-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oq1azty5SrSqGpGRijz7GmgqaU2sGcup7thyCDde0TTcCrk0CRK3L/lvm4qLqQEP YN87GXd4ZMIf1w60kK5HBA== 0001125282-03-002275.txt : 20030317 0001125282-03-002275.hdr.sgml : 20030317 20030317151721 ACCESSION NUMBER: 0001125282-03-002275 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FUEL TECH N V CENTRAL INDEX KEY: 0000846913 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21724 FILM NUMBER: 03605855 BUSINESS ADDRESS: STREET 1: CASTORWEG 22-24 CITY: CURACAO NETHERLANDS STATE: P7 MAIL ADDRESS: STREET 1: C/O FUEL TECH INC STREET 2: 300 ATLANTIC ST CITY: STAMFORD STATE: CT ZIP: 06901 10-K 1 b323572_10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended: December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from_________________to_______________ Commission File No. 000-21724 FUEL-TECH N.V. (Exact name of registrant as specified in its charter) Netherlands Antilles N/A (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation of organization) Fuel-Tech N.V. Fuel Tech, Inc. (Registrant) (U.S. Operating Subsidiary) Castorweg 22-24 Suite 703, 300 Atlantic Street Curacao, Netherlands Antilles Stamford, CT 06901 (599) 9-461-3754 (203) 425-9830 (Address and telephone number of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value per share The Nasdaq Stock Market, Inc. -------------------------------------- ----------------------------- (Title of Class) (Name of Exchange on Which Registered) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 under the Securities Exchange Act of 1934). Yes X No --- --- The aggregate market value of the voting stock held by non-affiliates of the registrant based on the average bid and asked prices of June 28, 2002 was $95,271,000. The aggregate market value of the voting stock held by non-affiliates of the registrant based on the average bid and asked prices of March 3, 2003 was $52,005,000 Indicate number of shares outstanding of each of the registered classes of Common Stock at March 3, 2003: 19,680,432 shares of Common Stock, $0.01 par value. Documents incorporated by reference: Certain portions of the Proxy Statement for the annual meeting of stockholders to be held in 2003 are incorporated by reference in Parts II, III, and IV hereof. TABLE OF CONTENTS
Page ---- PART I Item 1. Business 1 Item 2. Description of Property 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to Vote of Security Holders 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 14 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes in and Disagreements with Accountants and Financial Disclosure 32 PART III Item 10. Directors and Executive Officers of the Registrant 32 Item 11. Executive Compensation 32 Item 12. Security Ownership of Certain Beneficial Owners and Management 32 Item 13. Certain Relationships and Related Transactions 32 PART IV Item 14. Controls and Procedures 33 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33 Signatures and Certifications 35
ii TABLE OF DEFINED TERMS Term Definition ABC American Bailey Corporation AES Advanced Engineering Services CAAA Clean Air Act Amendments of 1990 CDT Clean Diesel Technologies, Inc. CFD Computational Fluid Dynamics Common Shares Shares of the common stock of Fuel Tech EPRI Electric Power Research Institute FTI Fuel Tech, Inc. FUEL CHEM(R) FTI's fuel and flue gas treatment processes, including its Targeted-In-Furnace-Injection programs for slagging, fouling and corrosion control and plume abatement Fuel Tech Fuel-Tech N.V. and its subsidiaries and affiliates Investors The purchasers of Fuel Tech securities pursuant to a Securities Purchase Agreement as of March 23, 1998 Loan Notes Nil Coupon Non-redeemable Convertible Unsecured Loan Notes of Fuel Tech NOx Oxides of nitrogen NOxOUT CASCADE(R) Combination of NOxOUT and SCR NOxOUT(R) Process Fuel Tech's SNCR process for the reduction of NOx NOxOUT SCR(R) Urea used as a catalyst reagent Rich Reagent An SNCR-type process that broadens the NOx reduction Injection capability of the NOxOUT Process at a cost similar to Technology (RRI) NOxOUT. RRI can also be applied on a stand-alone basis. SCR Selective Catalytic Reduction SIP Call State Implementation Plan Rulemaking Procedure SNCR Selective Non-Catalytic Reduction NOxOUT ULTRA(R) Fuel Tech's process for generating ammonia for use as SCR reagent ACUITIV(TM) Fuel Tech's advanced visualization services, formerly referred to as Virtual Vantage iii Fuel-Tech N.V. Subsidiaries and Affiliates December 31, 2002 ------------ FTNV ---------------- Netherlands ---------------------------------------- | Antiles | | |49% ------------ |100% |15% | | | | ---------- | 100% ---------- ---------- FTCS | PPI CDT Germany ------------- Delaware Delaware ---------- FTI ---------- ---------- Massachusetts ------------- | | 100% 100% 100% | 100% ------------------------------------------------------------ | | | | | | | | --------- --------- ----------- --------- FTJL FTL HOLDINGS Jamaica Canada Netherlands Srl Italy Antilles --------- --------- ----------- --------- | | 100% | - --------------------------------------------------------- ----------- FTNV - Fuel-Tech N.V. FTI - Fuel Tech, Inc. Holdings - Fuel Tech Holdings N.V. BV BV - Fuel Tech BV Netherlands GmbH - Fuel Tech GmbH HFTL - Fuel Tech Targeted Injection Chemicals Ltd. ----------- FTJL - Fuel Tech Jamaica Limited | Srl - Fuel Tech Srl | 100% PPI - Platinum Plus, Inc. |____ CDT - Clean Diesel Technologies, Inc. | FTCS - Fuel Tech CS GmbH --------- GmbH Germany ---------
iv PART I Forward Looking Statements Statements in this Form 10-K which are not historical facts, so-called "forward-looking statements," are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in Fuel Tech's filings with the Securities and Exchange Commission. See "Risk Factors of the Business" in Item 1 and also Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 1. BUSINESS Fuel Tech Fuel-Tech N.V., including its subsidiaries ("Fuel Tech"), is a technology company active in the air pollution control and specialty chemical businesses through its wholly owned subsidiary Fuel Tech, Inc. ("FTI"). Fuel-Tech N.V., incorporated in 1987 under the laws of the Netherlands Antilles, is registered at Castorweg 22-24 in Curacao under No. 1334/N.V. Fuel Tech, Inc. FTI's special focus is the worldwide marketing of its nitrogen oxide ("NOx") reduction and FUEL CHEM Processes. The NOx reduction technologies, which include the NOxOUT, NOxOUT CASCADE, and NOxOUT SCR processes, reduce NOx emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. The FUEL CHEM business uses chemical processes for slagging, fouling, corrosion control and plume abatement in furnaces and boilers through the addition of chemicals into the fuel or by Targeted-In-Furnace-Injection. FTI has a number of other technologies, such as NOxOUT ULTRA, both commercial and in the development stage, that are for the most part add-ons to the NOxOUT Process or similar in their technological base. Additionally, in 2002, Fuel Tech created a separate division to market its high-end visualization software product. This product, commercially introduced in 2002, is marketed under the "ACUITIV" trade name. FTI's business is materially dependent on the continued existence and enforcement of worldwide air quality regulations. American Bailey Corporation American Bailey Corporation ("ABC") performs management services for Fuel Tech under an Agreement dated April 30, 1998, as amended. Ralph E. Bailey, Chairman, Chief Executive Officer and Managing Director of Fuel Tech, and Douglas G. Bailey, Vice Chairman, Managing Director and Chief Strategic Officer of Fuel Tech are shareholders of ABC. See the more detailed information relating to this subject under the caption "Certain Relationships and Related Transactions" in Fuel Tech's Proxy Statement to be distributed in connection with Fuel Tech's 2003 Annual General Meeting of Shareholders, which information is incorporated by reference. Also, refer to Note 8 to the consolidated financial statements. NOx Reduction Regulations and Markets The domestic U.S. air pollution control market is the primary driver in Fuel Tech's NOx reduction business. This market is dependant on air pollution regulations and their continued enforcement. These regulations are based on the Clean Air Act Amendments of 1990 (the "CAAA") which require reductions in NOx emissions on varying timetables with respect to various sources of emissions. Under the SIP (State Implementation Plan) Call, a regulation promulgated under the Amendments (discussed further below), over 1000 utility and large industrial boilers in 19 states are required, as an aggregate, to achieve a NOx reduction target by May 31, 2004. Also, in Europe under European Union Directives, over 100 industrial units must achieve NOx reductions by 2005. In 1994, governors of eleven Northeastern states, known collectively as the Ozone Transport Region, signed a Memorandum of Understanding requiring utilities to reduce their NOx emissions by 55% to 65% from 1990 levels by May 1999. In 1998, the EPA announced more stringent regulations. The Ozone Transport State Implementation Plan (SIP) Call regulation, designed to mitigate the effects of wind-aided ozone transported from the Midwestern and Southeastern U.S. into the Northeastern non-attainment areas, requires, following the litigation described below, 19 states to make even deeper aggregate reductions of 85% from 1990 levels by May 31, 2004. Over 1,000 utility and large industrial boilers are affected by these mandates. Additionally, most other states with non-attainment areas are also required to meet ambient air quality standards for ozone by 2007. Although the SIP Call was the subject of litigation, an appellate court of the D.C. Circuit upheld the validity of this regulation. This court's ruling was later affirmed by the U.S. Supreme Court. In February 2001, the U.S. Supreme Court, in a unanimous decision, upheld EPA's authority to revise the National Ambient Air Quality Standard for ozone to 0.080 parts per million averaged through an eight-hour period from the current 0.120 parts per million for a one-hour period. This more stringent standard provides clarity and impetus for air pollution control efforts well beyond the current ozone attainment requirement of 2007. In keeping with this trend, the Supreme Court, only days later, denied industry's attempt to stay the SIP Call, effectively exhausting all means of appeal. 1 Products Fuel Tech's NOxOUT Process is a Selective Non-Catalytic Reduction ("SNCR") process that uses non-hazardous urea as the reagent rather than ammonia. The NOxOUT Process on its own is capable of reducing NOx by up to 40% for utilities and by potentially significantly greater amounts for industrial units in many types of plants with capital costs ranging from $6 - $20/kw for utility boilers and with annualized operating costs ranging from $1,000 - $1,500/ton of NOx removed. Fuel Tech's NOxOUT CASCADE Process uses catalyst as an add-on to the NOxOUT Process to achieve performance similar to Selective Catalytic Reduction ("SCR"). Based on demonstrations, NOxOUT CASCADE's capital cost is less than that of SCR, while operating costs are competitive with those experienced by SCR. Fuel Tech's NOxOUT SCR Process utilizes urea as a catalyst reagent to achieve NOx reductions of up to 90% from stationary combustion sources with capital and operating costs competitive with equivalently sized, standard SCR systems. Fuel Tech is currently in the process of commercially offering its NOxOUT ULTRA system. The system is designed to convert urea to ammonia, safely and economically, for use as a reagent in the selective catalytic reduction process (SCR) for NOx reduction. In this fashion, Fuel Tech intends to participate in the SCR segment of the SIP Call driven market. Recent local hurdles in the ammonia permitting process have raised concerns regarding the safety of ammonia storage in quantities sufficient to supply SCR. Fuel Tech has sublicensed the Rich Reagent Injection Technology from Reaction Engineering International, who has a direct license from the Electric Power Research Institute. The technology has been proven in full-scale field studies on cyclone-fired units to reduce NOx by 25-30%. The technology is a generic SNCR whose applicability is outside the temperature range of NOxOUT. The technology is seen as an add-on to Fuel Tech's NOxOUT systems, thus potentially broadening the NOx reduction of the combined system to almost 50% with a minimal additional capital requirement. Sales of the NOx reduction technologies were $25.5 million, $10.4 million, and $17.4 million for the years ended December 31, 2002, 2001, and 2000, respectively. 2 NOx Reduction Competition Processes competitive with Fuel Tech's NOx reduction products may be expected from combustion modifications, SCR and ammonia SNCR, among others. Combustion modifications, including low NOx burners, can be fitted to most types of boilers with cost and effectiveness varying with specific boilers. Combustion modifications may effect 20-50% NOx reduction economically with capital costs ranging from $5 - $40/kw and levelized total costs ranging from $300 - $1,500/ton of NOx removed. Such companies as Alstom, Foster Wheeler Corporation, The Babcock & Wilcox Company and Steam Sales Corporation are active competitors in the low-NOx burner business. SCR is an effective and proven method of control for the removal of up to 90% of NOx. SCR has a high capital cost ranging from $55 - $150/kw on retrofit coal applications. Such companies as Alstom, The Babcock & Wilcox Company, Cormetech, Inc., Engelhard Corporation, Foster Wheeler Corporation, Peerless Manufacturing Company, and the Siemens Westinghouse Power Corporation are active SCR system providers. The use of ammonia as the reagent for the SNCR process was developed by the ExxonMobil Corporation. Fuel Tech understands that the ExxonMobil patents on this process have expired. This process can reduce NOx by 30% to 70% on incinerators, but has limited applicability in the utility industry. Ammonia system capital costs range from $15 - $22/kw, with annualized operating costs ranging from $1,000 - $3,000/ton of NOx removed. These systems require the use of stored ammonia, a hazardous substance. In addition to or in lieu of using the foregoing processes, certain customers will elect to close or derate plants, purchase electricity from third-party sources, switch from higher to lower NOx emitting fuels or purchase NOx emission allowances. FUEL CHEM Product and Markets Fuel Tech's fireside and fuel additive programs, FUEL CHEM, help improve unit performance and reduce customer operating costs. Through the program, customers have enjoyed returns on their investments of up to 500%. The Targeted-In-Furnace-Injection approach, a key FUEL CHEM technology on which two patents have been issued, is a uniquely engineered and economical solution to furnace fouling and corrosion problems. Electric utilities, the pulp and paper industry and municipal solid waste incinerator facilities make up the principal markets for the program. Sales of the FUEL CHEM products were $7.1 million, $7.2 million, and $4.5 million for the years ended December 31, 2002, 2001, and 2000, respectively. Competition Competition for Fuel Tech's FUEL CHEM product line includes chemicals sold by specialty chemical companies, such as GE Betz, Inc., primarily in the traditional heavy-fuel-oil treatment area. No substantive competition currently exists for Fuel Tech's technology for Targeted-In-Furnace-Injection of additives for the control of slagging, fouling, and corrosion and for plume abatement, but there can be no assurance that such lack of substantive competition will continue. Advanced Engineering Services and ACUITIV Fuel Tech uses its advanced engineering services to support the sale of Fuel Tech's NOx reduction and FUEL CHEM systems, particularly through the use of computational fluid dynamics ("CFD") tools. These CFD tools assist in the prediction of the behavior of gas flows, thereby enhancing the implementation of Fuel Tech's NOx reduction systems and the application of its FUEL CHEM slag and corrosion control processes. In 2001 and 2002, Fuel Tech augmented its advanced engineering services staff and equipment with a view toward not only better serving Fuel Tech's customers but also to seek other applications for its services. Toward this goal, the ACUITIV software product was commercially introduced on June 6, 2002, and Fuel Tech recently received its second commercial order for this software. The software allows users to visualize complex data sets in a virtual reality environment, and, a recent version of the software was released which is compatible with the Microsoft Windows(R) operating system. Although the validity of the product has been confirmed, Fuel Tech does not expect revenues related to this product to be material for the upcoming year. Intellectual Property See Item 2 "Description of Property" for information on Fuel Tech's intellectual property and proprietary position, which are material to its business. Employees Fuel Tech has 84 full-time employees, 79 in North America and 5 in Europe. Fuel Tech enjoys good relations with its employees and is not a party to any labor management agreements. 3 Risk Factors of the Business Investors in Fuel Tech should be mindful of the following risk factors relative to Fuel Tech's business. (i) Lack of Diversification Fuel Tech is engaged in two principal businesses; the marketing of products to reduce air pollution, and the licensing of software that allows users to visualize complex data sets. The software business is in its infancy and its ultimate success is uncertain, while an adverse development in Fuel Tech's air pollution control business as a result of competition, technological change, government regulation, or any other factor could have a significantly greater impact than if Fuel Tech maintained diverse operations. (ii) Competition Competition in the NOx control market will come from processes utilizing low-NOx burners, over-fired air, flue gas recirculation, ammonia SNCR, SCR and, with respect to particular uses of urea not infringing Fuel Tech's patents, urea (see Item 2 "Description of Property"). Competition will also come from business practices such as the purchase rather than the generation of electricity, fuel switching, closure or derating of units, and sale or trade of pollution credits. Utilization by customers of such processes or business practices or combinations thereof may adversely affect Fuel Tech's pricing and participation in the NOx Control market if customers elect to comply with regulations by methods other than Fuel Tech's NOxOUT or NOxOUT CASCADE processes. See above under this Item I the text under the captions "Products" and "NOx Reduction Competition." (iii) Dependence on Regulations and Enforcement Fuel Tech's business is primarily regulatory driven. That business will be adversely impacted to the extent that regulations are repealed or amended to significantly reduce the level of required NOx reduction, or to the extent that regulatory authorities minimize enforcement. See also the text above under the caption "Regulations and Markets." (iv) Protection of Patents and Proprietary Rights Fuel Tech holds licenses to or owns a number of patents and has patents pending. There can be no assurance that pending patent applications will be granted or that outstanding patents will not be challenged or circumvented by competitors. Certain critical technology relating to Fuel Tech's products is protected by trademark and trade secret laws and confidentiality and licensing agreements. There can be no assurance that such protection will prove adequate or that Fuel Tech will have adequate remedies for disclosure of its trade secrets or violations of its intellectual property rights. See Item 2 "Description of Property." 4 ITEM 2. DESCRIPTION OF PROPERTY Fuel Tech's products are generally protected by U.S. and non-U.S. patents. Fuel Tech owns 108 patents worldwide, with 3 patent applications pending in the U.S. and 30 pending in non-U.S. jurisdictions. These patents cover some 44 inventions, 32 associated with the NOx reduction business; 2 associated with FUEL CHEM, 2 associated with ACUITIV and 9 associated with non-commercialized technologies. These inventions represent significant enhancements of the application and performance of the technologies. Further, Fuel Tech believes that the protection provided by the numerous claims in the above referenced patents or patent applications is substantial, and affords Fuel Tech a significant competitive advantage in its business. Accordingly, any significant reduction in the protection afforded by these patents or any significant development in competing technologies could have a material adverse effect on Fuel Tech's business. Apart from its intellectual property, the property of Fuel Tech is not material. Fuel Tech and its subsidiaries operate from leased office and engineering facilities in Curacao, Netherlands Antilles; Batavia, Illinois; Stamford, Connecticut; and Milan, Italy. ITEM 3. LEGAL PROCEEDINGS Fuel Tech has no pending litigation material to its business. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS During the fourth quarter of 2002, no matters were submitted to a vote of security holders. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Fuel Tech's Common Shares have been traded since September 1993 on The NASDAQ Stock Market, Inc. Fuel Tech's Common Shares are also traded on the Berlin Stock Exchange. Prices The table below sets forth the high and low sales prices during each calendar quarter since January 2001. 2002 High Low ---- ---- --- Fourth Quarter 4.950 2.760 Third Quarter 6.640 3.950 Second Quarter 7.250 5.200 First Quarter 6.820 4.500 2001 ---- Fourth Quarter 6.070 2.190 Third Quarter 3.700 2.010 Second Quarter 3.840 2.000 First Quarter 2.781 1.250 Dividends Fuel Tech has not to date paid dividends on its Common Shares and is not expected to do so in the foreseeable future. Holders Based on information from Fuel Tech's Transfer Agent, as of March 3, 2003, there were 391 registered holders of Fuel Tech's common stock. Management believes that, on such date, there were approximately 2,300 beneficial holders of Fuel Tech's common stock. Transfer Agent The Transfer Agent and Registrar for the Common Shares is Mellon Investor Services, LLC, 85 Challenger Road, Overpeck Centre, Ridgefield Park, New Jersey 07660. Exchange Controls Fuel Tech received a license of unlimited duration from the Central Bank of the Netherlands Antilles to exempt it from foreign exchange controls in dealings with parties outside of the Netherlands Antilles or with parties in the Netherlands Antilles holding a similar license. Fuel Tech also received a business license of unlimited duration that allows the securities of Fuel Tech to be held by non-residents of the Netherlands Antilles. There are no other restrictions on the rights of such non-residents as shareholders. The books of Fuel Tech are maintained in United States dollars, however, there are transactions in other currencies. Taxation Under the Netherlands Antilles tax code applicable to Fuel Tech until at least the fiscal year 2019, Fuel Tech's income taxes in the Netherlands Antilles, which are based on profits exclusive of Dutch dividends received, are computed at a rate of 2.4% on the first 100,000 Netherlands Antilles Guilders (approximately $60,000) and 3% on the excess. Also, capital gains and losses are not included in the taxable profit of Fuel Tech. Based on a tax ruling received by Fuel Tech, Dutch dividends received will be taxed to Fuel Tech at a rate of 5.0% at source, and at 5.5% of the net Dutch dividends in the Netherlands Antilles until at least the fiscal year 2005. Fuel-Tech N.V. is not now liable for tax in any jurisdiction other than the Netherlands Antilles. The subsidiaries of Fuel Tech are generally subject to the tax regimes of the jurisdictions where they are incorporated and conduct operations but not in the Netherlands Antilles. Dividends paid by Fuel Tech to United States persons who are not engaged in a trade or business through a permanent establishment in the Netherlands Antilles are currently not subject to tax in the Netherlands Antilles. Gain or loss derived by a United States person from the sale or exchange of Fuel Tech's Common Shares are exempt from Netherlands Antilles income tax. The tax treaty between the United States and the Netherlands Antilles was terminated effective December 31, 1987. 6 Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information for all equity compensation plans as of the fiscal year ended December 31, 2002, under which the securities of Fuel Tech were authorized for issuance:
- -------------------------------- ---------------------------------- --------------------------- ------------------------------- Plan Category Number of Securities to be Weighted-average Number of securities issued upon exercise of exercise price of remaining available for outstanding options, warrants outstanding options, future issuance under and rights warrants and rights equity compensation plans excluding securities listed in column (a) - -------------------------------- ---------------------------------- --------------------------- ------------------------------- (a) (b) (c) - -------------------------------- ---------------------------------- --------------------------- ------------------------------- Equity compensation plans 2,207,000 $2.71 244,700 approved by security holders (1) - -------------------------------- ---------------------------------- --------------------------- -------------------------------
(1) Includes shares of Common Stock of Fuel Tech authorized for awards under Fuel Tech's 1993 Incentive Plan, as amended through August 3, 1999. 7 ITEM 6. SELECTED FINANCIAL DATA Selected financial data is presented below as of the end of and for each of the fiscal years in the five-year period ended December 31, 2002. The selected financial data should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2002, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
For the years ended December 31 --------------- ------------ ------------ ------------- --------------- 2002 2001 2000 1999 1998 --------------- ------------ ------------ ------------- --------------- STATEMENT of OPERATIONS DATA (in thousands of U.S. dollars, except for share data) Net sales $ 32,627 $ 17,672 $ 21,906 $ 33,325 $25,864 Selling, general and administrative and other costs and expenses 11,687 9,873 9,305 9,691 8,927 Net income (loss) 3,057 (1,633) 415 3,008 539 --------------- ------------ ------------ ------------- --------------- Basic income (loss) per common share $ 0.16 $ (0.09) $ 0.02 $ 0.17 $ 0.03 Diluted income (loss) per common share $ 0.14 $ (0.09) $ 0.02 $ 0.16 $ 0.03 Weighted-average basic shares outstanding 19,350,000 18,592,000 18,396,000 17,752,000 15,680,000 Weighted-average diluted shares outstanding 22,437,000 18,592,000 19,621,000 19,335,000 17,437,000 December 31 --------------- ------------ ------------ ------------- --------------- 2002 2001 2000 1999 1998 --------------- ------------ ------------ ------------- --------------- BALANCE SHEET DATA (in thousands of U.S. dollars, except for per share data) Working capital $ 13,947 $ 8,861 $ 12,542 $ 12,126 $ 9,047 Total assets 25,869 20,328 23,089 24,464 19,153 Total liabilities 9,064 7,193 8,522 10,773 8,837 Shareholders' equity 16,805 13,135 14,567 13,691 10,316 Net tangible book value per share $ 0.64 $ 0.56 $ 0.59 $ 0.52 $ 0.45
Notes: (1) Shareholders' equity includes outstanding nominal nil coupon non-redeemable perpetual loan notes. See Note 4 to the consolidated financial statements. (2) Net tangible book value per share assumes full conversion of Fuel Tech's nil coupon non-redeemable perpetual loan notes into shares of Fuel Tech's common stock. (3) Effective January 1, 2002, Fuel Tech adopted FASB (Financial Accounting Standards Board) Statement No. 142, "Goodwill and Other Intangible Assets." Under the guidance of this statement, goodwill and indefinite-lived intangible assets are no longer amortized but will be reviewed annually, or more frequently if indicators arise, for impairment. For the twelve months ended December 31, the following table depicts the impact on each of the prior years noted, had the non-amortization policy been applied.
2002 2001 2000 1999 1998 ------------------------------------------------------------------------------ Reported net income (loss) $ 3,057,000 $ (1,633,000) $ 415,000 $ 3,008,000 $ 539,000 Add back: Goodwill amortization -- 334,000 334,000 199,000 57,000 ------------------------------------------------------------------------------ Adjusted net income (loss) $3,057,000 $ (1,299,000) $ 749,000 $ 3,207,000 $ 596,000 ============================================================================== Basic earnings per share: Reported net income (loss) $ .16 $ (.09) $ .02 $ .17 $ .03 Add back: Goodwill amortization -- .02 .02 .01 .01 ------------------------------------------------------------------------------ Adjusted net income (loss) $ .16 $ (.07) $ .04 $ .18 $ .04 ============================================================================== Diluted earnings per share: Reported net income (loss) $ .14 $ (.09) $ .02 $ .16 $ .03 Add back: Goodwill amortization -- .02 .02 .01 .01 ------------------------------------------------------------------------------ Adjusted net income (loss) $ .14 $ (.07) $ .04 $ .17 $ .04 ==============================================================================
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Background Fuel-Tech N.V. (the "Company") operates primarily in the air pollution control business. It distributes its products through its direct sales force, licensees and agents. Principal markets for its products are stationary combustion sources that produce nitrogen oxide (NOx) and other emissions. Fuel Tech sells its fuel treatment chemicals through its direct sales force and agents to industrial and utility power-generation facilities. Fuel Tech currently generates revenues from the following three product lines: Nitrogen Oxide ("NOx") Reduction Technologies Fuel Tech markets several NOx reduction technologies to meet statutory NOx reduction requirements worldwide. The near-term driver for growth in this business is the Ozone Transport SIP (State Implementation Plan) Call, which requires 19 states to decrease their NOx emissions by May 31, 2004. This regulation impacts 700-800 utility boilers and 400-500 large industrial boilers (see below for more detail on the SIP Call). Fuel Tech believes that the implementation of the SIP Call will extend well beyond the May, 2004 implementation date. Fuel Treatment Chemicals Fuel Tech's proprietary Targeted-In-Furnace-Injection technology centers around the unique application of specialty chemicals to improve the performance of combustion units. Specifically, this technology is used to reduce slag formation, corrosion and opacity in boilers, furnaces and incinerators. Fuel Tech believes its largest market opportunity for this product line is those units burning Western coals, many of which have significant operational issues related to the formation of slag. Visualization Software In 2002, Fuel Tech introduced a software product, marketed under the ACUITIV trade name that allows users to visualize in a three dimensional immersive environment, complex data sets. The software is currently being marketed to users of Computation Fluid Dynamics ("CFD") software, an engineering software tool that aids users in predicting flows, such as liquid or gas streams. Fuel Tech developed this software internally to make the design process of its NOx reduction and fuel treatment chemical business more efficient and accurate. Fuel Tech licenses this product to end users on an annual or permanent basis. Fuel Tech will not record license revenue until its capitalized software development costs, with a balance of approximately $490,000 at December 31, 2002, are recovered. This product was introduced in mid-2002, and to date two licenses have been sold. Fuel Tech expects demand for this product to increase in 2003, as it recently introduced a version of the software that is compatible with the Microsoft Windows operating system. Fuel Tech does not believe, however, that it will recognize significant revenues in 2003 from this product due to the cost recovery requirement discussed above. 2002 versus 2001 Net sales for the 12 months ended December 31, 2002 and 2001 were $32,627,000 and $17,672,000, respectively. The improvement is attributable to the increase in domestic NOx reduction utility project revenues, as project bookings in the fourth quarter of 2001 and in 2002 generated revenues during their various phases of completion. NOx reduction utility revenue in 2001 had been negatively impacted by the delay in obtaining a final ruling on the Environmental Protection Agency's (EPA) SIP (State Implementation Plan) Call regulation. As discussed further below, the uncertainty regarding this regulation has been lifted and Fuel Tech expects demand for its NOx reduction technologies to continue to increase during the next few years. Fuel treatment chemical revenues for the twelve-month period ended December 31, 2002 continued to be favorably impacted by shipments to utilities burning Western coals. Fuel Tech believes that utilities burning Western coals represent the largest market opportunity for its fuel treatment chemical business and that penetration into this market is a priority. In addition to shipments to PacifiCorp, Fuel Tech's strategic agreement partner, demonstrations with two midwestern utilities, both on coal-fired units, commenced during the year. All of these utilities are using Fuel Tech's patented Targeted-In-Furnace-Injection (TIFI) process to control the formation of slag deposits in boilers burning western coals. More than offsetting the improved performance in the coal-fired utility segment of this market were the following two factors: first, the continued deterioration in the oil-fired business, as the high price of oil as compared with the price of natural gas caused customers in this segment to switch fuels, negatively impacting results. Second, the use of low-slagging coal by one of Fuel Tech's customers caused that customer to temporarily suspend treatment. Although Fuel Tech believes that both factors will reverse themselves, it is not possible to predict when that will occur. The "SIP Call" is the federal mandate that, when introduced in 1998, required 22 states to reduce NOx emissions by May 2003. On March 3, 2000, an appellate court of the D.C. Circuit upheld the validity of the SIP Call for 19 of the 22 states and, on June 22, 2000, the same court made a final ruling upholding the EPA's SIP call regulation and denying the appeal of the states and utilities. Although the NOx reduction requirement date was moved back one year to May of 2004, nineteen states were required to complete and issue their State Implementation Plans for NOx reduction by October of 2000. These plans, which the EPA had until October 2001 to approve, will potentially impact 700 to 800 utility boilers and 400 to 500 industrial units. 9 In February 2001, the United States Supreme Court, in a unanimous decision, upheld EPA's authority to revise the National Ambient Air Quality Standard for ozone to 0.080 parts per million averaged through an eight-hour period from the current 0.120 parts per million for a one-hour period. This more stringent standard provides clarity and impetus for NOx reduction efforts well beyond the current ozone attainment requirement of 2007. In keeping with this trend, the Supreme Court, only days later, denied industry's attempt to again stay the SIP Call, effectively exhausting all means of appeal. Based on these regulatory developments, Fuel Tech is enjoying accelerated interest in its NOx reduction programs that have led to significant project bookings late in 2001 and in 2002. Fuel Tech anticipates continued demand for its air pollution control technologies over the next several years. Cost of sales, as a percentage of net sales, for the 12-month period ended December 31, 2002 was 56% versus 51% for the same period of the prior year. The increase reflects a change in product mix in 2002, in favor of the lower margin NOx reduction project business. Selling, general and administrative expenses were $10,232,000 and $8,708,000, respectively, for the 12-month periods ended December 31, 2002 and 2001. The increase is due primarily to revenue-related expenses, as revenue increased significantly from the prior year, and secondarily to the addition of sales and marketing personnel, both for the fuel treatment chemical and ACUITIV businesses. Market penetration of Fuel Tech's TIFI technology in the coal-fired utility market remains a strategic priority. Research and development expenses for the 12 months ended December 31, 2002 and 2001 were $1,455,000 and $1,165,000, respectively. Fuel Tech continues to pursue commercial applications for its technologies outside of its traditional markets, with a particular focus on its ACUITIV software and its NOxOUT ULTRA process. The ACUITIV software product was commercially introduced on June 6, 2002, and Fuel Tech recently received its second commercial order. Fuel Tech recorded a loss of $54,000 for the 12 months ended December 31, 2002 on its equity investment in Fuel Tech CS GmbH (FTCS), a 49 percent-owned entity. During the quarter ended March 31, 2002, Fuel Tech recognized a gain of $250,000 on its equity investment in Clean Diesel Technologies, Inc. (CDT), its 15.2 percent-owned affiliate. The gain resulted from CDT's repayment of the full principal amount of loans made by Fuel Tech to CDT in 2000 and 2001. Because of the continuing losses incurred by CDT, the carrying value of the loans was reduced to zero as of December 31, 2001, based on Fuel Tech's pro-rata share of the losses incurred. Fuel Tech's investment in CDT, whose shares are publicly traded on the OTC Bulletin Board and the Alternative Investment Market of the London Stock Exchange, had a market value of $2.7 million at December 31, 2002, which is not reflected on Fuel Tech's balance sheet. During the 12 months ended December 31, 2001, Fuel Tech recognized a $92,000 loss on its equity investment in FTCS, while a loss of $250,000 was recorded on Fuel Tech's investment in CDT for the same period. Please refer to Note 8 of the consolidated financial statements for a further discussion of related party transactions. Interest expense for the 12 months ended December 31, 2002 was reduced to $136,000 from $245,000 in the prior 12-month period. The decrease is attributable to a reduction in the average outstanding principal balance on Fuel Tech's term loan, as well as to a reduction in short term interest rates. Other income and expense for the 12-month period ended December 31, 2002 was $139,000 versus $37,000 for the same period in 2001. The increase stems largely from the elimination of goodwill amortization effective January 1, 2002, which has been offset somewhat by reductions in interest income. An income tax benefit of $150,000 was recorded in 2002, which represented a reduction of the reserve for prior years' state income tax refunds receivable, as the related receivables were collected in 2002. No provision for federal or state income taxes was recorded in any period due to the existence of net operating loss carry forwards. Fuel Tech has $32.4 million in United States federal income tax loss carry forwards as of December 31, 2002, the deferred tax benefit of which has been offset by a valuation allowance in Fuel Tech's balance sheet. In the opinion of management, Fuel Tech's expected near-term revenue growth in its NOx reduction business will be directly related to the implementation of the requirements of the CAAA. Fuel Tech's implementor and alliance strategies will enable Fuel Tech to provide the NOxOUT Process to an increasing number of customers without significantly adding technical and support staff. Customers purchase the NOxOUT Process and related technologies from either Fuel Tech or its implementors. If customers purchase the NOxOUT Process from implementors, the per contract revenues to Fuel Tech may be lower, but more installations may be handled. 10 2001 versus 2000 Net sales in 2001 totaled $17,672,000 versus net sales of $21,906,000 in 2000, a decline of 19%. This overall decline was due to a $9,100,000 year on year reduction in domestic NOx reduction industrial project revenues, the basis of which is discussed further below. This result was partially offset by two favorable factors. First, Fuel Tech experienced a $2,776,000 increase in fuel treatment chemical revenues in 2001 versus 2000, to a record level of $7,209,000. Second, Fuel Tech realized revenues from temperature mapping and modeling activities predominantly for the domestic NOx reduction utility project business in the amount of approximately $1,700,000 in 2001 versus an immaterial amount in 2000. The year on year decline in domestic NOx reduction industrial project revenues was attributable to a NOx reduction regulation, as mandated in Title III of the CAAA, requiring municipal solid waste incinerators to significantly reduce their NOx emissions by December 1, 2000. This regulation had a significant positive impact on industrial project revenues in 2000, and it was expected that these revenues would not repeat in 2001. NOx reduction utility revenue had been negatively impacted by the delay in obtaining a final ruling on the EPA's SIP Call regulation. The increase in fuel treatment chemical revenues was attributable to Fuel Tech's success in penetrating the market for utility units burning Western coals, and to customers' conversion from existing suppliers to Fuel Tech. Significant focus was placed on marketing Fuel Tech's patented Targeted-In-Furnace-Injection approach to reduce the operating costs of customers' units. In 2001, Fuel Tech realized approximately $1,700,000 in revenues from temperature mapping and modeling orders received on 40 boilers predominantly for the domestic NOx reduction utility project business. Fuel Tech's performance of temperature mapping and modeling work for a customer is the precursor to performing NOx reduction project installations on the units for which the mapping and modeling has been performed. It is Fuel Tech's belief that project orders will be received from the majority of customers for whom temperature mapping and modeling work has been performed. The gross margin percentage on an overall basis across all products was 49% in 2001, compared with 46% in 2000. The improvement was realized primarily due to the increase in revenues in the fuel treatment chemical business. As NOx reduction revenues from utility companies in the United States increase due to the above-mentioned regulations, this business will comprise a much larger percentage of Fuel Tech's overall revenues. As a result, Fuel Tech expects that the overall gross margin percentages will decline over the next several years, reflecting the change in product mix. Selling, general and administrative expenses were $8,708,000 for the twelve months ended December 31, 2001, an increase of $774,000 from the prior year. The increase was due primarily to a higher level of selling and service expenses resulting from the increased agents fees and commissions for the U.S. fuel treatment chemical business, and to a lesser extent to an increase in expenses related to the enhancement and expansion of Fuel Tech's European business. Research and development expenses for the twelve months ended December 31, 2001 and 2000 were $1,165,000 and $843,000, respectively. Fuel Tech continued to aggressively pursue commercial applications for its technologies outside of its traditional markets, with a particular focus on its NOxOUT ULTRA process and its ACUITIV advanced visualization software. Fuel Tech sold its first commercial demonstration of NOxOUT ULTRA late in 2001. Fuel Tech recorded a net loss from its equity interest in affiliates during the year 2001 of $342,000. This amount consisted of a $250,000 loss recognized on its equity investment in Clean Diesel Technologies, Inc. (CDT), and a $92,000 loss on its investment in Fuel Tech CS GmbH. Fuel Tech had a 16% common stock ownership interest in CDT as of December 31, 2001, while Fuel Tech had a 49% ownership interest in Fuel Tech CS GmbH as noted above. Please refer to Note 8 of the consolidated financial statements for a further discussion of related party transactions. Interest expense decreased to $245,000 for the twelve-month period ended December 31, 2001 from $354,000 for the same period in 2000. The favorable variance was due solely to the decrease in the average outstanding principal debt balance during the year, and to a decrease in short-term interest rates. Other income and expense for the twelve-month period ended December 31, 2001 was $37,000 versus $82,000 for the same period in 2000. The decrease was due to a lower level of interest income that was driven by the decrease in short-term interest rates noted above, and to the write down of impaired assets. Partially offsetting these factors was a gain in the amount of approximately $180,000 related to the dissolution of the wholly owned subsidiaries in Poland and Taiwan. The entity in Poland has not been operational since 1997, and the entity in Taiwan operated only as a sales agency office. Fuel Tech recorded a tax benefit of $114,000 in 2001 related to the Italian subsidiary. There were no domestic income taxes recorded in 2001 as Fuel Tech recorded a net loss for the year. Fuel Tech had $39.9 million in United States federal income tax loss carryforwards as of December 31, 2001, the deferred tax benefit of which has been offset by a valuation allowance in Fuel Tech's balance sheet. 11 LIQUIDITY AND CAPITAL RESOURCES Fuel Tech's cash and cash equivalents were approximately $10.9 million at December 31, 2002 versus $9.3 million at December 31, 2001. Operating activities provided $3.0 million of cash in 2002 primarily due to Fuel Tech's operating profits. Investing activities, which used cash of $1.1 million during the year, were primarily comprised of the continued investment in equipment and intellectual property of $1.3 million, which was partially offset by the aforementioned loan repayment by CDT. Financing activities, which used cash of $365,000 during the year, were comprised primarily of debt repayments of $900,000, which were offset by cash received from the exercise of stock options. Historically, Fuel Tech had financed its operations principally through the private placement of its Common Shares and the private placement of nil coupon non-redeemable convertible unsecured loan notes (the "Loan Notes"). The Loan Notes are convertible at any time into Fuel Tech's common stock. They bear no interest, have no maturity date and are repayable generally only in the event of the winding up of Fuel Tech. Fuel Tech has therefore classified the Loan Notes within shareholders' equity in its balance sheet. At December 31, 2002, Fuel Tech had cash and cash equivalents of $10,939,000 and working capital of $13,947,000 versus $9,338,000 and $8,861,000 at the end of 2001, respectively. Fuel Tech, Inc. (FTI), a wholly owned subsidiary of Fuel Tech, has a $10.0 million revolving credit facility expiring July 31, 2004, which is collateralized by all personal property owned by FTI. FTI can use this facility for cash advances and standby letters of credit. Cash advances under this facility bear interest at the bank's prime rate, or at an optional rate that can be selected by FTI which is based on the bank's Interbank Offering Rate plus 2.25%. Also, FTI has a term loan agreement with the same bank for a total principal balance of $4.5 million. The principal balance was to be repaid in quarterly installments of $225,000 commencing on December 31, 1999, with a final principal payment of $1,575,000 due on January 31, 2003. Further, FTI entered into an interest rate swap transaction that fixed the rate of interest at 8.91% on approximately 50% of the outstanding principal balance during the term of the loan. This swap expired on October 22, 2002. The remaining principal balance bears interest at the bank's prime rate, or an optional rate that can be selected by FTI, and is based on the bank's Interbank Offering Rate plus 2.25%. The borrowings under this facility are collateralized by all personal property owned by FTI. The $10.0 million revolving credit facility was obtained via an amendment, effective December 31, 2002, that increased the credit facility from $6.0 million to $10.0 million and extended the agreement until July 31, 2004. The term loan was paid in full on January 31, 2003 using funds from the line of credit. At December 31, 2002, the bank had provided standby letters of credit, predominantly to customers, totaling approximately $927,028 in connection with contracts in process. FTI is committed to reimbursing the issuing bank for any payments made by the bank under these letters of credit. At December 31, 2002, there were no cash borrowings against the revolving credit facility and $9,072,972 was available for utilization. The carrying amount of debt approximates fair value at December 31, 2002. Interest payments were $156,000, $250,000 and $373,000 for the years ended December 31, 2002, 2001 and 2000, respectively Fuel Tech believes that it will have sufficient resources to fund its growth and operations going forward. 12 Contractual Obligations and Commitments In its normal course of business, Fuel Tech enters into agreements that obligate Fuel Tech to make future payments. The operating lease obligations noted below are primarily related to supporting the normal operations of the business and are not recognized as liabilities in Fuel Tech's consolidated balance sheet in accordance with generally accepted accounting principles. Also shown below is the term loan balance at December 31, 2002, which, as noted previously, was paid in full on January 31, 2003 using funds from the line of credit.
- ---------------------------- ----------------------------------------------------------------------------------------------- Payments due by period in thousands of US dollars - ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------ Contractual Cash Total Less than 1 2-3 years 4-5 years Thereafter Obligations year - ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------ Operating leases $1,367 $347 $ 430 $366 $224 - ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------ Term Loan 1,800 - 1,800 - - - ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------ Total Contractual Cash $3,167 $347 $2,230 $366 $224 Obligations - ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Fuel Tech in the normal course of business, uses bank performance guarantees and letters of credit in support of construction contracts with customers as follows: - in support of the warrantee period defined in the contract, or - in support of the system performance criteria that are defined in the contract In addition, Fuel Tech uses letters of credit as security for other obligations as needed in the normal course of business. As of December 31, 2002, Fuel Tech has outstanding bank performance guarantees and letters of credit as noted in the table below:
- ---------------------------- ----------------------------------------------------------------------------------------------- Commitment expiration by period in thousands of US dollars - ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------ Commercial Commitments Total Less than 1 2-3 years 4-5 years Thereafter year - ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------ Standby letters of $927 $821 $106 - - credit and bank guarantees - ---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Critical Accounting Policies and Estimates The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require Fuel Tech to make estimates and assumptions. Fuel Tech believes that of its significant accounting policies (see Note 1 to the consolidated financial statements), the following involves a higher degree of judgment and complexity: Fuel Tech uses the percentage of completion method of accounting for certain long-term equipment construction and license contracts. Under the percentage of completion method, sales and gross profit are recognized as work is performed based on the relationship between actual engineering hours and equipment construction costs incurred and total estimated hours and costs at completion. Since the financial reporting of these contracts depends on estimates, which are assessed continually during the term of the contract, recognized sales and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become known. FORWARD-LOOKING INFORMATION From time to time, information provided by Fuel Tech, statements made by its employees or information included in its filings with the Securities and Exchange Commission (including this Annual Report) may contain statements that are not historical facts, so-called "forward-looking statements." These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Fuel Tech's actual future results may differ significantly from those stated in any forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including, but not limited to, product demand, pricing, market acceptance, litigation, risk of dependence on significant customers, third-party suppliers and intellectual property rights, risks in product and technology development and other risk factors detailed in this Annual Report and in Fuel Tech's Securities and Exchange Commission filings. 13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Fuel Tech's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. Fuel Tech does not enter into foreign currency forward contracts or into foreign currency option contracts to manage this risk due to the immaterial nature of the transactions involved. Fuel Tech is also exposed to changes in interest rates primarily due to its long-term debt arrangement (refer to Note 7 to the consolidated financial statements). A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not have a materially adverse effect on interest expense during the upcoming year ended December 31, 2003. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS OF FUEL-TECH N.V. We have audited the accompanying consolidated balance sheets of Fuel-Tech N.V. as of December 31, 2002 and 2001, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of Fuel Tech's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fuel-Tech N.V. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, Fuel Tech changed its method of accounting for goodwill to conform with SFAS No. 142, "Goodwill and Other Intangible Assets," and effective January 1, 2001, changed its method of accounting for derivative financial instruments to conform with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Ernst & Young LLP Chicago, Illinois February 19, 2003 15 Consolidated Balance Sheets (in thousands of U.S. dollars, except share data)
2002 2001 -------------------------- December 31 ASSETS Current assets: Cash and cash equivalents $10,939 $9,338 Accounts receivable, net of allowances for doubtful accounts of $107 and $162, respectively 8,849 5,368 Inventories 420 274 Prepaid expenses and other current assets 744 583 -------------------------- Total current assets 20,952 15,563 Equipment, net of accumulated depreciation of $5,118 and $4,222, respectively 2,123 1,756 Goodwill, net of accumulated amortization of $924 2,119 2,126 Other assets 675 883 -------------------------- Total assets $25,869 $20,328 ========================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of note payable $ - $ 2,700 Accounts payable 5,065 1,978 Accrued liabilities: Employee compensation 802 513 Deferred revenue - 319 Other accrued liabilities 1,138 1,192 -------------------------- Total current liabilities 7,005 6,702 Note payable 1,800 - Other liabilities 259 491 -------------------------- Total liabilities 9,064 7,193 Shareholders' equity: Common stock, $.01 par value, 40,000,000 shares authorized, 19,613,817 and 18,984,097 shares issued, respectively 196 190 Additional paid-in capital 90,315 87,720 Accumulated deficit (73,150) (76,207) Accumulated other comprehensive income (loss) 10 (68) Treasury stock (1,098) (1,098) Nil coupon perpetual loan notes 532 2,598 -------------------------- Total shareholders' equity 16,805 13,135 -------------------------- Total liabilities and shareholders' equity $25,869 $20,328 ==========================
See notes to consolidated financial statements. 16 Consolidated Statements of Operations (in thousands of U.S. dollars, except share data)
2002 2001 2000 ------------- ------------- ------------ For the years ended December 31 Net revenues $ 32,627 $ 17,672 $ 21,906 Costs and expenses Cost of sales 18,232 8,996 11,757 Selling, general and administrative 10,232 8,708 7,934 Research and development 1,455 1,165 843 Closing costs of German subsidiary - - 528 ------------ ------------ ------------------ 29,919 18,869 21,062 ------------ ------------------ ------------------ Operating income (loss) 2,708 (1,197) 844 Income (loss) from equity interest in affiliates 196 (342) (195) Interest expense (136) (245) (354) Other income (expense): Gain on sale of German subsidiary chemical business - - 269 Cumulative translation loss of German subsidiary - - (231) Other income, net 139 37 82 ------------ ------------------ ------------------ Income (loss) before taxes 2,907 (1,747) 415 Income tax benefit 150 114 - ------------ ------------------ ------------------ Net income (loss) $ 3,057 $ (1,633) $ 415 ============ ================== ================== Net income (loss) per common share Basic $ 0.16 $ (0.09) $ 0.02 Diluted 0.14 (0.09) 0.02 Average number of common shares outstanding Basic 19,350,000 18,592,000 18,396,000 Diluted 22,437,000 18,592,000 19,621,000
See notes to consolidated financial statements. 17 Consolidated Statements of Shareholders' Equity (in thousands of U.S. dollars, except share data in thousands)
Accumulated Common Stock Additional Other Treasury Stock Nil Coupon ------------ Paid-in Accumulated Comprehensive -------------- Perpetual Shares Amount Capital Deficit Income (Loss) Shares Amount Loan Notes Total ----------------------------------------------------------------------------------------------------- Balance at January 1, 18,328 $183 $85,692 $ (74,989) $ (25) 94 $ (1,058) $3,888 $ 13,691 2000 Comprehensive income: Net income 415 415 Foreign currency translation Adjustments 122 122 ---------- Comprehensive income 537 Conversion of nil coupon perpetual loan notes into common stock 7 - 68 (68) - Exercise of stock options 192 2 337 339 ------------------------------------------------------------------------------------------------------ Balance at December 31, 18,527 $185 $86,097 $ (74,574) $ 97 94 $ (1,058) $3,820 $ 14,567 2000 ----------------------------------------------------------------------------------------------------- Comprehensive loss: Net loss (1,633) (1,633) Adjustment for fair value of derivative (42) (42) Foreign currency translation adjustments (123) (123) ---------- Comprehensive loss (1,798) Conversion of nil coupon perpetual loan notes into common stock 200 2 1,220 (1,222) - Exercise of stock options 216 3 403 406 Other 41 (30) (40) (40) ------------------------------------------------------------------------------------------------------ Balance at December 31, 2001 18,984 $190 $87,720 $(76,207) $ (68) 64 $ (1,098) $2,598 $13,135 ------------------------------------------------------------------------------------------------------ Comprehensive loss: Net income 3,057 3,057 Adjustment for fair value of derivative 42 42 Foreign currency translation adjustments 36 36 ---------- Comprehensive income 3,135 Conversion of nil coupon perpetual loan notes into common stock 387 4 2,062 (2,066) - Exercise of stock options 243 2 533 535 Other 46 ------------------------------------------------------------------------------------------------------ Balance at December 31, 19,614 $196 $90,315 $(73,150) $ 10 110 $ (1,098) $ 532 $16,805 2002 ======================================================================================================
See notes to consolidated financial statements. 18 Consolidated Statements of Cash Flows (in thousands of U.S. dollars)
2002 2001 2000 ----------------------------------- For the years ended December 31 OPERATING ACTIVITIES Net income (loss) $ 3,057 $ (1,633) $ 415 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 902 769 601 Amortization 41 375 382 Provision for doubtful accounts 289 44 233 Loss on equipment disposals/impaired assets 186 156 82 (Income) loss from equity interest in affiliates (196) 342 195 Income taxes (150) - - Closing reserve for German subsidiary - - 528 Cash payments against German subsidiary closing reserve (20) (26) (277) Gain on sale of German subsidiary chemical business - - (269) Cumulative translation (gain) loss - (90) 231 Changes in operating assets and liabilities: Accounts receivable (3,813) 2,110 1,758 Inventories, prepaid expenses, other current assets and other noncurrent assets (214) 422 (334) Accounts payable, accrued liabilities, deferred revenue and other noncurrent liabilities 2,912 (417) (1,957) Other 7 8 3 ------------------------------------ Net cash provided by operating activities 3,001 2,060 1,591 INVESTING ACTIVITIES Investment in and loans to CDT 250 (125) (350) Investment in Fuel Tech CS GmbH - - (116) Proceeds from sale of German subsidiary's chemical - - 122 business Proceeds from sale of equipment 17 - - Purchases of equipment and patents (1,338) (1,016) (774) ------------------------------------ Net cash used in investing activities (1,071) (1,141) (1,118) FINANCING ACTIVITIES Proceeds from exercise of stock options 535 406 339 Purchase and retirement of nil coupon loan notes - - - Purchase of treasury shares - (40) - Repayment of borrowings (900) (900) (675) ------------------------------------ Net cash used in financing activities (365) (534) (336) Effect of exchange rate fluctuations on cash 36 (34) (109) ------------------------------------ Net increase in cash and cash equivalents 1,601 351 28 Cash and cash equivalents at beginning of year 9,338 8,987 8,959 ------------------------------------ Cash and cash equivalents at end of year $ 10,939 $ 9,338 $ 8,987 ====================================
See notes to consolidated financial statements. 19 Notes to Consolidated Financial Statements 1. Organization and Significant Accounting Policies Organization Fuel-Tech N.V. ("Fuel Tech") is a holding company primarily in the business of air pollution control. Fuel Tech's primary focus, through its wholly owned subsidiary, Fuel Tech, Inc. ("FTI"), is on the worldwide marketing and sale of its NOxOUT Process and related technologies as well as its FUEL CHEM fuel treatment chemical product line. The NOxOUT Process reduces nitrogen oxide ("NOx") emissions from boilers, furnaces and other stationary combustion sources. FUEL CHEM is based on Fuel Tech's proprietary Targeted-In-Furnace-Injection technology in the unique application of specialty chemicals to improve the performance of combustion units. Fuel Tech's business is materially dependent on the continued existence and enforcement of air quality regulations, particularly in the United States. Fuel Tech recently introduced a software product under the ACUITIV trade name that allows users of high-end engineering software to visualize complex data sets in an immersive, virtual reality environment. Fuel Tech has expended significant resources in the research and development of new technologies in building its proprietary portfolio of air pollution control, fuel treatment chemicals, computer modeling and advanced visualization technologies. For the years ended December 31, 2002, 2001, and 2000, 12%, 25%, and 20% of Fuel Tech's revenues, respectively, were derived from international markets, principally in Europe and Asia. Basis of Presentation The consolidated financial statements include the accounts of Fuel Tech and its wholly owned subsidiaries. All intercompany transactions have been eliminated. Reclassifications Certain amounts included in prior year financial statements have been reclassified to conform to the current year presentation. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Foreign Currency Translation The functional currency for Fuel Tech's foreign subsidiaries is the respective local currency. Accordingly, assets and liabilities are translated into U.S. dollars at current exchange rates, and revenues and expenses are translated using average rates of exchange prevailing during the year. Adjustments resulting from translation of financial statements denominated in currencies other than the U.S. dollar are included in accumulated other comprehensive income or loss. Foreign currency transaction gains and losses are included in the determination of net income. Cash Equivalents and Financial Instruments Fuel Tech considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 2002, substantially all of Fuel Tech's cash and cash equivalents are on deposit with three financial institutions. All financial instruments are reflected in the accompanying balance sheets at amounts that approximate fair market value. 20 Derivative Financial Instruments Effective January 1, 2001, Fuel Tech adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated other comprehensive income or loss, and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. Interest Rate Risk Management: Fuel Tech is exposed to interest rate risk due to its long-term debt arrangement. Fuel Tech used an interest rate derivative instrument (an interest rate swap) to manage exposure to interest rate changes. Fuel Tech had entered into an interest rate swap transaction that fixed the rate of interest at 8.91% on approximately 50% of the outstanding principal balance during the term of the loan. The term of the swap was from October 22, 1999 until October 22, 2002, at which date it expired. At the date of adoption, January 1, 2001, Fuel Tech recorded the fair value of the interest rate swap, a credit of approximately $20,000, as an "other liability" with a corresponding decrease to "accumulated other comprehensive income." Foreign Currency Risk Management: Fuel Tech's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. Fuel Tech does not enter into foreign currency forward contracts or into foreign currency option contracts to manage this risk due to the immaterial nature of the transactions involved. Accounts Receivable Accounts receivable includes unbilled receivables, representing costs and estimated earnings in excess of billings on contracts under the percentage of completion method. At December 31, 2002 and 2001, unbilled receivables were approximately $1,225,000 and $2,057,000, respectively. The allowance for doubtful accounts is established based on Fuel Tech's historical level of write-off activity. 21 Goodwill and Other Intangibles The goodwill recognized as a result of prior transactions was being amortized by the straight-line method over periods of nine and ten years. Effective January 1, 2002, Fuel Tech adopted FASB (Financial Accounting Standards Board) Statement No. 142, "Goodwill and Other Intangible Assets." Under the guidance of this statement, goodwill and indefinite-lived intangible assets will no longer be amortized but will be reviewed annually, or more frequently if indicators arise, for impairment. In connection with the adoption of FASB No. 142, Fuel Tech completed the required transitional and annual goodwill impairment testing using the market capitalization methodology. Based on the testing performed, no impairment was indicated. The following is a reconciliation of 2001 and 2000 net earnings and basic and diluted earnings per share between the amounts previously reported by Fuel Tech and the adjusted amounts that would have been reported if SFAS No. 142 had been applied in prior periods. For the twelve months ended December 31 -------------------------------- 2001 2000 -------------------------------- Reported net (loss) income $ (1,633,000) $ 415,000 Add back: Goodwill amortization 334,000 334,000 -------------------------------- Adjusted net (loss) income $ (1,299,000) $ 749,000 ================================ Basic earnings per share: Reported net (loss) income $ (.09) $ .02 Add back: Goodwill amortization .02 .02 -------------------------------- Adjusted net (loss) income $ (.07) $ .04 ================================ Diluted earnings per share: Reported net (loss) income $ (.09) $ .02 Add back: Goodwill amortization .02 .02 -------------------------------- Adjusted net (loss) income $ (.07) $ .04 ================================ Further, on October 1, 2002, Fuel Tech completed its annual fair value measurement test, and there was no evidence of impairment. Other intangibles, which are included with other assets on the consolidated balance sheet, consist principally of third-party costs related to the development of patent rights. These costs are being amortized by the straight-line method over a period of 10 years from the date of patent issuance. Patent maintenance fees are charged to operations as incurred. Further, the estimated amortization expense related to Fuel Tech's intangible patent assets is expected to approximate $40,000 per year for the five-year period ending December 31, 2007. Equipment Equipment is stated on the basis of cost. Provisions for depreciation are computed by the straight-line method, using estimated useful lives as follows: Laboratory equipment......................................... 5-10 years Furniture and fixtures....................................... 3-10 years Computer equipment and software.............................. 3-5 years Field equipment.............................................. 3-4 years Vehicles..................................................... 3 years Accounting for the Impairment of Long-Lived Assets Fuel Tech reviews long-lived assets and certain intangible assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the sum of the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. The impact of such losses on Fuel Tech was $90,000 and $139,000 for the years ended December 31, 2002 and 2001, respectively. 22 Revenue Recognition Fuel Tech uses the percentage of completion method of accounting for certain long-term equipment construction and license contracts. Under the percentage of completion method, sales and gross profit are recognized as work is performed based on the relationship between actual engineering hours and equipment construction costs incurred and total estimated hours and costs at completion. Sales and gross profit are adjusted for revisions in completion estimates and contract values in the period in which the facts giving rise to the revisions become known. Revenues from the sales of chemical products are recorded when title transfers, either at the point of shipment or at the point of destination, depending on the contract with the customer. Distribution Costs Fuel Tech classifies shipping and handling costs in cost of sales in the consolidated statement of operations. Stock-Based Compensation Fuel Tech accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under Fuel Tech's current plans, options may be granted at not less than the fair market value on the date of grant, and therefore, no compensation expense is recognized for the stock options granted. If compensation expense for Fuel Tech's plans had been determined based on the fair value at the grant dates for awards under its plans, consistent with the method described in SFAS No. 123, Fuel Tech's net income (loss) and income (loss) per share would have been adjusted as follows for the years ended December 31:
- ---------------------------- ------------------------- ----------------- ------------------ ---------------- (in thousands) 2002 2001 2000 - ---------------------------- ------------------------- ----------------- ------------------ ---------------- Net income (loss) - ---------------------------- ------------------------- ----------------- ------------------ ---------------- As reported $3,057 $(1,633) $415 - ---------------------------- ------------------------- ----------------- ------------------ ---------------- As adjusted 2,083 (2,329) (103) - ---------------------------- ------------------------- ----------------- ------------------ ---------------- - ---------------------------- ------------------------- ----------------- ------------------ ---------------- Basic and diluted income (loss) per share: - ---------------------------- ------------------------- ----------------- ------------------ ---------------- Basic - as reported $.16 $(.09) $.02 - ---------------------------- ------------------------- ----------------- ------------------ ---------------- Basic - as adjusted $.11 $(.13) $(.01) - ---------------------------- ------------------------- ----------------- ------------------ ---------------- - ---------------------------- ------------------------- ----------------- ------------------ ---------------- Diluted - as reported $.14 $(.09) $.02 - ---------------------------- ------------------------- ----------------- ------------------ ---------------- Diluted - as adjusted $.09 $(.13) $(.01) - ---------------------------- ------------------------- ----------------- ------------------ ----------------
In accordance with the provisions of SFAS No. 123, the "As adjusted" disclosures include only the effect of stock options granted after 1994. The application of the "As adjusted" disclosures presented above are not representative of the effects SFAS No. 123 may have on such operating results in future years due to the timing of stock option grants and considering that options vest over a period of immediately to five years. Basic and Diluted Earnings Per Common Share Basic earnings per share excludes the dilutive effects of stock options and of the nil coupon non-redeemable convertible unsecured loan notes (see Note 4). Diluted earnings per share includes the dilutive effect of the nil coupon non-redeemable convertible unsecured loan notes and of stock options and warrants. The following table sets forth the weighted-average shares used at December 31 in calculating earnings per share (in thousands):
- -------------------------------------------------- -------------------------- ------------------------ --------------------- 2002 2001 2000 - -------------------------------------------------- -------------------------- ------------------------ --------------------- Basic weighted-average shares 19,350 18,592 18,396 - -------------------------------------------------- -------------------------- ------------------------ --------------------- Conversion of unsecured loan notes 85 - 483 - -------------------------------------------------- -------------------------- ------------------------ --------------------- Unexercised options and warrants 3,002 - 742 - -------------------------------------------------- -------------------------- ------------------------ --------------------- Diluted weighted-average shares 22,437 18,592 19,621 - -------------------------------------------------- ========================== ======================== =====================
23 2. TAXATION At December 31, 2002, FTI had tax losses available for offset against future years' earnings of approximately $32.4 million in the United States. For financial statement purposes, a valuation allowance has been recorded to offset the tax benefit of these carryforwards. Under the provisions of the United States Tax Reform Act of 1986, utilization of Fuel Tech's United States federal income tax loss carryforwards may be limited should ownership changes exceed 50% within a three-year period. The United States federal tax loss carryforwards expire as follows (in thousands): 2003 $14,925 2004 4,639 2005 5,467 2006 1,987 2007 2,325 2008 1,480 2009 220 2010 309 2011 884 2012 40 2016 117 ------- $32,393 The components of income (loss) before taxes for the years ended December 31 are as follows (in thousands):
- --------------------------------------------- ------------------- ------------------- -------------------- Origin of income (loss) before taxes 2002 2001 2000 - --------------------------------------------- ------------------- ------------------- -------------------- United States of America $3,689 $ (9) $ 1,211 - --------------------------------------------- ------------------- ------------------- -------------------- Foreign (782) (1,738) (796) - --------------------------------------------- ------------------- ------------------- -------------------- Income (loss) before taxes $2,907 $(1,747) $ 415 - --------------------------------------------- =================== =================== ====================
A reconciliation between the (benefit) provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated (benefit) provision in the consolidated statements of operations for the years ended December 31 is as follows (in thousands):
- ------------------------------------ ---------------- --------------- ---------------- 2002 2001 2000 - ------------------------------------ ---------------- --------------- ---------------- Provision (benefit) at the U.S. $ 1,040 $ (611) $ 145 federal statutory rate - -------------------------------------------------------------------------------------- Foreign losses without tax benefit 274 608 444 - -------------------------------------------------------------------------------------- Valuation allowance adjustment (1,314) - (424) - -------------------------------------------------------------------------------------- State income taxes (150) - (207) - -------------------------------------------------------------------------------------- Foreign (benefit) income taxes - (114) 25 - -------------------------------------------------------------------------------------- Other - 3 17 - -------------------------------------------------------------------------------------- (Benefit) provision for income taxes $ (150) $ (114) $ - - ------------------------------------------============================================
Fuel Tech recorded an income tax benefit of $150,000 in 2002, which represented a reduction in the reserve for prior years' state income tax refunds receivable, as the refunds were collected in 2002. The benefit of $114,000 recorded in 2001 was related to its Italian subsidiary. The reduction in the valuation allowance in 2002 and 2000 results primarily from the utilization of tax loss carryforwards where a valuation allowance had previously been provided. The state income tax credit in 2000 results from recording the benefit of net operating losses generated in prior years, which were carried forward and applied at the state level. Temporary differences arising from treating income and expense items for financial reporting purposes differently than for tax return purposes are not material. 24 3. COMMON STOCK At December 31, 2002, Fuel Tech had 19,613,817 Common Shares outstanding, with an additional 84,787 shares reserved for issuance upon conversion of the nil coupon non-redeemable convertible unsecured loan notes (see Note 4) and 2,207,000 shares reserved for issuance upon the exercise of stock options, 1,220,625 of which are currently exercisable (see Note 5). 4. NIL COUPON NON-REDEEMABLE CONVERTIBLE UNSECURED LOAN NOTES At December 31, 2002 and 2001, Fuel Tech had $533,500 and $2,658,500 principal amount of nil coupon non-redeemable convertible unsecured perpetual loan notes (the "Loan Notes") outstanding, respectively. The Loan Notes are convertible at any time into shares of Fuel Tech's common stock at rates of $6.50 or $11.43 per share. The Loan Notes bear no interest and have no maturity date. They are generally repayable only in the event of Fuel Tech's dissolution and, accordingly, have been classified within shareholders' equity in the accompanying balance sheet. During 2002 and 2001, approximately $2,125,000 and $1,300,000 principal amount of Loan Notes were converted into 185,937 and 200,000 shares of Fuel Tech's common stock, respectively. 5. STOCK OPTIONS AND WARRANTS Fuel Tech has granted stock options under the 1993 Incentive Plan ("1993 Plan"). Under the 1993 Plan, awards may be granted to participants in the form of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Awards, Bonuses or other forms of share-based or non-share-based awards or combinations thereof. Participants in the 1993 Plan may be such of Fuel Tech's directors, officers, employees, consultants or advisors (except consultants or advisors in capital-raising transactions) as the directors determine are key to the success of Fuel Tech's business. The amount of shares that may be issued or reserved for awards to participants under a 1998 amendment to the 1993 Plan is 12.5% of outstanding shares. In 2002, 2001 and 2000, 424,000, 472,500 and 406,000 options, respectively, were granted to employees and directors. 25 The Black-Scholes option-pricing model was used to estimate the fair value of employee stock options for the FAS No. 123 proforma disclosure in Note 1. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because Fuel Tech's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The fair value of each option grant, for "As adjusted" disclosure purposes in Note 1, was estimated on the date of grant using the modified Black-Scholes option pricing model with the following weighted-average assumptions: 2002 2001 2000 ------------------------------------ Expected dividend yield 0.00% 0.00% 0.00% Risk-free interest rate 2.60% 4.40% 5.10% Expected volatility 74.7% 115.1% 96.2% Expected life of option 4 years 4 years 4 years The following table presents a summary of Fuel Tech's stock option activity and related information for the years ended December 31:
2002 2001 2000 Weighted- Weighted- Weighted Number of Average Number of Average Number of Average Options Exercise Price Options Exercise Price Options Exercise Price ----------------------------------------------------------------------------------------------- Outstanding at beginning of year 2,155,500 $ 2.34 2,052,000 $ 2.34 1,874,500 $ 2.39 Granted 424,000 5.82 472,500 2.15 406,000 2.10 Exercised (243,250) 2.20 (215,500) 1.89 (192,000) 1.75 Expired or forfeited (129,250) 6.23 (153,500) 2.71 (36,500) 5.38 ----------------------------------------------------------------------------------------------- Outstanding at end of year 2,207,000 $ 2.71 2,155,500 $ 2.34 2,052,000 $ 2.34 ----------------------------------------------------------------------------------------------- Exercisable at end of year 1,220,625 $ 2.30 1,086,250 $ 2.66 965,500 $ 2.73 Weighted -average fair value of options granted during the year $ 3.31 $ 1.66 $ 1.47
The following table summarizes information about stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------------------- Weighted-Average Weighted- Weighted- Range of Number of Remaining Average Number of Average Exercise Prices Options Contractual Life Exercise Price Options Exercise Price - ------------------------------------------------------------------------------------------------------------------------- $1.375 - $3.38 1,733,000 6.20 years $ 1.92 1,100,625 $ 1.98 $3.595 - $6.27 474,000 9.18 years $ 5.59 120,000 $ 5.15 -------------- -------------- $1.375 - $6.27 2,207,000 6.84 years $ 2.71 1,220,625 $ 2.30 - -------------------------------------------------------------------------------------------------------------------------
In addition to the above, Fuel Tech has 2,710,000 warrants outstanding to purchase additional shares of Fuel Tech's common stock at an exercise price of $1.75. The warrants expire on April 30, 2008. 26 6. COMMITMENTS Operating Leases Fuel Tech leases office space, autos and certain equipment under agreements expiring on various dates through 2009. Future minimum lease payments at December 31, 2002, are as follows (in thousands): ---------------------- ---------------------- Year of Payment Amount ---------------------- ---------------------- 2003 $347 ---------------------- ---------------------- 2004 248 ---------------------- ---------------------- 2005 182 ---------------------- ---------------------- 2006 186 ---------------------- ---------------------- 2007 180 ---------------------- ---------------------- thereafter 224 ---------------------- ---------------------- For the years ended December 31, 2002, 2001 and 2000, rent expense approximated $584,000, $581,000 and $556,000, respectively. Performance Guarantees The majority of Fuel Tech's long-term equipment construction contracts contain language guaranteeing that the performance of the system that is being sold to the customer will meet specific criteria. On occasion bank performance guarantees and letters of credit are issued to the customer in support of the construction contracts as follows: - in support of the warrantee period defined in the contract, or - in support of the system performance criteria that are defined in the contract As of December 31, 2002, Fuel Tech has outstanding bank performance guarantees and letters of credit in the amount of $712,000 in support of equipment construction contracts that have not completed their final acceptance test or that are still operating under a warranty period. Management of Fuel Tech believes that these projects will be successfully completed and that there will not be a materially adverse impact on Fuel Tech's operations from these bank performance guarantees and letters of credit. 7. DEBT FINANCING Fuel Tech, Inc. (FTI) has a $10.0 million revolving credit facility expiring July 31, 2004, which is collateralized by all personal property owned by FTI. FTI can use this facility for cash advances and standby letters of credit. Cash advances under this facility bear interest at the bank's prime rate, or at an optional rate that can be selected by FTI which is based on the bank's Interbank Offering Rate plus 2.25%. Also, FTI has a term loan agreement with the same bank for a total principal balance of $4.5 million. The principal balance was to be repaid in quarterly installments of $225,000 commencing on December 31, 1999, with a final principal payment of $1,575,000 due on January 31, 2003. Further, FTI entered into an interest rate swap transaction that fixed the rate of interest at 8.91% on approximately 50% of the outstanding principal balance during the term of the loan. This swap expired on October 22, 2002. The remaining principal balance bears interest at the bank's prime rate, or an optional rate that can be selected by FTI, and is based on the bank's Interbank Offering Rate plus 2.25%. The borrowings under this facility are collateralized by all personal property owned by FTI. The $10.0 million revolving credit facility was obtained via an amendment, effective December 31, 2002, that increased the credit facility from $6.0 million to $10.0 million and extended the agreement until July 31, 2004. The term loan was paid in full on January 31, 2003 using funds from the line of credit. At December 31, 2002, the bank had provided standby letters of credit, predominantly to customers, totaling approximately $927,000 in connection with contracts in process. FTI is committed to reimbursing the issuing bank for any payments made by the bank under these letters of credit. At December 31, 2002, there were no cash borrowings under the revolving credit facility and approximately $9,073,000 was available for utilization. The carrying amount of debt approximates fair value at December 31, 2002. Interest payments were $156,000, $250,000 and $373,000 for the years ended December 31, 2002, 2001 and 2000, respectively. 27 8. RELATED PARTY TRANSACTIONS Fuel Tech has a 15.2% common stock ownership interest in Clean Diesel Technologies, Inc. (CDT), at December 31, 2002. Fuel Tech is precluded from selling its interest in CDT except pursuant to a registration statement, or in an exempt private placement within the limitations of Rule 144 of the Securities and Exchange Commission. On August 3, 1995, Fuel Tech signed a Management and Services Agreement with CDT. According to the agreement, CDT is to reimburse Fuel Tech for management, services and administrative expenses incurred by Fuel Tech on behalf of CDT. Additionally, Fuel Tech charges CDT an additional 3% of such costs annually. For the years ended December 31, 2002, 2001 and 2000, $69,000, $73,000 and $78,000, respectively, was charged to CDT as a management fee. On November 11, 1998, a pre-existing $495,000 demand note, with interest at 8%, and a $500,000 bridge loan and interest thereon of $20,000 were converted into 2,029 shares of Series A Convertible Preferred stock in CDT. Each preferred share was convertible into 333.33 shares of CDT common stock. In April of 2000, Fuel Tech purchased 300 additional convertible preferred shares of CDT for $225,000, which had the same convertible provisions noted above. As a result of the continuing losses incurred by CDT, Fuel Tech recorded a loss of $225,000 in 2000 based on its pro-rata share of CDT's operating results for the year. The CDT common and preferred stock has no carrying value in Fuel Tech's balance sheet as of December 31, 2002 and 2001, and the 15.2% investment is being accounted for using the cost method. In November 2000, Fuel Tech committed to lend CDT $250,000 as part of a $1.0 million loan facility between CDT, Fuel Tech and other entities. In December 2000, Fuel Tech loaned CDT $125,000 as its share of the first $500,000 draw down under the terms of the loan facility. This amount was included in the prepaid expenses and other current assets line item on the consolidated balance sheet as of December 31, 2000. In March 2001, Fuel Tech loaned CDT $125,000 as its share of the second $500,000 draw down under the terms of the loan facility. The principal balance on both loan installments, with accrued interest at 10% per annum, was payable on May 14, 2002. For its participation in the loan facility and for its $250,000 contribution, Fuel Tech received 25,000 warrants to purchase CDT common stock. The warrants have an exercise price of $2.00 and can be exercised on or before November 14, 2010. Because of the continuing losses incurred by CDT, the carrying value of the loans was reduced to $0 as of December 31, 2001 based on Fuel Tech's pro-rata share of the losses incurred. Consequently, a $250,000 loss was recorded during 2001. In the first quarter of 2002, CDT repaid the entire amount of the loans plus interest. The payment of the $250,000 principal value of the loan was recorded as income in the first quarter of 2002, along with approximately $24,000 in interest income. The value assigned to these warrants on the consolidated balance sheet at December 31, 2002 and 2001, is not significant. Pursuant to an assignment agreement of certain technology to CDT, Fuel Tech is due royalties from CDT of 2.5% of CDT's annual revenue from sales of CDT's Platinum Fuel Catalyst, commencing in 1998. The royalty obligation expires in 2008. CDT may terminate the royalty obligation to Fuel Tech by payment of $12 million commencing in 1998 and declining annually to $1,090,910 in 2008. CDT as assignee and owner will maintain the technology at its own expense. To date, Fuel Tech has received approximately $9,000 in royalties. Fuel Tech intends to record royalties from CDT on a cash basis. On April 30, 1998, Fuel Tech entered into an agreement with American Bailey Corporation (ABC) for it to provide certain management and consulting services to Fuel Tech. Principals of ABC currently own 24% of Fuel Tech's Common Shares and also own warrants to purchase an additional 2.7 million shares, which expire on April 30, 2008. No fees were to be payable under the agreement for the first 24 months. This agreement was amended in 1999 to extend its term to April 30, 2002, and provide for the payment of a management fee of $10,417 per month commencing September 1, 1999, through May 1, 2000, and $20,833 per month until the termination of the agreement. The agreement was further amended effective May 1, 2002 to increase the management fee to $29,167 per month until the termination of the agreement as of April 30, 2004. Ralph Bailey, Chairman and CEO of Fuel Tech, is Chairman of ABC. In the second quarter of 2000 Fuel Tech announced that it would concentrate its European resources in its Italian company, Fuel Tech Srl, and shut down Fuel Tech GmbH, a wholly owned subsidiary in Germany. As part of the restructure, Fuel Tech GmbH recorded a charge in 2000 of $528,000 related to the closure of the entity. The charge included accruals of $343,000 primarily for severance obligations for four employees, lease termination costs and other costs related to the closure of the entity. This charge was recorded as a reduction to operating income in the consolidated statement of operations. As of June 30, 2002, all closing costs, which approximated the accrual balance, have been paid. Also as part of the restructure, Fuel Tech GmbH's NOxOUT chemical business was sold to a new entity in Germany (Fuel Tech CS GmbH) in which Fuel Tech holds a 49% ownership interest that was acquired for $116,000. The selling price was dependent on the future results of the chemical business, but was not to be less than 1,250,000 Deutchmarks (approximately $600,000), paid out over three years. A gain on this transaction of $269,000 was recorded in other income and expense in the 2000 consolidated statement of operations. 28 9. DEFINED CONTRIBUTION PLAN Fuel Tech has a retirement savings plan available for all U.S. employees who have met minimum length-of-service requirements. Fuel Tech's contributions are determined based upon amounts contributed by Fuel Tech's employees with additional contributions made at the discretion of Fuel Tech's Board of Directors. Costs related to this plan were $180,000, $150,000 and $289,000 in 2002, 2001 and 2000, respectively. 10. BUSINESS SEGMENT, GEOGRAPHIC AND QUARTERLY FINANCIAL DATA BUSINESS SEGMENT FINANCIAL DATA Fuel Tech's business is organized into two operating segments providing air pollution control chemicals and equipment and software. The software segment does not meet the materiality test for disclosure purposes. Information concerning Fuel Tech's operations by geographic area is provided below. Operating earnings represent sales less cost of products sold and operating expenses. Foreign operating expenses include direct expenses incurred outside of the United States of foreign corporations controlled by Fuel Tech plus an allocation of domestic selling and general expenses directly related to the foreign operations. Assets are those directly associated with operations of the geographic area.
For the years ended December 31 2002 2001 2000 Revenues: United States $ 28,724,000 $ 13,246,000 $ 17,550,000 Foreign 3,903,000 4,426,000 4,356,000 ------------ ------------ ------------ $ 32,627,000 $ 17,672,000 $ 21,906,000 ============ ============ ============ Operating (Loss) Earnings: United States $ 2,654,000 $ (1,143,000) $ 1,506,000 Foreign 54,000 (54,000) (662,000) ------------ ------------ ------------ $ 2,708,000 $ (1,197,000) $ 844,000 ============ ============ ============ December 31 2002 2001 2000 Assets: United States $ 24,393,000 $ 18,952,000 $ 19,640,000 Foreign 1,476,000 1,376,000 3,449,000 ------------ ------------ ------------ $ 25,869,000 $ 20,328,000 $ 23,089,000 ============ ============ ============
29 QUARTERLY FINANCIAL DATA Set forth below is the unaudited quarterly financial data for the fiscal years ended December 31, 2002 and 2001.
For the quarter ended: March 31 June 30 September 30 December 31 (in thousands, except share data) 2002: Net sales $ 5,221 $ 8,021 $ 8,033 $ 11,352 Cost of sales 2,583 4,130 4,462 7,057 Net income 312 1,029 379 1,337 Net income per common share: Basic $ .02 $ .05 $ .02 $ .07 Diluted $ .01 $ .05 $ .02 $ .06 2001: Net sales $ 3,155 $ 4,741 $ 4,194 $ 5,582 Cost of sales 1,717 2,225 1,984 3,070 Net (loss) income (1,042) 71 (256) (406) Net (loss) income per common share: Basic $ (.06) $ - $ (.01) $ (.02) Diluted $ (.06) $ - $ (.01) $ (.02)
30 11. PARENT COMPANY FINANCIAL STATEMENTS
Balance Sheets (at December 31) 2002 2001 ------------ ------------ Assets: Receivable and other current assets $ 72,000 $ 34,000 Investments in subsidiaries 16,915,000 13,319,000 ------------ ------------ Total assets $ 16,987,000 $ 13,353,000 ============ ============ Liabilities and shareholders' equity Liabilities Accounts payable and accrued expenses 182,000 218,000 Shareholders' equity 16,805,000 13,135,000 ------------ ------------ Total liabilities and shareholders' equity $ 16,987,000 $ 13,353,000 ============ ============ Statements of Operations (for the years ended December 31) 2002 2001 2000 ------------ ------------ ------------ Loss from operations $ (710,000) $ (952,000) $ (750,000) Interest and other income, net 222,000 129,000 - Income (loss) from equity investment in subsidiary 3,545,000 (810,000) 335,000 ------------ ------------ ------------ Net income (loss) $ 3,057,000 $ (1,633,000) $ (415,000) ============ ============ ============ Statements of Cash Flow (for the years ended December 31) 2002 2001 2000 ------------ ------------ ------------ Operating activities: Net cash used in operating activities $ (757,000) $ (521,000) $ (511,000) ------------ ------------ ------------ Investing activities: Investment in and loans to CDT 250,000 (125,000) (350,000) Investment in Fuel Tech CS GmbH - - (116,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities 250,000 (125,000) (466,000) Financing activities: Dividend from FTI (28,000) 280,000 638,000 Exercise of stock options 535,000 406,000 339,000 Purchase of treasury stock/other - (40,000) - Purchase and retirement of nil coupon loan notes - - - ------------ ------------ ------------ Net cash provided by investing activities 507,000 646,000 977,000 Net decrease in cash and cash equivalents - - - Cash and cash equivalents at beginning of period - - - ------------ ------------ ------------ Cash and cash equivalents at end of period $ - $ - $ - ============ ============ ============
Basis of Presentation: In the parent company financial statements, Fuel Tech's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. Fuel Tech's share of net income of its unconsolidated subsidiaries is included in consolidated income using the equity method. The parent company financial statements should be read in conjunction with Fuel Tech's consolidated financial statements. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item will be set forth under the captions "Election of Directors," "Directors and Executive Officers of Fuel Tech," "Compensation Committee," "Audit Committee," and "Financial Experts" in Fuel Tech's Proxy Statement related to the 2003 Annual General Meeting of Shareholders (the `Proxy Statement") and is incorporated by reference. Fuel Tech has adopted a Code of Ethics and Business Conduct (the "Code") that applies to all employees, officers and directors, including the Chief Executive Officer, Chief Financial Officer and Controller. A copy of the Code is available free of charge to any person on written or telephone request to Fuel Tech's Investor Relations at the address or telephone number set out in Fuel Tech's Annual Report to Shareholders. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item will be set forth under the caption "Executive Compensation" in the Proxy Statement and is incorporated by reference excluding, however, the information under the captions "Report of the Board of Directors on Executive Compensation" and "Performance Graph," which is not incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item will be set forth under the caption "Principal Shareholders and Stock Ownership of Management" in the Proxy Statement and is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item will be set forth under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated by reference. 32 PART IV Item 14. CONTROLS AND PROCEDURES Fuel Tech maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in Fuel Tech's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Fuel Tech's principal executive and financial officers have evaluated Fuel Tech's disclosure controls and procedures within 90 days of the filing of this Annual Report on Form 10-K and concluded that such disclosure controls and procedures are effective for the purpose for which they were designed. Subsequent to the date of such evaluation, there were no significant changes in internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a) (1) Financial Statements The financial statements identified below and required by Part II, Item 8 of this Form 10-K are set forth above. Report of Independent Auditors Consolidated Balance Sheets as of December 31, 2002 and 2001 Consolidated Statements of Operations for Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedules have been omitted because of the absence of the conditions under which they are required or because the required information where material is shown in the financial statements or the notes thereto. (3) Exhibits
+ 1.0 Articles of Association of Fuel-Tech N.V. (in Dutch and English) as amended through April 27, 1998 * 2.1 Instrument Constituting US $19,200,000 Nil Coupon Non-Redeemable Convertible Unsecured Loan Notes of Fuel-Tech N.V., dated December 21, 1989 * 2.2 First Supplemental Instrument Constituting US $3,000,000 Nil Coupon Non-Redeemable Convertible Unsecured Loan Notes of Fuel-Tech N.V., dated July 10, 1990 ** 2.3 Instrument Constituting US $6,000,000 Nil Coupon Non-Redeemable Convertible Unsecured Loan Notes of Fuel-Tech N.V., dated March 12, 1993 ** 2.4 Form of Warrants issued April 30, 1998 evidencing right to purchase 3 million shares of Fuel-Tech N.V. common stock. * 3.1 Form of Indemnity Agreement between Fuel-Tech N.V. and directors and officers * 3.2 Fuel Tech, Inc. Form of 1992 Substitute Stock Option Agreement * 3.3 Fuel-Tech N.V. Form of 1992 Substitute Stock Option Agreement * 3.4 Fuel-Tech N.V. Form of 1993 Stock Option Agreement as amended through August 3, 1999 & 3.5 The 1993 Incentive Plan of Fuel-Tech N.V. as amended through August 3, 1999 * 3.6 License Implementation Agreement dated June 10, 1991 among NFT, Nalco Fuel Tech, B.V., and Foster Wheeler Energy Corporation * 3.7 License Implementation Agreement dated April 23, 1991 among NFT, Nalco Fuel Tech, B.V., and R-C Environmental Services & Technologies, a division of Research Cottrell, Inc. * 3.8 License Implementation Agreement dated December 20, 1990 between NFT and RJM Corporation * 3.9 License Implementation Agreement dated May 22, 1991 among NFT, Nalco Fuel Tech, B.V., and Wheelabrator Air Pollution Control, Inc. * 3.10 Agreement dated July 3, 1990 between NFT and Arcadian Corporation * 3.11 License Agreement dated September 12, 1991 between NFT and BP Chemicals Inc. * 3.12 Agreement dated November 5, 1990 between NFT and Cargill, Incorporated * 3.13 Agreement dated August 30, 1990 between NFT and Nitrochem, Inc. * 3.14 License Agreement dated December 27, 1990 between NFT and Union Oil Company of California dba Unocal * 3.15 Agreement dated September 30, 1990 between NFT and W.H. Shurtleff Company ** 3.16 Securities Purchase Agreement dated as of March 23, 1998, between Fuel-Tech N.V., and the several Investors signatory thereto, including exhibits.
33
** 3.17 Purchase Agreement dated as of March 23, 1998, between Nalco FT, Inc., Nalco Chemical Company and Fuel Tech, Inc., including exhibits #& 3.18 License Agreement dated November 18, 1998 between The Gas Technology Institute and Fuel Tech, Inc. relating to the FLGR Process #& 3.19 Amendment No. 1, dated February 28, 2000, to License Agreement of November 18, 1998 between The Gas Technology Institute and Fuel Tech, Inc. o 3.20 The Amended and Restated Business Loan Agreement dated as of August 31, 1999 between Bank of America, National Association and FTI; as amended through December 31, 2002 oo 19.2 Those portions of the Proxy Statement to be distributed to Shareholders of Fuel Tech for the 2003 Annual General Meeting of Shareholders of Fuel-Tech N.V. specifically incorporated by reference into this Annual Report on Form 10-K. o 23.1 Consent of Ernst & Young LLP
* Filed with Registration Statement on Form 20-F, No. 000-21724 of August 26, 1993, as amended ** Filed with Registrant's Report on Form 6-K for the month of March 1998 + Filed with Registrant's Report on Form 20-F for the year 1997 o Filed herewith oo To be filed with the Registrant's definitive proxy material for its 2003 Annual General Meeting # Confidential information removed and filed separately & Filed with Registrant's report on Form 10-K for the year 1999 (b) Reports on Form 8-K No reports on Form 8-K were filed by Fuel Tech during the fourth quarter of 2002. 34 SIGNATURES AND CERTIFICATIONS Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The undersigned in their capacities as Chief Executive Officer and Chief Financial Officer of the Registrant do hereby certify that: (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Registrant as of, and for, the periods presented in the report. Date: March 14, 2003 By: /s/ Ralph E. Bailey ------------------- Ralph E. Bailey Chairman, Managing Director and Chief Executive Officer Date: March 14, 2003 By: /s/ Scott M. Schecter --------------------- Scott M. Schecter Chief Financial Officer, Vice President and Treasurer I, Ralph E. Bailey, certify that: 1. I have reviewed this annual report on Form 10-K of Fuel-Tech N.V.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules l3a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 35 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 14, 2003 By: /s/ Ralph E. Bailey ------------------- Ralph E. Bailey Chairman, Managing Director and Chief Executive Officer I, Scott M. Schecter, certify that: 1. I have reviewed this annual report on Form 10-K of Fuel-Tech N.V.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules l3a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 14, 2003 By: /s/ Scott M. Schecter ---------------------- Scott M. Schecter Chief Financial Officer, Vice President and Treasurer 36 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of Fuel-Tech N.V. and in the capacities and on the date indicated.
/s/ Ralph E. Bailey Chairman, Managing Director and Chief Executive Officer ------------------- (Principal Executive Officer) Ralph E. Bailey /s/ Scott M. Schecter Chief Financial Officer, Vice President and Treasurer --------------------- (Principal Financial and Accounting Officer) Scott M. Schecter /s/ Douglas G. Bailey Managing Director --------------------- Douglas G. Bailey /s/ Thomas J. Shaw Managing Director ------------------ Thomas J. Shaw /s/ Miguel Espinosa Managing Director Miguel Espinosa /s/ Samer S. Khanachet Managing Director ---------------------- Samer S. Khanachet /s/ Charles W. Grinnell Managing Director, Vice President, General Counsel and Corporate Secretary ----------------------- Charles W. Grinnell /s/ John R. Selby Managing Director ------------------ John R. Selby Tarma Trust Management N.V. Managing Director By: /s/ Robert W. Huyzen -------------------- Robert W. Huyzen Managing Director
37 EX-3.20 3 b323572_ex3-20.txt AMENDED AND RESTATED BUSINESS LOAN AGREEMENT Exhibit 3.20 AMENDED AND RESTATED BUSINESS LOAN AGREEMENT This Amended and Restated Business Loan Agreement dated as of August 31, 1999, is between BANK OF AMERICA, NATIONAL ASSOCIATION (formerly known as Bank of America National Trust and Savings Association and herein, together with its successors and assigns, called the "Bank") and FUEL TECH, INC., a Massachusetts corporation (the "Borrower"). W I T N E S E T H: WHEREAS, the Bank and the Borrower are parties to a Business Loan Agreement dated as of July 31, 1998 (the "Original Loan Agreement"); and WHEREAS, the Bank and the Borrower desire to amend the Original Loan Agreement and, in connection therewith, to restate the Original Loan Agreement in its entirety. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged the Bank and the Borrower agree to amend and restate the Original Loan Agreement to read in its entirety as set forth below. 1. COMMITMENTS. On the terms and subject to the conditions of this Agreement, and in reliance upon the warranties of the Borrower set forth herein and in the other Loan Documents (as defined in Section 7.7), the Bank agrees as follows: 1.1 LINE OF CREDIT AMOUNT AND TERMS (a) Line of Credit Amount. (i) During the availability period described below, the Bank will provide a line of credit to the Borrower. The amount of the line of credit (the "Line of Credit Commitment") is Three Million Dollars ($3,000,000.00). The amount available to the Borrower (the "Availability") at any time is Three Million Dollars ($3,000,000.00). If at any time the total amount of principal outstanding under the line of credit exceeds this limit, the Borrower will, not later than two (2) days after demand by the Bank, reduce the total amount outstanding in order to comply with this limit. (ii) This is a revolving line of credit providing for cash advances and standby letters of credit. During the availability period, the Borrower may repay principal amounts and reborrow them. (iii) The aggregate principal balance of cash advances outstanding at any one time may not exceed $3,000,0000 minus outstanding amounts of any letters of credit issued pursuant to the Line of Credit Commitment set forth in this Agreement (including amounts drawn on such letters of credit and not yet reimbursed). For purposes of determining the amount outstanding under any letter of credit denominated in a currency other than U.S. Dollars (a "Foreign Currency"), the U.S. Dollar equivalent of such Foreign Currency amount shall be determined by the Bank from time to time on the basis of the spot rate at which the Bank offers to purchase such Foreign Currency with U.S. Dollars at approximately 10:00 am., Chicago, Illinois time on the date of determination. (iv) Each advance will be for at least $100,000, or for the amount of the remaining available line of credit, if less. (v) The Borrower agrees not to permit the outstanding principal balance of advances under the line of credit plus the outstanding amounts of any letters of credit, including amounts drawn on letters of credit and not yet reimbursed, to exceed the Commitment. (b) Availability Period. The line of credit is available between the date of this Agreement and August 31, 2002 (the "Expiration Date") unless the Borrower is in default. (c) Interest Rate. (i) Unless the Borrower elects an optional interest rate as described below, the interest rate is a per annum rate equal to the Reference Rate defined below. (ii) The Reference Rate is the rate of interest publicly announced from time to time by the Bank in San Francisco, California, as its Reference Rate. The Reference Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate will take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Reference Rate. (d) Optional Interest Rates. Instead of the interest rate based on the Bank's Reference Rate, the Borrower may elect the optional interest rates listed below during interest periods of one, two, three or six months. The optional interest rates shall be subject to the terms and conditions described later in this Agreement. Any principal amount bearing interest at an optional rate under this Agreement is referred to as a "Portion." The following optional interest rate is available: the IBOR Rate plus 2.25 percentage points. -2- (e) Repayment Terms. (i) The Borrower will pay interest on September 30, 1999, and then quarterly thereafter until payment in full of any principal outstanding under this line of credit. (ii) The Borrower will repay in full all principal and any unpaid interest or other charges outstanding under this line of credit no later than the Expiration Date. (iii) The Borrower may prepay all principal outstanding under this line of credit in full or in part at any time. (f) Letters of Credit. (i) This line of credit may be used for financing standby letters of credit with a maximum maturity of 18 months but not to extend later than five (5) Banking Days prior to the Expiration Date. The standby letters of credit may include a provision providing that the maturity date will be automatically extended each year for an additional year unless the Bank gives written notice to the contrary; provided, however, that each letter of credit must include a final maturity date which will not be subject to automatic extension. (ii) The amount of the letters of credit issued pursuant to the Commitment set forth in this Agreement outstanding at any one time (including amounts drawn on such letters of credit and not yet reimbursed) may not exceed $3,000,000. (iii) The Borrower agrees: (1) that any sum drawn under a letter of credit may, at the option of the Bank, be added to the principal amount outstanding under this Agreement (such principal amount to bear interest and be due as described elsewhere in this Agreement); (2) that if there is a default under this Agreement (after expiration of all applicable notice and grace periods), it will upon demand by the Bank immediately prepay and make the Bank whole for any outstanding letters of credit; -3- (3) that the issuance of any letter of credit and any amendment to a letter of credit is subject to the Bank's written approval and must be in form and content satisfactory to the Bank and in favor of a beneficiary acceptable to the Bank; (4) to sign the Bank's form Application and Agreement for Standby Letter of Credit (a "Letter of Credit Application"); (5) to pay any issuance and/or other fees that the Bank notifies the Borrower will be charged for issuing and processing letters of credit for the Borrower, provided that such fees shall be no greater than the amounts charged by the Bank to its customers generally in accordance with published schedules of fees as in effect from time to time; (6) to allow the Bank to automatically charge its checking account for applicable fees, discounts, and other charges; and (7) to pay the Bank a non-refundable fee for each letter of credit equal to the greater of (A) 1.00% of the original face amount of such letter of credit and (B) $500, payable in advance. (g) Existing Loans and Letters of Credit. On the effective date of this Agreement the outstanding principal balance of amounts borrowed by the Borrower under the Original Loan Agreement (the "Existing Loans") is $0. The Existing Loans shall continue outstanding under this Agreement, and shall be considered to be amounts advanced by the Bank under and pursuant to this Agreement for all purposes of this Agreement and the other Loan Documents. The letters of credit listed on Schedule 1.1(Q) (the "Existing Letters of Credit") have been previously issued by the Bank on the application of the Borrower and are currently outstanding. The Existing Letters of Credit shall continue outstanding and shall be considered to be letters of credit issued under and pursuant to this Agreement for all purposes of this Agreement and the other Loan Documents. 1.2 TERM LOAN AND TERMS (a) Loan Amount. During the availability period described below, the Bank agrees to provide a term loan to the Borrower in the amount of Four Million Five Hundred Thousand Dollars ($4,500,000.00) (the "Term Loan Commitment"). The Term Loan Commitment will expire on the first to occur of the date the term loan is funded or the last day of the availability period described below. -4- (b) Availability Period. This term loan is available in one disbursement during the period from the effective date of this Agreement to the date which is thirty (30) days following the effective date, as long as the Borrower is not in default. (c) Interest Rate. Unless the Borrower elects an optional interest rate as described below, the interest rate is a per annum rate equal to the Reference Rate. (d) Optional Interest Rates. Instead of the interest rate based on the Bank's Reference Rate, the Borrower may elect the optional interest rates listed below during interest periods of one, two, three or six months. The optional interest rates shall be subject to the terms and conditions described later in this Agreement. Any principal amount bearing interest at an optional rate under this Agreement is referred to as a "Portion." The following optional interest rate is available: the IBOR Rate plus 2.25 percentage points. (e) Repayment Terms. (i) The Borrower will pay all accrued but unpaid interest on September 30, 1999 and then quarterly thereafter and upon payment in full of the principal of the loan. (ii) The Borrower will repay principal in successive quarterly installments of Two Hundred Twenty-Five Thousand Dollars ($225,000.00) starting December 31, 1999. On the Expiration Date the Borrower will repay the remaining principal balance plus any interest then due. (iii) The Borrower may prepay the loan in full or in part at any time in an amount not less than $500,000 or an integral multiple of $100,000 in excess thereof. The prepayment will be applied to the most remote payment of principal due under this Agreement. 2. OPTIONAL INTEREST RATES 2.1 Optional Rates. Each optional interest rate is a rate per year. Interest will be paid on the last day of each interest period, and if the interest period is longer than three months, then on the last day of each quarter during the interest period. At the end of any interest period, the interest rate will revert to the rate based on the Reference Rate, unless the Borrower has designated another optional interest rate for the Portion. No Portion will be converted to a different interest rate during the applicable interest period. Upon the occurrence of an event of default under this Agreement, the Bank may terminate the availability of optional interest rates for interest periods commencing after the default occurs. -5- 2.2 IBOR Rate. The election of IBOR Rates shall be subject to the following terms and requirements: (a) The interest period during which the IBOR Rate will be in effect will be no shorter than 30 days and no longer than one 180 days. The first day of the interest period must be a Banking Day on which the Bank is also open for business in California and Chicago, Illinois, and dealing in offshore dollars. The last day of the interest period will be determined by the Bank using the practices of the offshore dollar inter-bank market. (b) The Borrower shall irrevocably request an IBOR Rate Portion no later than 10:00 a.m. Chicago time two Banking Days prior to the day on which the IBOR Rate will take effect with respect to the requested IBOR Rate Portion. (c) Each IBOR Rate Portion will be for an amount not less than $100,000 or an integral multiple of $50,000 in excess thereof. Not more than five (5) IBOR Rate Portions shall be permitted to be outstanding at the same time. (d) The "IBOR Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank as of the first day of the interest period.) IBOR Rate = IBOR Base Rate (1.00 - Reserve Percentage) Where, (i) "IBOR Base Rate" means the interest rate at which the Bank's Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable interest period to other major banks in the offshore dollar inter-bank market. (ii) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. (e) Each prepayment of an IBOR Rate Portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid and a prepayment fee as described below. A "prepayment" is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which: -6- (i) the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by the Bank, for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such Portion (or the scheduled payment date for the amount prepaid, if earlier). (f) The Bank will have no obligation to accept an election for an IBOR Rate Portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the interest period, of an IBOR Rate Portion are not available in the offshore Dollar inter-bank market; or (ii) the IBOR Rate does not accurately reflect the cost of an IBOR Rate Portion. 3. FEES AND EXPENSES 3.1 Fees. (a) Loan Fee. The Borrower agrees to pay a loan fee in the amount of $_________. This fee is due on or before the date this Agreement becomes effective. (b) Unused Commitment Fee. The Borrower agrees to pay a fee on any difference between the Line of Credit Commitment and the amount of the line of credit it actually uses, determined by the weighted average credit outstanding during the specified period. The fee will be calculated at 0.20% per year. The calculation of credit outstanding will include the undrawn amount of letters of credit. This fee is due on September 30, 1999 and on the last day of each following fiscal quarter until the expiration of the availability period. -7- 3.2 Expenses. The Borrower agrees to reimburse the Bank upon demand, whether or not any loan is made under this Agreement, for: (a) filing, recording and search fees, reasonable appraisal fees, reasonable field audit fees and expenses, title report fees, documentation fees, and other similar fees, costs and expenses incurred by the Bank; (b) any reasonable expenses the Bank incurs in the preparation, negotiation and execution of this Agreement and any agreement or instrument required by this Agreement. Expenses include, but are not limited to, reasonable attorneys' fees, including any reasonable allocated costs of the Bank's in-house counsel; (c) the reasonable cost of periodic audits and appraisals of the collateral securing this Agreement, at such intervals as the Bank may reasonably require. The audits and appraisals may be performed by employees of the Bank or by independent appraisers; and (d) any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement and any agreement or instrument required by this Agreement. 4. COLLATERAL. The Borrower's obligations to the Bank under this Agreement will be secured by all personal property the Borrower now owns or will own in the future. Nothing in this Agreement shall be construed to restrict the Borrower from granting liens on its other assets not securing the Borrower's obligations to the Bank. The collateral is further defined in a security agreement executed by the Borrower. In addition, all personal property collateral securing this Agreement shall also secure all other present and future obligations of the Borrower to the Bank. DISBURSEMENTS, PAYMENTS AND COSTS 5.1 Requests for Credit. Each request for an extension of credit will be made in writing in a manner acceptable to the Bank, or by another means acceptable to the Bank. 5.2 Disbursements and Payments. Each disbursement by the Bank will be made in immediately available funds and will be evidenced by records kept by the Bank. In addition, the Bank may, at its discretion, require the Borrower to sign (a) a promissory note in the form of Exhibit A-1 (the "Revolving Note"), with appropriate insertions to evidence the amounts borrowed under the Line of Credit and (b) a promissory note in the form of Exhibit A-2 (the "Term Note") to evidence the term loan. Each payment made by the Borrower will be made without set-off or counterclaim in immediately available funds not later than 2:00 p.m., Chicago time, on the date called for under this Agreement at the Bank's office at 231 South LaSalle Street, Chicago, Illinois 60697. Funds received on any day after such time will be deemed to have been received on the next Banking Day. Whenever any payment to be made under this Agreement is stated to be due on a day which is not a Banking Day, such payment will be made on the next succeeding Banking Day and such extension of time will be included in the computation of any interest. -8- 5.3 Telephone and Facsimile Authorization. (a) The Bank may honor telephone or facsimile instructions for advances or repayments or for the designation of optional interest rates and facsimile requests for the issuance of letters of credit given by any one of the individuals authorized to sign loan agreements on behalf of the Borrower, or any other individual designated by any one of such authorized signers. (b) Advances will be deposited in and repayments will be withdrawn from the Borrower's account number ____________, or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower. (c) The Borrower will provide written confirmation to the Bank of any telephone or facsimile instructions within five (5) days. If there is a discrepancy and the Bank has already acted on the instructions, the telephone or facsimile instructions will prevail over the written confirmation. (d) The Borrower indemnifies and excuses the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any act resulting from telephone or facsimile instructions the Bank reasonably believes are made by any individual authorized by the Borrower to give such instructions. This indemnity and excuse will survive this Agreement. 5.4 Direct Debit. (a) The Borrower agrees that interest and principal payments and any fees will be deducted automatically on the due date from the Borrower's checking account number ____________, or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower. (b) The Bank will debit the account on the dates the payments become due. If a due date does not fall on a Banking Day, the Bank will debit the account on the first Banking Day following the due date. -9- (c) The Borrower will maintain sufficient funds in the account on the dates the Bank enters debits authorized by this Agreement. If there are insufficient funds in the account on the date the Bank enters any debit authorized by this Agreement, the debit will be reversed. 5.5 Banking Days. Unless otherwise provided in this Agreement, a "Banking Day"-is a day other than a Saturday or a Sunday on which the Bank is open for business in Chicago, Illinois. All payments and disbursements which would be due on a day which is not a Banking Day will be due on the next Banking Day. All payments received on a day which is not a Banking Day will be applied to the credit on the next Banking Day. 5.6 Additional Costs. The Borrower will pay the Bank, on demand, for the Bank's costs or losses arising from any statute or regulation, or any request or requirement of a regulatory agency which is applicable to all national banks or a class of all national banks. The costs and losses will be allocated to the loan in a manner determined by the Bank, using any reasonable method. The costs include the following: (a) any reserve or deposit requirements; and (b) any capital requirements relating to the Bank's assets and commitments for credit. 5.7 Interest Calculation. Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 365/366 day year and the actual number of days elapsed. Interest on any Portion which bears interest with reference to the IBOR rate shall be computed on the basis of a 360 day year and the actual number of days elapsed. Installments of principal which are not paid when due under this Agreement shall continue to bear interest until paid. 5.8 Default Rate. Upon the occurrence and during the continuation of any default under this Agreement, principal amounts outstanding under this Agreement will at the option of the Bank bear interest at a rate which is 2.00 percentage point(s) higher than the rate of interest otherwise provided under this Agreement. This will not constitute a waiver of any default. 6. CONDITIONS The following conditions must be satisfied before this Agreement shall become effective and before the Bank is obligated to extend any credit to the Borrower under this Agreement: -10- 6.1 Receipt of Documents. The Bank shall have received the following, each of which must be in form and content acceptable to the Bank: (a) Authorizations. Evidence that the execution, delivery and performance by the Borrower of this Agreement and any instrument or agreement required under this Agreement have been duly authorized. (b) Governing Documents. A copy of any amendments to the Borrower's articles of incorporation adopted since the date of the Original Loan Agreement or, if there are no amendments, a certificate to that effect signed by the President or a Vice President of the Borrower. (c) Security Agreement. A signed original security agreement, amending and restating the security agreement executed and delivered in connection with the Original Loan Agreement, together with any financing statements which the Bank requires. (d) Promissory Notes. Duly executed promissory notes in the forms of Exhibit A-1 and Exhibit A-2. (e) Subordination Agreement Reaffirmation. The reaffirmation by Fuel-Tech N.V., a Netherlands Antilles limited liability company and parent of Borrower ("FTNV") that the subordination agreement executed and delivered by FTNV in connection with the Original Loan Agreement, pursuant to which the Borrower's indebtedness to FTNV is subordinated to the Borrower's obligations to the Bank, continues in full force and effect. (f) Legal Opinion. A written opinion from the Borrower's legal counsel, covering such matters as the Bank may require. The legal counsel and the terms of the opinion must be acceptable to the Bank. 6.2 Termination of Purchase Transaction Obligations. Documents evidencing and establishing that (a) all of the Borrower's obligations under or in connection with the Purchase Agreement dated as of March 23, 1998 (together with all amendments thereto, the "Purchase Agreement") among the Borrower, Nalco FT, Inc. and Nalco Chemical Company or under any promissory note or other agreement imposing an obligation upon the Borrower executed in connection with or pursuant to the Purchase Agreement (collectively, together with the Purchase Agreement, the "Purchase Transaction Documents") have been satisfied and (b) that all liens in favor of Nalco FT, Inc. or Nalco Chemical Company on any assets of Borrower have been terminated. 6.3 Evidence of Priority. Evidence that security interests and liens in favor of the Bank on the collateral securing the Borrower's obligations to the Bank are valid, enforceable, and prior to all others' rights and interests in such collateral, except those the Bank consents to in writing. -11- 6.4 Insurance. Evidence of insurance coverage, as required in the "Covenants" section of this Agreement. 6.5 Payment of Fees. Payment of all accrued and unpaid expenses incurred by the Bank as required by the paragraph entitled "Expenses". 6.6 Good Standing. Certificates of good standing for the Borrower from its state of formation, from the State of Illinois, and from each other state where the failure to be in good standing is reasonably likely to have a material adverse effect on the Borrower or the Borrower and its Subsidiaries taken as a whole. 6.7 Credit Approvals; Due Diligence. The Bank shall have (a) obtained all required internal credit approvals and (b) completed its due diligence audit of the business, operations and assets of the Borrower and each of the Borrower's Subsidiaries, the results of which shall provide the Bank with results and information which, in its sole determination, are satisfactory to permit it to enter into the financing transaction described in this Agreement and the other Loan Documents. 6.8 Conditions to Each Advance or Letter of Credit. Before each extension of credit, including the first, the following conditions must be satisfied: (a) Receipt of Documents, Bank must receive the following items, in form and content acceptable to the Bank: (i) a request for an advance or the issuance of a letter of credit under the line of credit, indicating the amount and, if an advance, the Portion (if any) that is to bear interest at the IBOR Rate and the requested interest period for the Portion. (ii) Any other relevant information the Bank may request. (b) Other Conditions. The following additional conditions must be satisfied to the satisfaction of the Bank: (i) there has been no material adverse change in the business, financial condition, operations, properties or prospects of the Borrower, any Subsidiary, or the Borrower and its Subsidiaries taken as a whole; (ii) before and after giving effect to such extension of credit no default or event of default under this Agreement or any other Loan Document, or event which, with the giving of notice or the passage of time, or both, would be or become an event of default, shall exist; -12- (iii) there shall have been no material adverse change, or notice of prospective material adverse change in the nature, extent, scope or cost of the insurance policies of the Borrower; (iv) before and after giving effect to such extension of credit the representations and warranties in Section 7 and in each other Loan Document shall be true and correct in all material respects with the same effect as if then made (unless stated to relate solely to an early date, in which case such representations and warranties shall be true and correct as of such earlier date), except for such changes as are specifically permitted hereunder. 6.9 Other Items. Any other items that the Bank reasonably requires. 7. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement, and until the Bank is repaid in full, the Borrower makes the following representations and warranties. Each request for an extension of credit constitutes a renewed representation. 7.1 Organization of Borrower. The Borrower is a corporation duly formed and existing under the laws of the state where organized. Each of the Borrower's Subsidiaries (hereafter defined) is duly formed and existing under the laws of its state of organization or formation. As used in this Agreement, a "Subsidiary" of the Borrower means, (i) any corporation of which or in which the Borrower, the Borrower and one or more of its Subsidiaries, or one or more Subsidiaries of the Borrower directly or indirectly own more than 50% of the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (ii) any partnership, limited liability company, joint venture or similar entity of which or in which the Borrower, the Borrower and one or more of its Subsidiaries, or one or more Subsidiaries of the Borrower directly or indirectly own more than 50$ of the capital interest or profits interest or (iii) any trust, association or other unincorporated organization of which or in which the Borrower, the Borrower and one or more of its Subsidiaries, or one or more Subsidiaries of the Borrower directly or indirectly own more than 50$ of the beneficial interest. -13- 7.2 Authorization. This Agreement, and any instrument or agreement required hereunder, are within the Borrower's powers, have been duly authorized, and do not conflict with any of its organizational papers. 7.3 Enforceable Agreement. This Agreement is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable. 7.4 Good Standing. In each state in which the Borrower or any of its Subsidiaries does business, it or the Subsidiary, as applicable, is properly licensed, in good standing, and, where required, in compliance with fictitious name statutes. 7.5 No Conflicts. This Agreement does not conflict with any law, agreement, or obligation by which the Borrower or any of its Subsidiaries is bound. 7.6 Financial Information. All financial and other information that has been or will be supplied to the Bank, including the audited financial statements of the Borrower dated as of December 31, 1998 and the unaudited financial statements of the Borrower dated June 30, 1999, is: (a) sufficiently complete to give the Bank accurate knowledge of the financial condition of the Borrower and its Subsidiaries, including all material contingent liabilities; and (b) in compliance with all government regulations that apply. Since the date of the audited financial statements of the Borrower dated December 31, 1998 provided to the Bank, there has been no material adverse change in the business, financial condition, operations, properties or prospects of the Borrower, any of its Subsidiaries, or the Borrower and its Subsidiaries taken as a whole, excepting insolvency proceedings in Poland with respect to Borrower's Polish Subsidiary, information as to which has been previously furnished to the Bank. 7.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or to the Borrower's knowledge threatened against the Borrower, which, if lost, would impair the financial condition of the Borrower, any of its Subsidiaries, or the Borrower and its Subsidiaries taken as a whole, or the Borrower's ability to pay and perform its obligations under this Agreement, any Letter of Credit Application, any security agreement or other instrument or agreement executed and delivered by the Borrower in connection with or pursuant to this Agreement (collectively, the "Loan Documents"), except as have been disclosed in writing to the Bank. -14- 7.8 Collateral. All collateral required in this Agreement or any other Loan Document is owned by the grantor of the security interest free of any material title defects or any liens or interests of others, except those (a) permitted under Section 8.6 of this Agreement or (b) which have been approved by the Bank in writing. 7.9 Permits, Franchises. The Borrower and each of its Subsidiaries possesses all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade name rights, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged. 7.10 Other Obligations. Neither the Borrower nor any of its Subsidiaries is in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. 7.11 Income Taxes. The Borrower and each of its Subsidiaries has filed all tax returns required to be filed and has paid, or made adequate provisions for the payment of, all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property. No tax liens for material amounts have been filed and no material claims are being asserted with respect to any such taxes. The reserves on the books of the Borrower and its Subsidiaries in respect of taxes are adequate. The Borrower is not aware of any proposed assessment or adjustment for additional taxes (or any basis for any such assessment) which might be material to the Borrower or the Borrower and its Subsidiaries taken as a whole. 7.12 No Event of Default. There is no event which is, or with notice or lapse of time or both would be, a default under this Agreement. 7.13 Insurance. The Borrower has obtained, and maintained in effect, the insurance coverage required in the "Covenants" section of this Agreement. 7 .14 ERISA Plans. (a) Each Plan (other than a multiemployer plan) is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. To the extent applicable, each Plan has received a favorable determination letter from the IRS and to the best knowledge of the Borrower, nothing has occurred which would cause the loss of such qualification. The Borrower and each of its Subsidiaries has fulfilled its respective obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan, and has not incurred any liability with respect to any Plan under Title IV of ERISA. -15- (b) There are no claims, lawsuits or actions (including by any governmental authority), and there has been no prohibited transaction or violation of the fiduciary responsibility rules, with respect to any Plan which has resulted or could reasonably be expected to result in a material adverse effect on the Borrower or the Borrower and its Subsidiaries taken as a whole. (c) With respect to any Plan subject to Title IV of ERISA: (i) No reportable event has occurred under Section 4043(c) of ERISA for which the PBGC requires 30 day notice; (ii) No action by the Borrower or any ERISA Affiliate to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA; and (iii) No termination proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. (d) The following terms have the meanings indicated for purposes of this Agreement: (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (ii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. (iii) "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414 (b) or (c) of the Code. (iv) means the Pension Benefit Guaranty Corporation. (v) "Plan" means a pension, profit-sharing, or stock bonus plan intended to qualify under Section 401(a) of the Code, maintained or contributed to by the Borrower or any ERISA Affiliate, including any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA. 7.15 Location of Borrower. The Borrower's place of business (or, if the Borrower has more than one place of business, its chief executive office) is located at the address listed under the Borrower's signature on this Agreement. -16- 7.16 Year 2000 Compliance. The Borrower has conducted a comprehensive review and assessment of the Borrower's and its Subsidiaries' computer applications with respect to the "year 2000 problem" (that is, the risk that computer applications may not be able to properly perform date-sensitive functions after December 31, 1999). Based on that review and assessment and given the nature of the Borrower's and its Subsidiaries' businesses (a) the year 2000 problem will not result in a material adverse change in the business condition (financial or otherwise), operations, properties or prospects of the Borrower, or the Borrower and its Subsidiaries taken as a whole, or the Borrower's ability to fulfill its obligations under this Agreement and the other Loan Documents and (b) the Borrower has no reason to believe that the failure of any of the Borrower's or its Subsidiaries' key suppliers, vendors or customers to have computer systems which are "year 2000 compliant," will result in a material adverse change in the business condition (financial or otherwise), operations, properties or prospects of the Borrower, or the Borrower and its Subsidiaries taken as a whole, or the Borrower's ability to fulfill its obligations under this Agreement and the other Loan Documents. 8. COVENANTS The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full: 8.1 Use of Proceeds. To use the proceeds of the credit only for general corporate purposes, including capital expenditures. The proceeds of the term loan shall be used to satisfy all remaining monetary obligations of the Borrower under the Purchase Transaction Documents. 8.2 Financial Information. To provide the following financial information and statements in form and content acceptable to the Bank, and such additional information as requested by the Bank from time to time: (a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual financial statements. These financial statements must be prepared on a consolidated basis and audited (with an unqualified opinion) by a Certified Public Accountant acceptable to the Bank. (b) Within 45 days of the Borrower's fiscal quarter end, quarterly financial statements. These financial statements may be Borrower prepared. -17- (c) Copies of (1) the Form 20-F of Fuel-Tech N.V., a Netherlands Antilles limited liability company, within 5 days after the date of its being filed with the Securities and Exchange Commission and (2) any press releases concerning Fuel Tech N.V.'s operating results, within 5 days following the issuance thereof. (d) Within the period(s) provided in (a) and (b) above, a compliance certificate of the Borrower signed by an authorized financial officer of the Borrower setting forth (i) the information and computations (in sufficient detail) to establish that the Borrower is in compliance with all financial covenants at the end of the period covered by the financial statements then being furnished and (ii) whether there existed as of the date of such financial statements and whether there exists as of the date of the certificate, any default under this Agreement and, if any such default exists, specifying the nature thereof and the action the Borrower is taking and proposes to take with respect thereto. 8.3 Net Worth. To maintain consolidated net worth equal to at least the sum of the following: (a) Nine Million Dollars ($9,000,000.00); plus (b) the sum of 50% of net income after income taxes (without subtracting losses other than up to $500,000 of losses with respect to the Borrower's investment in Clean Diesel Technologies, Inc.) earned in each quarterly accounting period commencing after June 30, 1999; plus (c) the net proceeds from any equity securities issued after the date of this Agreement; plus (d) any increase in stockholders' equity resulting from the conversion of debt securities to equity securities after the date of this Agreement. As used herein "consolidated net worth" means the sum of (x) the gross book value of the assets of the Borrower and its consolidated Subsidiaries plus (y) Specified Subordinated Debt (as hereinafter defined) minus (z) consolidated total liabilities of the Borrower and its consolidated Subsidiaries, including but not limited to accrued and deferred income taxes, and any reserves against assets. "Specified Subordinated Debt" means the aggregate principal amount of all indebtedness owed by the Borrower to FTNV or other persons or entities wholly owned by FTNV, in each case which has been subordinated to the Borrower's obligations to the Bank pursuant to a subordination agreement in form and substance reasonably satisfactory to the Bank. -18- 8.4 Fixed Charge Coverage Ratio. To maintain a Fixed Charge Coverage Ratio, determined as of the last day of each fiscal quarter, of at least 2.0 to 1.0. "Fixed Charge Coverage Ratio" as of the last day of any fiscal quarter means the ratio of (a) Trailing EBITDA minus Trailing Capital Expenditures, determined as of such last day to (b) the sum on such last day of the Borrower's Pro Forma Interest Expense and the current portion of long-term debt measured as of such last day. "Trailing EBITDA" as of the last day of any fiscal quarter means the sum for the period of twelve months ending on such last day of (i) the Borrower's consolidated net income, plus (ii) the Borrower's consolidated interest expense, plus (iii) the Borrower's consolidated tax expense, plus (iv) the Borrower's consolidated depreciation, amortization and other noncash charges; provided that in calculating "consolidated net income" for any period there shall be excluded all extraordinary or nonrecurring gains or losses during such period. "Trailing Capital Expenditures" as of the last day of any fiscal month or quarter means the sum for the period of twelve months ending on such last day of the Borrower's consolidated capital expenditures. "Pro Forma Interest Expense" as of the last day of a fiscal month or quarter means the aggregate pro forma consolidated interest expense to be incurred by the Borrower and its consolidated Subsidiaries during the period of twelve consecutive months commencing after such last day determined on the basis on the aggregate indebtedness of the Borrower and its consolidated Subsidiaries outstanding on such last day. 8.5 Other Debts. Not to, and not permit any of its Subsidiaries to, have outstanding or incur any direct or contingent liabilities or lease obligations (other than those to the Bank), or become liable for the liabilities of others without the Bank's written consent. This does not prohibit, without duplication: (a) Acquiring goods, supplies, or merchandise on normal trade credit; (b) Endorsing negotiable instruments received in the usual course of business; (c) Liabilities and lines of credit and leases in existence on the date of this Agreement disclosed on Schedule 8.5 attached hereto; (d) Additional debts and lease obligations (including under capitalized or operating leases) for the acquisition or leasing of fixed or capital assets, to the extent permitted elsewhere in this Agreement; -19- (e) Lease obligations incurred in connection with the leasing of current or new office space on commercially reasonable terms; (f) Liabilities under standard commercial indemnities granted or issued by the Borrower in the conduct of its business in the ordinary course; and (g) Unsecured indebtedness for borrowed money and unsecured obligations in respect of letters of credit in an amount not to exceed an outstanding amount of $500,000 in the aggregate. 8.6 Other Liens. Not to, and not permit any of its Subsidiaries to, create, assume, or allow any security interest or lien (including judicial liens) on property the Borrower or its Subsidiaries now or later owns, except: (a) Liens and security agreements in favor of the Bank; (b) Liens for taxes not yet delinquent or taxes being diligently contested in good faith and by appropriate proceedings and as to which such reserves or other appropriate provisions as may be required by generally accepted accounting principles are being maintained on its books; (c) Liens of carrier's, warehousemen, mechanics, materialmen, repairmen, landlords and other like statutory liens arising in the ordinary course of business securing obligations which are not overdue or which are being diligently contested in good faith and by appropriate proceedings and as to which such reserves or other appropriate provisions as may be required by generally accepted accounting principles are being maintained on its books; (d) Liens incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or other forms of governmental insurance or benefits; (e) judgment liens in existence less than 21 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered in full (subject to a customary deductible) by insurance maintained with responsible insurance companies; (f) Liens outstanding on the date of this Agreement disclosed to the Bank in writing and liens in favor of Nalco FT, Inc. pursuant to a Security Agreement dated as of March 23, 1998, (the termination of which is a condition to the Bank's having any obligation to make an extension of credit under this Agreement.) -20- (g) Purchase money security interests in property acquired after the date of this Agreement if (1) the lien attaches only to the property acquired and (2) the total principal amount of debt secured by such liens does not exceed Five Hundred Thousand Dollars ($500,000) at any one time; 8.7 Capital Expenditures. Not to, and not permit its Subsidiaries to, spend or incur obligations (including the total amount of any capital leases) for more than One Million Five Hundred Thousand Dollars ($1,500,000) in the aggregate for the Borrower and its Subsidiaries in any single fiscal year to acquire fixed or capital assets, exclusive of amounts expended which either (a) represent the proceeds of grant monies actually received by the Borrower or one of its Subsidiaries or (b) do not exceed grant monies which have been actually awarded and which are to be received not later than 90 days after the date of the expenditure. 8.8 Leases. Not permit the aggregate payments due from the Borrower and its Subsidiaries in any fiscal year under all leases (including capital and operating leases for real or personal property) to exceed One Million Dollars ($1,000,000). 8.9 Dividends. Not to declare or pay any dividends on any of its shares except dividends payable in capital stock of the Borrower, and not to purchase, redeem or otherwise acquire for value, or permit any of its Subsidiaries to purchase, redeem or otherwise acquire, any shares of Borrower's stock, or create any sinking fund in relation thereto except dividends payable in its capital stock, if immediately before or immediately after giving effect thereto either (a) a default exists or would exist under this Agreement or (b) the aggregate amount paid in any fiscal year as dividends or to purchase, redeem or otherwise acquire army outstanding stock, would exceed $900,000. 8.10 Loans and Investments. Not, and not permit its Subsidiaries to, make any loans or other extensions of credit to, or make any investments in, or make any capital contributions or other transfers of assets to, any individual or entity", except for: (a) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (b) advances to its employees or employees of any of its Subsidiaries for travel or other ordinary business expenses, in amounts which are reasonable and consistent With the Borrower's past practices; -21- (c) advances to subcontractors and suppliers in amounts which are reasonable and consistent with the Borrower's past practices; (d) shares of stock, obligations or other securities received in settlement of claims arising in the ordinary course of business; (e) an investment by the Borrower in Clean Diesel Technologies, Inc. in an aggregate amount not to exceed $500,000; (f) investments by the Borrower in its Subsidiaries in existence of the date of this Agreement and in Subsidiaries created after the date hereof; provided that the aggregate dollar amount of all such investments shall not exceed the sum of (1) Borrower's aggregate investment in its Subsidiaries on the date of this Agreement plus (2) $500,000; (g) deposits in bank accounts in foreign countries in major foreign banks to the extent necessary to provide operating funds for Borrower's foreign Subsidiaries; (h) investments in any of the following: (i) certificates of deposit; (ii) U.S. treasury bills and other obligations of the federal government; (iii) commercial paper rated at least A-1 by Standard & Poor's Ratings Group and at least P-1 by Moody's Investors Service, Inc.; (iv) repurchase agreements covering U.S. government securities; and (v) securities accounts or investment accounts maintained by the Bank in the name of the Borrower or for the benefit of the Borrower; and (i) investments in the nature of acquisitions permitted under Section 8.20(f). As used in this Agreement, the term "investment" means, without duplication, (1) any investment, made in cash or by delivery of any kind of property or asset, by the Borrower or any of its Subsidiaries in any other person or entity, whether by acquisition of shares of stock or similar interest, indebtedness or other obligation or security, or by loan, advance or capital contribution, or otherwise, (2) any guarantee by the Borrower or any of its Subsidiaries of the obligations of any other person or entity and (3) any ownership or similar interest held by the Borrower or any of its Subsidiaries in any other person or entity. The amount of any "investment" shall be the original principal or capital amount thereof less all returns of principal or equity thereon and shall, if made by the transfer or exchange of property other than cash, be deemed to have been made in an original principal or capital amount equal to the fair market value of such property. -22- 8.11 Notices to Bank. To promptly notify the Bank in writing of: (a) any lawsuit over $500,000 against the Borrower or any of its Subsidiaries. (b) any substantial dispute between the Borrower or any of its Subsidiaries and any government authority. (c) any failure to comply with this Agreement or any other Loan Document. (d) any material adverse change in the business condition (financial or otherwise), operations, properties or prospects of the Borrower, or the Borrower and its Subsidiaries taken as a whole, or the Borrower's ability to perform and fulfill its obligations under this Agreement or any other Loan Document. (e) any change in the Borrower's name, legal structure, place of business, or chief executive office if the Borrower has more than one place of business. 8.12 Books and Records. To maintain adequate books and records. 8.13 Audits. To allow the Bank and its agents to inspect the Borrower's properties and examine, audit and make copies of books and records at any reasonable time. If any of the Borrower's properties, books or records are in the possession of a third party, the Borrower authorizes that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books and records. The Bank has no duty to inspect the Borrower's properties or to examine, audit or copy books and records and the Bank shall not incur any obligation or liability by reason of not making any such inspection or inquiry. In the event that the Bank inspects the Borrower's properties or examines, audits or copies books and records, the Bank will be acting solely for the purposes of protecting the Bank's security and preserving the Bank's rights under this Agreement. Neither the Borrower nor any other party is entitled to rely on any inspection or other inquiry by the Bank. The Bank owes no duty of care to protect the Borrower or any other party against, or to inform the Borrower or any other party of, any adverse condition that may be observed as affecting the Borrower's properties or premises, or the Borrower's business. In the event that the Bank has a duty or obligation under applicable laws, regulations or legal requirements to disclose any report or findings made as a result of, or in connection with, any site visit, observation or testing by the Bank, the Bank may make such a disclosure to the Borrower or any other party. As long as Borrower is not in default of its obligations under this Agreement the Bank will give at least two days' advance notice of its intent to visit a premises, and all such visits shall be during normal business hours and made in such a way as to interfere as little as possible with the conduct of the Borrower's or its Subsidiaries' businesses. -23- 8.14 Compliance with Laws. To comply, and cause its Subsidiaries to comply, with, the laws (including any fictitious name statute), regulations, and orders of any government body with authority over the Borrower's and its Subsidiaries' businesses. 8.15 Preservation of Rights. Except as otherwise permitted under Section 8.20, to maintain and preserve, and cause its Subsidiaries to maintain and preserve, all rights, privileges, and franchises the Borrower and its Subsidiaries now have, except where maintenance of such rights, privileges and franchises shall have been determined by the Borrowers' Board of Directors to be not commercially reasonable. 8.16 Maintenance of Properties. To make, and cause its Subsidiaries to make, any repairs, renewals, or replacements to keep the Borrower's and its Subsidiaries' properties in good working condition, except where taking any such action shall have been determined by the Borrowers' Board of Directors to be not commercially.reasonable. 8.17 Perfection of Liens. To help the Bank perfect and protect its security interests and liens, and reimburse it for reasonable related costs it incurs to protect its security interests and liens. 8.18 Cooperation. To take any action reasonably requested by the Bank to carry out the intent of this Agreement and the other Loan Documents. 8.19 Insurance. (a) General Business Insurance. To maintain and cause its Subsidiaries to maintain insurance satisfactory to the Bank as to amount, nature and carrier covering property damage (including loss of use and occupancy) to any of the Borrower's and its Subsidiaries' properties, public liability insurance including coverage for contractual liability, product liability and workers' compensation, and any other insurance which is usual for the Borrower's and its Subsidiaries' businesses. (b) Evidence of Insurance. Upon the request of the Bank, to deliver to the Bank a copy of each insurance policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force. -24- 8.20 Additional Negative Covenants. Without the Bank's written consent, not to and not permit any of its Subsidiaries to: (a) engage in any business activities substantially different from its respective present business (and its initiative in advanced computing is considered part of its present business). (b) liquidate or dissolve the Borrower's or any of its Subsidiaries' business, except that (1) a Subsidiary of the Borrower may liquidate or dissolve into the Borrower or into any other wholly-owned Subsidiary of the Borrower and (2) this paragraph shall not prohibit the liquidation, dissolution or sale of Fuel Tech, Inc. Gmbh and Fuel Tech Polske Sp. zo.o, both of which are Subsidiaries of Borrower on the date of this Agreement. (c) enter into any consolidation, merger, pool, joint venture, syndicate, or other combination, or become a partner in a partnership, a member of a joint venture, or a member of a limited liability company, except that (1) any Subsidiary of the Borrower may merge into the Borrower (provided the Borrower is the surviving entity) or may merge or consolidate with or into any other wholly-owned Subsidiary of the Borrower and (2) this paragraph shall not prohibit acquisitions permitted under section 8.20(f). (d) sell, assign, lease, transfer or otherwise dispose of any assets for less than fair market value, or enter into any agreement to do so. (e) sell, assign, lease, transfer or otherwise dispose of any assets, or enter into any agreement to do so, except: (i) dispositions of inventory, or used, worn-out or surplus equipment or other assets, all in the ordinary course of business; (ii) allowing patents, trademarks, copyrights or other intellectual property to lapse or expire if the Borrower in good faith has determined that the such intellectual property is no longer of material value or usefulness to the conduct of its business; and (iii) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment. -25- (f) acquire or purchase a business or its assets (whether through the purchase of assets, through merger, consolidation or otherwise) unless, both before and after giving effect thereto, both of the following conditions are satisfied: (1) the aggregate consideration paid (whether in cash or property, by assumption of indebtedness or otherwise) by the Borrower and its Subsidiaries for all such acquisitions or purchases during any Fiscal Year does not exceed 1,500,000 AND (2) no default or event of default or event which, with the giving of notice or the passage of time, or both, would be or become an event of default under this Agreement or any other Loan Document, shall exist. In addition to the foregoing requirements, if the Borrower is unable to fund the entire consideration paid in connection with an acquisition from internally generated funds and/or through the sale of equity securities (i.e., the Borrower requests a borrowing to fund a portion of such consideration), the Combined Pro Forma Fixed Charge Coverage Ratio (as hereinafter defined) after giving effect to such acquisition must be at least 2.50 to 1.0 As used in this paragraph (f) "Combined Pro Forma Fixed Charge Coverage Ratio" means at any date of determination (or, if such date is not the last day of a fiscal quarter, the fiscal quarter end next preceding such date) the ratio on such date of (x) Combined Pro Forma Trailing EBITDA minus Combined Pro Forma Trailing Capital Expenditures to (y) the sum of the Combined Pro Forma Interest Expense and the Combined Pro Forma Current Debt. "Combined Pro Forma Trailing EBITDA" as of any date of determination means the sum for the period of twelve months ending on such date of (i) the aggregate of the consolidated net income of the Borrower and of the business or assets to be acquired (the "Target"), plus (ii) the aggregate of the Borrower's and the Target's consolidated interest expense, plus (iii) the aggregate of the Borrower's and the Target's consolidated tax expense, plus (iv) the aggregate of the Borrower's and the Target's consolidated depreciation, amortization and other noncash charges, in each case calculated as if the Borrower had acquired the Target at the beginning of such twelve month period; provided that in calculating "consolidated net income" for any period there shall be excluded all extraordinary or nonrecurring gains or losses during such period. "Combined Pro Forma Trailing Capital Expenditures" as of any date of determination means the sum for the period of twelve months ending on such date of the Borrower's and the Target's consolidated capital expenditures calculated as if the Borrower had acquired the Target at the beginning of such twelve month period. "Combined Pro Forma Interest Expense" as of any date of determination means the aggregate of the Borrower's and the Target's pro forma consolidated interest expense to be incurred by the Borrower and the Target and their respective consolidated Subsidiaries during the period of twelve consecutive months commencing after such date of determination on the basis on the aggregate indebtedness of the Borrower and the Target and their respective consolidated Subsidiaries outstanding on such date. "Combined Pro Forma Current Debt" as of any date of determination means the aggregate on such date of the current portion of long-term debt of the Borrower and the Target. -26- (g) voluntarily suspend its business, except for its Poland and German Subsidiaries. 8.21 Hank as Principal Depository. To maintain the Bank as its principal depository bank, including for the maintenance of business, cash management, operating and administrative deposit accounts. 8.22 ERISA Plans. With respect to a Plan subject to Title IV of ERISA, to give prompt written notice to the Bank of: (a) The occurrence of any reportable event under Section 4043(c) of ERISA for which the PBGC requires 30 day notice. (b) Any action by the Borrower or any ERISA Affiliate to terminate or withdraw from a Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA. (c) The commencement of any proceeding with respect to a Plan under Section 4042 of ERISA. 9. HAZARDOUS WASTE INDEMNIFICATION. The Borrower will indemnify and hold harmless the Bank from any loss or liability directly or indirectly arising out of the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of a hazardous substance. This indemnity will apply whether the hazardous substance is on, under or about the Borrower's property or operations or property leased to the Borrower. The indemnity includes but is not limited to reasonable attorneys' fees (including the reasonable estimate of the allocated cost of in-house counsel and staff). The indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys and assigns. "Hazardous substances" means any substance, material or waste that is or becomes designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant" or a similar designation or regulation under any federal, state or local law (whether under common law, statute, regulation or otherwise) or judicial or administrative interpretation of such, including without limitation petroleum or natural gas. This indemnity will survive repayment of the Borrower's obligations to the Bank. 10. DEFAULT If any of the following events occurs, the Bank may do one or more of the following: declare the Borrower in default, stop making any additional credit available to the Borrower, and require the Borrower to repay its entire debt immediately and without prior notice. If an event of default occurs under the paragraph entitled "Bankruptcy" below, with respect to the Borrower, then the entire debt outstanding under this Agreement will automatically be due immediately. -27- 10.1 Failure to Pay. The Borrower (a) fails to make a payment of principal of any Advance when due, or (b) fails to pay any interest, fee or other amount when due and such failure continues for a period of three days. 10.2 Lien Priority. The Bank fails to have an enforceable first lien (except for any prior liens to which the Bank has consented in writing) on or security interest in any property given as security for this Agreement. 10.3 False Information. The Borrower has knowingly or intentionally given the Bank false or misleading information or representations. 10.4 Bankruptcy. The Borrower files a bankruptcy petition, a bankruptcy petition is filed against the Borrower, or the Borrower makes a general assignment for the benefit of creditors. The default will be deemed cured if any bankruptcy petition filed against the Borrower is dismissed within a period of 60 days after the filing; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during that period. 10.5 Receivers; Termination. A receiver or similar official is appointed for the Borrower's business or the business is terminated. 10.6 Judgments. Any judgments or arbitration awards are entered against the Borrower, or the Borrower enters into any settlement agreements with respect to any litigation or arbitration, in an aggregate amount of $500,000 or more in excess of any insurance coverage and either (a) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (b) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect. 10.7 Government Action. Any government authority takes action that the Bank reasonably believes materially adversely affects the Borrower's financial condition or ability to repay. 10.8 Material Adverse Change. A material adverse change occurs, in the Borrower's business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. -28- 10.9 Cross-default. Any default by the Borrower or any of its Subsidiaries occurs under any agreement in connection with any credit the Borrower or any of its Subsidiaries has obtained from anyone other than the Bank or which the Borrower or any of its Subsidiaries has guaranteed in the amount of Five Hundred Thousand Dollars ($500,000) or more in the aggregate. 10.10 Default Under Other Loan Documents. Any guaranty, subordination agreement, security agreement, mortgage, deed of trust, or other Loan Document required by this Agreement (a) is violated, and such violation continues to exist after the giving of any required notice and the expiration of any applicable grace period set forth in such Loan Document, or (b) shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of a party obligated to the Bank thereunder. 10.11 Other Bank Agreements. The Borrower fails to meet the conditions of, or fails to perform any obligation under any other agreement the Borrower has with the Bank or any affiliate of the Bank, or demand is made by the Bank or any affiliate of the Bank on any obligation owing to the Bank or such affiliate under any other agreement the Borrower has with the Bank or any affiliate of the Bank. 10.12 ERISA Plans. The occurrence of any one or more of the following events with respect to a Plan subject to Title IV of ERISA, provided such event or events could reasonably be expected, in the judgment of the Bank, to subject the Borrower to any tax, penalty or liability (or any combination of the foregoing) which, in the aggregate, could have a material adverse effect on the financial condition of the Borrower: (a) A reportable event shall occur under Section 4043(c) of ERISA with respect to a Plan. (b) Any Plan termination (or commencement of proceedings to terminate a Plan) or the full or partial withdrawal from a Plan by the Borrower or any ERISA Affiliate. 10.13 Other Breach Under Agreement. The Borrower fails to meet the conditions of, or fails to perform any obligation under, any term of this Agreement not specifically referred to in this Article. This includes any failure by the Borrower to comply with any financial covenants, including any failure which continues to exist after the giving of any required notice and the expiration of any applicable grace period, set forth in this Agreement, whether such failure is evidenced by financial statements delivered to the Bank or is otherwise known to the Borrower or the Bank. -29- 11. ENFORCING THIS AGREEMENT; MISCELLANEOUS 11.1 GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank and all financial covenants will be made under generally accepted accounting principles, consistently applied. 11.2 Illinois Law. THIS AGREEMENT IS GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. 11.3 Successors and Assigns. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement without the Bank's prior consent. The Bank may sell participations in or assign this loan, and may exchange financial information about the Borrower with actual or potential participants or assignees. 11.4 Severability; Waivers. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing. 11.5 Attorneys' Fees. The Borrower shall reimburse the Bank for any reasonable costs and reasonable attorneys' fees incurred by the Bank in connection with the enforcement or preservation of any rights or remedies under this Agreement and any other documents executed in connection with this Agreement, and in connection with the administration of this Agreement or any amendment, waiver, "workout" or restructuring under this Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable attorneys' fees incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. In the event that any case is commenced by or against the Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute, the Bank is entitled to recover costs and reasonable attorneys' fees incurred by the Bank related to the preservation, protection, or enforcement of any rights of the Bank in such a case. As used in this paragraph, "attorneys' fees" includes the reasonable allocated costs of the Bank's in-house counsel. 11.6 One Agreement. This Agreement and any related security or other agreements required by this Agreement, collectively: (a) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit; and (b) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and -30- (c) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. 11.7 Indemnification. The Borrower will indemnify and hold the Bank harmless from any loss, liability, damages, judgments, and costs of any kind relating to or arising directly or indirectly out of (a) this Agreement or any document required hereunder, (b) any credit extended or committed by the Bank to the Borrower hereunder, and (c) any litigation or proceeding related to or arising out of this Agreement, any such document, or any such credit, except to the extent that such loss, liability, damages, judgments, and costs is proximately caused by the Bank's gross negligence or willful misconduct. This indemnity includes but is not limited to reasonable attorneys' fees (including the reasonable allocated cost of in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys, and assigns. This indemnity will survive repayment of the Borrower's obligations to the Bank. All sums due to the Bank hereunder shall be obligations of the Borrower, due and payable immediately without demand. 11.8 Notices. All notices required under this Agreement will be in writing and will be transmitted by personal delivery, first class mail, overnight courier, or facsimile to the addresses or facsimile numbers on the signature page of this Agreement, or to such other addresses or facsimile numbers as the Bank and the Borrower may specify from time to time in writing. 11.9 Headings. Article and paragraph headings are for reference only and do not affect the interpretation or meaning of any provisions of this Agreement. 11.10 Counterparts; Effectiveness. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so executed, will be deemed an original but all such counterparts will constitute but one and the same agreement. On the date (a) a counterpart executed by the Borrower has been received by the Bank, (b) the Bank has executed this Agreement and (c) all of the conditions precedent described in Section 6 have been satisfied to the satisfaction of the Bank, this Agreement shall become effective (such date is herein called the "Restatement Effective Date"). 11.11 Consent to Jurisdiction. To induce the Bank to accept this Agreement, the Borrower irrevocably agrees that, subject to the -31- Bank's sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY ARISING OUT OF OR RELATED TO THIS AGREEMENT WILL BE LITIGATED IN COURTS HAVING SITUS IN CHICAGO, ILLINOIS. THE BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY COURT LOCATED WITHIN CHICAGO, ILLINOIS, WAIVES PERSONAL SERVICE OF PROCESS UPON THE BORROWER, AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL DIRECTED TO THE BORROWER AT THE ADDRESS STATED ON THE SIGNATURE PAGE HEREOF AND SERVICE SO MADE WILL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT. 11.12 Waiver of J1ury Trial. THE BORROWER AND THE BANK EACH WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a) UNDER THIS AGREEMENT OR ANY RELATED AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS AGREEMENT OR (b) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. (SIGNATURE PAGE FOLLOWS NEXT] -32- This Agreement is executed as of the date stated at the top of the first page. BANK OF AMERICA, FUEL TECH INC., a Delaware NATIONAL ASSOCIATION corporation By: By Title: Title: Vice President Address and facsimile number Address and facsimile number where notices to the Bank are where notices to the Borrower to be sent: are to be to be sent: 231 South LaSalle Street 512 Kingsland Drive Chicago, IL 60697 Batavia, IL 60510-2299 Attn: Marc J . Crady Attn: Vince Arnone Facsimile: (312) 828- Facsimile: 630-845-4501 -33- AMENDMENT NO. 1 TO AMENDED AND RESTATED Bank of America, N.A. BUSINESS LOAN AGREEMENT This Amendment No. 1 (the "Amendment") dated as of December 31, 1999, is between BANK OF AMERICA, NATIONAL ASSOCIATION (the "Bank") and FUEL TECH, INC. (the "Borrower"). RECITALS A. The Bank and the Borrower entered into a certain Amended and Restated Business Loan Agreement dated as of August 31, 1999 (the "Agreement"). B. The Bank and the Borrower desire to amend the Agreement. AGREEMENT 1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meanings given to them in the Agreement. 2. Amendment. Subsection (a) of Section 8.2 Financial Information of the Agreement is hereby amended and restated to read: "(a) Within 90 days of: (i) FTNV's fiscal year end, FTNV's annual financial statements. These financial statements must be prepared on a consolidated basis and audited (with an unqualified opinion) by a Certified Public Accountant acceptable to the Bank and (ii) the Borrower's fiscal year end, the Borrower's annual financial statements. These financial statements may be Borrower prepared. The statements shall be prepared on a consolidated basis." 3. Representations and Warranties. When the Borrower signs this Amendment, the Borrower represents and warrants to the Bank that: 3.1 There is no event which is, or with notice or lapse of time or both would be, a default under the Agreement except those events, if any, that have been disclosed in writing to the Bank or waived in writing by the Bank; 3.2 The representations and warranties in the Agreement are true and correct as of the date of this Amendment as if made on the date of this Amendment; 3.3 The Borrower has notified the Bank in writing of any change in (i) the locations of the Borrower's place of business or, if the Borrower has more than one place of business, the Borrower's chief executive office and any collateral; and (ii) the Borrower's name, identity or business structure. 3.4 This Amendment is within the Borrower's powers, has been duly authorized, and does not conflict with any of the Borrower's organizational papers; and 3.5 This Amendment does not conflict with any law, agreement, or obligation by which the Borrower is bound. 4. Conditions. This Amendment will become effective on the date first set forth above, provided, however, that the effectiveness of this Amendment is subject to receipt by the Bank of an original of this Amendment duly executed by the Borrower. ================================================================================ 5. Effect of Amendment. Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. 6. Counterparts. This Amendment may be executed in counterparts, each of which when so executed shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. This Amendment is executed as of the date stated at the beginning of this Amendment. BANK OF AMERICA, NATIONAL ASSOCIATION FUEL TECH, INC. By: By. Title: Title: ------------------------ ------------------------ SIXTH AMENDMENT TO AMENDED AND RESTATED BUSINESS LOAN AGREEMENT THIS SIXTH AMENDMENT TO AMENDED AND RESTATED BUSINESS LOAN AGREEMENT (this "Amendment") dated as of March 31, 2002 is made and entered into by and between BANK OF AMERICA, N.A. (the "Bank") and FUEL TECH, INC., a Massachusetts corporation (the "Borrower"). RECITALS WHEREAS, the Bank and the Borrower are parties to that certain Amended and Restated Business Loan Agreement dated as of August 31, 1999 (as heretofore amended, the "Agreement"); WHEREAS, the Bank and the Borrower have agreed to amend the Agreement as hereinafter set forth; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Bank and the Borrower hereby agree as follows: AGREEMENT 1. Definitions. Capitalized terms used, but not defined, in this Amendment shall have the meanings given to them in the Agreement. 2. Amendment. The Agreement is hereby amended as follows: 2.1 Line of Credit Amount. Section 1.1(a)(i) of the Agreement is hereby restated as follows: (i) During the availability period described below, the Bank will provide a line of credit to the Borrower. The amount of the line of credit (the "Line of Credit Commitment") is Six Million Dollars ($6,000,000.00). The amount available to the Borrower (the "Availability") at any time is Six Million Dollars ($6,000,000.00). 2.2 Unused Commitment Fee. Section 3.1 (b) of the Agreement is hereby restated as follows: (b) Unused Commitment Fee. The Borrower agrees to pay a fee on any difference between the Line of Credit Commitment and the amount of the line of credit it actually uses, determined by the weighted average credit outstanding during the specified period. The fee will be calculated at 0.50% per year. The calculation of credit outstanding will include the undrawn amount of letters of credit. This fee is due on the last day of each fiscal quarter until the expiration of the availability period. 2.3 Net Worth. Section 8.3 of the Agreement is hereby restated as follows: 8.3 Net Worth. To maintain consolidated net worth (as hereinafter defined) as of March 31, 2002, and as of the last day of each fiscal quarter thereafter, of not less than Twelve Million Seven Hundred and Fifty Thousand Dollars ($12,750,000). As used herein "consolidated net worth" means the sum of (a) the gross book value of the assets of the Borrower and its consolidated Subsidiaries, plus (b) Specified Subordinated Debt (as hereinafter defined), minus (c) consolidated total liabilities of the Borrower and its consolidated Subsidiaries, including but not limited to accrued and deferred income taxes, and any reserves against assets. "Specified Subordinated Debt" means the aggregate principal amount of all indebtedness owed by the Borrower to FTNV or other persons or entities wholly owned by FTNV, in each case which has been subordinated to the Borrower's obligations to the Bank pursuant to a subordination agreement in form and substance reasonably satisfactory to the Bank. 2.4 Minimum EBITDA. Section 8.4 of the Agreement is hereby restated as follows: 8.4 Minimum EBITDA. To maintain a minimum EBITDA (as hereinafter deferred) as of the last day of each fiscal quarter set forth below of not less than the following respective amounts: Fiscal Quarter Ending Minimum EBITDA Amount June 30, 2002 $1,000,000 September 30, 2002 $750,000 (based on a two-fiscal quarter average) December 31, 2002 $750,000 (based on a three-fiscal quarter average) March 31, 2003 and $750,000 each fiscal quarter thereafter (based on a four-fiscal quarter average) -2- As used herein, "EBITDA" means, for any period, the sum for such period of (a) the Borrower's consolidated net income, plus (b) the Borrower's consolidated interest expense, plus (c) the Borrower's consolidated tax expense, plus (d) the Borrower's consolidated depreciation, amortization and other noncash charges; provided that in calculating "consolidated net income" for any period, there shall be excluded all extraordinary or nonrecurring gains or losses during such period. 2.5 Value of Nations Fund Account. Section 8.23 of the Agreement is hereby deleted. 3. Warranties. To induce the Bank to enter into this Amendment, the Borrower warrants that: 3:1 Authorization. The Borrower is duly authorized to execute and deliver this Amendment and is and will continue to be duly authorized to borrow monies under the Agreement, as amended hereby, and to perform its obligations under the Agreement, as amended hereby. 3.2 No Conflicts. The execution and delivery of this Amendment and the performance by the Borrower of its obligations under the Agreement, as amended hereby, do not and will not conflict with any provision of law or of the articles of incorporation or by-laws of the Borrower or of any agreement binding upon the Borrower. 3.3 Validity and Binding Effect. The Agreement, as amended hereby, is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. 3.4 Representations and Warranties. After giving effect to this Amendment, each of the representations and warranties set forth in the Agreement are true and correct on, and as of, the date first set forth above. 4. Conditions Precedent To Amendments. The amendments contemplated by Section 2 hereof shall be effective as of the date hereof, subject to the satisfaction of each of the following conditions precedent: 4.1 Documentation. The Borrower shall have delivered to the Bank all of the following, each duly executed and dated the closing date hereof, in form and substance satisfactory to the Bank: (a) Amendment. This Amendment; (b) Fuel-Tech N.V. Reaffirmation. Fuel-Tech N.V. shall have executed and delivered to the Bank a Reaffirmation of Subordination Agreement in the form of Exhibit A attached hereto; and -3- (c) Other. Such other instruments, documents or agreements as the Bank may reasonably request. 4.2 No Default. As of the date hereof, No Default (as set forth in Section 10 of the Agreement) shall exist, after giving effect to this Amendment. 4.3 Warranties. As of the date hereof, the warranties in Section 3 of this Amendment shall be true and correct on, and as of, such date. 4.4 Amendment Fee. The Borrower shall have paid to the Bank an amendment fee of $__________. 5. General. 5.1 Expenses. The Borrower agrees to pay the Bank upon demand for all expenses, including reasonable attorneys' fees incurred by the Bank in connection with the preparation, negotiation arid execution of this Amendment and any document required to be furnished therewith. 5.2 Law. This Amendment shall be construed in accordance with, and governed by, the internal laws of the State of Illinois. 5.3 Successors. 'this Amendment shall be binding upon the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank and the successors and assigns of the Bank. 5.4 Confirmation of the Agreement. The Agreement, as amended hereby, shall remain in full force and effect and is hereby ratified and confirmed in all respects. 5.5 References to the Agreement. Each reference in the Agreement to "this Agreement," "hereunder," "hereof," or words of similar import to documents provided for in the Agreement or delivered or to be delivered thereunder or in connection therewith, shall, except where the context otherwise requires, be deemed a reference to the Agreement as amended hereby. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed at Chicago, Illinois by their respective officers thereunto duly authorized as of the date first written above. -4- SEVENTH AMENDMENT TO AMENDED AND RESTATED BUSINESS LOAN AGREEMENT THIS SEVENTH AMENDMENT TO AMENDED AND RESTATED BUSINESS LOAN AGREEMENT (this "Amendment") dated as of December 31, 2002 is made and entered into by and between BANK OF AMERICA, N.A. (the "Bank") and FUEL TECH, INC., a Massachusetts corporation (the "Borrower"). RECITALS WHEREAS, the Bank and the Borrower are parties to that certain Amended and Restated Business Loan Agreement dated as of August 31, 1999 (as heretofore amended, the "Agreement"); WHEREAS, the Bank and the Borrower have agreed to amend the Agreement as hereinafter set forth; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Bank and the Borrower hereby agree as follows: AGREEMENT 1. Definitions. Capitalized terms used, but not defined, in this Amendment shall have the meanings given to them in the Agreement. 2. Amendment. The Agreement is hereby amended as follows: 2.1 Line of Credit Amount. Section l.l(a)(i) of the Agreement is hereby restated as follows: (i) During the availability period described below, the Bank will provide a line of credit to the Borrower. The amount of the line of credit (the "Line of Credit Commitment") is Ten Million Dollars ($10,000,000.00). The amount available to the Borrower (the "Availability") at any time is Ten Million Dollars ($10,000,000.00). 2.2 Availability Period. Section 1.1(b) of the Agreement is hereby restated as follows: (b) Availability Period. The line of credit is available between the date of this Agreement and July 31, 2004 (the "Expiration Date"), unless the Borrower is in default. 2.3 Unused Commitment Fee. Section 3.1 (b) of the Agreement is hereby restated as follows: (b) Unused Commitment Fee. The Borrower agrees to pay a fee on any difference between (a) the Line of Credit Commitment and (b) the sum of (i) the amount of the line of credit it actually uses (determined by the weighted average line of credit outstandings during the specified period) plus (ii) the maximum principal amount of this credit facility extended to Fuel Tech SRL by the Bank's Milan, Italy branch, assuming for purposes of this Section 3.1 b that such credit facility has been fully borrowed. The fee will be calculated at 0.50% per year. The calculation of line of credit outstandings will include the undrawn amount of letters of credit. This fee is due on the last day of each fiscal quarter until the expiration of the availability period. 2.4 Capital Expenditures. Section 8.7 of this Agreement is hereby restated as follows: 8.7 Capital Expenditures. Not to, and not permit its Subsidiaries to, spend or incur obligations (including the total amount of any capital leases) for more than $2,250,000 in the aggregate for the Borrower and its Subsidiaries in any single fiscal year to acquire fixed or capital assets, exclusive of amounts expended which either (a) represent the proceeds of grant monies actually received by the Borrower or one of its Subsidiaries or (b) do not exceed grant monies which have been actually awarded and which are to be received not later than 90 days after the date of the expenditure. 2.5 Dividends. Section 8.9 of the Agreement is hereby restated as follows: 8.9 Dividends. Not to declare or pay any dividends on any of its shares except dividends payable in capital stock of the Borrower, and not to purchase, redeem or otherwise acquire for value, or permit any of its Subsidiaries to purchase, redeem or otherwise acquire, any shares of Borrower's stock, or create any sinking fund in relation thereto except dividends payable in its capital stock, if immediately before or immediately after giving effect thereto a default exists or would exist under this Agreement. 2.6 Loans and Investments. Section 8.10 of this Agreement is hereby restated as follows: 8.10 Loans and Investments. Not, and permit its Subsidiaries to, make any loans or other extensions of credit to, or make any investments in, or make any capital contributions or other transfers of assets to, any individual or entity, except for: (a) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; 2 (b) advances to its employees or employees of any of its Subsidiaries for travel or other ordinary business expenses, in amounts which are reasonable and consistent with the Borrower's past practices; (c) advances to subcontractors and suppliers in amounts which are reasonable and consistent with the Borrower's past practices; (d) shares of stock, obligations or other securities received in settlement of claims arising in the ordinary course of business; (e) an investment by the Borrower in Clean Diesel Technologies, Inc. in an aggregate amount not to exceed $500,000; (f) investments by the Borrower in its Subsidiaries in existence of the date of this Agreement and in Subsidiaries created after the date hereof; provided that the aggregate dollar amount of all such investments shall not exceed the sum of (1) Borrower's aggregate investment in its Subsidiaries on the date of this Agreement plus (2) $1,000,000; (g) deposits in bank accounts in foreign countries in major foreign banks to the extent necessary to provide operating funds for Borrower's foreign Subsidiaries; (h) investments in any of the following: (i) certificates of deposit; (ii) U.S. treasury bills and other obligations of the federal government; (iii) commercial paper rated at least A-1 by Standard & Poor's Ratings Group and at least P-1 by Moody's Investors Service, Inc.; (iv) repurchase agreements covering U.S. government securities; and (v) securities accounts or investment accounts maintained by the Bank in the name of the Borrower or for the benefit of the Borrower; (i) investments in the nature of acquisitions permitted under Section 8.20(f); and (j) loans, advances capital contributions, investments or extensions of credit not otherwise described in subsections (a) through (i) above not exceeding $500,000 in the aggregate outstanding at any time. As used in this Agreement, the term "investment" means, without duplication, (1) any investment, made in cash or by delivery of any kind of property or asset, by the Borrower or any of its Subsidiaries in any other person or entity, whether by acquisition of shares of stock or similar interest, indebtedness or other obligation or security, or by loan, advance or capital contribution, or otherwise, (2) any guarantee by the Borrower or any of its Subsidiaries of the obligations of any other person or entity and (3) any ownership or similar interest held by the Borrower or any of its Subsidiaries in any other person or entity. The amount of any "investment" shall be the original principal or capital amount thereof less all returns of principal or equity thereon and shall, if made by the transfer or exchange of property other than cash, be deemed to have been made in an original principal or capital amount equal to the fair market value of such property. 3 2.7 Additional Negative Covenants. Section 8.20 of the Agreement is hereby restated as follows: 8.20 Additional Negative Covenants. Without the Bank's written consent, not to and not permit any of its Subsidiaries to: (a) engage in any business activities substantially different from its respective present business (and its initiative in advanced computing is considered part of its present business). (b) liquidate or dissolve the Borrower's or any of its Subsidiaries' business, except that (1) a Subsidiary of the Borrower may liquidate or dissolve into the Borrower or into any other wholly-owned Subsidiary of the Borrower and (2) this paragraph shall not prohibit the liquidation, dissolution or sale of Fuel Tech, Gmbh and Fuel Tech Jamaica, Ltd. (c) enter into any consolidation, merger, pool, joint venture, syndicate, or other combination, or become a partner in a partnership, a member of a joint venture, or a member of a limited liability company, except that (1) any Subsidiary of the Borrower may merge into the Borrower (provided the Borrower is the surviving entity) or may merge or consolidate with or into any other wholly-owned Subsidiary of the Borrower and (2) this paragraph shall not prohibit acquisitions permitted under Section 8.20 (d) sell, assign, lease, transfer or otherwise dispose of any assets for less than fair market value, or enter into any agreement to do so. (e) sell, assign, lease, transfer or otherwise dispose of any assets, or enter into any agreement to do so, except: (i) dispositions of inventory, or used, worn-out or surplus equipment or other assets, all in the ordinary course of business; (ii) allowing patents, trademarks, copyrights or other intellectual property to lapse or expire if the Borrower in good faith has determined that the such intellectual property is no longer of material value or usefulness to the conduct of its business; and 4 (iii) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment. (f) acquire or purchase a business or its assets (whether through the purchase of assets, through merger, consolidation or otherwise) unless both before and after giving effect thereto, both of the following conditions are satisfied: (1) the aggregate consideration paid (whether in cash or property, by assumption of indebtedness or otherwise) by the Borrower and its Subsidiaries for all such acquisitions or purchases during any Fiscal Year does not exceed $5,000,000 AND (2) no default or event of default or event which, with the giving of notice or the passage of time, or both, would be or become an event of default under this Agreement or any other Loan Document, shall exist. In addition to the foregoing requirements, if the Borrower is unable to fund the entire consideration paid in connection with an acquisition from internally generated funds and/or through the sale of equity securities i.e., the Borrower requests a borrowing to fund a portion of such consideration), the ratio of the Borrower's Funded Debt to EBITDA (as such terms are defined below) after giving effect to such acquisition must be less than 2.50 to 1.0. As used herein, "Funded Debt" shall mean with respect to the Borrower and its Subsidiaries determined on a consolidated basis, the following, without duplication, (a) all indebtedness for borrowed money, whether or not evidenced by bonds, debentures, notes or similar instruments (excluding inter-company indebtedness), (b) all obligations as lessee under capitalized leases, (c) all obligations to pay the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business), (d) all indebtedness secured by a lien whether or not such indebtedness shall have been assumed, and (e) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn) and banker's acceptances. As used herein, "EBITDA" shall mean with respect to the Borrower and its Subsidiaries determined on a consolidated basis, for any period without duplication, the sum for such period of (a) net income, plus (b) interest expense, ~l (c) tax expense, ~l (d) depreciation, amortization and other noncash charges; provided that in calculating net income for any period, there shall be excluded all extraordinary or nonrecurring gains or losses during such period. 5 2.8 Term Loan. Section 1.2 of the Agreement is hereby restated as "Intentionally Omitted". Upon the effectiveness of this Amendment, the Borrower shall prepay all outstanding principal and accrued interest on the term loan. Upon receipt of such prepayment, the Term Loan Commitment shall be cancelled and the Bank shall return the Term Note to the Borrower marked "Paid and Cancelled". 3. Warranties. To induce the Bank to enter into this Amendment, the Borrower warrants that: 3.1 Authorization. The Borrower is duly authorized to execute and deliver this Amendment and the Replacement Revolving Note referred to in Section 4.1 hereof (the "Note") and is and will continue to be duly authorized to borrow monies under the Agreement, as amended hereby, and to perform its obligations under the Agreement, as amended hereby. 3.2 No Conflicts. The execution and delivery of this Amendment and the Note and the performance by the Borrower of its obligations under the Agreement, as amended hereby, do not and will not conflict with any provision of law or of the articles of incorporation or by-laws of the Borrower or of any agreement binding upon the Borrower. 3.3 Validity and Binding Effect. The Agreement, as amended hereby, and the Note are the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. 3.4 Representations and Warranties. After giving effect to this Amendment, each of the representations and warranties set forth in the Agreement are true and correct on, and as of, the date hereof. 4. Conditions Precedent To Amendments. This Amendment shall be effective as of the date hereof, subject to the satisfaction of each of the following conditions precedent: 4.1 Documentation. The Borrower shall have delivered to the Bank all of the following, each duly executed and dated the closing date hereof, in form and substance satisfactory to the Bank: (a) Amendment. ThIis Amendment; (b) Note. A Replacement Revolving Note in the form of Exhibit A hereto; (c) Reaffirmation of Fuel-Tech N.V. Fuel-Tech N.V. shall have executed and delivered to the Bank a Reaffirmation of Subordination Agreement in the form of Exhibit B hereto; (d) Guaranty of Fuel Tech SRL. Fuel Tech SRL ("SRL") shall have executed and delivered to the Bank a Guaranty in the form of Exhibit C hereto (the "SRL Guaranty"); 6 (e) Authorization of Borrower. Evidence that the execution, delivery and performance of this Amendment and the Note have been duly authorized, along with evidence of the incumbency and a specimen signature, of each officer of the Borrower executing this Amendment and the Note; (f) Authorization of SRL. Evidence that the execution, delivery and performance of the SRL Guaranty have been duly authorized, along with evidence of the incumbency and a specimen signature, of each officer of SRL executing the SRL Guaranty; and (g) Other. Such other instruments, documents or agreements as the Bank may reasonably request. 4.2 No Default. As of the date hereof, no Default shall exist, after giving effect to this Amendment. 4.3 Warranties. As of the date hereof, the warranties in Section 3 of this Amendment shall be true and correct on, and as of, such date. 5. General. 5.1 Expenses. The Borrower agrees to pay the Bank upon demand for all expenses, including reasonable attorneys' fees incurred by the Bank in connection with the preparation, negotiation and execution of this Amendment and any document required to be furnished therewith. 5.2 Law. This Amendment shall be construed in accordance with, and governed by, the internal laws of the State of Illinois. 5.3 Successors. This Amendment shall be binding upon the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank and the successors and assigns of the Bank. 5.4 Confirmation of the Agreement. The Agreement, as amended hereby, shall remain in full force and effect and is hereby ratified and confirmed in all respects. 5.5 References to the Agreement. Each reference in the Agreement to "this Agreement," "hereunder," "hereof," or words of similar import to documents provided for in the Agreement or delivered or to be delivered thereunder or in connection therewith, shall, except where the context otherwise requires, be deemed a reference to the Agreement as amended hereby. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed at Chicago, Illinois by their respective officers thereunto duly authorized as of the date first written above. EX-23.1 4 b323572_ex23-1.txt CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-83068 dated August 16, 1994 and No. 333-36390 dated May 5, 2000) pertaining to The 1993 Incentive Plan of Fuel Tech N.V. of our report dated February 19, 2003, with respect to the consolidated financial statements of Fuel Tech N.V. included in this Annual Report on Form 10-K for the year ended December 31, 2002. Ernst & Young LLP Chicago, Illinois March 11, 2003 -----END PRIVACY-ENHANCED MESSAGE-----