ITEM 1. BUSINESS
The Company
Fuel-Tech N.V., including its subsidiaries (the "Company"), is a technology company active in the business of air pollution control through its wholly owned subsidiary Fuel Tech, Inc. ("FTI") and its affiliate Clean Diesel Technologies, Inc. ("CDT"). 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 oxides of nitrogen ("NOx") reduction and FUEL CHEM(R) Processes. The NOx reduction technologies, which include the NOxOUT(R), NOxOUT CASCADE(R), NOxOUT SCR(R) and FLGR(TM) 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, and 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, 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. FTI's business is materially dependent on the continued existence and enforcement of worldwide air quality regulations.
Clean Diesel Technologies, Inc.
CDT, a Delaware corporation, is a specialty chemical company supplying fuel additives and systems that reduce harmful emissions from internal combustion engines while improving fuel economy. CDT's two main technology areas are Platinum Fuel Catalysts ("PFC's") for emission control and fuel economy improvement in diesel and gasoline-fueled engines and NOx reduction systems for control of NOx emissions from stationary and mobile diesel engines. CDT was formed in 1994 as a wholly owned subsidiary of the Company, which had conducted fundamental work regarding the Company's technologies. CDT was spun off by the Company in a 1995 rights offering. At December 31, 2000, the Company held 21.6% of the equity of CDT in the form of CDT common stock and Series A Convertible preferred stock. CDT is a public company registered under the Securities Act of 1934. CDT's technology was in part acquired by assignment from the Company, which assignment obligates CDT until 2008 to pay to the Company royalties of 2.5% of gross revenues derived from sale of the PFC's.
American Bailey Corporation
American Bailey Corporation ("ABC") performs management services for the Company under an Agreement dated April 30, 1998, as amended. Ralph E. Bailey, Chairman, Chief Executive Officer and Managing Director of the Company, and Douglas G. Bailey, Managing Director of the Company, are shareholders of ABC. See the more detailed information relating to this subject under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement to be distributed in connection with the Company's 2001 Annual General Meeting of Shareholders, which information is incorporated by reference. Also, refer to Note 2 to the consolidated financial statements.
NOx Reduction
Regulations and Markets
The global air pollution control market is estimated by management at more than $18 billion. The domestic U.S. air pollution control market is the primary driver in the Company's business. The Company estimates the domestic market to be $2 billion per year over the next three to four years. 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 Title I - Ozone Non-Attainment (Ozone Transport) of the CAAA, over 1000 utility and large industrial boilers in 19 states must achieve certain NOx reduction targets from 2003 to 2005. Under Title III - Air Toxics of the CAAA, 80 municipal solid waste facilities in the U.S. had to achieve certain NOx reduction targets by December 2000. 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 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.
As noted above, the SIP Call is the federal mandate originally introduced in 1998 to further reduce NOx in 22 states by May 2003. This mandate was an extension of Phase II of Title I of the Clean Air Act Amendments of 1990 (CAAA). On May 14, 1999, the U.S. Circuit Court of Appeals for the District of Columbia Circuit issued a decision and opinion in American Trucking Association, Inc. et al v. Environmental Protection Agency et al (No. 97-1440), in which the Court found that the 1997 EPA adoption of primary and secondary national ambient air quality standards for particulate matter and ozone involved an unconstitutional delegation of Congressional power and remanded the case to the EPA for action. Also, on May 25, 1999 in a separate case, State of Michigan et al v. Environmental Protection Agency (No. 98-1497), the same Court ordered a partial stay of implementation of the SIP Call regulation until further order of the Court. This order was in response to a motion of the plaintiffs to delay implementation of the SIP Call regulation until resolution of their suit challenging that regulation. 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. Subsequent to this court ruling, the stay in the SIP Call was lifted. Although the NOx reduction requirement date was moved back one year to May of 2004, 19 states were required to complete and issue their State Implementation Plans for NOx reduction by late October of 2000. These plans, which the EPA has until October 2001 to approve, will potentially impact 700 to 800 utility boilers and 400 to 500 industrial units.
In February 2001, the Federal 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.
In addition to the SIP Call regulation, the so-called Section 126 Petitions, which enable downwind states to obtain relief from pollutants arising from their upwind neighbors, require major emissions sources in 12 of the 19 aforementioned states to comply with the 85% aggregate NOx reduction requirement by May 1, 2003. Based on these regulatory developments, the Company expects to see project bookings from utilities resume in the first half of 2001 and beyond.
Products
The Company'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 $400 - $1,500/ton of NOx removed.
The Company's NOxOUT CASCADE Process provides for the addition of 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.
The Company'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 Lean Gas Reburn (FLGR), licensed from the Gas Technology Institute on a co-exclusive basis, utilizes injection of natural gas to react with and reduce NOx by 25-40%.
The Company is currently in the process of commercially offering its NOxOUT ULTRA system. The system is designed to safely and economically convert urea to ammonia for use as a reagent in the selective catalytic process (SCR) for NOx reduction. In this fashion, the Company intends to participate in the SCR segment of the SIP Call driven market. Recent local hurdles encountered in the ammonia permitting process have raised concerns regarding the safety of ammonia storage in quantities sufficient to supply SCR.
Sales of the NOx reduction technologies were $17.4 million, $27.5 million and $19.9 million for the years ended December 31, 2000, 1999 and 1998, respectively.
NOx Reduction Competition
Processes competitive with the Company'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 annualized operating costs ranging from $300 - $1,000/ton of NOx removed. Such companies as ABB Ltd., Foster Wheeler Corporation, The Babcock & Wilcox Company, Steam Sales Corporation, and Todd Combustion Ltd. 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 ABB Ltd., 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. The Company 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 for utility applications; annualized operating costs range 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
The Company'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 program, 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 $4.5 million, $5.8 million and $6.0 million for the years ended December 31, 2000, 1999 and 1998 respectively.
Competition
In early 2000, oil prices nearly tripled having a significant effect on oil-fired electric utilities and the pulp and paper market. This price increase caused many customers operating in these markets to switch to natural gas, a less costly fuel at the time, and reduce the capital expenditures and equipment purchases required to participate in FUEL CHEM programs. The market price of natural gas increased dramatically late in 2000, causing many customers to switch back to oil. This, however, occurred too late in the year to have a material positive impact on financial results in 2000.
Competition for the Company's FUEL CHEM product line includes chemicals sold by specialty chemical companies, such as Hercules Incorporated, primarily in the traditional heavy-fuel-oil treatment area. No substantive competition currently exists for the Company's technology for Targeted-In-Furnace-Injection of additives for 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
The Company's Advanced Engineering Services ("AES") continued in 2000 to support the sale of the Company'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 the Company's NOx reduction systems and the application of its FUEL CHEM slag and corrosion control processes. Also, in 2000, the Company augmented its AES staff and equipment with a view toward not only better serving the Company's customers but also to seek other applications for its services. Toward this goal, Virtual Vantage(TM) was developed in 2000. Virtual Vantage embodies the Company's advanced visualization service capabilities, which enable complex data sets to be viewed in a virtual reality environment.
Intellectual Property
See Item 2
ITEM 2. DESCRIPTION OF PROPERTY
The Company's NOxOUT Process is based on the Electric Power Research Institute (EPRI) urea technology embodied in two patents licensed to the Company ("EPRI patents"). One of these patents expired in 1997 and the other expired in 1999. In addition to these, the Company owns 124 patents worldwide, with 2 patent applications pending in the U.S., covering some 41 inventions, 35 related to the NOxOUT Process. These inventions represent significant enhancements of the application and performance of the technologies. Although the EPRI patents and license have expired, the Company believes that the protection provided by the numerous claims in the above referenced patents or patent applications of the Company is substantial and, regardless of the expired EPRI urea patents, affords the Company a significant competitive advantage in the SNCR field. 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 the Company's business.
The Company's most recent NOx reduction technology is Fuel Lean Gas Reburn (FLGR) which is licensed from the Gas Technology Institute in Chicago, Illinois and which expires in November of 2003 with an option to extend the agreement for a seven-year period of time.
Apart from its intellectual property, the property of the Company is not material.
The Company and its subsidiaries operate from leased office and engineering facilities in Curacao, Netherlands Antilles; Batavia, Illinois; Stamford, Connecticut; Essen, Germany; and Milan, Italy.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company has no pending litigation material to its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matters were submitted to a vote of security holders.
PART II ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
The Company's Common Shares have been traded since September 1993 on The NASDAQ Stock Market, Inc. (Small Capitalization) and the Berlin Stock Exchange.
Prices
The table below sets forth the high and low sales prices during each calendar quarter since January, 1999.
2000 High Low ---- ---- --- Fourth Quarter 2.375 1.250 Third Quarter 2.625 1.875 Second Quarter 2.813 1.844 First Quarter 3.500 1.844
---- Fourth Quarter 3.625 1.750 Third Quarter 3.750 1.906 Second Quarter 2.188 0.875 First Quarter 2.375 1.375
Dividends
The Company 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 the Company's Transfer Agent, as of March 2, 2001, there were 441 registered holders of the Company's common stock. Management believes that, on such date, there were approximately 1,800 beneficial holders of the Company'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
The Company 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. The Company also received a business license of unlimited duration that allows the securities of the Company 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 the Company are maintained in United States dollars, however, there are transactions in other currencies.
Taxation
Under the Netherlands Antilles tax code applicable to the Company until at least the fiscal year 2019, the Company'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 the Company. Based on a tax ruling received by the Company, Dutch dividends received will be taxed to the Company 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 the Company 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 the Company 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 the Company'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.
ITEM 6.
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, 2000. The selected financial data should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2000, and "Management's Discussion and Analysis of Financial Condition and Results of Operations. "(1)
(1) Effective April 30, 1998, Fuel Tech, Inc., a wholly owned subsidiary of Fuel-Tech N.V. (the "Company"), purchased Nalco Chemical Company's 50% interest in the Nalco Fuel Tech (NFT) joint venture. As a result of this transaction, the Company now owns 100% of the assets and liabilities of NFT. The 1998 operations of NFT have been consolidated with those of the Company for the entire year. The Company's operating results for 1996 - 1997 reflect the Company's 50% share of operating results on the equity basis of accounting. Refer to Note 2 to the consolidated financial statements.
(2) Shareholders' equity includes outstanding nominal nil coupon non-redeemable perpetual loan notes. See Note 5 to the consolidated financial statements.
(3) Assumes full conversion of the Company's nil coupon non-redeemable perpetual loan notes into shares of the Company's common stock.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background
Effective April 30, 1998, Fuel Tech, Inc. (FTI), a wholly owned subsidiary of Fuel-Tech N.V. (the "Company"), purchased Nalco Chemical Company's 50% interest in the Nalco Fuel Tech (NFT) joint venture. As a result of this transaction, the Company now owns 100% of the assets and liabilities of NFT. The 1998 operations of NFT have been consolidated with those of the Company for the entire year with Nalco's 50% share of NFT's operating results prior to April 30, 1998, included in minority interest.
The purchase price for Nalco's 50% interest in NFT was $1.1 million cash, the issuance of a $3.0 million note and up to $5.5 million in contingent payments based upon the achievement of gross margin targets for 1998 through 2001. Simultaneously with this transaction, principals of American Bailey Corporation, an investment and management company, invested $3.35 million in the Company in exchange for 4.75 million shares of the Company's common stock, and warrants to purchase an additional 3.0 million Common Shares at an exercise price of $1.75 per share. The Company recorded approximately $1.03 million in goodwill from this transaction, including the contingent payment obligation for 1998 of $113,000.
On September 1, 1999, the Company satisfied its remaining obligations to Nalco by paying Nalco approximately $4.5 million, representing the $2.5 million remaining balance on the note plus accrued interest, and a buyout of the balance of the contingent payment obligation for approximately $2.0 million. At the time of the transaction, a maximum of approximately $5.4 million remained outstanding under the contingent payment obligation. This transaction was financed by a $4.5 million term loan from the Company's existing bank (see Note 8 to the consolidated financial statements). As a result of this transaction, the Company recorded approximately $2.0 million of additional goodwill.
2000 versus 1999
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. The Company sells its fuel treatment chemicals through its direct sales force and agents to industrial and utility power-generation facilities.
Net sales in 2000 totaled $21,906,000 versus net sales of $33,325,000 in 1999, a decline of 34%. This overall decline is due primarily to a $13,337,000 year on year reduction in domestic NOx reduction project revenue from utilities. This result was somewhat offset by a 28% increase in domestic NOx reduction industrial project revenue, as particular emphasis was placed on this market segment while awaiting resolution of litigation concerning regulations affecting the domestic utility segment. International NOx reduction industrial project revenues in 2000 were behind 1999 by 51%, with the decline being attributable to the closure of Fuel Tech GmbH, a wholly owned subsidiary of the Company (discussed further below) and to the completion of a major project in Asia in 1999. International project revenues were, however, supported by the continued maturation of the Western European market, with new business attained in France and Italy. Lastly, revenues derived from the sale of fuel treatment chemicals domestically and internationally fell short of 1999 levels by 9% and 58%, respectively. Domestically, the negative impact of high crude oil prices early in the year could not be completely overcome by year-end gains resulting from the high price of natural gas (causing boiler operators to switch fuels back to oil), and the penetration of the Company's patented Targeted-In-Furnace- Injection technology. The decline in International fuel treatment chemical revenues was primarily attributable to a large customer's change in fuels, thus eliminating their requirement for treatment chemicals.
The Company believes that the delay in obtaining a final ruling on the Environmental Protection Agency's (EPA) SIP Call regulation contributed to the decline experienced in 2000 in domestic NOx reduction utility project revenue. The SIP Call is the federal mandate introduced in 1998 to further reduce NOx in 22 states by May 2003. This mandate was an extension of Phase II of Title I of the Clean Air Act Amendments of 1990 (CAAA). In May 1999 a "stay" was imposed on this regulation. 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. Subsequent to this court ruling, the stay in the SIP Call was lifted. Although the NOx reduction requirement date was moved back one year to May of 2004, 19 states were required to complete and issue their State Implementation Plans for NOx reduction by late October of 2000. These plans will potentially impact 700 to 800 utility boilers and 400 to 500 industrial units.
In addition to the SIP Call regulation, the so-called Section 126 Petitions, which enable downwind states to obtain relief from pollutants arising from their upwind neighbors, require major emissions sources in 12 of the 19 aforementioned states to comply with the 85% aggregate NOx reduction requirement by May 1, 2003. The Company expects to see project bookings from utilities resume in the first half of 2001 due to these regulations.
In 2000, the Company and American Electric Power Company, Inc. ("AEP"), one of the United States' largest generators of electricity with more than 38,000 megawatts of generating capacity, announced that they had executed an agreement for the potential use of the Company's Selective Non-Catalytic Reduction (SNCR) technology on AEP's coal-fired power plants. The Company will be the sole-source SNCR provider to AEP for the term of the agreement, which expires on the earlier of December 31, 2007 or through the date that AEP achieves all required federal,
state and local NOx and ozone requirements. The agreement gives AEP guaranteed priority status for Fuel Tech's services on units in AEP's generating fleet on which AEP decides to use SNCR technology during a period of expected increased demand for the technology. This agreement with AEP also provides the Company with additional flexibility in an emissions reduction procurement marketplace that will become increasingly dynamic as NOx reduction deadlines approach (May 2003 and May 2004). The Company entered into a similar alliance agreement in May of 2000 with another large Midwest utility.
As noted above, sales in the domestic fuel treatment chemical segment increased during the latter part of 2000. In addition to this recent revenue increase resulting from the increase in the cost of natural gas that has caused customers to switch back to using fuel oil, significant effort is being expended to further penetrate and enter the potentially lucrative pulp and paper and Powder River Basin coal markets. The Company is directing its sales and marketing efforts toward the penetration of its patented Targeted-In-Furnace-Injection technology towards these segments of the market, where the return on investment to the Company's customers can reach in excess of 500% per year.
The gross margin percentage on an overall basis across all products was 46.3% in 2000, compared with 43.6% in 1999. The improvement was realized primarily due to the reduction in revenues realized from lower margin NOx reduction utility projects in the United States in 2000 versus 1999, and to the improved margin performance on NOx reduction industrial projects. 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 the Company's overall revenues. As a result, the Company believes that although NOx reduction industrial project margins will be sustained, the overall gross margin percentages will gradually decline over the next several years.
The Company's net income on a consolidated basis for the 12 months ended December 31, 2000 included a net charge of $490,000 related to the restructure of its European operations in an effort to consolidate its business and enhance profitability. In the second quarter, the Company 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. The restructuring consisted of the following transactions, which were recorded at June 30, 2000:
- Fuel Tech GmbH's NOxOUT chemical business was sold to a new entity in Germany (Fuel Tech CS GmbH) in which the Company holds a 49% ownership interest that was acquired for $116,000. The selling price is dependent on future results of the chemical business, but will not be less than 1,250,000 deutsche marks (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 consolidated statement of operations.
- Fuel Tech GmbH recorded a charge 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 December 31, 2000, the Company made payments of approximately $277,000 related to this charge. The remaining amount is expected to be paid during the first half of 2001.
- The cumulative foreign currency translation loss related to Fuel Tech GmbH of $231,000 was recognized as other income and expense in the consolidated statement of operations.
Selling, general and administrative costs decreased by $953,000 from 1999. The decrease is due primarily to a reduction in revenue-based expenses, such as sales commissions to employees and agents, and to a lesser extent, to reductions in controllable expenses.
The Company recorded a net loss from its equity interest in affiliates during the year 2000 of $195,000. This amount consists of a $225,000 loss recognized on its equity investment in Clean Diesel Technologies, Inc. (CDT), offset by a $30,000 gain on its investment in Fuel Tech CS GmbH. The Company has a 21.6% common stock ownership interest in CDT as of December 31, 2000, while the Company has a 49% ownership interest in Fuel Tech CS GmbH as noted above. Please refer to Note 9 of the consolidated financial statements for a further discussion of related party transactions.
Interest expense increased to $354,000 for the 12 month period ended December 31, 2000 from $309,000 for the same period in 1999. The unfavorable variance is due solely to the increase in the average outstanding principal debt balance during the year. A $4.5 million term loan was received on September 1, 1999, and was used to retire a note held by Nalco with a remaining principal balance of $2.5 million and for the buyout of a contingent payment obligation, as noted above.
Other income and expense for the 12 month period ended December 31, 2000 was favorable versus the prior year by $333,000. Higher levels of interest income driven by favorable cash balances and higher interest rates, as well as the impact of the German transactions discussed above provided the positive variance.
The Company did not record the impact of income taxes in 2000, while income tax expense of $1,299,000 was recorded in 1999. The Company has $46.0 million in U.S. federal income tax loss carryforwards as of December 31, 2000 (the deferred tax benefit of which has been offset by a valuation allowance in the Company's balance sheet). There was no income tax impact recorded in the 2000 results primarily due to recording the benefit of the net operating losses generated in prior years, which were carried forward and applied at the state level.
Effective March 31, 1985, FTI effected a quasi-reorganization and reduced the value of certain of its assets. Tax benefits resulting from the utilization of the U.S. federal tax loss carryforwards existing as of the date of the quasi-reorganization have been excluded from the results of operations and credited to additional paid-in capital when realized. Tax benefits from the utilization of such carryforwards of $722,000 and $1,363,000 were realized in 1999 and 1998, respectively. As such, a non-cash charge was recorded as income tax expense, and additional paid-in capital was increased accordingly for the amounts noted above in both years. There are no remaining tax loss carryforwards from years prior to the date of the quasi-reorganization.
In the opinion of management, the Company's revenue growth in the short term will be directly related to the implementation of the requirements of the CAAA. The Company's implementor and alliance strategies will enable the Company 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 the Company or its implementors. If customers purchase the NOxOUT Process from implementors, the per contract revenues to the Company may be lower, but more installations may be handled.
1999 versus 1998
Net sales in 1999 totaled $33,325,000 versus net sales of $25,864,000 in 1998, an increase of 29%. The increase primarily represents a $4,872,000 increase in domestic NOx project revenue and a $2,746,000 increase in Asian pollution control revenue. The gains were marginally offset by a decline in the domestic fuel treatment chemical business.
The domestic NOx increase was due to the substantial increase in utility industry air pollution control project revenue caused by the implementation of Phase II of Title I of the Clean Air Act Amendments of 1990 (CAAA). In 1994, governors of 11 Northeastern states, known collectively as the Ozone Transport Region, signed a Memorandum of Understanding requiring utilities to reduce their NOx emissions by 55% to 65% from 1990 levels by May 1999. This memorandum favorably impacted the domestic NOx utility project performance in 1999.
The increase in Asian revenue was the direct result of one large contract at a Korean utility. The decline in domestic fuel treatment chemical sales was tied directly to the increased market price for fuel oil. As the price of fuel oil increased in 1999, customers switched their fuel source to natural gas, thus negating the requirement to utilize fuel treatment chemicals.
Gross margin percentages were 43.6% in 1999 compared with 44.6% in 1998. The slight decline in margin percentage was due primarily to the impact of low-margin air pollution control projects in Europe in 1999, which were driven by a highly competitive marketplace. When excluding this factor, the gross margin on air pollution control revenues as a whole remained relatively flat year on year.
Selling, general and administrative costs increased $990,000 from 1998 due predominantly to selling expenses from accelerated business activity.
Interest expense increased by $103,000 from 1998. The increase was due to the financing required to satisfy the contingent obligation due to Nalco as part of the Company's purchase of Nalco's 50% share of NFT. The $4.5 million term loan financing was received on September 1, 1999, and was used to retire a note held by Nalco with a remaining principal balance of $2.5 million, and to pay off the aforementioned contingent payment obligation.
The Company recorded $1.3 million of income tax expense in 1999 versus $1.4 million in 1998. The Company had $47.4 million in U.S. federal income tax loss carryforwards at December 31, 1999 (the deferred tax benefit of which has been offset by a valuation allowance in the Company's balance sheet). As noted previously, the Company effected a quasi-reorganization on March 31, 1985, and reduced the value of certain assets. Tax benefits resulting from the utilization of tax loss carryforwards existing as of the date of the quasi-reorganization are required to be excluded from the Company's results of operations and recorded as an increase to additional paid-in capital when realized. Consequently, additional paid-in capital was increased by $.7 million and $1.4 million in 1999 and 1998, respectively. At December 31, 1999, all tax loss carryforwards existing at the time of the quasi-reorganization had been fully utilized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were approximately $9.0 million at both December 31, 2000 and December 31, 1999. Operating activities provided $1.5 million of cash in 2000, which was driven by operating profits and the continued improvement in working capital management. Investing activities, which used cash of $1.0 million during the year, were primarily comprised of the aforementioned investments in CDT and Fuel Tech CS GmbH of $225,000 and $116,000, respectively, and to the continued investment in equipment and intellectual property of $774,000. Financing activities, which used cash of $336,000 during the year, were comprised of debt repayments of $675,000, which were offset by cash received from the exercise of stock options.
Historically, the Company has 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 the Company's common stock. They bear no interest, have no maturity date and are repayable generally only in the event of the winding up of the Company. The Company has therefore classified the Loan Notes within shareholders' equity in its balance sheet.
At December 31, 2000, the Company had cash and cash equivalents of $8,987,000 and working capital of $12,542,000 versus $8,959,000 and $12,126,000 at the end of 1999, respectively.
Effective April 30, 1998, FTI purchased Nalco's 50% interest in NFT for $1.1 million cash, the issuance of a $3.0 million note and up to $5.5 million in contingent payments based upon FTI's future performance. The acquisition of the aforementioned 50% interest in NFT was accounted for as a purchase. The notes bore interest at 10% per annum, payable quarterly, with principal payments of $250,000, payable quarterly, beginning on March 31, 1999. One-half of the contingent payments ($2.75 million) were based on the achievement of annual gross margin targets for the years 1998 - 2001, with the other half payable upon the achievement of a cumulative gross margin target for the years 1998-2001. The notes and contingent payment obligation were secured by materially all of the Company's assets. The contingent payment earned by Nalco in 1998 was $113,000. Such amount was included in goodwill in the Company's balance sheet.
Simultaneously with this transaction, principals of American Bailey Corporation (ABC) invested $3.35 million in the Company in exchange for 4.75 million shares of the Company's common stock, and warrants to purchase an additional 3.0 million shares of the Company's common stock at an exercise price of $1.75. Such shares (and shares underlying the warrants) are restricted from sale for a period of three years from the date of the transaction, and give the holder certain registration rights.
On September 1, 1999, the Company satisfied its remaining obligations to Nalco by paying Nalco approximately $4.5 million, representing the $2.5 million remaining balance on the note, plus accrued interest, and a buyout of the balance of the contingent payment obligation for approximately $2.0 million. At the time of the transaction, a maximum of approximately $5.4 million remained outstanding under the contingent payment obligation. This transaction was financed by a $4.5 million term loan from the Company's existing bank (see Note 8 to the consolidated financial statements). As a result of this transaction, the Company recorded approximately $2.0 million of additional goodwill.
In 1999, the Company established with a bank a $3.0 million revolving credit facility that expires August 31, 2002. The facility can be used for both cash advances and letters of credit. At December 31, 2000, approximately $2,041,000 in standby letters of credit were outstanding and approximately $959,000 was available for cash advances.
On September 1, 1999, the Company entered into a term loan agreement with a bank for a total principal balance of $4.5 million. The principal balance is to be repaid in quarterly installments of $225,000 commencing on December 31, 1999, with a final principal payment of $2,025,000 due on August 31, 2002. The Company has entered into an interest rate swap transaction that fixes the rate of interest at 8.91% on approximately 50% of the outstanding principal balance during the term of the loan. The remaining principal balance bears interest at the prevailing rates available in the marketplace, which 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 the Company. The carrying value of the debt approximates fair value at December 31, 2000.
As a result of the aforementioned transactions, the pending regulatory deadlines in the United States and the current cash and working capital positions, the Company believes that it will have sufficient resources to fund its growth and operations going forward.
FORWARD-LOOKING INFORMATION
From time to time, information provided by the Company, 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. The Company'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 the Company's Securities and Exchange Commission filings.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. The Company 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.
The Company is also exposed to changes in interest rates primarily due to its long-term debt arrangement (refer to Note 8 to the consolidated financial statements). The Company uses interest rate derivative instruments (an interest rate swap) to manage exposure to interest rate changes. The Company has entered into an interest rate swap transaction that fixes the rate of interest at 8.91% on approximately 50% of the outstanding principal balance during the term of the loan. 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, 2001.
ITEM 8.
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, 2000 and 1999, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company'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. 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Chicago, Illinois February 27, 2001
Consolidated Balance Sheets
(in thousands of U.S. dollars, except share data)
See notes to consolidated financial statements.
Consolidated Statements of Operations (in thousands of U.S. dollars, except share data)
See notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity (in thousands of U.S. dollars, except share data in thousands)
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows (in thousands of U.S. dollars)
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Fuel-Tech N.V. (the "Company") is a holding company active in the business of air pollution control. The Company's primary focus, through its wholly owned subsidiary, Fuel Tech, Inc. (FTI), is on selling, worldwide, its NOxOUT(R) Process and related technologies for the reduction of oxides of nitrogen (NOx) and other emissions from boilers, furnaces and other stationary combustion sources. The Company's business is materially dependent on the continued existence and enforcement of air quality regulations, particularly in the United States. The Company 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, 2000, 1999 and 1998, 20%, 25% and 20% of the Company's revenues, respectively, were derived from international markets, principally in Europe and Asia.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated. As more fully discussed in Note 2, on April 30, 1998, FTI purchased Nalco Chemical Company's (Nalco's) 50% share in the Nalco Fuel Tech (NFT) joint venture, increasing FTI's ownership of the joint venture's assets and liabilities to 100%. The accompanying financial statements consolidate the results of NFT from January 1, 1998, and reflect Nalco's 50% interest in the joint venture for the period from January 1, 1998, through April 30, 1998, as a minority interest. Prior to 1998, the Company accounted for its 50% interest in NFT using the equity method of accounting. Also, as discussed in Note 9, effective as of June 30, 2000, the Company sold its German chemicals business to Fuel Tech CS GmbH, an entity in which the Company holds a 49% ownership interest that is accounted for using the equity method.
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 the Company and its subsidiaries is the currency of the country in which each entity transacts its business. In accordance with SFAS No. 52, "Foreign Currency Translation," assets and liabilities denominated in currencies other than the U.S. dollar 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
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 2000, substantially all of the Company's cash and cash equivalents are on deposit with two financial institutions. All financial instruments are reflected in the accompanying balance sheets at amounts that approximate fair market value.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage the economic impact of fluctuations in interest rates. To achieve this the Company enters into interest rate swaps. The Company uses an interest rate swap to manage the duration and interest rate characteristics of its outstanding debt. The interest differential paid or received is recognized as an adjustment to interest expense on an ongoing basis.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, as amended, was adopted as of January 1, 2001, and did not materially impact the Company's financial statements.
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, 2000 and 1999, unbilled receivables were approximately $2,256,000 and $4,413,000, respectively.
Goodwill and Other Intangibles
Goodwill recognized as a result of the transactions described in Note 2 is being amortized by the straight-line method over periods of nine and ten years, which represent the estimated remaining useful life of the Company's intellectual property. Other intangibles 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.
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
The Company 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 the Company was $82,000 and $94,000 for the years ended December 31, 2000 and 1999, respectively.
Revenue Recognition
The Company 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 prospectively for revisions in completion estimates and contract values. Revenues from the sales of chemical products are recorded when title transfers, generally at the time of shipment.
Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under the Company'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.
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 5). Diluted earnings per share includes the dilutive effect of the nil coupon non-redeemable convertible unsecured loan notes and of stock options and warrants. The following table sets forth the weighted-average shares used in calculating earnings per share (in thousands):
2000 1999 ---------------------- Basic weighted-average shares 18,396 17,752 Conversion of unsecured loan notes 483 591 Unexercised options and warrants 742 992 -------------------- Diluted weighted-average shares 19,621 19,335 ====================
2. THE NALCO AND AMERICAN BAILEY CORPORATION TRANSACTIONS
Effective April 30, 1998, FTI purchased Nalco's 50% interest in NFT for $1.1 million cash, the issuance of a $3.0 million note and up to $5.5 million in contingent payments based upon FTI's future earnings. The acquisition was accounted for as a purchase. The notes bore interest at 10% per annum, payable quarterly, with principal payments of $250,000, payable quarterly, beginning on March 31, 1999. One-half of the contingent payments ($2.75 million) was based on the achievement of annual gross margin targets for the years 1998 - 2001, with the other half payable upon the achievement of a cumulative gross margin target for the years 1998 - 2001. The note and contingent payment obligations were secured by substantially all of the Company's assets. The 1998 financial statements include an accrual of $113,000 for the contingent payment earned by Nalco based on 1998 gross margins. Goodwill, net of amortization, resulting from this acquisition totaled $1,025,000, including the contingent payment obligation, at December 31, 1998.
Simultaneously with this transaction, principals of American Bailey Corporation (ABC) invested $3.35 million in the Company in exchange for 4.75 million shares of the Company's common stock, and warrants to purchase an additional 3.0 million shares of the Company's common stock at an exercise price of $1.75. The warrants expire on April 30, 2008. Such shares (and shares underlying the warrants) are restricted from sale by the holders for a period of three years from the date of transaction, and give the holders certain registration rights.
On September 1, 1999, the Company satisfied its remaining obligations to Nalco by paying Nalco approximately $4.5 million, representing the $2.5 million remaining balance on the note, plus accrued interest, and a buyout of the balance of the contingent payment obligation for approximately $2.0 million. At the time of the transaction, a maximum of approximately $5.4 million remained outstanding under the contingent payment obligation. This transaction was financed by a $4.5 million term loan from the Company's existing bank (see Note 8 to the consolidated financial statements). As a result of this transaction, the Company recorded approximately $2.0 million of additional goodwill.
3. TAXATION
At December 31, 2000, FTI had tax losses available for offset against future years' earnings of approximately $46.0 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 U.S. Tax Reform Act of 1986, utilization of the Company's U.S. federal income tax loss carryforwards may be limited should ownership changes exceed 50% within a three-year period. The U.S. federal tax loss carryforwards expire as follows (in thousands):
2001 $ 6,231 2002 7,520 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 ------- $46,027 =======
The components of income before taxes for the years ended December 31 are as follows (in thousands):
2000 1999 1998 ------ ------ ------ Domestic $1,211 $5,167 $3,190 Foreign (796) (860) (1,288) ------ ------ ------ Income before taxes $ 415 $4,307 $1,902 ====== ====== ======
A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated provision in the consolidated statements of operations for the years ended December 31 is as follows (in thousands):
2000 1999 1998 ------ ------ ------ Provision at the U.S. federal statutory rate $145 $1,507 $ 666 Foreign losses without tax benefit 444 301 446 Valuation allowance adjustment (424) (1,052) 220 State income taxes (207) 576 - Foreign income taxes 25 - - Other 17 (33) 31 ----- ------ ------ Provision for income taxes $ - $1,299 $1,363 ===== ====== ======
The reduction in the valuation allowance in 2000 results primarily from the utilization of tax loss carryforwards from where a valuation allowance had previously been provided. The state income tax credit 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.
Effective March 31, 1985, FTI effected a quasi-reorganization and reduced the value of certain of its assets. Tax benefits resulting from the utilization of the U.S. federal tax loss carryforwards existing as of the date of the quasi-reorganization have been excluded from the results of operations and credited to additional paid-in capital when realized. Tax benefits of $722,000 and $1,363,000 were realized in 1999 and 1998, respectively. As such, a non-cash charge was recorded as deferred income tax expense, and additional paid-in capital was increased accordingly for the amounts noted above in both years. There are no remaining tax loss carryforwards from years prior to the date of the quasi-reorganization.
4. COMMON STOCK
At December 31, 2000, the Company had 18,526,972 Common Shares outstanding, with an additional 470,724 shares reserved for issuance upon conversion of the nil coupon non-redeemable convertible unsecured loan notes (see Note 5) and 2,052,000 shares reserved for issuance upon the exercise of stock options, 965,500 of which are currently exercisable (see Note 6).
5. NIL COUPON NON-REDEEMABLE CONVERTIBLE UNSECURED LOAN NOTES
At December 31, 2000 and 1999, the Company had $3,958,500 and $4,030,500 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 the Company's common stock generally at rates that vary from $6.50 to $11.43 per share. The Loan Notes bear no interest and have no maturity date. They are generally repayable only in the event of the Company's dissolution and, accordingly, have been classified within shareholders' equity in the accompanying balance sheet. In 1989 and 1993, the Company incurred approximately $1.1 million and $100,000, respectively, in expenses related to Loan Note issuances. The Loan Notes are shown net of the residual portion of these expenses, which approximates $137,000 and $141,000 at December 31, 2000 and 1999, respectively.
During 2000 and 1999, approximately $72,000 and $11,012,500 principal amount of Loan Notes were converted into 6,299 and 963,600 shares of the Company's common stock, respectively.
6. STOCK OPTIONS AND WARRANTS
The Company 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 the Company'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 the Company'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 2000, 1999 and 1998, 406,000, 513,500 and 767,500 options, respectively, were granted to employees and directors.
If compensation expense for the Company'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, the Company's net income (loss) and income (loss) per share would have been adjusted as follows for the years ended December 31:
2000 1999 1998 -------------------------------- Net income (loss) (in thousands): As reported $415 $3,008 $539 As adjusted (103) 2,714 (39)
Basic and diluted income (loss) per share: Basic-- As reported $.02 $ .17 $.03 As adjusted (.01) .15 .00
Diluted-- As reported $.02 $ .16 $.03 As adjusted (.01) .14 .00
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.
The Black-Scholes option-pricing 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 the Company'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, was estimated on the date of grant using the modified Black-Scholes option pricing model with the following weighted-average assumptions:
2000 1999 1998 ---------------------------------- Expected dividend yield 0.00% 0.00% 0.00% Risk-free interest rate 5.10% 6.68% 5.03% Expected volatility 96.2% 108.4% 43.7% Expected life of option 4 years 4 years 4 years
The following table presents a summary of the Company's stock option activity and related information for the years ended December 31:
The following table summarizes information about stock options outstanding at December 31, 2000:
The Company also has outstanding warrants to purchase 140,000 Common Shares for $4.00 per share. The warrants are exercisable at any time, at the holder's option, in whole or in part prior to the expiration date of March 1, 2001. Lastly, as mentioned in Note 2, ABC has warrants to purchase an additional 3.0 million shares of the Company's common stock at an exercise price of $1.75. The warrants expire on April 30, 2008. Such shares (and shares underlying the warrants) are restricted from sale by the holders for a period of three years from the date of the transaction and give the holders certain registration rights.
7. COMMITMENTS
Operating Leases
The Company leases office space, autos and certain equipment under agreements expiring on various dates through 2009. Future minimum lease payments at December 31, 2000, are as follows (in thousands):
2001 $375 2002 297 2003 304 2004 224 2005 169 Thereafter 537
For the years ended December 31, 2000, 1999 and 1998, rent expense approximated $556,000, $493,000 and $455,000, respectively.
Performance Guarantees
The Company's long-term equipment construction and license contracts typically contain performance guarantees. The Company has outstanding performance guarantees of $457,000 for projects that have not completed their final acceptance test or that are still operating under a warranty period. Management of the Company believes that these projects will be successfully completed and that there will not be a materially adverse impact on the Company's operations from these guarantees.
8. DEBT FINANCING
In 1999, the Company entered into a $3.0 million revolving credit facility expiring August 31, 2002, which is collateralized by all personal property owned by the Company. The Company can use this facility for cash advances and standby letters of credit. The interest rate to be borne on cash advances is the bank's reference rate, or an optional rate that can be selected by the Company, and is based on the bank's Interbank Offering Rate plus 2.25%. At December 31, 2000, the bank had provided standby letters of credit, predominantly to customers, totaling approximately $2,041,000 in connection with contracts in process. The Company is committed to reimbursing the issuing bank for any payments made by the bank under these letters of credit. At December 31, 2000, there were no cash borrowings against this facility and approximately $959,000 was available for utilization.
On September 1, 1999, the Company entered into a term loan agreement with a bank for a total principal balance of $4.5 million. The principal balance is to be repaid in quarterly installments of $225,000 commencing on December 31, 1999, with a final principal payment of $2,025,000 due on August 31, 2002. The Company has entered into an interest rate swap transaction that fixes the rate of interest at 8.91% on approximately 50% of the outstanding principal balance during the term of the loan. The remaining principal balance bears interest at the prevailing rates available in the marketplace, which 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 the Company.
The carrying amount of debt approximates fair value at December 31, 2000. The fair value of the interest rate swap, based on quoted market prices, is negative $21,000 at December 31, 2000. The notional value of the swap is $1,800,000 at December 31, 2000.
Interest payments were $373,000, $327,000 and $127,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
9. RELATED PARTY TRANSACTIONS
The Company has a 21.6% common stock ownership interest in Clean Diesel Technologies, Inc. (CDT), at December 31, 2000. The Company is precluded from selling its interest in CDT except pursuant to a registration statement in an exempt private placement or within the limitations of Rule 144 of the Securities and Exchange Commission.
On August 3, 1995, the Company signed a Management and Services Agreement with CDT. According to the agreement, CDT is to reimburse the Company for management, services and administrative expenses incurred by the Company on behalf of CDT. Additionally, the Company charges CDT an additional 3% of such costs annually, depending upon the nature of the cost.
For the years ended December 31, 2000, 1999 and 1998, $78,000, $106,000 and $168,000, respectively, was charged to CDT as a management fee.
In February 1998, the Company provided CDT a $500,000 bridge loan. On November 11, 1998, a pre-existing $495,000 demand note, with interest at 8%, and the $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 is convertible into 333.33 shares of CDT common stock. In April of 2000, the Company purchased 300 additional convertible preferred shares of CDT for $225,000, which have the same convertible provisions noted above. The Company accounts for its investment in CDT using the equity method, and recorded losses of $225,000 and $500,000 in 2000 and 1998, respectively, related to its share of CDT's operating results in those years. The CDT common and preferred stock has no carrying value in the Company's balance sheet as of December 31, 2000 and 1999.
In November 2000, the Company committed to lend CDT $250,000 as part of a $1.0 million loan facility between CDT, the Company and other entities. In December 2000, the Company loaned CDT $125,000 as its share of the first $500,000 draw down under the terms of the loan facility. This amount is included in the prepaid expenses and other current assets line item on the consolidated balance sheet. The principal balance on the loan with interest of 10% is payable on May 14, 2001. For its participation in the loan facility and for its $125,000 contribution, the Company received 18,750 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. The value assigned to these warrants on the consolidated balance sheet at December 31, 2000, is not significant. To the extent CDT incurs losses subsequent to the date of the loan, the carrying value of the loan on the Company's financial statements will be adjusted downward based on the Company's pro-rata share of the losses incurred.
CDT's summary financial information for the years ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998 ------------------------------
Current assets $ 965 $1,311 Other assets 92 35 Current liabilities 403 494 Long-term debt 500 - Net revenues 582 142 $ 46 Loss from operations (2,036) (2,485) (2,663) Net loss (2,713) (4,584) (2,984)
Pursuant to an assignment agreement of certain technology to CDT, the Company 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 the Company 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, no royalties from CDT have been received by the Company. The report of independent auditors pertaining to CDT's financial statements for the years ended December 31, 2000, 1999 and 1998, contained a going concern qualification. The Company intends to record royalties from CDT on a cash basis.
On April 30, 1998, the Company entered into an agreement with American Bailey Corporation for it to provide certain management and consulting services to the Company. ABC currently owns 26% of the Company's Common Shares and also owns warrants to purchase an additional 3.0 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.
NFT paid fees to FTI as compensation for selected sales and other specified services. In addition, NFT reimbursed FTI for payroll, rent and other expenditures incurred on its behalf. From January 1, 1998, to April 30, 1998, these billings were $1,001,000.
As noted previously, in the second quarter of 2000 the Company 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's NOxOUT chemical business was sold to a new entity in Germany (Fuel Tech CS GmbH) in which the Company holds a 49% ownership interest that was purchased for $116,000. The selling price is dependent on the future results of the chemical business, but will not 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 consolidated statement of operations.
Also as part of the restructure, Fuel Tech GmbH recorded a charge 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 December 31, 2000, the Company made payments of approximately $277,000 related to this charge. The remaining amount is expected to be paid during the first half of 2001.
The Company has an option to require the majority shareholder of Fuel Tech CS GmbH to purchase up to 35% of Fuel Tech CS GmbH from the Company at fair value between three and five years from the date of the purchase agreement.
10. DEFINED CONTRIBUTION PLAN
The Company has a retirement savings plan available for all U.S. employees who have met minimum length-of-service requirements. The Company's contributions are determined based upon amounts contributed by the Company's employees with additional contributions made at the discretion of the Company's Board of Directors. Costs related to this plan were $289,000, $276,000 and $148,000 in 2000, 1999 and 1998, respectively.
11. BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
The Company's business is organized into one operating segment providing air pollution control chemicals and equipment.
Information concerning the Company'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 the Company 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 2000 1999 1998
Revenues: Domestic $ 17,550,000 $ 25,127,000 $ 20,638,000 Foreign 4,356,000 8,198,000 5,226,000 ------------ ------------ ------------ $ 21,906,000 $ 33,325,000 $ 25,864,000 ============ ============ ============
Operating Earnings: Domestic $ 1,506,000 $ 4,017,000 $ 3,204,000 Foreign (662,000) 812,000 (601,000) ------------ ------------ ------------ $ 844,000 $ 4,829,000 $ 2,603,000 ============ ============ ============
December 31 2000 1999 1998 ------------ ------------ ------------ Assets: Domestic $ 19,640,000 $ 22,020,000 $ 16,307,000 Foreign 3,449,000 2,444,000 2,846,000 ------------ ------------ ------------ $ 23,089,000 $ 24,464,000 $ 19,153,000 ============ ============ ============
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item will be set forth under the captions "Election of Directors" and "Directors and Executive Officers of the Company" in the Company's Proxy Statement related to the 2001 Annual General Meeting of Shareholders (the `Proxy Statement") and is incorporated by reference.
ITEM 11.
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.
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.
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.
PART IV
ITEM 14.
ITEM 14. 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, 2000 and 1999 Consolidated Statements of Operations for Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 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
* 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 2001 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 the Company during the fourth quarter of 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Fuel -Tech N.V. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FUEL-TECH N.V.
Dated: March 23, 2001 By: /Ralph E. Bailey -------------------------------- Ralph E. Bailey Chairman, Managing Director and Chief Executive Officer
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.