10-K/A 1 0001.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K/A Amendment No. 1 (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, 2000 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 incorporation of organization) Identification Number) 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. Aggregate market value of the voting stock held by non-affiliates of the registrant based on the average bid and asked prices of March 2, 2001: $26,692,883 Indicate number of shares outstanding of each of the registered classes of Common Stock at March 2, 2001: 18,526,972 shares 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 2001 described in Parts II, III, and IV hereof are incorporated by reference in this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The registrant hereby amends Item 8 of its report on Form 10-K for the period ending December 31, 2000 to add the supplementary quarterly data required by Item 302(a) of Regulation S-K. i 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 1 Consolidated Balance Sheets (in thousands of U.S. dollars, except share data)
2000 1999 ---------------------------- December 31 ASSETS Current assets: Cash and cash equivalents $ 8,987 $ 8,959 Accounts receivable, net of allowances for doubtful accounts of $192 and $114, respectively 7,550 9,636 Inventories 162 227 Prepaid expenses and other current assets 1,019 471 --------------------------- Total current assets 17,718 19,293 Equipment, net of accumulated depreciation of $4,489 and $3,948, respectively 1,584 1,428 Goodwill, net of accumulated amortization of $590 and $256, respectively 2,450 2,784 Other intangibles, net of accumulated amortization of $809 and $826, respectively 458 579 Other assets 879 380 --------------------------- Total assets $23,089 $24,464 =========================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of note payable $ 900 $ 900 Accounts payable 2,480 4,077 Accrued liabilities: Employee compensation 714 922 Other accrued liabilities 1,082 1,268 --------------------------- Total current liabilities 5,176 7,167 Note payable 2,700 3,375 Other liabilities 646 231 --------------------------- Total liabilities 8,522 10,773 Shareholders' equity: Common stock, $.01 par value, 40,000,000 shares authorized, 18,526,972 and 18,328,673 shares issued, respectively 185 183 Additional paid-in capital 86,097 85,692 Accumulated deficit (74,574) (74,989) Accumulated other comprehensive income (loss) 97 (25) Treasury stock (1,058) (1,058) Nil coupon perpetual loan notes 3,820 3,888 --------------------------- Total shareholders' equity 14,567 13,691 --------------------------- Total liabilities and shareholders' equity $23,089 $24,464 ===========================
See notes to consolidated financial statements. 2 Consolidated Statements of Operations (in thousands of U.S. dollars, except share data)
2000 1999 1998 ----------- ----------- --------- For the years ended December 31 Net revenues $21,906 $33,325 $25,864 Costs and expenses Cost of sales 11,757 18,805 14,334 Selling, general and administrative 7,934 8,887 7,897 Research and development 843 804 1,030 Closing costs of German subsidiary 528 - - ------------------------------------------- 21,062 28,496 23,261 ------------------------------------------- Operating income 844 4,829 2,603 Loss from equity interest in affiliates (195) - (500) Interest expense (354) (309) (206) Other income (expense): Gain on sale of German subsidiary chemical business 269 - - Cumulative translation loss of German subsidiary (231) - - Other income (expense), net 82 (213) 117 ------------------------------------------- Income before minority interest and taxes 415 4,307 2,014 Less: Minority interest in NFT - - (112) ------------------------------------------- Income before taxes 415 4,307 1,902 Income tax expense - (1,299) (1,363) ------------------------------------------- Net income $ 415 $ 3,008 $ 539 =========================================== Net income per common share Basic $ 0.02 $ 0.17 $ 0.03 Diluted 0.02 0.16 0.03 Average number of common shares outstanding Basic 18,396,000 17,752,000 15,680,000 Diluted 19,621,000 19,335,000 17,437,000
See notes to consolidated financial statements. 3 Consolidated Statements of Shareholders' Equity (in thousands of U.S. dollars, except share data in thousands)
Accumulated Other Common Stock Additional Comprehensive Treasury Stock Nil Coupon ------------------- Paid-in Accumulated Income --------------- Perpetual Shares Amount Capital Deficit (Loss) Shares Amount Loan Notes Total ------------------------------------------------------------------------------------------------------- Balance at January 1, 1998 12,484 $125 $67,487 $(78,536) $(34) 94 $(1,058) $17,262 $ 5,246 Comprehensive income: Net income 539 539 Foreign currency translation Adjustment 86 86 ------ Comprehensive income 625 ------ Conversion of nil coupon perpetual loan notes into common stock 2 - 13 (13) - Tax benefit from years prior to quasi-reorganization 1,363 1,363 Issuance of new shares 4,750 47 3,035 3,082 ------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 17,236 $172 $71,898 $(77,997) $ 52 94 $(1,058) $17,249 $10,316 Comprehensive income: Net income 3,008 3,008 Foreign currency translation adjustment (77) (77) ------- Comprehensive income 2,931 ------- Conversion of nil coupon perpetual loan notes into common stock 963 10 10,372 (10,382) - Purchase of nil coupon perpetualloan notes 2,535 (2,979) (444) Tax benefit from years prior to quasi-reorganization 722 722 Exercise of stock options 129 1 211 212 Other (46) (46) ------------------------------------------------------------------------------------------------------ Balance at December 31, 1999 18,328 $183 $85,692 $(74,989) $(25) 94 $(1,058) $3,888 $13,691 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, 2000 18,527 $185 $86,097 $(74,574) $97 94 $(1,058) $3,820 $14,567 ======================================================================================================
See notes to consolidated financial statements. 4 Consolidated Statements of Cash Flows (in thousands of U.S. dollars)
2000 1999 1998 -------------------------------------------- For the years ended December 31 OPERATING ACTIVITIES Net income $ 415 $3,008 $ 539 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 601 519 317 Amortization 382 261 57 Provision for doubtful accounts 233 134 - Loss on equipment disposals/impaired assets 82 246 52 Loss from equity interest in affiliates 195 - 388 Income taxes - 722 1,363 Closing reserve for German subsidiary 528 - - Cash payments against German subsidiary closing reserve (277) - - Gain on sale of German subsidiary chemical business (269) - - Cumulative translation loss of German subsidiary 231 - - Changes in operating assets and liabilities: Accounts receivable 1,758 (759) (4,156) Inventories, prepaid expenses, other current assets and other noncurrent assets (459) 139 403 Accounts payable, accrued liabilities and other noncurrent liabilities (1,957) 661 411 Other 3 69 90 ----------------------------------------- Net cash provided by (used in) operating activities 1,466 5,000 (536) INVESTING ACTIVITIES Investment in and loans to CDT (225) - (500) Investment in Fuel Tech CS GmbH (116) - - Proceeds from sale of German subsidiary chemical business 122 - - Purchase of 50% of NFT - (1,958) 514 Consolidation of opening NFT cash balance - - 1,595 Purchases of equipment and patents (774) (795) (396) ----------------------------------------- Net cash (used in) provided by investing activities (993) (2,753) 1,213 FINANCING ACTIVITIES Issuance of common shares - (46) 3,082 Exercise of stock options 339 212 - Purchase and retirement of nil coupon loan notes - (444) - Repayment of borrowings (675) (3,225) - Proceeds from borrowings - 4,500 - ----------------------------------------- Net cash (used in) provided by financing activities (336) 997 3,082 Effect of exchange rate fluctuations on cash (109) (77) 86 ----------------------------------------- Net increase in cash and cash equivalents 28 3,167 3,845 Cash and cash equivalents at beginning of year 8,959 5,792 1,947 ----------------------------------------- Cash and cash equivalents at end of year $8,987 $8,959 $5,792 =========================================
See notes to consolidated financial statements. 5 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. 6 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. 7 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. 8 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. 9 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 10 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:
2000 1999 1998 Weighted- Weighted- Weighted- Average Average Average Number of Exercise Number of Exercise Number of Exercise Options Price Options Price Options Price ---------------------------------------------------------------------------------- Outstanding at beginning of year 1,874,500 $ 2.39 1,728,493 $ 3.18 1,057,728 $ 6.81 Granted 406,000 2.10 513,500 2.13 767,500 1.74 Exercised (192,000) 1.75 (129,085) 1.63 - - Expired or forfeited (36,500) 5.38 (238,408) 7.48 (96,735) 2.31 ------------------------------------------------------------------------------------ Outstanding at end of year 2,052,000 $ 2.34 1,874,500 $ 2.39 1,728,493 $ 3.18 ------------------------------------------------------------------------------------ Exercisable at end of year 965,500 $ 2.73 802,000 $ 3.05 989,160 $ 4.27 Weighted-average fair value of options granted during the year $ 1.47 $ 1.59 $ 0.56
The following table summarizes information about stock options outstanding at December 31, 2000:
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 1,911,000 7.03 years $ 1.98 824,500 $ 1.98 $4.75 - $12.06 141,000 1.46 years $ 7.15 141,000 $ 7.15 --------- ------- $1.375 - $12.06 2,052,000 6.65 years $ 2.34 965,500 $ 2.73 -----------------------------------------------------------------------------------------------------------------------
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. 11 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. 12 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. 13 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 ============ ============ ============ QUARTERLY FINANCIAL DATA Set forth below are the unaudited quarterly financial data for the fiscal years ended December 31, 2000 and 1999. The information for 1999 has not been reviewed by independent auditors.
For the quarter ended: March 31 June 30 September 30 December 31 (in thousands, except share data) 2000: Net sales $ 4,455 $ 5,851 $ 5,981 $ 5,619 Cost of sales 2,777 3,271 2,944 2,765 Net (loss) income (296) (325) 753 283 Net (loss) income per common share: Basic $ (.02) $ (.02) $ .04 $ .02 Diluted $ (.02) $ (.02) $ .04 $ .01 1999: Net sales $ 8,766 $ 8,414 $ 7,288 $ 8,857 Cost of sales 5,697 4,465 4,016 4,627 Net income 373 1,353 538 744 Net income per common share: Basic $ .02 $ .08 $ .03 $ .04 Diluted $ .02 $ .07 $ .03 $ .04
14 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report on Form 10-K/A Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: April 3, 2001 By: /s/ S.M. Schecter ------------------ Scott M. Schecter Vice President and Chief Financial Officer