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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from_________________to_______________
Commission File No. 000-21724
FUEL-TECH N.V.
(Exact name of registrant as specified in its charter)
Netherlands Antilles N/A
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
Fuel-Tech N.V. Fuel Tech, Inc.
(Registrant) (U.S. Operating Subsidiary)
Castorweg 22-24 Suite 703, 300 Atlantic Street
Curacao, Netherlands Antilles Stamford, CT 06901
(599) 9-461-3754 (203) 425-9830
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 par value per share The Nasdaq Stock Market, Inc.
-------------------------------------- -----------------------------
(Title of Class) (Name of Exchange on Which Registered)
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 No
--- ---
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. X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 under the Securities Exchange Act of 1934). Yes X No
--- ---
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 28, 2002 was
$95,271,000. The aggregate market value of the voting stock held by
non-affiliates of the registrant based on the average bid and asked prices of
March 3, 2003 was $52,005,000
Indicate number of shares outstanding of each of the registered classes of
Common Stock at March 3, 2003: 19,680,432 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 2003 are incorporated by reference in Parts II, III, and IV
hereof.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to Vote of Security Holders 5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 14
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure 32
PART III
Item 10. Directors and Executive Officers of the Registrant 32
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial Owners
and Management 32
Item 13. Certain Relationships and Related Transactions 32
PART IV
Item 14. Controls and Procedures 33
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33
Signatures and Certifications 35
ii
TABLE OF DEFINED TERMS
Term Definition
ABC American Bailey Corporation
AES Advanced Engineering Services
CAAA Clean Air Act Amendments of 1990
CDT Clean Diesel Technologies, Inc.
CFD Computational Fluid Dynamics
Common Shares Shares of the common stock of Fuel Tech
EPRI Electric Power Research Institute
FTI Fuel Tech, Inc.
FUEL CHEM(R) FTI's fuel and flue gas treatment processes, including its
Targeted-In-Furnace-Injection programs for slagging,
fouling and corrosion control and plume abatement
Fuel Tech Fuel-Tech N.V. and its subsidiaries and affiliates
Investors The purchasers of Fuel Tech securities pursuant to a
Securities Purchase Agreement as of March 23, 1998
Loan Notes Nil Coupon Non-redeemable Convertible Unsecured Loan Notes
of Fuel Tech
NOx Oxides of nitrogen
NOxOUT CASCADE(R) Combination of NOxOUT and SCR
NOxOUT(R) Process Fuel Tech's SNCR process for the reduction of NOx
NOxOUT SCR(R) Urea used as a catalyst reagent
Rich Reagent An SNCR-type process that broadens the NOx reduction
Injection capability of the NOxOUT Process at a cost similar to
Technology (RRI) NOxOUT. RRI can also be applied on a stand-alone basis.
SCR Selective Catalytic Reduction
SIP Call State Implementation Plan Rulemaking Procedure
SNCR Selective Non-Catalytic Reduction
NOxOUT ULTRA(R) Fuel Tech's process for generating ammonia for use
as SCR reagent
ACUITIV(TM) Fuel Tech's advanced visualization services, formerly
referred to as Virtual Vantage
iii
Fuel-Tech N.V. Subsidiaries and Affiliates
December 31, 2002
------------
FTNV
---------------- Netherlands ----------------------------------------
| Antiles | |
|49% ------------ |100% |15%
| | | |
---------- | 100% ---------- ----------
FTCS | PPI CDT
Germany ------------- Delaware Delaware
---------- FTI ---------- ----------
Massachusetts
-------------
|
| 100%
100% 100% | 100%
------------------------------------------------------------
| | | |
| | | |
--------- --------- ----------- ---------
FTJL FTL HOLDINGS
Jamaica Canada Netherlands Srl Italy
Antilles
--------- --------- ----------- ---------
|
| 100%
|
- --------------------------------------------------------- -----------
FTNV - Fuel-Tech N.V.
FTI - Fuel Tech, Inc.
Holdings - Fuel Tech Holdings N.V. BV
BV - Fuel Tech BV Netherlands
GmbH - Fuel Tech GmbH
HFTL - Fuel Tech Targeted Injection Chemicals Ltd. -----------
FTJL - Fuel Tech Jamaica Limited |
Srl - Fuel Tech Srl | 100%
PPI - Platinum Plus, Inc. |____
CDT - Clean Diesel Technologies, Inc. |
FTCS - Fuel Tech CS GmbH ---------
GmbH
Germany
---------
iv
PART I
Forward Looking Statements
Statements in this Form 10-K which 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 of the Business" in Item 1 and also Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 1. BUSINESS
Fuel Tech
Fuel-Tech N.V., including its subsidiaries ("Fuel Tech"), is a technology
company active in the air pollution control and specialty chemical businesses
through its wholly owned subsidiary Fuel Tech, Inc. ("FTI"). Fuel-Tech N.V.,
incorporated in 1987 under the laws of the Netherlands Antilles, is registered
at Castorweg 22-24 in Curacao under No. 1334/N.V.
Fuel Tech, Inc.
FTI's special focus is the worldwide marketing of its nitrogen oxide
("NOx") reduction and FUEL CHEM Processes. The NOx reduction technologies, which
include the NOxOUT, NOxOUT CASCADE, and NOxOUT SCR processes, reduce NOx
emissions in flue gas from boilers, incinerators, furnaces and other stationary
combustion sources. The FUEL CHEM business uses chemical processes for slagging,
fouling, corrosion control and plume abatement in furnaces and boilers through
the addition of chemicals into the fuel or by Targeted-In-Furnace-Injection. FTI
has a number of other technologies, such as NOxOUT ULTRA, both commercial and in
the development stage, that are for the most part add-ons to the NOxOUT Process
or similar in their technological base. Additionally, in 2002, Fuel Tech created
a separate division to market its high-end visualization software product. This
product, commercially introduced in 2002, is marketed under the "ACUITIV" trade
name. FTI's business is materially dependent on the continued existence and
enforcement of worldwide air quality regulations.
American Bailey Corporation
American Bailey Corporation ("ABC") performs management services for Fuel
Tech under an Agreement dated April 30, 1998, as amended. Ralph E. Bailey,
Chairman, Chief Executive Officer and Managing Director of Fuel Tech, and
Douglas G. Bailey, Vice Chairman, Managing Director and Chief Strategic Officer
of Fuel Tech are shareholders of ABC. 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 2003 Annual General Meeting of Shareholders, which information
is incorporated by reference. Also, refer to Note 8 to the consolidated
financial statements.
NOx Reduction
Regulations and Markets
The domestic U.S. air pollution control market is the primary driver in
Fuel Tech's NOx reduction business. This market is dependant 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 1000 utility and large industrial
boilers in 19 states are required, as an aggregate, to achieve a NOx reduction
target by May 31, 2004. Also, in Europe under European Union Directives, over
100 industrial units must achieve NOx reductions by 2005.
In 1994, governors of eleven 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 EPA announced more stringent regulations. The Ozone Transport State
Implementation Plan (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, requires, 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 are 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
provides clarity and impetus for air pollution control efforts well beyond the
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.
1
Products
Fuel Tech's NOxOUT Process is a Selective Non-Catalytic Reduction ("SNCR")
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 40% for utilities
and by potentially significantly greater amounts for industrial units in many
types of plants with capital costs ranging from $6 - $20/kw for utility boilers
and with annualized operating costs ranging from $1,000 - $1,500/ton of NOx
removed.
Fuel Tech's NOxOUT CASCADE Process uses catalyst as an add-on to the NOxOUT
Process to achieve performance similar to Selective Catalytic Reduction ("SCR").
Based on demonstrations, NOxOUT CASCADE's capital cost is less than that of SCR,
while operating costs are competitive with those experienced by SCR.
Fuel Tech's NOxOUT SCR Process utilizes urea as a catalyst reagent to
achieve NOx reductions of up to 90% from stationary combustion sources with
capital and operating costs competitive with equivalently sized, standard SCR
systems.
Fuel Tech is currently in the process of commercially offering its NOxOUT
ULTRA system. The system is designed to convert urea to ammonia, safely and
economically, for use as a reagent in the selective catalytic reduction process
(SCR) for NOx reduction. In this fashion, Fuel Tech intends to participate in
the SCR segment of the SIP Call driven market. Recent local hurdles in the
ammonia permitting process have raised concerns regarding the safety of ammonia
storage in quantities sufficient to supply SCR.
Fuel Tech has sublicensed the Rich Reagent Injection Technology from
Reaction Engineering International, who has a direct license from the Electric
Power Research Institute. The technology has been proven in full-scale field
studies on cyclone-fired units to reduce NOx by 25-30%. The technology is a
generic SNCR whose applicability is outside the temperature range of NOxOUT. 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 50% with a minimal
additional capital requirement.
Sales of the NOx reduction technologies were $25.5 million, $10.4 million,
and $17.4 million for the years ended December 31, 2002, 2001, and 2000,
respectively.
2
NOx Reduction Competition
Processes competitive with Fuel Tech's NOx reduction products may be
expected from combustion modifications, SCR and ammonia SNCR, among others.
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. Such companies as Alstom, Foster Wheeler
Corporation, The Babcock & Wilcox Company and Steam Sales Corporation are active
competitors in the low-NOx burner business.
SCR is an effective and proven method of control for the removal of up to
90% of NOx. SCR has a high capital cost ranging from $55 - $150/kw on retrofit
coal applications. Such companies as Alstom, The Babcock & Wilcox Company,
Cormetech, Inc., Engelhard Corporation, Foster Wheeler Corporation, Peerless
Manufacturing Company, and the Siemens Westinghouse Power Corporation are active
SCR system providers.
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% to 70% on
incinerators, but has limited applicability in the utility industry. Ammonia
system capital costs range from $15 - $22/kw, with annualized operating costs
ranging from $1,000 - $3,000/ton of NOx removed. These systems require the use
of stored ammonia, a hazardous substance.
In addition to or in lieu of using the foregoing processes, certain
customers will 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.
FUEL CHEM
Product and Markets
Fuel Tech's fireside and fuel additive programs, FUEL CHEM, help improve
unit performance and reduce customer operating costs. Through the program,
customers have enjoyed returns on their investments of up to 500%. The
Targeted-In-Furnace-Injection approach, a key FUEL CHEM technology on which two
patents have been issued, is a uniquely engineered and economical solution to
furnace fouling and corrosion problems. Electric utilities, the pulp and paper
industry and municipal solid waste incinerator facilities make up the principal
markets for the program.
Sales of the FUEL CHEM products were $7.1 million, $7.2 million, and $4.5
million for the years ended December 31, 2002, 2001, and 2000, respectively.
Competition
Competition for Fuel Tech's FUEL CHEM product line includes chemicals sold
by specialty chemical companies, such as GE Betz, Inc., primarily in the
traditional heavy-fuel-oil treatment area. No substantive competition currently
exists for Fuel Tech's technology for Targeted-In-Furnace-Injection of additives
for the control of slagging, fouling, and corrosion and for plume abatement, but
there can be no assurance that such lack of substantive competition will
continue.
Advanced Engineering Services and ACUITIV
Fuel Tech uses its advanced engineering services to support the sale of
Fuel Tech's 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 implementation of
Fuel Tech's NOx reduction systems and the application of its FUEL CHEM slag and
corrosion control processes.
In 2001 and 2002, Fuel Tech augmented its advanced engineering services
staff and equipment with a view toward not only better serving Fuel Tech's
customers but also to seek other applications for its services. Toward this
goal, the ACUITIV software product was commercially introduced on June 6, 2002,
and Fuel Tech recently received its second commercial order for this software.
The software allows users to visualize complex data sets in a virtual reality
environment, and, a recent version of the software was released which is
compatible with the Microsoft Windows(R) operating system. Although the validity
of the product has been confirmed, Fuel Tech does not expect revenues related to
this product to be material for the upcoming year.
Intellectual Property
See Item 2 "Description of Property" for information on Fuel Tech's
intellectual property and proprietary position, which are material to its
business.
Employees
Fuel Tech has 84 full-time employees, 79 in North America and 5 in Europe.
Fuel Tech enjoys good relations with its employees and is not a party to any
labor management agreements.
3
Risk Factors of the Business
Investors in Fuel Tech should be mindful of the following risk factors
relative to Fuel Tech's business.
(i) Lack of Diversification
Fuel Tech is engaged in two principal businesses; the marketing of products
to reduce air pollution, and the licensing of software that allows users to
visualize complex data sets. The software business is in its infancy and its
ultimate success is uncertain, while an adverse development in Fuel Tech's air
pollution control 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 diverse operations.
(ii) Competition
Competition in the NOx control market will come from processes utilizing
low-NOx burners, over-fired air, flue gas recirculation, ammonia SNCR, SCR and,
with respect to particular uses of urea not infringing Fuel Tech's patents, urea
(see Item 2 "Description of 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 under this Item I
the text under the captions "Products" and "NOx Reduction Competition."
(iii) Dependence on Regulations and Enforcement
Fuel Tech's business is primarily regulatory driven. That 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 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 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 2
"Description of Property."
4
ITEM 2. DESCRIPTION OF PROPERTY
Fuel Tech's products are generally protected by U.S. and non-U.S. patents.
Fuel Tech owns 108 patents worldwide, with 3 patent applications pending in the
U.S. and 30 pending in non-U.S. jurisdictions. These patents cover some 44
inventions, 32 associated with the NOx reduction business; 2 associated with
FUEL CHEM, 2 associated with ACUITIV and 9 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.
Apart from its intellectual property, the property of Fuel Tech is not
material.
Fuel Tech and its subsidiaries operate from leased office and engineering
facilities in Curacao, Netherlands Antilles; Batavia, Illinois; Stamford,
Connecticut; and Milan, Italy.
ITEM 3. LEGAL PROCEEDINGS
Fuel Tech has no pending litigation material to its business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the fourth quarter of 2002, no matters were submitted to a vote of
security holders.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Fuel Tech's Common Shares have been traded since September 1993 on The
NASDAQ Stock Market, Inc. Fuel Tech's Common Shares are also traded on the
Berlin Stock Exchange.
Prices
The table below sets forth the high and low sales prices during each
calendar quarter since January 2001.
2002 High Low
---- ---- ---
Fourth Quarter 4.950 2.760
Third Quarter 6.640 3.950
Second Quarter 7.250 5.200
First Quarter 6.820 4.500
2001
----
Fourth Quarter 6.070 2.190
Third Quarter 3.700 2.010
Second Quarter 3.840 2.000
First Quarter 2.781 1.250
Dividends
Fuel Tech has not to date paid dividends on its Common Shares and is not
expected to do so in the foreseeable future.
Holders
Based on information from Fuel Tech's Transfer Agent, as of March 3, 2003,
there were 391 registered holders of Fuel Tech's common stock. Management
believes that, on such date, there were approximately 2,300 beneficial holders
of Fuel Tech's common stock.
Transfer Agent
The Transfer Agent and Registrar for the Common Shares is Mellon Investor
Services, LLC, 85 Challenger Road, Overpeck Centre, Ridgefield Park, New Jersey
07660.
Exchange Controls
Fuel Tech received a license of unlimited duration from the Central Bank of
the Netherlands Antilles to exempt it from foreign exchange controls in dealings
with parties outside of the Netherlands Antilles or with parties in the
Netherlands Antilles holding a similar license. Fuel Tech also received a
business license of unlimited duration that allows the securities of Fuel Tech
to be held by non-residents of the Netherlands Antilles. There are no other
restrictions on the rights of such non-residents as shareholders. The books of
Fuel Tech are maintained in United States dollars, however, there are
transactions in other currencies.
Taxation
Under the Netherlands Antilles tax code applicable to Fuel Tech until at
least the fiscal year 2019, Fuel Tech's income taxes in the Netherlands
Antilles, which are based on profits exclusive of Dutch dividends received, are
computed at a rate of 2.4% on the first 100,000 Netherlands Antilles Guilders
(approximately $60,000) and 3% on the excess. Also, capital gains and losses are
not included in the taxable profit of Fuel Tech. Based on a tax ruling received
by Fuel Tech, Dutch dividends received will be taxed to Fuel Tech at a rate of
5.0% at source, and at 5.5% of the net Dutch dividends in the Netherlands
Antilles until at least the fiscal year 2005. Fuel-Tech N.V. is not now liable
for tax in any jurisdiction other than the Netherlands Antilles. The
subsidiaries of Fuel Tech are generally subject to the tax regimes of the
jurisdictions where they are incorporated and conduct operations but not in the
Netherlands Antilles.
Dividends paid by Fuel Tech to United States persons who are not engaged in
a trade or business through a permanent establishment in the Netherlands
Antilles are currently not subject to tax in the Netherlands Antilles. Gain or
loss derived by a United States person from the sale or exchange of Fuel Tech's
Common Shares are exempt from Netherlands Antilles income tax. The tax treaty
between the United States and the Netherlands Antilles was terminated effective
December 31, 1987.
6
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, 2002, under which the securities of Fuel Tech
were authorized for issuance:
- -------------------------------- ---------------------------------- --------------------------- -------------------------------
Plan Category Number of Securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options, warrants outstanding options, future issuance under
and rights warrants and rights equity compensation plans
excluding securities
listed in column (a)
- -------------------------------- ---------------------------------- --------------------------- -------------------------------
(a) (b) (c)
- -------------------------------- ---------------------------------- --------------------------- -------------------------------
Equity compensation plans 2,207,000 $2.71 244,700
approved by security
holders (1)
- -------------------------------- ---------------------------------- --------------------------- -------------------------------
(1) Includes shares of Common Stock of Fuel Tech authorized for awards
under Fuel Tech's 1993 Incentive Plan, as amended through August 3, 1999.
7
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is presented below as of the end of and for each of
the fiscal years in the five-year period ended December 31, 2002. The selected
financial data should be read in conjunction with the audited consolidated
financial statements as of and for the year ended December 31, 2002, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
For the years ended December 31
--------------- ------------ ------------ ------------- ---------------
2002 2001 2000 1999 1998
--------------- ------------ ------------ ------------- ---------------
STATEMENT of OPERATIONS DATA
(in thousands of U.S. dollars, except for
share data)
Net sales $ 32,627 $ 17,672 $ 21,906 $ 33,325 $25,864
Selling, general and administrative and other
costs and expenses 11,687 9,873 9,305 9,691 8,927
Net income (loss) 3,057 (1,633) 415 3,008 539
--------------- ------------ ------------ ------------- ---------------
Basic income (loss) per common share $ 0.16 $ (0.09) $ 0.02 $ 0.17 $ 0.03
Diluted income (loss) per common share $ 0.14 $ (0.09) $ 0.02 $ 0.16 $ 0.03
Weighted-average basic shares outstanding 19,350,000 18,592,000 18,396,000 17,752,000 15,680,000
Weighted-average diluted shares outstanding 22,437,000 18,592,000 19,621,000 19,335,000 17,437,000
December 31
--------------- ------------ ------------ ------------- ---------------
2002 2001 2000 1999 1998
--------------- ------------ ------------ ------------- ---------------
BALANCE SHEET DATA
(in thousands of U.S. dollars, except for per
share data)
Working capital $ 13,947 $ 8,861 $ 12,542 $ 12,126 $ 9,047
Total assets 25,869 20,328 23,089 24,464 19,153
Total liabilities 9,064 7,193 8,522 10,773 8,837
Shareholders' equity 16,805 13,135 14,567 13,691 10,316
Net tangible book value per share $ 0.64 $ 0.56 $ 0.59 $ 0.52 $ 0.45
Notes:
(1) Shareholders' equity includes outstanding nominal nil coupon non-redeemable
perpetual loan notes. See Note 4 to the consolidated financial statements.
(2) Net tangible book value per share assumes full conversion of Fuel Tech's nil
coupon non-redeemable perpetual loan notes into shares of Fuel Tech's common
stock.
(3) 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 will be reviewed annually, or
more frequently if indicators arise, for impairment. For the twelve months
ended December 31, the following table depicts the impact on each of the
prior years noted, had the non-amortization policy been applied.
2002 2001 2000 1999 1998
------------------------------------------------------------------------------
Reported net income (loss) $ 3,057,000 $ (1,633,000) $ 415,000 $ 3,008,000 $ 539,000
Add back: Goodwill
amortization -- 334,000 334,000 199,000 57,000
------------------------------------------------------------------------------
Adjusted net income (loss) $3,057,000 $ (1,299,000) $ 749,000 $ 3,207,000 $ 596,000
==============================================================================
Basic earnings per share:
Reported net income (loss) $ .16 $ (.09) $ .02 $ .17 $ .03
Add back: Goodwill
amortization -- .02 .02 .01 .01
------------------------------------------------------------------------------
Adjusted net income (loss) $ .16 $ (.07) $ .04 $ .18 $ .04
==============================================================================
Diluted earnings per share:
Reported net income (loss) $ .14 $ (.09) $ .02 $ .16 $ .03
Add back: Goodwill
amortization -- .02 .02 .01 .01
------------------------------------------------------------------------------
Adjusted net income (loss) $ .14 $ (.07) $ .04 $ .17 $ .04
==============================================================================
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
Fuel-Tech N.V. (the "Company") operates primarily in the air pollution
control business. It distributes its products through its direct sales force,
licensees and agents. Principal markets for its products are stationary
combustion sources that produce nitrogen oxide (NOx) and other emissions. Fuel
Tech sells its fuel treatment chemicals through its direct sales force and
agents to industrial and utility power-generation facilities.
Fuel Tech currently generates revenues from the following three product
lines:
Nitrogen Oxide ("NOx") Reduction Technologies
Fuel Tech markets several NOx reduction technologies to meet statutory NOx
reduction requirements worldwide. The near-term driver for growth in this
business is the Ozone Transport SIP (State Implementation Plan) Call, which
requires 19 states to decrease their NOx emissions by May 31, 2004. This
regulation impacts 700-800 utility boilers and 400-500 large industrial boilers
(see below for more detail on the SIP Call). Fuel Tech believes that the
implementation of the SIP Call will extend well beyond the May, 2004
implementation date.
Fuel Treatment Chemicals
Fuel Tech's proprietary Targeted-In-Furnace-Injection technology centers
around the unique application of specialty chemicals to improve the performance
of combustion units. Specifically, this technology is used to reduce slag
formation, corrosion and opacity in boilers, furnaces and incinerators. Fuel
Tech believes its largest market opportunity for this product line is those
units burning Western coals, many of which have significant operational issues
related to the formation of slag.
Visualization Software
In 2002, Fuel Tech introduced a software product, marketed under the
ACUITIV trade name that allows users to visualize in a three dimensional
immersive environment, complex data sets. The software is currently being
marketed to users of Computation Fluid Dynamics ("CFD") software, an engineering
software tool that aids users in predicting flows, such as liquid or gas
streams. Fuel Tech developed this software internally to make the design process
of its NOx reduction and fuel treatment chemical business more efficient and
accurate.
Fuel Tech licenses this product to end users on an annual or permanent
basis. Fuel Tech will not record license revenue until its capitalized software
development costs, with a balance of approximately $490,000 at December 31,
2002, are recovered. This product was introduced in mid-2002, and to date two
licenses have been sold. Fuel Tech expects demand for this product to increase
in 2003, as it recently introduced a version of the software that is compatible
with the Microsoft Windows operating system. Fuel Tech does not believe,
however, that it will recognize significant revenues in 2003 from this product
due to the cost recovery requirement discussed above.
2002 versus 2001
Net sales for the 12 months ended December 31, 2002 and 2001 were
$32,627,000 and $17,672,000, respectively. The improvement is attributable to
the increase in domestic NOx reduction utility project revenues, as project
bookings in the fourth quarter of 2001 and in 2002 generated revenues during
their various phases of completion. NOx reduction utility revenue in 2001 had
been negatively impacted by the delay in obtaining a final ruling on the
Environmental Protection Agency's (EPA) SIP (State Implementation Plan) Call
regulation. As discussed further below, the uncertainty regarding this
regulation has been lifted and Fuel Tech expects demand for its NOx reduction
technologies to continue to increase during the next few years. Fuel treatment
chemical revenues for the twelve-month period ended December 31, 2002 continued
to be favorably impacted by shipments to utilities burning Western coals. Fuel
Tech believes that utilities burning Western coals represent the largest market
opportunity for its fuel treatment chemical business and that penetration into
this market is a priority. In addition to shipments to PacifiCorp, Fuel Tech's
strategic agreement partner, demonstrations with two midwestern utilities, both
on coal-fired units, commenced during the year. All of these utilities are using
Fuel Tech's patented Targeted-In-Furnace-Injection (TIFI) process to control the
formation of slag deposits in boilers burning western coals. More than
offsetting the improved performance in the coal-fired utility segment of this
market were the following two factors: first, the continued deterioration in the
oil-fired business, as the high price of oil as compared with the price of
natural gas caused customers in this segment to switch fuels, negatively
impacting results. Second, the use of low-slagging coal by one of Fuel Tech's
customers caused that customer to temporarily suspend treatment. Although Fuel
Tech believes that both factors will reverse themselves, it is not possible to
predict when that will occur.
The "SIP Call" is the federal mandate that, when introduced in 1998,
required 22 states to reduce NOx emissions by May 2003. On March 3, 2000, an
appellate court of the D.C. Circuit upheld the validity of the SIP Call for 19
of the 22 states and, on June 22, 2000, the same court made a final ruling
upholding the EPA's SIP call regulation and denying the appeal of the states and
utilities. Although the NOx reduction requirement date was moved back one year
to May of 2004, nineteen states were required to complete and issue their State
Implementation Plans for NOx reduction by October of 2000. These plans, which
the EPA had until October 2001 to approve, will potentially impact 700 to 800
utility boilers and 400 to 500 industrial units.
9
In February 2001, the United States 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 provides clarity and impetus for NOx reduction efforts well beyond the
current ozone attainment requirement of 2007. In keeping with this trend, the
Supreme Court, only days later, denied industry's attempt to again stay the SIP
Call, effectively exhausting all means of appeal.
Based on these regulatory developments, Fuel Tech is enjoying accelerated
interest in its NOx reduction programs that have led to significant project
bookings late in 2001 and in 2002. Fuel Tech anticipates continued demand for
its air pollution control technologies over the next several years.
Cost of sales, as a percentage of net sales, for the 12-month period ended
December 31, 2002 was 56% versus 51% for the same period of the prior year. The
increase reflects a change in product mix in 2002, in favor of the lower margin
NOx reduction project business.
Selling, general and administrative expenses were $10,232,000 and
$8,708,000, respectively, for the 12-month periods ended December 31, 2002 and
2001. The increase is due primarily to revenue-related expenses, as revenue
increased significantly from the prior year, and secondarily to the addition of
sales and marketing personnel, both for the fuel treatment chemical and ACUITIV
businesses. Market penetration of Fuel Tech's TIFI technology in the coal-fired
utility market remains a strategic priority.
Research and development expenses for the 12 months ended December 31, 2002
and 2001 were $1,455,000 and $1,165,000, respectively. Fuel Tech continues to
pursue commercial applications for its technologies outside of its traditional
markets, with a particular focus on its ACUITIV software and its NOxOUT ULTRA
process. The ACUITIV software product was commercially introduced on June 6,
2002, and Fuel Tech recently received its second commercial order.
Fuel Tech recorded a loss of $54,000 for the 12 months ended December 31,
2002 on its equity investment in Fuel Tech CS GmbH (FTCS), a 49 percent-owned
entity. During the quarter ended March 31, 2002, Fuel Tech recognized a gain of
$250,000 on its equity investment in Clean Diesel Technologies, Inc. (CDT), its
15.2 percent-owned affiliate. The gain resulted from CDT's repayment of the full
principal amount of loans made by Fuel Tech to CDT in 2000 and 2001. Because of
the continuing losses incurred by CDT, the carrying value of the loans was
reduced to zero as of December 31, 2001, based on Fuel Tech's pro-rata share of
the losses incurred. 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 $2.7 million at December 31, 2002,
which is not reflected on Fuel Tech's balance sheet.
During the 12 months ended December 31, 2001, Fuel Tech recognized a
$92,000 loss on its equity investment in FTCS, while a loss of $250,000 was
recorded on Fuel Tech's investment in CDT for the same period. Please refer to
Note 8 of the consolidated financial statements for a further discussion of
related party transactions.
Interest expense for the 12 months ended December 31, 2002 was reduced to
$136,000 from $245,000 in the prior 12-month period. The decrease is
attributable to a reduction in the average outstanding principal balance on Fuel
Tech's term loan, as well as to a reduction in short term interest rates.
Other income and expense for the 12-month period ended December 31, 2002
was $139,000 versus $37,000 for the same period in 2001. The increase stems
largely from the elimination of goodwill amortization effective January 1, 2002,
which has been offset somewhat by reductions in interest income.
An income tax benefit of $150,000 was recorded in 2002, which represented a
reduction of the reserve for prior years' state income tax refunds receivable,
as the related receivables were collected in 2002. No provision for federal or
state income taxes was recorded in any period due to the existence of net
operating loss carry forwards. Fuel Tech has $32.4 million in United States
federal income tax loss carry forwards as of December 31, 2002, the deferred tax
benefit of which has been offset by a valuation allowance in Fuel Tech's balance
sheet.
In the opinion of management, Fuel Tech's expected near-term revenue growth
in its NOx reduction business will be directly related to the implementation of
the requirements of the CAAA. Fuel Tech's implementor and alliance strategies
will enable Fuel Tech to provide the NOxOUT Process to an increasing number of
customers without significantly adding technical and support staff. Customers
purchase the NOxOUT Process and related technologies from either Fuel Tech or
its implementors. If customers purchase the NOxOUT Process from implementors,
the per contract revenues to Fuel Tech may be lower, but more installations may
be handled.
10
2001 versus 2000
Net sales in 2001 totaled $17,672,000 versus net sales of $21,906,000 in
2000, a decline of 19%. This overall decline was due to a $9,100,000 year on
year reduction in domestic NOx reduction industrial project revenues, the basis
of which is discussed further below. This result was partially offset by two
favorable factors. First, Fuel Tech experienced a $2,776,000 increase in fuel
treatment chemical revenues in 2001 versus 2000, to a record level of
$7,209,000. Second, Fuel Tech realized revenues from temperature mapping and
modeling activities predominantly for the domestic NOx reduction utility project
business in the amount of approximately $1,700,000 in 2001 versus an immaterial
amount in 2000.
The year on year decline in domestic NOx reduction industrial project
revenues was attributable to a NOx reduction regulation, as mandated in Title
III of the CAAA, requiring municipal solid waste incinerators to significantly
reduce their NOx emissions by December 1, 2000. This regulation had a
significant positive impact on industrial project revenues in 2000, and it was
expected that these revenues would not repeat in 2001. NOx reduction utility
revenue had been negatively impacted by the delay in obtaining a final ruling on
the EPA's SIP Call regulation.
The increase in fuel treatment chemical revenues was attributable to Fuel
Tech's success in penetrating the market for utility units burning Western
coals, and to customers' conversion from existing suppliers to Fuel Tech.
Significant focus was placed on marketing Fuel Tech's patented
Targeted-In-Furnace-Injection approach to reduce the operating costs of
customers' units.
In 2001, Fuel Tech realized approximately $1,700,000 in revenues from
temperature mapping and modeling orders received on 40 boilers predominantly for
the domestic NOx reduction utility project business. Fuel Tech's performance of
temperature mapping and modeling work for a customer is the precursor to
performing NOx reduction project installations on the units for which the
mapping and modeling has been performed. It is Fuel Tech's belief that project
orders will be received from the majority of customers for whom temperature
mapping and modeling work has been performed.
The gross margin percentage on an overall basis across all products was 49%
in 2001, compared with 46% in 2000. The improvement was realized primarily due
to the increase in revenues in the fuel treatment chemical business. As NOx
reduction revenues from utility companies in the United States increase due to
the above-mentioned regulations, this business will comprise a much larger
percentage of Fuel Tech's overall revenues. As a result, Fuel Tech expects that
the overall gross margin percentages will decline over the next several years,
reflecting the change in product mix.
Selling, general and administrative expenses were $8,708,000 for the twelve
months ended December 31, 2001, an increase of $774,000 from the prior year. The
increase was due primarily to a higher level of selling and service expenses
resulting from the increased agents fees and commissions for the U.S. fuel
treatment chemical business, and to a lesser extent to an increase in expenses
related to the enhancement and expansion of Fuel Tech's European business.
Research and development expenses for the twelve months ended December 31,
2001 and 2000 were $1,165,000 and $843,000, respectively. Fuel Tech continued to
aggressively pursue commercial applications for its technologies outside of its
traditional markets, with a particular focus on its NOxOUT ULTRA process and its
ACUITIV advanced visualization software. Fuel Tech sold its first commercial
demonstration of NOxOUT ULTRA late in 2001.
Fuel Tech recorded a net loss from its equity interest in affiliates during
the year 2001 of $342,000. This amount consisted of a $250,000 loss recognized
on its equity investment in Clean Diesel Technologies, Inc. (CDT), and a $92,000
loss on its investment in Fuel Tech CS GmbH. Fuel Tech had a 16% common stock
ownership interest in CDT as of December 31, 2001, while Fuel Tech had a 49%
ownership interest in Fuel Tech CS GmbH as noted above. Please refer to Note 8
of the consolidated financial statements for a further discussion of related
party transactions.
Interest expense decreased to $245,000 for the twelve-month period ended
December 31, 2001 from $354,000 for the same period in 2000. The favorable
variance was due solely to the decrease in the average outstanding principal
debt balance during the year, and to a decrease in short-term interest rates.
Other income and expense for the twelve-month period ended December 31,
2001 was $37,000 versus $82,000 for the same period in 2000. The decrease was
due to a lower level of interest income that was driven by the decrease in
short-term interest rates noted above, and to the write down of impaired assets.
Partially offsetting these factors was a gain in the amount of approximately
$180,000 related to the dissolution of the wholly owned subsidiaries in Poland
and Taiwan. The entity in Poland has not been operational since 1997, and the
entity in Taiwan operated only as a sales agency office.
Fuel Tech recorded a tax benefit of $114,000 in 2001 related to the Italian
subsidiary. There were no domestic income taxes recorded in 2001 as Fuel Tech
recorded a net loss for the year. Fuel Tech had $39.9 million in United States
federal income tax loss carryforwards as of December 31, 2001, the deferred tax
benefit of which has been offset by a valuation allowance in Fuel Tech's balance
sheet.
11
LIQUIDITY AND CAPITAL RESOURCES
Fuel Tech's cash and cash equivalents were approximately $10.9 million at
December 31, 2002 versus $9.3 million at December 31, 2001. Operating activities
provided $3.0 million of cash in 2002 primarily due to Fuel Tech's operating
profits. Investing activities, which used cash of $1.1 million during the year,
were primarily comprised of the continued investment in equipment and
intellectual property of $1.3 million, which was partially offset by the
aforementioned loan repayment by CDT. Financing activities, which used cash of
$365,000 during the year, were comprised primarily of debt repayments of
$900,000, which were offset by cash received from the exercise of stock options.
Historically, Fuel Tech had financed its operations principally through the
private placement of its Common Shares and the private placement of nil coupon
non-redeemable convertible unsecured loan notes (the "Loan Notes"). The Loan
Notes are convertible at any time into Fuel Tech's common stock. They bear no
interest, have no maturity date and are repayable generally only in the event of
the winding up of Fuel Tech. Fuel Tech has therefore classified the Loan Notes
within shareholders' equity in its balance sheet.
At December 31, 2002, Fuel Tech had cash and cash equivalents of
$10,939,000 and working capital of $13,947,000 versus $9,338,000 and $8,861,000
at the end of 2001, respectively.
Fuel Tech, Inc. (FTI), a wholly owned subsidiary of Fuel Tech, has a $10.0
million revolving credit facility expiring July 31, 2004, which is
collateralized by all personal property owned by FTI. FTI can use this facility
for cash advances and standby letters of credit. Cash advances under this
facility bear interest at the bank's prime rate, or at an optional rate that can
be selected by FTI which is based on the bank's Interbank Offering Rate plus
2.25%.
Also, FTI has a term loan agreement with the same bank for a total
principal balance of $4.5 million. The principal balance was to be repaid in
quarterly installments of $225,000 commencing on December 31, 1999, with a final
principal payment of $1,575,000 due on January 31, 2003. Further, FTI entered
into an interest rate swap transaction that fixed the rate of interest at 8.91%
on approximately 50% of the outstanding principal balance during the term of the
loan. This swap expired on October 22, 2002. The remaining principal balance
bears interest at the bank's prime rate, or an optional rate that can be
selected by FTI, and is based on the bank's Interbank Offering Rate plus 2.25%.
The borrowings under this facility are collateralized by all personal property
owned by FTI.
The $10.0 million revolving credit facility was obtained via an amendment,
effective December 31, 2002, that increased the credit facility from $6.0
million to $10.0 million and extended the agreement until July 31, 2004. The
term loan was paid in full on January 31, 2003 using funds from the line of
credit.
At December 31, 2002, the bank had provided standby letters of credit,
predominantly to customers, totaling approximately $927,028 in connection with
contracts in process. FTI is committed to reimbursing the issuing bank for any
payments made by the bank under these letters of credit. At December 31, 2002,
there were no cash borrowings against the revolving credit facility and
$9,072,972 was available for utilization.
The carrying amount of debt approximates fair value at December 31, 2002.
Interest payments were $156,000, $250,000 and $373,000 for the years ended
December 31, 2002, 2001 and 2000, respectively
Fuel Tech believes that it will have sufficient resources to fund its
growth and operations going forward.
12
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 normal operations of the
business and are not recognized as liabilities in Fuel Tech's consolidated
balance sheet in accordance with generally accepted accounting principles.
Also shown below is the term loan balance at December 31, 2002, which, as
noted previously, was paid in full on January 31, 2003 using funds from the line
of credit.
- ---------------------------- -----------------------------------------------------------------------------------------------
Payments due by period in thousands of US dollars
- ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Contractual Cash Total Less than 1 2-3 years 4-5 years Thereafter
Obligations year
- ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Operating leases $1,367 $347 $ 430 $366 $224
- ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Term Loan 1,800 - 1,800 - -
- ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Total Contractual Cash $3,167 $347 $2,230 $366 $224
Obligations
- ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
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 warrantee 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, 2002,
Fuel Tech has outstanding bank performance guarantees and letters of credit as
noted in the table below:
- ---------------------------- -----------------------------------------------------------------------------------------------
Commitment expiration by period in thousands of US dollars
- ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Commercial Commitments Total Less than 1 2-3 years 4-5 years Thereafter
year
- ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Standby letters of $927 $821 $106 - -
credit and bank
guarantees
- ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
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 significant accounting policies (see Note 1 to the consolidated financial
statements), the following involves a higher degree of judgment and complexity:
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 engineering hours and
equipment construction costs incurred and total estimated hours and costs at
completion. Since the financial reporting of these contracts depends on
estimates, which 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.
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 this Annual Report and in Fuel
Tech's Securities and Exchange Commission filings.
13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 7 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, 2003.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS OF FUEL-TECH N.V.
We have audited the accompanying consolidated balance sheets of Fuel-Tech N.V.
as of December 31, 2002 and 2001, and the related consolidated statements of
operations, cash flows and shareholders' equity for each of the three years in
the period ended December 31, 2002. These consolidated financial statements are
the responsibility of Fuel Tech's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial position of
Fuel-Tech N.V. at December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, Fuel Tech changed its method of accounting for goodwill to
conform with SFAS No. 142, "Goodwill and Other Intangible Assets," and effective
January 1, 2001, changed its method of accounting for derivative financial
instruments to conform with SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities."
Ernst & Young LLP
Chicago, Illinois
February 19, 2003
15
Consolidated Balance Sheets
(in thousands of U.S. dollars, except share data)
2002 2001
--------------------------
December 31
ASSETS
Current assets:
Cash and cash equivalents $10,939 $9,338
Accounts receivable, net of allowances for doubtful
accounts of $107 and $162, respectively 8,849 5,368
Inventories 420 274
Prepaid expenses and other current assets 744 583
--------------------------
Total current assets 20,952 15,563
Equipment, net of accumulated depreciation of $5,118 and
$4,222, respectively 2,123 1,756
Goodwill, net of accumulated amortization of $924 2,119 2,126
Other assets 675 883
--------------------------
Total assets $25,869 $20,328
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of note payable $ - $ 2,700
Accounts payable 5,065 1,978
Accrued liabilities:
Employee compensation 802 513
Deferred revenue - 319
Other accrued liabilities 1,138 1,192
--------------------------
Total current liabilities 7,005 6,702
Note payable 1,800 -
Other liabilities 259 491
--------------------------
Total liabilities 9,064 7,193
Shareholders' equity:
Common stock, $.01 par value, 40,000,000 shares authorized,
19,613,817 and 18,984,097 shares issued, respectively 196 190
Additional paid-in capital 90,315 87,720
Accumulated deficit (73,150) (76,207)
Accumulated other comprehensive income (loss) 10 (68)
Treasury stock (1,098) (1,098)
Nil coupon perpetual loan notes 532 2,598
--------------------------
Total shareholders' equity 16,805 13,135
--------------------------
Total liabilities and shareholders' equity $25,869 $20,328
==========================
See notes to consolidated financial statements.
16
Consolidated Statements of Operations
(in thousands of U.S. dollars, except share data)
2002 2001 2000
------------- ------------- ------------
For the years ended December 31
Net revenues $ 32,627 $ 17,672 $ 21,906
Costs and expenses
Cost of sales 18,232 8,996 11,757
Selling, general and administrative 10,232 8,708 7,934
Research and development 1,455 1,165 843
Closing costs of German subsidiary - - 528
------------ ------------ ------------------
29,919 18,869 21,062
------------ ------------------ ------------------
Operating income (loss) 2,708 (1,197) 844
Income (loss) from equity interest in affiliates 196 (342) (195)
Interest expense (136) (245) (354)
Other income (expense):
Gain on sale of German subsidiary chemical business - - 269
Cumulative translation loss of German subsidiary - - (231)
Other income, net 139 37 82
------------ ------------------ ------------------
Income (loss) before taxes 2,907 (1,747) 415
Income tax benefit 150 114 -
------------ ------------------ ------------------
Net income (loss) $ 3,057 $ (1,633) $ 415
============ ================== ==================
Net income (loss) per common share
Basic $ 0.16 $ (0.09) $ 0.02
Diluted 0.14 (0.09) 0.02
Average number of common shares outstanding
Basic 19,350,000 18,592,000 18,396,000
Diluted 22,437,000 18,592,000 19,621,000
See notes to consolidated financial statements.
17
Consolidated Statements of Shareholders' Equity
(in thousands of U.S. dollars, except share data in thousands)
Accumulated
Common Stock Additional Other Treasury Stock Nil Coupon
------------ Paid-in Accumulated Comprehensive -------------- Perpetual
Shares Amount Capital Deficit Income (Loss) Shares Amount Loan Notes Total
-----------------------------------------------------------------------------------------------------
Balance at January 1, 18,328 $183 $85,692 $ (74,989) $ (25) 94 $ (1,058) $3,888 $ 13,691
2000
Comprehensive income:
Net income 415 415
Foreign currency
translation
Adjustments 122 122
----------
Comprehensive income 537
Conversion of nil coupon
perpetual loan notes
into common stock 7 - 68 (68) -
Exercise of stock options 192 2 337 339
------------------------------------------------------------------------------------------------------
Balance at December 31, 18,527 $185 $86,097 $ (74,574) $ 97 94 $ (1,058) $3,820 $ 14,567
2000
-----------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (1,633) (1,633)
Adjustment for fair
value of derivative (42) (42)
Foreign currency
translation
adjustments (123) (123)
----------
Comprehensive loss (1,798)
Conversion of nil coupon
perpetual loan notes
into common stock 200 2 1,220 (1,222) -
Exercise of stock options 216 3 403 406
Other 41 (30) (40) (40)
------------------------------------------------------------------------------------------------------
Balance at December 31,
2001 18,984 $190 $87,720 $(76,207) $ (68) 64 $ (1,098) $2,598 $13,135
------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net income 3,057 3,057
Adjustment for fair
value of derivative 42 42
Foreign currency
translation
adjustments 36 36
----------
Comprehensive income 3,135
Conversion of nil coupon
perpetual loan notes
into common stock 387 4 2,062 (2,066) -
Exercise of stock options 243 2 533 535
Other 46
------------------------------------------------------------------------------------------------------
Balance at December 31, 19,614 $196 $90,315 $(73,150) $ 10 110 $ (1,098) $ 532 $16,805
2002 ======================================================================================================
See notes to consolidated financial statements.
18
Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)
2002 2001 2000
-----------------------------------
For the years ended December 31
OPERATING ACTIVITIES
Net income (loss) $ 3,057 $ (1,633) $ 415
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 902 769 601
Amortization 41 375 382
Provision for doubtful accounts 289 44 233
Loss on equipment disposals/impaired assets 186 156 82
(Income) loss from equity interest in affiliates (196) 342 195
Income taxes (150) - -
Closing reserve for German subsidiary - - 528
Cash payments against German subsidiary closing reserve (20) (26) (277)
Gain on sale of German subsidiary chemical business - - (269)
Cumulative translation (gain) loss - (90) 231
Changes in operating assets and liabilities:
Accounts receivable (3,813) 2,110 1,758
Inventories, prepaid expenses, other current assets
and other noncurrent assets (214) 422 (334)
Accounts payable, accrued liabilities, deferred
revenue and other noncurrent liabilities 2,912 (417) (1,957)
Other 7 8 3
------------------------------------
Net cash provided by operating activities 3,001 2,060 1,591
INVESTING ACTIVITIES
Investment in and loans to CDT 250 (125) (350)
Investment in Fuel Tech CS GmbH - - (116)
Proceeds from sale of German subsidiary's chemical - - 122
business
Proceeds from sale of equipment 17 - -
Purchases of equipment and patents (1,338) (1,016) (774)
------------------------------------
Net cash used in investing activities (1,071) (1,141) (1,118)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 535 406 339
Purchase and retirement of nil coupon loan notes - - -
Purchase of treasury shares - (40) -
Repayment of borrowings (900) (900) (675)
------------------------------------
Net cash used in financing activities (365) (534) (336)
Effect of exchange rate fluctuations on cash 36 (34) (109)
------------------------------------
Net increase in cash and cash equivalents 1,601 351 28
Cash and cash equivalents at beginning of year 9,338 8,987 8,959
------------------------------------
Cash and cash equivalents at end of year $ 10,939 $ 9,338 $ 8,987
====================================
See notes to consolidated financial statements.
19
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies
Organization
Fuel-Tech N.V. ("Fuel Tech") is a holding company primarily in the business
of air pollution control. Fuel Tech's primary focus, through its wholly owned
subsidiary, Fuel Tech, Inc. ("FTI"), 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 CHEM is based on Fuel Tech's proprietary
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 recently
introduced a software product under the ACUITIV trade name that allows users of
high-end engineering software to visualize complex data sets in an immersive,
virtual reality environment. 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.
For the years ended December 31, 2002, 2001, and 2000, 12%, 25%, and 20% of
Fuel Tech's revenues, respectively, were derived from international markets,
principally in Europe and Asia.
Basis of Presentation
The consolidated financial statements include the accounts of Fuel Tech and
its wholly owned subsidiaries. All intercompany transactions have been
eliminated.
Reclassifications
Certain amounts included in prior year financial statements have been
reclassified to conform to the current year presentation.
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.
Foreign Currency Translation
The functional currency for Fuel Tech's foreign subsidiaries is the
respective local currency. Accordingly, assets and liabilities are translated
into U.S. dollars at current exchange rates, and revenues and expenses are
translated using average rates of exchange prevailing during the year.
Adjustments resulting from translation of financial statements denominated in
currencies other than the U.S. dollar are included in accumulated other
comprehensive income or loss. Foreign currency transaction gains and losses are
included in the determination of net income.
Cash Equivalents and Financial Instruments
Fuel Tech considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At December 31, 2002,
substantially all of Fuel Tech's cash and cash equivalents are on deposit with
three financial institutions. All financial instruments are reflected in the
accompanying balance sheets at amounts that approximate fair market value.
20
Derivative Financial Instruments
Effective January 1, 2001, Fuel Tech adopted SFAS 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in
accumulated other comprehensive income or loss, and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings.
Interest Rate Risk Management:
Fuel Tech is exposed to interest rate risk due to its long-term debt
arrangement. Fuel Tech used an interest rate derivative instrument (an interest
rate swap) to manage exposure to interest rate changes. Fuel Tech had entered
into an interest rate swap transaction that fixed the rate of interest at 8.91%
on approximately 50% of the outstanding principal balance during the term of the
loan. The term of the swap was from October 22, 1999 until October 22, 2002, at
which date it expired. At the date of adoption, January 1, 2001, Fuel Tech
recorded the fair value of the interest rate swap, a credit of approximately
$20,000, as an "other liability" with a corresponding decrease to "accumulated
other comprehensive income."
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 contracts under the percentage of
completion method. At December 31, 2002 and 2001, unbilled receivables were
approximately $1,225,000 and $2,057,000, respectively. The allowance for
doubtful accounts is established based on Fuel Tech's historical level of
write-off activity.
21
Goodwill and Other Intangibles
The goodwill recognized as a result of prior transactions was being
amortized by the straight-line method over periods of nine and ten years.
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 will no longer be amortized but will be reviewed annually, or more
frequently if indicators arise, for impairment. In connection with the adoption
of FASB No. 142, Fuel Tech completed the required transitional and annual
goodwill impairment testing using the market capitalization methodology. Based
on the testing performed, no impairment was indicated. The following is a
reconciliation of 2001 and 2000 net earnings and basic and diluted earnings per
share between the amounts previously reported by Fuel Tech and the adjusted
amounts that would have been reported if SFAS No. 142 had been applied in prior
periods.
For the twelve months
ended December 31
--------------------------------
2001 2000
--------------------------------
Reported net (loss) income $ (1,633,000) $ 415,000
Add back: Goodwill amortization 334,000 334,000
--------------------------------
Adjusted net (loss) income $ (1,299,000) $ 749,000
================================
Basic earnings per share:
Reported net (loss) income $ (.09) $ .02
Add back: Goodwill amortization .02 .02
--------------------------------
Adjusted net (loss) income $ (.07) $ .04
================================
Diluted earnings per share:
Reported net (loss) income $ (.09) $ .02
Add back: Goodwill amortization .02 .02
--------------------------------
Adjusted net (loss) income $ (.07) $ .04
================================
Further, on October 1, 2002, Fuel Tech completed its annual fair value
measurement test, and there was no evidence of impairment.
Other intangibles, which are included with other assets on the consolidated
balance sheet, consist principally of third-party costs related to the
development of patent rights. These costs are being amortized by 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. Further, the
estimated amortization expense related to Fuel Tech's intangible patent assets
is expected to approximate $40,000 per year for the five-year period ending
December 31, 2007.
Equipment
Equipment is stated on the basis of cost. Provisions for depreciation are
computed by the straight-line method, using estimated useful lives as follows:
Laboratory equipment......................................... 5-10 years
Furniture and fixtures....................................... 3-10 years
Computer equipment and software.............................. 3-5 years
Field equipment.............................................. 3-4 years
Vehicles..................................................... 3 years
Accounting for the Impairment of Long-Lived Assets
Fuel Tech reviews long-lived assets and certain intangible assets for
impairment 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. The impact of such
losses on Fuel Tech was $90,000 and $139,000 for the years ended December 31,
2002 and 2001, respectively.
22
Revenue Recognition
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 engineering hours and
equipment construction costs incurred and total estimated hours and 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. 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.
Distribution Costs
Fuel Tech classifies shipping and handling costs in cost of sales in the
consolidated statement of operations.
Stock-Based Compensation
Fuel Tech accounts for stock option grants in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Under Fuel Tech's current plans, options may be granted at not less
than the fair market value on the date of grant, and therefore, no compensation
expense is recognized for the stock options granted.
If compensation expense for Fuel Tech's plans had been determined based on
the fair value at the grant dates for awards under its plans, consistent with
the method described in SFAS No. 123, Fuel Tech's net income (loss) and income
(loss) per share would have been adjusted as follows for the years ended
December 31:
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
(in thousands) 2002 2001 2000
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
Net income (loss)
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
As reported $3,057 $(1,633) $415
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
As adjusted 2,083 (2,329) (103)
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
Basic and diluted income
(loss) per share:
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
Basic - as reported $.16 $(.09) $.02
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
Basic - as adjusted $.11 $(.13) $(.01)
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
Diluted - as reported $.14 $(.09) $.02
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
Diluted - as adjusted $.09 $(.13) $(.01)
- ---------------------------- ------------------------- ----------------- ------------------ ----------------
In accordance with the provisions of SFAS No. 123, the "As adjusted"
disclosures include only the effect of stock options granted after 1994. The
application of the "As adjusted" disclosures presented above are not
representative of the effects SFAS No. 123 may have on such operating results in
future years due to the timing of stock option grants and considering that
options vest over a period of immediately to five years.
Basic and Diluted Earnings Per Common Share
Basic earnings per share excludes the dilutive effects of stock options and
of the nil coupon non-redeemable convertible unsecured loan notes (see Note 4).
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):
- -------------------------------------------------- -------------------------- ------------------------ ---------------------
2002 2001 2000
- -------------------------------------------------- -------------------------- ------------------------ ---------------------
Basic weighted-average shares 19,350 18,592 18,396
- -------------------------------------------------- -------------------------- ------------------------ ---------------------
Conversion of unsecured loan notes 85 - 483
- -------------------------------------------------- -------------------------- ------------------------ ---------------------
Unexercised options and warrants 3,002 - 742
- -------------------------------------------------- -------------------------- ------------------------ ---------------------
Diluted weighted-average shares 22,437 18,592 19,621
- -------------------------------------------------- ========================== ======================== =====================
23
2. TAXATION
At December 31, 2002, FTI had tax losses available for offset against
future years' earnings of approximately $32.4 million in the United States. For
financial statement purposes, a valuation allowance has been recorded to offset
the tax benefit of these carryforwards. Under the provisions of the United
States Tax Reform Act of 1986, utilization of Fuel Tech's United States federal
income tax loss carryforwards may be limited should ownership changes exceed 50%
within a three-year period. The United States federal tax loss carryforwards
expire as follows (in thousands):
2003 $14,925
2004 4,639
2005 5,467
2006 1,987
2007 2,325
2008 1,480
2009 220
2010 309
2011 884
2012 40
2016 117
-------
$32,393
The components of income (loss) before taxes for the years ended December
31 are as follows (in thousands):
- --------------------------------------------- ------------------- ------------------- --------------------
Origin of income (loss) before taxes 2002 2001 2000
- --------------------------------------------- ------------------- ------------------- --------------------
United States of America $3,689 $ (9) $ 1,211
- --------------------------------------------- ------------------- ------------------- --------------------
Foreign (782) (1,738) (796)
- --------------------------------------------- ------------------- ------------------- --------------------
Income (loss) before taxes $2,907 $(1,747) $ 415
- --------------------------------------------- =================== =================== ====================
A reconciliation between the (benefit) provision for income taxes
calculated at the U.S. federal statutory income tax rate and the consolidated
(benefit) provision in the consolidated statements of operations for the years
ended December 31 is as follows (in thousands):
- ------------------------------------ ---------------- --------------- ----------------
2002 2001 2000
- ------------------------------------ ---------------- --------------- ----------------
Provision (benefit) at the U.S. $ 1,040 $ (611) $ 145
federal statutory rate
- --------------------------------------------------------------------------------------
Foreign losses without tax benefit 274 608 444
- --------------------------------------------------------------------------------------
Valuation allowance adjustment (1,314) - (424)
- --------------------------------------------------------------------------------------
State income taxes (150) - (207)
- --------------------------------------------------------------------------------------
Foreign (benefit) income taxes - (114) 25
- --------------------------------------------------------------------------------------
Other - 3 17
- --------------------------------------------------------------------------------------
(Benefit) provision for income taxes $ (150) $ (114) $ -
- ------------------------------------------============================================
Fuel Tech recorded an income tax benefit of $150,000 in 2002, which
represented a reduction in the reserve for prior years' state income tax
refunds receivable, as the refunds were collected in 2002. The benefit of
$114,000 recorded in 2001 was related to its Italian subsidiary.
The reduction in the valuation allowance in 2002 and 2000 results primarily
from the utilization of tax loss carryforwards where a valuation allowance had
previously been provided. The state income tax credit in 2000 results from
recording the benefit of net operating losses generated in prior years, which
were carried forward and applied at the state level.
Temporary differences arising from treating income and expense items for
financial reporting purposes differently than for tax return purposes are not
material.
24
3. COMMON STOCK
At December 31, 2002, Fuel Tech had 19,613,817 Common Shares outstanding,
with an additional 84,787 shares reserved for issuance upon conversion of the
nil coupon non-redeemable convertible unsecured loan notes (see Note 4) and
2,207,000 shares reserved for issuance upon the exercise of stock options,
1,220,625 of which are currently exercisable (see Note 5).
4. NIL COUPON NON-REDEEMABLE CONVERTIBLE UNSECURED LOAN NOTES
At December 31, 2002 and 2001, Fuel Tech had $533,500 and $2,658,500
principal amount of nil coupon non-redeemable convertible unsecured perpetual
loan notes (the "Loan Notes") outstanding, respectively. The Loan Notes are
convertible at any time into shares of Fuel Tech's common stock 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.
During 2002 and 2001, approximately $2,125,000 and $1,300,000 principal
amount of Loan Notes were converted into 185,937 and 200,000 shares of Fuel
Tech's common stock, respectively.
5. STOCK OPTIONS AND WARRANTS
Fuel Tech has granted stock options under the 1993 Incentive Plan ("1993
Plan"). Under the 1993 Plan, 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 1993 Plan may be such of 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 1998 amendment to the 1993 Plan is 12.5% of outstanding
shares. In 2002, 2001 and 2000, 424,000, 472,500 and 406,000 options,
respectively, were granted to employees and directors.
25
The Black-Scholes option-pricing model was used to estimate the fair value
of employee stock options for the FAS No. 123 proforma disclosure in Note 1.
This model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition,
option-pricing models require the input of highly subjective assumptions
including the expected stock price volatility. Because Fuel Tech's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.
The fair value of each option grant, for "As adjusted" disclosure purposes
in Note 1, was estimated on the date of grant using the modified Black-Scholes
option pricing model with the following weighted-average assumptions:
2002 2001 2000
------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 2.60% 4.40% 5.10%
Expected volatility 74.7% 115.1% 96.2%
Expected life of option 4 years 4 years 4 years
The following table presents a summary of Fuel Tech's stock option activity
and related information for the years ended December 31:
2002 2001 2000
Weighted- Weighted- Weighted
Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price
-----------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,155,500 $ 2.34 2,052,000 $ 2.34 1,874,500 $ 2.39
Granted 424,000 5.82 472,500 2.15 406,000 2.10
Exercised (243,250) 2.20 (215,500) 1.89 (192,000) 1.75
Expired or forfeited (129,250) 6.23 (153,500) 2.71 (36,500) 5.38
-----------------------------------------------------------------------------------------------
Outstanding at end of year 2,207,000 $ 2.71 2,155,500 $ 2.34 2,052,000 $ 2.34
-----------------------------------------------------------------------------------------------
Exercisable at end of year 1,220,625 $ 2.30 1,086,250 $ 2.66 965,500 $ 2.73
Weighted -average fair value of
options granted during the year $ 3.31 $ 1.66 $ 1.47
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted- Weighted-
Range of Number of Remaining Average Number of Average
Exercise Prices Options Contractual Life Exercise Price Options Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
$1.375 - $3.38 1,733,000 6.20 years $ 1.92 1,100,625 $ 1.98
$3.595 - $6.27 474,000 9.18 years $ 5.59 120,000 $ 5.15
-------------- --------------
$1.375 - $6.27 2,207,000 6.84 years $ 2.71 1,220,625 $ 2.30
- -------------------------------------------------------------------------------------------------------------------------
In addition to the above, Fuel Tech has 2,710,000 warrants outstanding to
purchase additional shares of Fuel Tech's common stock at an exercise price of
$1.75. The warrants expire on April 30, 2008.
26
6. COMMITMENTS
Operating Leases
Fuel Tech leases office space, autos and certain equipment under agreements
expiring on various dates through 2009. Future minimum lease payments at
December 31, 2002, are as follows (in thousands):
---------------------- ----------------------
Year of Payment Amount
---------------------- ----------------------
2003 $347
---------------------- ----------------------
2004 248
---------------------- ----------------------
2005 182
---------------------- ----------------------
2006 186
---------------------- ----------------------
2007 180
---------------------- ----------------------
thereafter 224
---------------------- ----------------------
For the years ended December 31, 2002, 2001 and 2000, rent expense
approximated $584,000, $581,000 and $556,000, respectively.
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 warrantee period defined in the contract, or
- in support of the system performance criteria that are defined in the
contract
As of December 31, 2002, Fuel Tech has outstanding bank performance
guarantees and letters of credit in the amount of $712,000 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.
7. DEBT FINANCING
Fuel Tech, Inc. (FTI) has a $10.0 million revolving credit facility
expiring July 31, 2004, which is collateralized by all personal property owned
by FTI. FTI can use this facility for cash advances and standby letters of
credit. Cash advances under this facility bear interest at the bank's prime
rate, or at an optional rate that can be selected by FTI which is based on the
bank's Interbank Offering Rate plus 2.25%.
Also, FTI has a term loan agreement with the same bank for a total
principal balance of $4.5 million. The principal balance was to be repaid in
quarterly installments of $225,000 commencing on December 31, 1999, with a final
principal payment of $1,575,000 due on January 31, 2003. Further, FTI entered
into an interest rate swap transaction that fixed the rate of interest at 8.91%
on approximately 50% of the outstanding principal balance during the term of the
loan. This swap expired on October 22, 2002. The remaining principal balance
bears interest at the bank's prime rate, or an optional rate that can be
selected by FTI, and is based on the bank's Interbank Offering Rate plus 2.25%.
The borrowings under this facility are collateralized by all personal property
owned by FTI.
The $10.0 million revolving credit facility was obtained via an amendment,
effective December 31, 2002, that increased the credit facility from $6.0
million to $10.0 million and extended the agreement until July 31, 2004. The
term loan was paid in full on January 31, 2003 using funds from the line of
credit.
At December 31, 2002, the bank had provided standby letters of credit,
predominantly to customers, totaling approximately $927,000 in connection with
contracts in process. FTI is committed to reimbursing the issuing bank for any
payments made by the bank under these letters of credit. At December 31, 2002,
there were no cash borrowings under the revolving credit facility and
approximately $9,073,000 was available for utilization.
The carrying amount of debt approximates fair value at December 31, 2002.
Interest payments were $156,000, $250,000 and $373,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
27
8. RELATED PARTY TRANSACTIONS
Fuel Tech has a 15.2% common stock ownership interest in Clean Diesel
Technologies, Inc. (CDT), at December 31, 2002. Fuel Tech is precluded from
selling its interest in CDT except pursuant to a registration statement, or in
an exempt private placement within the limitations of Rule 144 of the Securities
and Exchange Commission.
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, 2002, 2001 and 2000, $69,000, $73,000 and
$78,000, respectively, was charged to CDT as a management fee.
On November 11, 1998, a pre-existing $495,000 demand note, with interest at
8%, and a $500,000 bridge loan and interest thereon of $20,000 were converted
into 2,029 shares of Series A Convertible Preferred stock in CDT. Each preferred
share was convertible into 333.33 shares of CDT common stock. In April of 2000,
Fuel Tech purchased 300 additional convertible preferred shares of CDT for
$225,000, which had the same convertible provisions noted above. As a result of
the continuing losses incurred by CDT, Fuel Tech recorded a loss of $225,000 in
2000 based on its pro-rata share of CDT's operating results for the year. The
CDT common and preferred stock has no carrying value in Fuel Tech's balance
sheet as of December 31, 2002 and 2001, and the 15.2% investment is being
accounted for using the cost method.
In November 2000, Fuel Tech committed to lend CDT $250,000 as part of a
$1.0 million loan facility between CDT, Fuel Tech and other entities. In
December 2000, Fuel Tech loaned CDT $125,000 as its share of the first $500,000
draw down under the terms of the loan facility. This amount was included in the
prepaid expenses and other current assets line item on the consolidated balance
sheet as of December 31, 2000. In March 2001, Fuel Tech loaned CDT $125,000 as
its share of the second $500,000 draw down under the terms of the loan facility.
The principal balance on both loan installments, with accrued interest at 10%
per annum, was payable on May 14, 2002. For its participation in the loan
facility and for its $250,000 contribution, Fuel Tech received 25,000 warrants
to purchase CDT common stock. The warrants have an exercise price of $2.00 and
can be exercised on or before November 14, 2010. Because of the continuing
losses incurred by CDT, the carrying value of the loans was reduced to $0 as of
December 31, 2001 based on Fuel Tech's pro-rata share of the losses incurred.
Consequently, a $250,000 loss was recorded during 2001. In the first quarter of
2002, CDT repaid the entire amount of the loans plus interest. The payment of
the $250,000 principal value of the loan was recorded as income in the first
quarter of 2002, along with approximately $24,000 in interest income. The value
assigned to these warrants on the consolidated balance sheet at December 31,
2002 and 2001, is not significant.
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 $9,000 in royalties. Fuel Tech intends to
record royalties from CDT on a cash basis.
On April 30, 1998, Fuel Tech entered into an agreement with American Bailey
Corporation (ABC) for it to provide certain management and consulting services
to Fuel Tech. Principals of ABC currently own 24% of Fuel Tech's Common Shares
and also own warrants to purchase an additional 2.7 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. Ralph Bailey, Chairman and
CEO of Fuel Tech, is Chairman of ABC.
In the second quarter of 2000 Fuel Tech announced that it would concentrate
its European resources in its Italian company, Fuel Tech Srl, and shut down Fuel
Tech GmbH, a wholly owned subsidiary in Germany. As part of the restructure,
Fuel Tech GmbH recorded a charge in 2000 of $528,000 related to the closure of
the entity. The charge included accruals of $343,000 primarily for severance
obligations for four employees, lease termination costs and other costs related
to the closure of the entity. This charge was recorded as a reduction to
operating income in the consolidated statement of operations. As of June 30,
2002, all closing costs, which approximated the accrual balance, have been paid.
Also as part of the restructure, Fuel Tech GmbH's NOxOUT chemical business
was sold to a new entity in Germany (Fuel Tech CS GmbH) in which Fuel Tech holds
a 49% ownership interest that was acquired for $116,000. The selling price was
dependent on the future results of the chemical business, but was not to be less
than 1,250,000 Deutchmarks (approximately $600,000), paid out over three years.
A gain on this transaction of $269,000 was recorded in other income and expense
in the 2000 consolidated statement of operations.
28
9. 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 $180,000, $150,000 and $289,000 in
2002, 2001 and 2000, respectively.
10. BUSINESS SEGMENT, GEOGRAPHIC AND QUARTERLY FINANCIAL DATA
BUSINESS SEGMENT FINANCIAL DATA
Fuel Tech's business is organized into two operating segments providing air
pollution control chemicals and equipment and software. The software segment
does not meet the materiality test for disclosure purposes.
Information concerning Fuel Tech's operations by geographic area is
provided below. Operating earnings represent sales less cost of products sold
and operating expenses. Foreign operating expenses include direct expenses
incurred outside of the United States of foreign corporations controlled by Fuel
Tech plus an allocation of domestic selling and general expenses directly
related to the foreign operations. Assets are those directly associated with
operations of the geographic area.
For the years ended December 31 2002 2001 2000
Revenues:
United States $ 28,724,000 $ 13,246,000 $ 17,550,000
Foreign 3,903,000 4,426,000 4,356,000
------------ ------------ ------------
$ 32,627,000 $ 17,672,000 $ 21,906,000
============ ============ ============
Operating (Loss) Earnings:
United States $ 2,654,000 $ (1,143,000) $ 1,506,000
Foreign 54,000 (54,000) (662,000)
------------ ------------ ------------
$ 2,708,000 $ (1,197,000) $ 844,000
============ ============ ============
December 31 2002 2001 2000
Assets:
United States $ 24,393,000 $ 18,952,000 $ 19,640,000
Foreign 1,476,000 1,376,000 3,449,000
------------ ------------ ------------
$ 25,869,000 $ 20,328,000 $ 23,089,000
============ ============ ============
29
QUARTERLY FINANCIAL DATA
Set forth below is the unaudited quarterly financial data for the fiscal years
ended December 31, 2002 and 2001.
For the quarter ended: March 31 June 30 September 30 December 31
(in thousands, except share data)
2002:
Net sales $ 5,221 $ 8,021 $ 8,033 $ 11,352
Cost of sales 2,583 4,130 4,462 7,057
Net income 312 1,029 379 1,337
Net income per common share:
Basic $ .02 $ .05 $ .02 $ .07
Diluted $ .01 $ .05 $ .02 $ .06
2001:
Net sales $ 3,155 $ 4,741 $ 4,194 $ 5,582
Cost of sales 1,717 2,225 1,984 3,070
Net (loss) income (1,042) 71 (256) (406)
Net (loss) income per common share:
Basic $ (.06) $ - $ (.01) $ (.02)
Diluted $ (.06) $ - $ (.01) $ (.02)
30
11. PARENT COMPANY FINANCIAL STATEMENTS
Balance Sheets (at December 31) 2002 2001
------------ ------------
Assets:
Receivable and other current assets $ 72,000 $ 34,000
Investments in subsidiaries 16,915,000 13,319,000
------------ ------------
Total assets $ 16,987,000 $ 13,353,000
============ ============
Liabilities and shareholders' equity
Liabilities
Accounts payable and accrued expenses 182,000 218,000
Shareholders' equity 16,805,000 13,135,000
------------ ------------
Total liabilities and shareholders' equity $ 16,987,000 $ 13,353,000
============ ============
Statements of Operations (for the years ended December 31) 2002 2001 2000
------------ ------------ ------------
Loss from operations $ (710,000) $ (952,000) $ (750,000)
Interest and other income, net 222,000 129,000 -
Income (loss) from equity investment in subsidiary 3,545,000 (810,000) 335,000
------------ ------------ ------------
Net income (loss) $ 3,057,000 $ (1,633,000) $ (415,000)
============ ============ ============
Statements of Cash Flow (for the years ended December 31) 2002 2001 2000
------------ ------------ ------------
Operating activities:
Net cash used in operating activities $ (757,000) $ (521,000) $ (511,000)
------------ ------------ ------------
Investing activities:
Investment in and loans to CDT 250,000 (125,000) (350,000)
Investment in Fuel Tech CS GmbH - - (116,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities 250,000 (125,000) (466,000)
Financing activities:
Dividend from FTI (28,000) 280,000 638,000
Exercise of stock options 535,000 406,000 339,000
Purchase of treasury stock/other - (40,000) -
Purchase and retirement of nil coupon loan notes - - -
------------ ------------ ------------
Net cash provided by investing activities 507,000 646,000 977,000
Net decrease in cash and cash equivalents - - -
Cash and cash equivalents at beginning of period - - -
------------ ------------ ------------
Cash and cash equivalents at end of period $ - $ - $ -
============ ============ ============
Basis of Presentation:
In the parent company financial statements, Fuel Tech's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. Fuel Tech's share of net income of
its unconsolidated subsidiaries is included in consolidated income using the
equity method. The parent company financial statements should be read in
conjunction with Fuel Tech's consolidated financial statements.
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 2003 Annual General 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.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and is incorporated by reference
excluding, however, the information under the captions "Report of the Board of
Directors on Executive Compensation" and "Performance Graph," which is not
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
32
PART IV
Item 14. CONTROLS AND PROCEDURES
Fuel Tech maintains disclosure controls and procedures and internal
controls designed to ensure that information required to be disclosed in Fuel
Tech's filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Fuel Tech's principal executive and
financial officers have evaluated Fuel Tech's disclosure controls and procedures
within 90 days of the filing of this Annual Report on Form 10-K and concluded
that such disclosure controls and procedures are effective for the purpose for
which they were designed.
Subsequent to the date of such evaluation, there were no significant
changes in internal controls or other factors that could significantly affect
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(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.
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for Years Ended December 31,
2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000 Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
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
+ 1.0 Articles of Association of Fuel-Tech N.V. (in Dutch and English) as amended through April 27, 1998
* 2.1 Instrument Constituting US $19,200,000 Nil Coupon Non-Redeemable Convertible Unsecured Loan Notes
of Fuel-Tech N.V., dated December 21, 1989
* 2.2 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
** 2.3 Instrument Constituting US $6,000,000 Nil Coupon Non-Redeemable Convertible Unsecured Loan Notes of
Fuel-Tech N.V., dated March 12, 1993
** 2.4 Form of Warrants issued April 30, 1998 evidencing right to purchase 3 million shares of Fuel-Tech
N.V. common stock.
* 3.1 Form of Indemnity Agreement between Fuel-Tech N.V. and directors and officers
* 3.2 Fuel Tech, Inc. Form of 1992 Substitute Stock Option Agreement
* 3.3 Fuel-Tech N.V. Form of 1992 Substitute Stock Option Agreement
* 3.4 Fuel-Tech N.V. Form of 1993 Stock Option Agreement as amended through August 3, 1999
& 3.5 The 1993 Incentive Plan of Fuel-Tech N.V. as amended through August 3, 1999
* 3.6 License Implementation Agreement dated June 10, 1991 among NFT, Nalco Fuel Tech, B.V., and Foster
Wheeler Energy Corporation
* 3.7 License Implementation Agreement dated April 23, 1991 among NFT, Nalco Fuel Tech, B.V., and R-C
Environmental Services & Technologies, a division of Research Cottrell, Inc.
* 3.8 License Implementation Agreement dated December 20, 1990 between NFT and RJM Corporation
* 3.9 License Implementation Agreement dated May 22, 1991 among NFT, Nalco Fuel Tech, B.V., and
Wheelabrator Air Pollution Control, Inc.
* 3.10 Agreement dated July 3, 1990 between NFT and Arcadian Corporation
* 3.11 License Agreement dated September 12, 1991 between NFT and BP Chemicals Inc.
* 3.12 Agreement dated November 5, 1990 between NFT and Cargill, Incorporated
* 3.13 Agreement dated August 30, 1990 between NFT and Nitrochem, Inc.
* 3.14 License Agreement dated December 27, 1990 between NFT and Union Oil Company of California dba Unocal
* 3.15 Agreement dated September 30, 1990 between NFT and W.H. Shurtleff Company
** 3.16 Securities Purchase Agreement dated as of March 23, 1998, between Fuel-Tech N.V., and the several
Investors signatory thereto, including exhibits.
33
** 3.17 Purchase Agreement dated as of March 23, 1998, between Nalco FT, Inc., Nalco Chemical Company and
Fuel Tech, Inc., including exhibits
#& 3.18 License Agreement dated November 18, 1998 between The Gas Technology Institute and Fuel Tech, Inc.
relating to the FLGR Process
#& 3.19 Amendment No. 1, dated February 28, 2000, to License Agreement of November 18, 1998 between The Gas
Technology Institute and Fuel Tech, Inc.
o 3.20 The Amended and Restated Business Loan Agreement dated as of August 31, 1999 between Bank of America,
National Association and FTI; as amended through December 31, 2002
oo 19.2 Those portions of the Proxy Statement to be distributed to Shareholders of Fuel Tech for the 2003 Annual
General Meeting of Shareholders of Fuel-Tech N.V. specifically incorporated by reference into this
Annual Report on Form 10-K.
o 23.1 Consent of Ernst & Young LLP
* Filed with Registration Statement on Form 20-F, No. 000-21724 of 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 To be filed with the Registrant's definitive proxy material for
its 2003 Annual General Meeting
# Confidential information removed and filed separately
& Filed with Registrant's report on Form 10-K for the year 1999
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Fuel Tech during the fourth quarter of
2002.
34
SIGNATURES AND CERTIFICATIONS
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.
The undersigned in their capacities as Chief Executive Officer and
Chief Financial Officer of the Registrant do hereby certify that:
(i) this report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(ii) information contained in the report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant as of, and for, the periods presented in the report.
Date: March 14, 2003 By: /s/ Ralph E. Bailey
-------------------
Ralph E. Bailey
Chairman, Managing Director
and Chief Executive Officer
Date: March 14, 2003 By: /s/ Scott M. Schecter
---------------------
Scott M. Schecter
Chief Financial Officer,
Vice President and
Treasurer
I, Ralph E. Bailey, certify that:
1. I have reviewed this annual report on Form 10-K of Fuel-Tech N.V.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules l3a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
35
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 14, 2003 By: /s/ Ralph E. Bailey
-------------------
Ralph E. Bailey
Chairman, Managing Director
and Chief Executive Officer
I, Scott M. Schecter, certify that:
1. I have reviewed this annual report on Form 10-K of Fuel-Tech N.V.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules l3a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 14, 2003 By: /s/ Scott M. Schecter
----------------------
Scott M. Schecter
Chief Financial Officer,
Vice President and
Treasurer
36
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 N.V. and in the capacities and on the date indicated.
/s/ Ralph E. Bailey Chairman, Managing Director and Chief Executive Officer
------------------- (Principal Executive Officer)
Ralph E. Bailey
/s/ Scott M. Schecter Chief Financial Officer, Vice President and Treasurer
--------------------- (Principal Financial and Accounting Officer)
Scott M. Schecter
/s/ Douglas G. Bailey Managing Director
---------------------
Douglas G. Bailey
/s/ Thomas J. Shaw Managing Director
------------------
Thomas J. Shaw
/s/ Miguel Espinosa Managing Director
Miguel Espinosa
/s/ Samer S. Khanachet Managing Director
----------------------
Samer S. Khanachet
/s/ Charles W. Grinnell Managing Director, Vice President, General Counsel and Corporate Secretary
-----------------------
Charles W. Grinnell
/s/ John R. Selby Managing Director
------------------
John R. Selby
Tarma Trust Management N.V. Managing Director
By: /s/ Robert W. Huyzen
--------------------
Robert W. Huyzen
Managing Director
37