term for one successive
term of five years at a market rate to be agreed upon between Fuel Tech and
the
lessor. Fuel Tech was provided with a 10-month “free rent” period under this
lease, and the total minimum lease payments are being amortized over the lease
term. The deferred rent liability is $138,000 at December 31, 2007, of which
$20,000 and $118,000 are recorded in current “Other accrued liabilities” and
long-term “Other liabilities,” respectively, on the consolidated balance sheet.
Under the sublease noted above, ABC was also provided with a 10-month “free
rent” period, and the total minimum lease rentals are also being amortized over
the lease term. The deferred rent receivable is $52,000 at December 31, 2007,
of
which $8,000 and $44,000 are recorded in current “Prepaid expenses and other
current assets” and long-term “Other assets”, respectively, on the consolidated
balance sheet.
-
The
Beijing, China building lease term runs from September 1, 2007 to August 31,
2009. Fuel Tech has the option to extend the lease term at a market rate to
be
agreed upon between Fuel Tech and the lessor.
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, bank performance
guarantees and 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, 2007, Fuel Tech has outstanding bank performance guarantees and
letters of credit in the amount of $6,021,000 in support of equipment
construction contracts that have not completed their final acceptance test
or
that are still operating under a warranty period. Management of Fuel Tech
believes 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.
Product
Warranties
Fuel
Tech
issues a standard product warranty with the sale of its products to customers.
Fuel Tech’s recognition of warranty liability is based, generally, on analyses
of warranty claims experience in the preceding years. Changes in the warranty
liability in 2007, 2006 and 2005 are summarized below:
|
(in
thousands)
|
2007
|
2006
|
2005
|
|||||||
|
Aggregate
product warranty liability at beginning of year
|
$
|
472
|
$
|
247
|
$
|
137
|
||||
|
Aggregate
accruals related to product warranties
|
88
|
280
|
160
|
|||||||
|
Aggregate
reductions for payments
|
(96
|
)
|
(55
|
)
|
(50
|
)
|
||||
|
Aggregate
product warranty liability at end of year
|
$
|
464
|
$
|
472
|
$
|
247
|
||||
8. DEBT
FINANCING
Fuel
Tech
has a $25.0 million revolving credit facility expiring July 31, 2009. The
facility is unsecured and bears interest at a rate of LIBOR plus 75 basis
points. Fuel Tech can use this facility for cash advances and standby letters
of
credit. As of December 31, 2007 and 2006, there were no outstanding borrowings
on this facility.
At
December 31, 2007, the bank had provided standby letters of credit,
predominantly to customers, totaling approximately $6,021,000 in connection
with
contracts in process. Fuel Tech is committed to reimbursing the issuing bank
for
any payments made by the bank under these letters of credit. At December 31,
2007, there were no cash borrowings under the revolving credit facility and
approximately $18,979,000 was available.
During
2007, under the $25.0 million facility, Fuel Tech requested and received a
waiver to enable Fuel Tech to exceed the capital spending covenant specified
in
the facility agreement. The waiver was requested to accommodate Fuel Tech’s
purchase of land and building for its new corporate headquarters.
Beijing
Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), a newly
formed wholly-owned subsidiary of Fuel Tech, entered into a revolving credit
facility agreement during the third quarter of 2007 for RMB 35 million
(approximately $4.8 million), which expires on July 31, 2009. The facility
is
unsecured and bears interest at a rate of 90% of the People's Bank of China
(PBOC) Base Rate. Beijing Fuel Tech can use this facility for cash advances
and
bank guarantees. At December 31, 2007, Beijing Fuel Tech had borrowings
outstanding in the amount $2,051,000.
Interest
payments in the amount of $24,000 were made during the year ended December
31,
2007, and no payments were made during the years ended December 31, 2006 or
2005.
9. RELATED
PARTY TRANSACTIONS
As
of
December 31, 2007, Fuel Tech has a 4% common stock ownership interest in Clean
Diesel Technologies, Inc. (CDT), which is being accounted for using the cost
method. Fuel Tech is precluded from selling its interest in CDT except pursuant
to a registration statement, or in a broker/dealer transaction within the
limitations of Rule 144 of the Securities and Exchange Commission (SEC), or
in
an exempt private placement within the limitations of Rule 144 of the SEC.
Fuel
Tech’s investment in CDT, whose shares are publicly traded on the OTC Bulletin
Board and the Alternative Investment Market of the London Stock Exchange, had
a
market value of $8.2 million at December 31, 2007. Fuel Tech also owns 25,000
warrants to purchase CDT common stock. The warrants have an exercise price
of
$10.00 and can be exercised on or before November 14, 2010. The value assigned
to the warrants on the consolidated balance sheet at December 31, 2007 and
2006
is not significant.
On
August
3, 1995, Fuel
Tech
signed a Management and Services Agreement with CDT. According to the agreement,
CDT is to reimburse Fuel Tech for management, services and administrative
expenses incurred by Fuel Tech on behalf of CDT. Additionally, Fuel Tech charges
CDT an additional 3% of such costs annually. For the years ended December 31,
2007, 2006 and 2005, $72,000, $71,000 and $71,000, respectively, was charged
to
CDT as a management fee.
Pursuant
to an assignment agreement of certain technology to CDT, Fuel Tech is due
royalties from CDT of 2.5% of CDT’s annual revenue from sales of CDT’s Platinum
Fuel Catalyst, commencing in 1998. The royalty obligation expires in 2008.
CDT
may terminate the royalty obligation to Fuel Tech by payment of $12 million
commencing in 1998 and declining annually to $1,090,910 in 2008. CDT as assignee
and owner will maintain the technology at its own expense. To date, Fuel Tech
has received approximately $46,000 in royalties.
On
April
30, 1998, Fuel Tech entered into an agreement with ABC for it to provide certain
management and consulting services to Fuel Tech. Persons
now or formerly associated with ABC
currently own 21% of Fuel Tech’s Common Shares and warrants to purchase an
additional 1.6 million shares, which expire on April 30, 2008. No fees were
to
be payable under the agreement for the first 24 months. This agreement was
amended in 1999 to extend its term to April 30, 2002, and provide for the
payment of a management fee of $10,417 per month commencing September 1, 1999,
through May 1, 2000, and $20,833 per month until the termination of the
agreement. The agreement was further amended effective May 1, 2002 to increase
the management fee to $29,167 per month until the termination of the agreement
as of April 30, 2004. Effective January 1, 2004, this agreement was terminated.
As
of
January 1, 2004, two former employees of ABC who were Directors of Fuel Tech
became employees of Fuel Tech. Concurrently, in early 2004, a new agreement
was
put in place between Fuel Tech and ABC. Effective January 1, 2004, a
compensation agreement was established whereby ABC will reimburse Fuel Tech
for
certain services that employees of Fuel Tech will provide to ABC. In addition,
ABC is a sublessee under Fuel Tech’s January 29, 2004
lease of its executive offices in Stamford, Connecticut. ABC will reimburse
Fuel
Tech for its share of lease and lease-related expenses under the sublease
agreement. Please refer to Note 7 to the consolidated financial statements
for a
further discussion of this topic. $30,000 is due from ABC at December 31, 2007
related to the compensation and sublease agreements.
10. DEFINED
CONTRIBUTION PLAN
Fuel
Tech
has a retirement savings plan available for all U.S. employees who have met
minimum length-of-service requirements. Fuel Tech’s contributions are determined
based upon amounts contributed by Fuel Tech’s employees with additional
contributions
made at the discretion of Fuel Tech’s Board of Directors. Costs related to this
plan were $802,000, $612,000 and $285,000 in 2007, 2006 and 2005,
respectively.
11. Business
Segment, Geographic and Quarterly financial Data
BUSINESS
SEGMENT FINANCIAL DATA
Fuel
Tech
segregates its financial results into two reportable segments representing
two
broad technology segments as follows:
-
The NOx
reduction technology segment, which includes the NOxOUT®,
NOxOUT
CASCADE®,
NOxOUT
ULTRA®
and
NOxOUT-SCR®
processes for the reduction of NOx emissions in flue gas from boilers,
incinerators, furnaces and other stationary combustion sources, and
-
The
fuel treatment chemicals technology segment, which uses chemical processes
for
the control of slagging, fouling, corrosion, opacity, acid plume, loss on
ignition and sulfur trioxide-related issues in furnaces and boilers through
the
addition of chemicals into the fuel using TIFI™ Targeted In-Furnace Injection™
technology.
The
“Other” classification includes those profit and loss items not allocated by
Fuel Tech to each reportable segment. Further, there are no intersegment sales
that require elimination.
Fuel
Tech
evaluates performance and allocates resources based on reviewing gross margin
by
reportable segment. The accounting policies of the reportable segments are
the
same as those described in the summary of significant accounting policies.
Fuel
Tech does not review assets by reportable segment, but rather, in aggregate
for
Fuel Tech as a whole.
Information
about reporting segment net sales and gross margin are provided
below:
(in
thousands)
|
For
the year ended
December
31, 2007
|
Nitrogen Oxide
Reduction
|
Fuel Treatment
Chemical
|
Other
|
Total
|
|||||||||
|
Revenues
from external customers
|
$
|
47,750
|
$
|
32,547
|
$
|
-
|
$
|
80,297
|
|||||
|
Cost
of sales
|
25,775
|
16,619
|
77
|
42,471
|
|||||||||
|
Gross
margin
|
21,975
|
15,928
|
(77
|
)
|
37,826
|
||||||||
|
Selling,
general and administrative
|
-
|
-
|
24,950
|
24,950
|
|||||||||
|
Research
and development
|
-
|
-
|
2,137
|
2,137
|
|||||||||
|
Operating
income (loss)
|
$
|
21,975
|
$
|
15,928
|
$
|
(27,164
|
)
|
$
|
10,739
|
||||
|
For
the year ended
December
31, 2006
|
Nitrogen Oxide
Reduction
|
Fuel Treatment
Chemical
|
Other
|
Total
|
|||||||||
|
Revenues
from external customers
|
$
|
46,454
|
$
|
28,661
|
$
|
-
|
$
|
75,115
|
|||||
|
Cost
of sales
|
26,328
|
11,932
|
169
|
38,429
|
|||||||||
|
Gross
margin
|
20,126
|
16,729
|
(169
|
)
|
36,686
|
||||||||
|
Selling,
general and administrative
|
-
|
-
|
23,901
|
23,901
|
|||||||||
|
Research
and development
|
-
|
-
|
2,052
|
2,052
|
|||||||||
|
Operating
income (loss)
|
$
|
20,126
|
$
|
16,729
|
$
|
(26,122
|
)
|
$
|
10,733
|
||||
|
For
the year ended
December
31, 2005
|
Nitrogen Oxide
Reduction
|
Fuel Treatment
Chemical
|
Other
|
Total
|
|||||||||
|
Revenues
from external customers
|
$
|
32,650
|
$
|
20,272
|
$
|
6
|
$
|
52,928
|
|||||
|
Cost
of sales
|
16,744
|
10,096
|
278
|
27,118
|
|||||||||
|
Gross
margin
|
15,906
|
10,176
|
(272
|
)
|
25,810
|
||||||||
|
Selling,
general and administrative
|
-
|
-
|
17,414
|
17,414
|
|||||||||
|
Research
and development
|
-
|
-
|
1,241
|
1,241
|
|||||||||
|
Operating
income (loss)
|
$
|
15,906
|
$
|
10,176
|
$
|
(18,927
|
)
|
$
|
7,155
|
||||
GEOGRAPHIC
SEGMENT FINANCIAL DATA
Information
concerning Fuel Tech’s operations by geographic area is provided below. Revenues
are attributed to countries based on the location of the customer. Assets
are those directly associated with operations of the geographic
area.
|
For
the years ended December 31 (in thousands)
|
2007
|
2006
|
2005
|
|||||||
|
Revenues:
|
||||||||||
|
United
States
|
$
|
67,534
|
$
|
57,628
|
$
|
41,721
|
||||
|
Foreign
|
12,763
|
17,487
|
11,207
|
|||||||
|
$
|
80,297
|
$
|
75,115
|
$
|
52,928
|
|||||
|
December
31
|
2007
|
2006
|
2005
|
|||||||
|
Assets:
|
||||||||||
|
United
States
|
$
|
79,132
|
$
|
62,190
|
$
|
39,959
|
||||
|
Foreign
|
8,082
|
3,470
|
4,116
|
|||||||
|
$
|
87,214
|
$
|
65,660
|
$
|
44,075
|
During
2007 Fuel Tech had two customers that individually represented greater than
10%
of revenues. In total these two customers represented 23% of revenues. These
two
customers utilized the product line offered by Fuel Tech’s Nitrogen Oxide
Reduction business segment.
During
2006 and 2005, Fuel Tech realized 25% and 13%, respectively, of its revenues
from one customer. This customer utilized the product line offered by Fuel
Tech’s Nitrogen Oxide Reduction business segment.
QUARTERLY
FINANCIAL DATA
Set
forth
below are the unaudited quarterly financial data for the fiscal years ended
December 31, 2007 and 2006.
|
For
the quarters ended:
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||
|
(in
thousands, except share data)
|
|||||||||||||
|
2007
(a)
|
|||||||||||||
|
Revenues
|
$
|
16,262
|
$
|
16,210
|
$
|
15,246
|
$
|
32,579
|
|||||
|
Cost
of sales
|
8,957
|
9,083
|
8,018
|
16,413
|
|||||||||
|
Net
income
|
792
|
282
|
927
|
5,242
|
|||||||||
|
Net
income per Common Share:
|
|||||||||||||
|
Basic
|
$
|
0.04
|
$
|
0.01
|
$
|
0.04
|
$
|
0.23
|
|||||
|
Diluted
|
$
|
0.03
|
$
|
0.01
|
$
|
0.04
|
$
|
0.21
|
|||||
|
2006
(b)
|
|||||||||||||
|
Revenues
|
$
|
17,121
|
$
|
19,759
|
$
|
20,173
|
$
|
18,062
|
|||||
|
Cost
of sales
|
9,056
|
10,112
|
10,042
|
9,219
|
|||||||||
|
Net
income
|
1,350
|
1,958
|
2,060
|
1,458
|
|||||||||
|
Net
income per Common Share:
|
|||||||||||||
|
Basic
|
$
|
0.07
|
$
|
0.09
|
$
|
0.09
|
$
|
0.07
|
|||||
|
Diluted
|
$
|
0.06
|
$
|
0.08
|
$
|
0.09
|
$
|
0.06
|
|||||
(a)
The
total of the basic net income amounts per share for the four quarters ending
December 31, 2007 does not sum to the amounts presented on the consolidated
statement of income for the year ending December 31, 2007 due to
rounding.
(b)
The
total of the diluted net income amounts per share for the four quarters ending
December 31, 2006 does not sum to the amounts presented on the consolidated
statement of income for the year ending December 31, 2006 due to
rounding.
None
Disclosure
Controls and Procedures
Under
the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, our management evaluated the effectiveness of the design
and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act), as of the end of the period covered by this
Annual Report on Form 10-K (the “Evaluation Date”). Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that, as
of
the Evaluation Date, our disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that we file
or
submit under the Securities Exchange Act of 1934 is (i) recorded, processed,
summarized and reported, within the time periods specified in the Securities
and
Exchange Commission’s rules and forms and (ii) accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
Change
in Internal Controls
There
has
been no change in our internal control over financial reporting that occurred
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Management’s
Report on Internal Control Over Financial Reporting
Fuel
Tech’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule
13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the
Exchange Act, Fuel Tech’s management carried out an evaluation, with the
participation of Fuel Tech’s Chief Executive Officer and Chief Financial
Officer, of the effectiveness of its internal control over financial reporting
as of the end of the last fiscal year. The framework on which such evaluation
was based is contained in the report entitled “Internal Control—Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the “COSO Report”).
Fuel
Tech’s
system
of internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject
to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Based
on
its assessment, management has concluded that Fuel
Tech
maintained effective internal control over financial reporting as of December
31, 2007, based on criteria in “Internal Control—Integrated
Framework” issued
by
the COSO.
None
Information
required by this Item will be set forth under the captions “Election of
Directors,” “Directors and Executive Officers of Fuel Tech,” “Compensation
Committee,” “Audit Committee,” and “Financial Experts” in Fuel Tech’s Proxy
Statement related to the 2008 Annual Meeting of Shareholders (the “Proxy
Statement”) and is incorporated by reference.
Fuel
Tech
has adopted a Code of Ethics and Business Conduct (the “Code”) that applies to
all employees, officers and directors, including the Chief Executive Officer,
Chief Financial Officer and Controller. A copy of the Code is available free
of
charge to any person on written or telephone request to Fuel Tech’s Investor
Relations at the address or telephone number set out in Fuel Tech’s Annual
Report to Shareholders. The Code is also available on Fuel Tech’s website at
www.ftek.com.
The
identities of the Fuel Tech directors and other information concerning the
directors and executive officers of Fuel Tech and relating to corporate
governance will be set forth under the captions “Election of Directors,” “Audit
Committee,” “Compensation and Nominating Committee,” “Financial Experts,”
“Corporate Governance” and “General” in Fuel Tech’s Proxy Statement related to
its 2008 Annual Meeting of Stockholders and is incorporated by reference.
The
identities of and the employment history of Fuel Tech executive officers with
Fuel Tech or its affiliates who are not directors are as follows:
Vincent
M. Albanese, 59, has been Senior Vice President, Regulatory Affairs since
February 28, 2007; previously he had been Senior Vice President, Advanced
Technology and Regulatory Affairs since April 5, 2006; Senior Vice President,
Air Pollution Control, Sales and Marketing since May, 2000; Vice President,
Air
Pollution Control since April, 1998 and Vice President, Sales and Marketing
since 1990.
Ellen
T
Albrecht, 35, has been Vice President and Controller since December 7, 2006;
previously she had been Controller since February 1, 2004; Accounting Manager
since May, 2001; and Senior Accountant since July, 1996.
Vincent
J. Arnone, 44, has been Senior Vice President, Treasurer and Chief Financial
Officer since February 28, 2006; previously he had been Vice President,
Treasurer and Chief Financial Officer since December, 2003; and Controller
since
May, 1999.
Stephen
P. Brady, 51, became Senior Vice President, Sales and Marketing on April 5,
2006; previously he had been Senior Vice President, Fuel Chem since January,
2002; and Vice President, Fuel Chem since February, 1998.
William
E. Cummings, Jr. 51, became Vice President, Sales on April 5, 2006; previously
he had been Vice President, Air Pollution Control Sales since May, 2000;
Director, Utility Sales since April, 1998; and Director, Eastern Region since
1994.
Kevin
R.
Dougherty, 46, became Vice President, Business Development and Marketing on
April 5, 2006; previously he had been Vice President, Corporate Marketing and
Procurement since December, 2005; Director, Marketing and Sales Administration,
Air Pollution Control since November, 2000; and Manager, Contracts
Administration, Air Pollution Control since 1999.
Timothy
Eibes, 51, has been Vice President, Project Execution since August 21, 2006;
previously he had been employed by Alliant Energy, Inc. since 1987, his last
position being Vice President, Asset Management.
Tracy
Krumme, 40, has been Vice President, Investor Relations and Corporate
Communications since December 7, 2006; previously she had been Director,
Investor Relations since September, 2002.
M.
Linda
Lin, 59, became Vice President, China/Pacific Rim on December 7, 2006;
previously she had been Vice President Asia/Pacific since April 5, 2006;
Marketing Manager since 1992; and Research Associate/Research Manager since
1990.
Michael
P. Maley, 50, became Senior Vice President, International Business Development
and Project Execution on April 5, 2006; previously he had been President and
Chief Operating Officer of Alliant Energy Generation from 2001 to 2005; Vice
President of Business Development of Calpine Corporation since 1998; and Vice
President of Project Development of Cogentrix Energy LLC since
1993.
Nolan
R.
Schwartz, 57, became Vice President, Corporate Development on January 1, 2004;
previously he had been a director of Fuel Tech, Inc., a former subsidiary of
Fuel Tech, since 1998; and, prior to that, a principal of American Bailey
Corporation.
Christopher
R. Smyrniotis, 55, became Vice President, Fuel Chem Technologies on April 5,
2006; previously he had been Vice President, Fuel Chem Technology and Market
Development since December, 2005; Director of Marketing and Technology, Fuel
Chem since October, 1998; and Market Development manager since 1993.
William
H. Sun, 51, became Vice President, Air Pollution Technologies on April 5, 2006;
previously he had been Vice President and Chief Technology Officer since
December, 2003; Vice President, Engineering and Technology since April, 1998;
and Director of Process Engineering since 1990.
Information
required by this Item will be set forth under the caption “Executive
Compensation” in the Proxy Statement and is incorporated by reference.
Information
required by this Item will be set forth under the caption “Principal
Shareholders and Stock Ownership of Management” in the Proxy Statement and is
incorporated by reference.
Information
required by this Item will be set forth under the captions “Compensation
Committee Interlocks and Insider Participation” and “Certain Relationships and
Related Transactions” in the Proxy Statement and is incorporated by
reference.
Information
required by this Item will be set forth under the caption “Approval of
Appointment of Auditors” in the Proxy Statement and is incorporated by
reference.
(a) (1)
Financial Statements
The
financial statements identified below and required by Part II, Item 8 of this
Form 10-K are set forth above.
Management’s
Report on Internal Control Over Financial Reporting
Report
of
Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
Report
of
Independent Registered Public Accounting Firm
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2007 and 2006
Consolidated
Statements of Income for Years Ended December 31, 2007, 2006 and
2005
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2007, 2006
and 2005
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
2005
Notes
to
Consolidated Financial Statements
(2)
Financial Statement Schedules
Schedule
II – Valuation and Qualifying Accounts
Fuel
Tech, Inc. - Allowance for Doubtful Accounts:
|
Year
|
Balance at
January 1
|
Charged to costs
and expenses
|
(Deductions)/Other
|
Balance at
December 31
|
|||||||||
|
2005
|
$
|
74,000
|
26,000
|
50,000
|
$
|
150,000
|
|||||||
|
2006
|
$
|
150,000
|
-
|
-
|
$
|
150,000
|
|||||||
|
2007
|
$
|
150,000
|
-
|
-
|
$
|
150,000
|
|||||||
Fuel
Tech, Inc. – Valuation Allowance for Deferred Tax Assets:
|
Year
|
Balance at
January 1
|
Charged to costs
and expenses
|
(Deductions)/Other
|
Balance at
December 31
|
|||||||||
|
2005
|
$
|
4,344,000
|
-
|
(4,299,000
|
)
|
$
|
45,000
|
||||||
|
2006
|
$
|
45,000
|
215,000
|
-
|
$
|
260,000
|
|||||||
|
2007
|
$
|
260,000
|
-
|
-
|
$
|
260,000
|
|||||||
All
other
schedules have been omitted because of the absence of the conditions under
which
they are required or because the required information, where material, is shown
in the financial statements or the notes thereto.
|
(3)
Exhibits
|
| ^^ |
3.1 Certificate
of Incorporation of Fuel Tech, Inc. filed September 30,
2006
|
| ^^ |
3.2 Certificate
of Conversion of Fuel Tech, Inc. filed September 30,
2006
|
| ^^ |
3.3 By-Laws
of Fuel Tech, Inc. adopted September 30,
2006
|
|
*
4.1
|
Instrument
Constituting US $19,200,000 Nil Coupon Non-Redeemable Convertible
Unsecured Loan Notes of Fuel-Tech N.V., dated December 21,
1989
|
|
*
4.2
|
First
Supplemental Instrument Constituting US $3,000,000 Nil Coupon
Non-Redeemable Convertible Unsecured Loan Notes of Fuel-Tech N.V.,
dated
July 10, 1990
|
|
**
4.3
|
Instrument
Constituting US $6,000,000 Nil Coupon Non-Redeemable Convertible
Unsecured
Loan Notes of Fuel-Tech N.V., dated March 12,
1993
|
|
**
4.4
|
Form
of Warrants issued April 30, 1998 evidencing right to purchase 3
million
shares of Fuel-Tech N.V. Common
Stock.
|
| ^^^ |
4.5 Fuel
Tech, Inc. Incentive Plan as amended through June 3, 2004
|
| oooo |
4.6 Fuel
Tech, Inc. Form of Non-Executive Director Stock Option Agreement.
|
| oooo |
4.7 Fuel
Tech, Inc. Form of Non-Qualified Stock Option
Agreement.
|
| oooo |
4.8 Fuel
Tech, Inc. Form of Incentive Stock Option
Agreement.
|
| ^ |
4.9 The
Business Loan Agreement dated as of July 31, 2006 between Wachovia
Bank
N.A. and Fuel Tech, Inc.
|
| ** |
10.1 Securities
Purchase Agreement dated as of March 23, 1998, between Fuel-Tech
N.V., and
the several Investors signatory thereto, including
exhibits.
|
| #& |
10.2
License
Agreement dated November 18, 1998 between The Gas Technology
Institute and
Fuel Tech, Inc. relating to the FLGR
Process
|
| #& |
10.3
Amendment
No. 1, dated February 28, 2000, to License Agreement of November
18, 1998
between The Gas Technology Institute and Fuel Tech,
Inc.
|
| oooo |
10.4 Employment
Agreement as of February 28, 2006 between John (Johnny) F. Norris
Jr. and
Fuel Tech, Inc.
|
|
o
|
10.5 Amendment
to Employment Agreement as of February 28, 2006 between John (Johnny)
F.
Norris Jr. and Fuel Tech, Inc.
|
| ^^^^ |
10.6
Form of Indemnity Agreement between Fuel Tech, Inc. and its Directors
and
Officers
|
| oo |
19.0
Those
portions of the Proxy Statement to be distributed to Shareholders
of Fuel
Tech for the 2008 Annual Meeting of Shareholders of Fuel Tech,
Inc.
specifically incorporated by reference into this Annual Report
on
Form10-K.
|
| o |
23.1
Consent of Independent Registered Public Accounting
Firm
|
| o |
23.2
Consent of Independent Registered Public Accounting
Firm
|
| o |
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
| o |
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
| o |
32.0
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
The
following are incorporated by reference from the documents
indicated.
| * |
Filed
with Registration Statement on Form 20-F, No. 000-21724 on August
26,
1993, as amended
|
| ** |
Filed
with Registrant’s Report on Form 6-K for the month of March
1998
|
| † |
Filed
with Registrant’s Report on Form 20-F for the year
1997
|
| o |
Filed
herewith
|
| oo |
Filed
with the Registrant’s definitive proxy material for its 2008 Annual
Meeting
|
| oooo |
Filed
with Registrant’s report on Form 10-K for the year
2006
|
| # |
Confidential
information removed and filed
separately
|
| & |
Filed
with Registrant’s report on Form 10-K for the year
1999
|
| ^ |
Filed
with Registrant’s Form 8-K on August 10,
2006
|
| ^^ |
Filed
with Registrant’s Form 8-K on September 30,
2006
|
| ^^^ |
Filed
with Registration Statement on Form S-8 No. 333-137735 on October
2nd
2006
|
| ^^^^ |
Filed
with Registrant’s Form 8-K on February 7,
2007
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Date:
March 5, 2008
|
By:
|
/s/ John F. Norris Jr.
|
|
|
John
F. Norris Jr.
|
|||
|
Chief
Executive Officer, President and Director
|
|||
|
Date:
March 5, 2008
|
By:
|
/s/ Vincent J. Arnone
|
|
|
Vincent
J. Arnone
|
|||
|
Chief
Financial Officer,
|
|||
|
Sr.
Vice President and
Treasurer
|
|||
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report
has
been duly signed below by the following persons on behalf of Fuel Tech, Inc.
and
in the capacities and on the date indicated.
Date:
March 5, 2008
|
/s/
Ralph E. Bailey
|
Executive
Chairman and Director
|
|
|
Ralph
E. Bailey
|
||
|
/s/
Douglas G. Bailey
|
Deputy
Chairman and Director
|
|
|
Douglas
G. Bailey
|
||
|
/s/
Thomas J. Shaw
|
Director
|
|
|
Thomas
J. Shaw
|
||
|
/s/
Miguel Espinosa
|
Director
|
|
|
Miguel
Espinosa
|
||
|
/s/
Delbert L. Williamson
|
Director
|
|
|
Delbert
L. Williamson
|
||
|
/s/
John D. Morrow
|
Director
|
|
|
John
D. Morrow
|
||
|
/s/
Thomas L. Jones
|
Director
|
|
|
Thomas
L. Jones
|
||
|
/s/
Charles W. Grinnell
|
Director,
Vice President, General Counsel and Corporate Secretary
|
|
|
Charles
W. Grinnell
|
52