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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM_________________TO_______________
COMMISSION FILE NO. 000-21724
FUEL-TECH N.V.
--------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NETHERLANDS ANTILLES N/A
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NUMBER)
FUEL-TECH N.V. FUEL TECH, INC.
(REGISTRANT) (U.S. OPERATING SUBSIDIARY)
CASTORWEG 22-24 695 EAST MAIN 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 IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, AS
DEFINED IN RULE 405 OF THE SECURITIES ACT.
YES___ NO_X_
INDICATE BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS
PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE ACT.
YES___ NO_X_
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. __
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 WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER OR A NON-ACCELERATED FILER (AS DEFINED IN RULE 12b-2 UNDER THE
SECURITIES EXCHANGE ACT OF 1934)
LARGE ACCELERATED FILER___ ACCELERATED FILER _X_ NON-ACCELERATED FILER___
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN
RULE 12b-2 OF THE EXCHANGE ACT).
YES__ NO_X_
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 30, 2005 WAS
$92,282,000. THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT BASED ON THE AVERAGE BID AND ASKED PRICES OF
FEBRUARY 17, 2006 WAS $181,367,000.
INDICATE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTERED CLASSES OF
COMMON STOCK AT FEBRUARY 17, 2006: 20,505,000 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 2006 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 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to Vote of Security Holders 4
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure 36
Item 9A. Controls and Procedures 36
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 37
Item 13. Certain Relationships and Related Transactions 37
Item 14. Principal Accounting Fees and Services 37
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38
Signatures and Certifications 40
ii
TABLE OF DEFINED TERMS
TERM DEFINITION
- ---- ----------
ABC American Bailey Corporation
ACUITIV(TM) A trademark used to describe Fuel Tech's advanced
visualization software
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
Common Stock Common Stock of Fuel Tech
EPA Environmental Protection Agency
EPRI Electric Power Research Institute
FTI Fuel Tech, Inc.
FUEL CHEM(R) A trademark used to describe Fuel Tech's fuel
and flue gas treatment processes, including its
TIFI(TM) Targeted In-Furnace Injection(TM) 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) A trademark used to describe Fuel Tech's combination
of NOxOUT and SCR
NOxOUT(R) Process A trademark used to describe Fuel Tech's SNCR process
for the reduction of NOx
NOxOUT-SCR(R) A trademark used to describe Fuel Tech's use of urea
used as a catalyst reagent
NOxOUT ULTRA(R) A trademark used to describe Fuel Tech's process for
generating ammonia for use as SCR reagent
Rich Reagent Injection An SNCR-type process that broadens the NOx reduction
Technology (RRI) capability of the NOxOUT Process at a cost similar to
NOxOUT. RRI can also be applied on a stand-alone
basis.
SCR Selective Catalytic Reduction
SIP Call State Implementation Plan Regulation
SNCR Selective Non-Catalytic Reduction
TDI(TM) Targeted Duct FUEL CHEM's programs for mitigating formation of
Injection(TM) sulfur trioxide
TIFI(TM) Targeted FUEL CHEM's programs for slagging, fouling and
In-Furnace Injection(TM) corrosion control and plume abatement
iii
FUEL-TECH N.V. SUBSIDIARIES AND AFFILIATES
December 31, 2005
---------------
| |
| FTNV |
| Netherlands |-----------
| Antilles | |
| | |
--------------- | 100%
| ------------
| 100% | |
----------------- | PPI |
| | | Delaware |
| FTI | | |
| Massachusetts | ------------
| |
-----------------
100% 100% | 100% 100%
-------------------------------------------------------------------
| | | |
- ------------- ------------ --------------- --------------
| | | | | HOLDINGS | | |
| FTJL | | FTL | | Netherlands | | |
| Jamaica | | Canada | | Antilles | | Srl Italy |
| | | | | | | |
- ------------- ------------ --------------- --------------
|
| 100%
|
---------------
- -------------------------------------------- | |
| | | BV |
| FTNV - Fuel-Tech N.V. | | Netherlands |
| FTI - Fuel Tech, Inc. | | |
| HOLDINGS - Fuel Tech Holdings N.V. | ---------------
| BV - Fuel Tech BV | | 100%
| GmbH - Fuel Tech GmbH | ----|
| FTL - Fuel Tech Targeted | ------------
| Injection Chemicals Ltd. | | |
| FTJL - Fuel Tech Jamaica Limited | | GmbH |
| Srl - Fuel Tech Srl | | Germany |
| PPI - Platinum Plus, Inc. | | |
| | ------------
- --------------------------------------------
iv
PART I
FORWARD LOOKING STATEMENTS
Statements in this Form 10-K that are not historical facts, so-called "forward-
looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in Fuel Tech's filings with the Securities and Exchange
Commission. See "Risk Factors 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 maintains an
Internet web site at www.fueltechnv.com.
Fuel Tech, Inc.
FTI's special focus is the worldwide marketing of its nitrogen oxide ("NOx")
reduction and FUEL CHEM(R) Processes. The NOx reduction technologies, which
include the NOxOUT(R), NOxOUT CASCADE(R), and NOxOUT-SCR(R) processes, reduce
NOx emissions in flue gas from boilers, incinerators, furnaces and other
stationary combustion sources. The FUEL CHEM product line uses chemical
processes for the control of slagging, fouling, and corrosion and for plume
abatement in furnaces and boilers through the addition of chemicals into the
fuel or via TIFI(TM) Targeted In-Furnace Injection(TM) programs. FTI has a
number of other technologies, both commercial and in the development stage, that
are related to the NOxOUT Process or similar in their technological base. FTI's
business is materially dependent on the continued existence and enforcement of
worldwide air quality regulations.
American Bailey Corporation
Ralph E. Bailey, Executive Chairman, Chief Executive Officer and Managing
Director of Fuel Tech, and Douglas G. Bailey, Deputy Chairman of Fuel Tech, are
shareholders of American Bailey Corporation ("ABC"). Please refer to Note 8 to
the consolidated financial statements in this document. Additionally, see the
more detailed information relating to this subject under the caption "Certain
Relationships and Related Transactions" in Fuel Tech's Proxy Statement, to be
distributed in connection with Fuel Tech's 2006 Annual Meeting of Shareholders,
which information is incorporated by reference.
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 1,000 utility and large
industrial boilers in 19 states were required to achieve NOx reduction targets
by May 31, 2004. Also, under European Union Directives, over 100 industrial
units in Europe were required to achieve NOx reductions by the end of 2005.
In 1994, governors of 11 Northeastern states, known collectively as the Ozone
Transport Region, signed a Memorandum of Understanding requiring utilities to
reduce their NOx emissions by 55% to 65% from 1990 levels by May 1999. In 1998,
the Environmental Protection Agency ("EPA") announced more stringent
regulations. The Ozone Transport SIP Call regulation, designed to mitigate the
effects of wind-aided ozone transported from the Midwestern and Southeastern
U.S. into the Northeastern non-attainment areas, 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
On December 23, 2003, the EPA proposed a new regulation that affects the SIP
Call states by calling for more NOx reductions in 2010 and 2015. Also, deep NOx
reductions are called for in 10 additional states outside the current SIP Call
region. The proposed rule allows a cap and trade format similar to the SIP Call.
This rule, under the name "Clean Air Interstate Rule," became final on March 10,
2005.
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 total annualized operating costs ranging from $1,000 - $2,000/ton of
NOx removed.
Fuel Tech's NOxOUT CASCADE Process uses catalyst as an addition 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 smaller stationary combustion sources with
capital and operating costs competitive with equivalently sized, standard SCR
systems.
Fuel Tech's NOxOUT ULTRA(R) system is designed to convert urea to ammonia safely
and economically for use as a reagent in the SCR process for NOx reduction. In
this fashion, Fuel Tech intends to participate in the SCR segment of the 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, which 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
process, 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 $32.6 million, $14.6 million and
$25.4 million for the years ended December 31, 2005, 2004, and 2003,
respectively.
NOx Reduction Competition
Competition with Fuel Tech's NOx reduction products can 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 - $250/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, or providers of the catalyst itself.
The use of ammonia as the reagent for the SNCR process was developed by the
ExxonMobil Corporation. Fuel Tech understands that the ExxonMobil patents on
this process have expired. This process can reduce NOx by 30% 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.
2
FUEL CHEM
Product and Markets
Fuel Tech's fireside and fuel additive programs, FUEL CHEM, help improve furnace
and boiler performance and reduce customer operating costs. The technology
offered by FUEL CHEM, through unique chemistries and application approaches,
offers the customer significant value and return on their investment. FUEL CHEM
offers in-fuel technologies and FTI's multi-patented, TIFI(TM) Targeted
In-Furnace Injection(TM) technology. This latter approach, the key FUEL CHEM
technology, is a uniquely engineered and economical solution for the control of
slagging, fouling, and corrosion and for plume abatement. FUEL CHEM also markets
a family of combustion catalysts, which can offer customers the benefit of
reducing unburned carbon, lowering excess air and improving combustion
efficiency. The FUEL CHEM technology is rapidly gaining credibility in the
coal-fired electric utility industry, especially within the segment fired by
slag-forming coal, as a viable, cost-effective approach to the prevention of
problems that can have a significant negative financial impact on a plant's
operation. Electric utilities, the pulp and paper industry and municipal solid
waste incinerator facilities make up the principal markets for the program.
New technical markets being explored and pursued by the FUEL CHEM Group include
the SO3/plume abatement market, which is a key concern in many utility and
industrial operations today. FTI has developed a TIFI derivative product,
TDI(TM) Targeted Duct Injection, to address this market. In addition, the
corrosion reduction market for the municipal solid waste incineration industry
is being assessed as a potential new market opportunity for Fuel Tech.
Sales of the FUEL CHEM products were $20.3 million, $16.2 million and $10.3
million for the years ended December 31, 2005, 2004, and 2003, 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 the TIFI 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(TM)
Fuel Tech uses its advanced engineering services ("AES") to support the sale of
its NOx reduction and FUEL CHEM systems, particularly through the use of
computational fluid dynamics ("CFD") tools. These CFD tools assist in the
prediction of the behavior of gas flows, thereby enhancing the implementation of
Fuel Tech's NOx reduction systems and the application of its FUEL CHEM slag and
corrosion control processes. To further aid the accuracy and expediency with
which process solutions could be designed and delivered to a customer, Fuel Tech
internally developed a visualization software product called ACUITIV(TM).
In 2001 and 2002, Fuel Tech augmented its AES staff and equipment with a view
toward not only better serving Fuel Tech's own customers, but also seeking other
commercial applications for its services. Toward this goal, the ACUITIV software
product was commercially introduced in the second quarter of 2002. The ACUITIV
product offering was designed to provide customers in several industries
including automotive, aerospace and defense, chemical processing and energy,
with the ability to uncover new opportunities, improve designs, accelerate
decision-making and shorten product development time to market. In early 2005,
ACUITIV was discontinued as a commercial venture. The software will continue to
be maintained and utilized internally on a prospective basis because it is an
essential tool in the design, marketing and sale of Fuel Tech's NOx reduction
and FUEL CHEM product applications.
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 104 full-time employees, 95 in North America and 9 in Europe. Fuel
Tech enjoys good relations with its employees and is not a party to any labor
management agreements.
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 has two business segments that provide advanced engineering solutions
for the optimization of combustion systems in utility and industrial
applications. They are as follows:
3
- - The nitrogen oxide reduction technology segment, which includes the
NOxOUT, NOxOUT CASCADE, and NOxOUT-SCR processes for the reduction of
nitrogen oxide emissions in flue gas from boilers, incinerators,
furnaces and other stationary combustion sources, and
- - The fuel treatment chemical segment, which uses chemical processes for
the control of slagging, fouling, and corrosion and for plume abatement
in furnaces and boilers through the addition of chemicals into the fuel
or by Targeted In-Furnace Injection.
An adverse development in Fuel Tech's advanced engineering solution business as
a result of competition, technological change, government regulation, or any
other factor could have a significantly greater impact than if Fuel Tech
maintained more diverse operations.
(ii) Competition
Competition in the NOx control market will come from processes utilizing low-NOx
burners, over-fire air, flue gas recirculation, ammonia SNCR, SCR and, with
respect to particular uses of urea not infringing Fuel Tech's patents, urea (see
Item 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 text under the
captions "Products" and "NOx Reduction Competition."
Competition in the FUEL CHEM markets includes chemicals sold by specialty
chemical companies, such as GE Betz, Inc., primarily in the traditional
heavy-fuel-oil treatment area. As noted previously, no substantive competition
currently exists for Fuel Tech's technology for the TIFI of additives for the
control of slagging, fouling, and corrosion and for plume abatement. However,
there can be no assurance that such lack of substantive competition will
continue.
(iii) Dependence on Regulations and Enforcement
Fuel Tech's business is significantly impacted by the regulatory environment
surrounding the markets in which it serves. Fuel Tech's business will be
adversely impacted to the extent that regulations are repealed or amended to
significantly reduce the level of required NOx reduction, or to the extent that
regulatory authorities minimize enforcement. See also the text above under the
caption "Regulations and Markets."
(iv) Protection of Patents and Proprietary Rights
Fuel Tech holds licenses to or owns a number of patents and also has patents
pending. There can be no assurance that pending patent applications will be
granted or that outstanding patents will not be challenged or circumvented by
competitors. Certain critical technology relating to Fuel Tech's products is
protected by trademark and trade secret laws and by confidentiality and
licensing agreements. There can be no assurance that such protection will prove
adequate or that Fuel Tech will have adequate remedies for disclosure of its
trade secrets or violations of its intellectual property rights. See Item 2
"Description of Property."
ITEM 2. DESCRIPTION OF PROPERTY
Fuel Tech's products are generally protected by U.S. and non-U.S. patents. Fuel
Tech owns 94 granted patents worldwide and has four patent applications pending
in the United States and 11 pending in non-U.S. jurisdictions. These patents
cover some 33 inventions, 23 associated with the NOx reduction business; five
associated with the FUEL CHEM business; and five associated with
non-commercialized technologies. These inventions represent significant
enhancements of the application and performance of the technologies. Further,
Fuel Tech believes that the protection provided by the numerous claims in the
above referenced patents or patent applications is substantial, and affords Fuel
Tech a significant competitive advantage in its business. Accordingly, any
significant reduction in the protection afforded by these patents or any
significant development in competing technologies could have a material adverse
effect on Fuel Tech's business.
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 Gallarate, 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 2005, no matters were submitted to a vote of
security holders.
4
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.
Prices
The table below sets forth the high and low sales prices during each calendar
quarter since January 2004.
2005 HIGH LOW
---- ---- ---
Fourth Quarter $10.12 $7.24
Third Quarter 10.13 5.75
Second Quarter 7.20 5.10
First Quarter 6.85 4.60
2004
----
Fourth Quarter $5.45 $4.15
Third Quarter 5.24 3.94
Second Quarter 5.30 3.79
First Quarter 5.60 3.40
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 6, 2006,
there were 339 registered holders of Fuel Tech's Common Shares. Management
believes that, on such date, there were approximately 5,943 beneficial holders
of Fuel Tech's Common Shares.
Transfer Agent
The Transfer Agent and Registrar for the Common Shares is Mellon Investor
Services, LLC, 85 Challenger Road, 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 U.S. 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 U.S. 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 U.S. person from the sale or exchange of Fuel Tech's Common Shares is
exempt from Netherlands Antilles income tax. The tax treaty between the United
States and the Netherlands Antilles was terminated effective December 31, 1987.
5
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, 2005, under which the securities of Fuel Tech
were authorized for issuance:
-------------------------------- ---------------------------------- --------------------------- -------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, WARRANTS OUTSTANDING OPTIONS, EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS WARRANTS AND RIGHTS LISTED IN COLUMN (A)
-------------------------------- ---------------------------------- --------------------------- -------------------------------
(A) (B) (C)
-------------------------------- ---------------------------------- --------------------------- -------------------------------
-------------------------------- ---------------------------------- --------------------------- -------------------------------
Equity compensation plans
approved by security
holders (1) 2,799,000 $4.29 367,000
-------------------------------- ---------------------------------- --------------------------- -------------------------------
(1) Includes Common Shares of Fuel Tech authorized for awards under Fuel Tech's
1993 Incentive Plan, as amended through June 3, 2004.
6
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data are presented below as of the end of and for each of the
fiscal years in the five-year period ended December 31, 2005. The selected
financial data should be read in conjunction with the audited consolidated
financial statements as of and for the year ended December 31, 2005, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 2005 2004 2003 2002 2001
--------------- ------------- ------------- -------------- -------------
(in thousands of U.S. dollars, except for
share data)
Net sales $52,928 $30,832 $ 35,736 $ 32,627 $ 17,672
Selling, general and administrative and other
costs and expenses 18,625 14,017 12,946 11,687 9,873
Net income (loss) 7,588 1,572 1,120 3,057 (1,633)
--------------- ------------- ------------- -------------- -------------
Basic income (loss) per Common Share $ 0.38 $ 0.08 $ 0.06 $ 0.16 $ (0.09)
Diluted income (loss) per Common Share $ 0.33 $ 0.07 $ 0.05 $ 0.14 $ (0.09)
Weighted-average basic shares outstanding 20,043,000 19,517,000 19,637,000 19,350,000 18,592,000
Weighted-average diluted shares outstanding 23,066,000 22,155,000 22,412,000 22,437,000 18,592,000
DECEMBER 31
------------------------------------------------------------------------
BALANCE SHEET DATA 2005 2004 2003 2002 2001
--------------- ------------ ------------ ------------- ----------------
(in thousands of U.S. dollars, except for
share data)
Working capital $ 19,590 $ 11,292 $ 10,973 $ 13,930 $ 8,844
Total assets 43,026 23,828 21,598 25,869 20,328
Long-term obligations 448 505 299 2,059 491
Total liabilities 13,890 4,873 4,287 9,064 7,193
Shareholders' equity 29,136 18,955 17,311 16,805 13,135
Net tangible book value per share $ 1.12 $ 0.70 $ 0.61 $ 0.64 $ 0.56
Notes:
(1)Shareholders' equity includes $282,000 principal amount of 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 Shares.
(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 12 months
ended December 31, the following table depicts the impact on the
prior year noted, had the non-amortization policy been applied.
2001
----------------
Reported net loss $ (1,633,000)
Add back: Goodwill amortization 334,000
----------------
Adjusted net loss $ (1,299,000)
================
Basic earnings per share:
Reported net loss $ (0.09)
Add back: Goodwill amortization 0.02
----------------
Adjusted net loss $ (.07)
================
Diluted earnings per share:
Reported net loss $ (0.09)
Add back: Goodwill amortization 0.02
----------------
Adjusted net loss $ (0.07)
================
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
Fuel-Tech N.V. ("Fuel Tech") is a technology company that provides advanced
engineering solutions for the optimization of combustion systems in utility and
industrial applications. Fuel Tech currently generates revenues from the
following product lines:
Nitrogen Oxide ("NOx") Reduction Technologies
Fuel Tech markets a suite of nitrogen oxide (NOx) reduction technologies. These
include the NOxOUT, NOxOUT CASCADE, and NOxOUT-SCR Processes, which use the
injection of chemicals to reduce NOx emissions in flue gas from boilers,
incinerators, furnaces and other stationary combustion sources to meet statutory
NOx reduction requirements worldwide. Fuel Tech distributes its products through
its direct sales force, licensees and agents. The current driver for growth in
this business is the Ozone Transport SIP (State Implementation Plan) Call, which
required 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 31, 2004
implementation date.
Fuel Treatment Chemicals
Fuel Tech's proprietary TIFI Targeted In-Furnace Injection technology centers on
the unique application of specialty chemicals to improve the performance of
combustion units. Specifically, this technology is used to address slagging,
fouling, corrosion and plume abatement in furnaces and boilers through the
injection of chemicals into the fuel or via TIFI. Fuel Tech sells its fuel
treatment chemicals through its direct sales force and agents to industrial and
utility power-generation facilities. Although coal sourced from a variety of
geographic areas have proven to provide utility units with operational
difficulty, Fuel Tech believes the largest market opportunity for this product
line to be those units burning Western coals, many of which have significant
operational issues related to the formation of slag.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require
Fuel Tech to make estimates and assumptions. Fuel Tech believes that of its
accounting policies (see Note 1 to the consolidated financial statements) the
following involves a higher degree of judgment and complexity and are deemed
critical. Fuel Tech discusses its critical accounting policies with the Audit
Committee.
Revenue Recognition
Fuel Tech uses the percentage of completion method of accounting for certain
long-term equipment construction and license contracts that are sold within the
nitrogen oxide reduction business segment. Under the percentage of completion
method, sales and gross profit are recognized as work is performed based on the
relationship between actual construction costs incurred and total estimated
costs at completion. Since the financial reporting of these contracts depends on
estimates that are assessed continually during the term of the contract,
recognized sales and profit are subject to revisions as the contract progresses
to completion. Revisions in profit estimates are reflected in the period in
which the facts that give rise to the revision become known. Different results
are possible when using different assumptions.
Fuel Tech's construction contracts are typically six to twelve months in length.
A typical contract will have three or four critical milestones that serve as the
basis for Fuel Tech to invoice the customer. At a minimum, the milestones will
include the generation of engineering drawings, the shipment of equipment and
the completion of a system performance test.
As part of most of its contractual project agreements, Fuel Tech will agree to
customer-specific acceptance criteria that relate to the operational performance
of the system that is being sold to the customer. These criteria are determined
based on mathematical modeling that is performed by Fuel Tech personnel, which
is based on operational inputs that are provided by the customer. The customer
will warrant that these operational inputs are accurate as they are specified in
the binding contractual agreement. Further, the customer is solely responsible
for the accuracy of the operating condition information; all performance
guarantees and equipment warranties granted by Fuel Tech are void if the
operating condition information is inaccurate or is not met.
Fuel Tech has installed over 350 units with the technology and has never failed
to meet a performance guarantee when the customer has provided the required
operating conditions for the project. As part of the project implementation
process, Fuel Tech will perform system start-up and optimization services that
effectively serve as a test of actual project performance. Fuel Tech believes
that this test, combined with the accuracy of the modeling that is performed,
enables revenue to be recognized prior to the receipt of formal customer
acceptance.
Allowance for doubtful accounts
Fuel Tech, in order to control and monitor the credit risk associated with its
customer base, reviews the credit worthiness of customers on a recurring basis.
Factors influencing the level of scrutiny include the level of business the
customer has with Fuel Tech, the customer's payment history and the customer's
financial stability. Representatives of Fuel Tech's Management team review all
past due accounts on a weekly basis to assess collectibility. At the end of each
reporting period, the allowance for doubtful accounts balance is reviewed
relative to management's collectibility assessment and is adjusted if deemed
necessary. Fuel Tech's historical credit loss has been insignificant.
8
Assessment of potential impairments of goodwill and intangible assets
Effective January 1, 2002, Fuel Tech adopted FASB (Financial Accounting
Standards Board) Statement No. 142, "Goodwill and Other Intangible Assets."
Under the guidance of this statement, goodwill and indefinite-lived intangible
assets are no longer amortized, but rather, are required to be reviewed annually
or more frequently if indicators arise, for impairment. The evaluation of
impairment involves comparing the current fair value of the business to the
recorded value. Fuel Tech uses a discounted cash flow model (DCF) to determine
the current fair value of its two reporting units. A number of significant
assumptions and estimates are involved in the application of the DCF model to
forecast operating cash flows, including markets and market share, sales volumes
and prices, costs to produce and working capital changes. Management considers
historical experience and all available information at the time the fair values
of its reporting units are estimated. However, actual fair values that could be
realized in an actual transaction may differ from those used to evaluate the
impairment of goodwill.
Fuel Tech reviews other intangible assets, which include a customer list, a
covenant not to compete and patent assets, for impairment on a recurring basis
or when events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. In the event the sum of the expected undiscounted
future cash flows resulting from the use of the asset is less than the carrying
amount of the asset, an impairment loss equal to the excess of the asset's
carrying value over its fair value is recorded. Management considers historical
experience and all available information at the time the estimates of future
cash flows are made, however, the actual cash values that could be realized may
differ from those that are estimated.
Valuation allowance for deferred income taxes
Deferred tax assets represent deductible temporary differences and net operating
loss and tax credit carryforwards. A valuation allowance is recognized if it is
more likely than not that some portion of the deferred tax asset will not be
realized.
Upon review of its potential sources of taxable income, Fuel Tech has concluded
that it is more likely than not that some portion of the deferred tax asset will
not be realized. Fuel Tech considers if there are taxable temporary differences
that could generate taxable income in the future, if there is the ability to
carryback the net operating losses or credits, if there is a projection of
future taxable income, and if there are any tax planning strategies which can be
readily implemented. Fuel Tech is a company whose revenues are generated from a
customer base that is heavily regulated. This fact lends some uncertainty to the
ability of the Company to project forward-looking income with precision.
9
2005 VERSUS 2004
Net sales for the year ended December 31, 2005 and 2004 were $52,928,000 and
$30,832,000, respectively. The year on year increase of $22,096,000, or 72%,
reflects gains from both the Nitrogen Oxide reduction (NOx) and Fuel Treatment
Chemical business segments.
Revenues for the NOx product line were $32,650,000 in 2005, an increase of 124%
over 2004. This business segment, which began to show increased strength in the
second half of 2004, continues to experience a surge in order activity.
Utilities and industrial facilities that are impacted by the Environmental
Protection Agency's (EPA) State Implementation Plan (SIP) Call regulation, which
became effective on May 31, 2004, continue to prove that Fuel Tech's technology
is a viable tool in their ongoing regulatory compliance planning. Fuel Tech's
strategy in addressing this market has involved the development of alliance
agreements with critical customers looking to finalize their compliance plans.
The SIP Call, introduced in 1998, is the federal mandate that 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 thirteen months to May 31, 2004, 19
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. 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.
On December 23, 2003, the EPA proposed a new regulation that affects the SIP
Call states by calling for more NOx reductions in 2010 and 2015. Also, deep NOx
reductions are called for in 10 additional states outside the current SIP Call
region. The proposed rule allows a cap and trade format similar to the SIP Call.
This rule, under the name "Clean Air Interstate Rule," became final on March 10,
2005.
Revenues for the Fuel Treatment Chemical business segment were $20,272,000 in
2005, an increase of 25% over 2004. This segment's growth, although indicative
of the continued market acceptance of Fuel Tech's patented TIFI Targeted
In-Furnace Injection technology, would have been enhanced had revenues not been
hampered by the following circumstances during 2005:
- - Demonstration programs - there were several demonstration programs
during 2005, five of which have not yielded commercial revenues at
December 31, 2005. One was a no-cost demonstration at a critical
coal-fired utility and one was a demonstration at a large coal-fired
utility offered at 50% of commercial value. These two successful
demonstrations had the impact of reducing revenue by approximately
$500,000 and this revenue is non-recoverable. The other three
demonstrations were structured on a cost-share basis and all were on
coal-fired units. Under cost-share arrangements, during the
demonstration period, Fuel Tech will invoice the customer at a
specified percentage of the commercial price. At the end of the
demonstration, if Fuel Tech meets the criteria for success that were
established for the program, Fuel Tech will invoice the customer for
the remaining percentage of the commercial price. These latter three
demonstrations are expected to reach their evaluation date in the first
quarter of 2006. If revenue was recognized at commercial pricing for
these latter demonstrations, an incremental $600,000 in revenue would
have been realized in 2005.
- - Coal supply chain issues - rail disruptions in the Powder River Basin
during 2005 impacted several utilities' ability to receive and burn
Powder River Basin coal. The required repair and maintenance work on
several rail lines is expected to impact coal shipments in several
parts of the country well into 2006. This market dynamic negatively
impacted Fuel Tech's revenue generating capability in 2005 as more than
one critical Western-coal fired utility unit was forced to reduce
capacity for an extended period of time due to transportation related
shortages of Western coal deliveries. New sales initiatives were also
negatively influenced by these issues as potential new customers were
forced to delay their evaluation and implementation of the Fuel Chem
technology.
- - Oil pricing - the high price of oil has resulted in reduced oil-fired
electricity generation in the United States. Fuel Tech's oil-fired
business was negatively impacted by this market dynamic in 2005.
Fuel Tech's TIFI technology alleviates the slagging and fouling issues
associated with burning coals that are high in low-melting-point ash
constituents, such as sodium. More than half of the coal burned in the United
States today to generate electricity is Western coal and it is Western coal that
has higher levels of low-melting-point ash constituents. Due to its lower cost
and lower pollutant content relative to Eastern coals, and despite the rail
issues noted above, it is anticipated that Western coals will be burned in
larger quantities and in an increasing number of facilities. The penetration of
the Western coal-fired utility market remains the top priority for this business
segment.
10
During 2005, demonstrations were performed on utility units that burn Illinois
Basin Coal. The utilization of this coal, whose high iron content also can
create slagging and fouling issues, is likely to provide the Fuel Chem product
line with an additional market niche.
In addition to the above, new technical markets being explored and pursued by
FUEL CHEM include the SO3/plume abatement market, which is a key concern in many
utility and industrial operations today, as well as the corrosion reduction
market for the municipal solid waste incineration industry. Both areas represent
market opportunities for Fuel Tech.
Cost of sales as a percentage of net sales for the year ended December 31, 2005
declined to 51% from 54% in the prior year. This improvement is primarily
attributable to the nitrogen oxide business, where the percentage decreased to
51% in 2005 from 58% in 2004. The decrease is attributable to the mix of project
business. The cost of sales percentage for the fuel treatment chemical business
increased to 50% in 2005 from 48% in 2004. The increase is due to the impact of
the demonstration programs discussed above.
Selling, general and administrative expenses were $17,414,000 and $12,775,000
for the years ended December 31, 2005 and 2004, respectively. Of the $4,639,000
variance with 2004, almost $2,800,000 was due to employee-related costs
including the wages and benefits resulting from the addition of new personnel;
recruiting costs; and incentive compensation. Revenue-related internal and
external commission accounted for $1,100,000 of the increase. The remainder of
the variance is attributable to audit and audit-related fees for Sarbanes Oxley
compliance and legal and consulting fees derived from Fuel Tech's strategic
desire to engage in business in new geographies.
Research and development expenses were $1,211,000 and $1,242,000 for the years
ended December 31, 2005 and 2004, respectively. Fuel Tech continues to pursue
commercial applications for technologies related to its core businesses, with a
particular focus on its FUEL CHEM technologies.
Other expense was $16,000 for the year ended December 31, 2005 versus $83,000
for the year ended December 31, 2004. The year on year reduction in expense is
comprised of an $180,000 increase in interest income resulting from a higher
average cash balance in 2005 versus 2004 and an increase in market interest
rates. This increase was offset by transaction losses related to balances
denominated in foreign currencies.
Fuel Tech's income tax benefit of $419,000 for 2005 predominantly represents the
recording of the reduction in the deferred tax asset valuation allowance
representing the anticipated utilization of net operating loss and research and
development tax credit carryforwards. Based on a review of both historical and
projected taxable income, Fuel Tech concluded that it was more likely than not
that the net operating losses and the research and development tax credits would
be utiized in subsequent periods and the valuation allowance was no longer
required.
At December 31, 2004, Fuel Tech recorded a $1,500,000 reduction in the deferred
tax asset valuation allowance, which represented the anticipated utilization of
net operating loss carryforwards in subsequent periods. Based on a review of
both historical and projected taxable income, Fuel Tech had concluded that it
was more likely than not that some portion of the net operating losses would be
utilized in subsequent periods and that a reduction in the deferred tax
valuation allowance was required.
11
2004 VERSUS 2003
Net sales for the years ended December 31, 2004 and 2003 were $30,832,000 and
$35,736,000, respectively. The year on year decline reflects a reduction in
revenues derived from the NOx reduction project product line. Revenues for this
product line were $14.6 million in 2004 versus $25.4 million in 2003. As
referred to in previous filings, although the Environmental Protection Agency's
(EPA) SIP (State Implementation Plan) Call regulation became effective as of May
31, 2004, there were several factors that led to a slowing of equipment orders
in the air pollution control business late in 2003 and during the first half of
2004. NOx allowance prices for 2004 were depressed as a result of weak demand
for power, the existence of a shortened ozone season and due to the allocation
of supplemental NOx allowances. Consequently, some utilities were able to delay
capital spending related to NOx control and they met their emissions reduction
requirements on a short-term basis through the purchase of allowances and other
temporary means. In addition, many utilities continued to experience significant
capital constraints. Based on these market factors, the air pollution control
business weakened during the latter portion of 2003 and the first half of 2004.
As expected, the second half of 2004 began to show improvement with the receipt
of several air pollution control project orders.
The decline in NOx reduction project revenues was partially offset by record
fuel treatment chemical revenues. Revenues for the Fuel Chem product line
increased to $16.2 million from $10.3 million in 2003, an increase of almost
60%. Revenues derived from Western coal-fired utility boilers had the largest
year on year impact, and contributions from the customer contracts acquired from
Martin Marietta Magnesia Specialties, LLC on September 30, 2003, also
contributed to the increase.
Fuel Tech believes that attaining success on additional Western coal-fired
utility boilers will lead to more expedient penetration of the Western
coal-fired utility market. Sales and marketing efforts are intensely focused on
penetrating this market as it represents the largest opportunity for the fuel
treatment chemical business.
Cost of sales as a percentage of net sales for the year ended December 31, 2004
declined to 54% from 61% in the prior year due to two primary reasons. First, a
significantly larger percentage of the revenues for the 12-month period ended
December 31, 2004 were generated by the fuel treatment chemical product line.
The gross margins realized by the fuel treatment chemical product line are
typically higher than the NOx reduction project business. Secondarily, a larger
percentage of the NOx reduction project revenues generated for the year ended
December 31, 2003 were generated by NOx reduction turnkey projects than in 2004.
When Fuel Tech receives a NOx reduction project order from a customer, the scope
of the project can include two components. First, there is the Fuel Tech
equipment scope for a project and second, there is an installation scope for a
project. Due to its patented technology, Fuel Tech's equipment scope for a
project generates a higher gross margin than does the installation scope for a
project. Historically, most NOx reduction projects undertaken by Fuel Tech have
not included the installation scope of a project and this portion of the work
has been the responsibility of the end customer. When Fuel Tech is responsible
for both components of the project scope, the overall project margin is reduced.
Selling, general and administrative expenses were $12,775,000 and $11,659,000
for the years ended December 31, 2004 and 2003, respectively. Of the $1,116,000
increase, $400,000 was due to employment-related costs for sales and marketing
personnel related to the fuel treatment chemical business. Market penetration of
Fuel Tech's TIFI technology in the coal-fired utility market remains a strategic
priority. The remainder of the variance was due primarily to an increase in
engineering expenses which was driven by the reduction in NOx reduction project
activity. When engineering employees are specifically working on NOx reduction
projects their costs are classified as cost of sales.
Research and development expenses were $1,242,000 and $1,287,000 for the years
ended December 31, 2004 and 2003, respectively. Fuel Tech continues to pursue
commercial applications for technologies related to its core businesses, with a
particular focus on its FUEL CHEM technologies.
There was no interest expense recorded for the year ended December 31, 2004,
while $25,000 was recorded during 2003. Fuel Tech paid off the entirety of its
outstanding debt balance in the second quarter of 2003.
Other expense was $83,000 for the year ended December 31, 2004 versus other
income of $144,000 for the year ended December 31, 2003. The decline is
principally due to recording an impairment loss for certain patent assets in the
amount of $113,000 in 2004. Additionally, Fuel Tech had lower interest income in
2004 resulting from a lower average outstanding cash balance in 2004 versus
2003.
Fuel Tech's income tax benefit of $1,406,000 for 2004 predominantly represents
the recording of a $1,500,000 reduction in the deferred tax asset valuation
allowance representing the anticipated utilization of net operating loss
carryforwards in subsequent years. Based on a review of both historical and
projected taxable income Fuel Tech concluded that it was more likely than not
that some portion of the net operating losses would be utilized in subsequent
years and that a reduction in the deferred tax valuation allowance was required.
The $94,000 in tax expense that offsets this amount primarily represents state
income tax expense. Fuel Tech did not record a financial impact from income
taxes in 2003.
12
LIQUIDITY AND SOURCES OF CAPITAL
At December 31, 2005, Fuel Tech had cash and cash equivalents and short-term
investments of $16,375,000 and working capital of $19,590,000 versus $6,531,000
and $11,292,000 at the end of 2004, respectively. Operating activities provided
$11,531,000 of cash in 2005 primarily due to Fuel Tech's operating profit plus
depreciation and amortization. Investing activities used cash of $6,292,000
during the year. Of this amount, $3,500,000 was an increase in short-term
investments. The remaining $2,792,000 was used in the purchase of equipment and
patents, primarily related to the fuel treatment chemical business. Lastly, Fuel
Tech generated cash from the exercise of stock options in the amount of
$1,230,000.
Fuel Tech, Inc. (FTI) has a $15.0 million revolving credit facility expiring
July 31, 2006, 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 based on the following:
- The Bank Prime Rate reduced by a range of zero to 50 basis points, or
- The Bank Interbank Offering Rate increased by a range of 200 to 250
basis points
The Company can choose which rate to apply to borrowings.
At December 31, 2005, the bank had provided standby letters of credit,
predominantly to customers, totaling approximately $2,704,000 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, 2005,
there were no cash borrowings under the revolving credit facility and
approximately $12,296,000 was available.
There were no interest payments for the years ended December 31, 2005 or 2004.
Interest payments of $39,000 were made during the year ended December 31, 2003.
In the opinion of management, Fuel Tech's expected near-term revenue growth will
be driven by the timing of penetration of the coal-fired utility marketplace via
utilization of its TIFI technology, by various entities' implementation of the
NOx reduction requirements of the CAAA domestically, and by the expansion of
both business segments in non-U.S. geographies. Fuel Tech expects its liquidity
requirements to be met by the operating results generated from these activities.
13
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.
----------------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD IN THOUSANDS OF U.S. DOLLARS
----------------------------------------------------------------------------------------------------------------------------
CONTRACTUAL CASH TOTAL LESS THAN 1 2-3 YEARS 4-5 YEARS THEREAFTER
OBLIGATIONS YEAR
---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Operating Leases $ 1,787 $ 504 $ 907 $ 370 $ 6
---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Fuel Tech has a sublease agreement that obligates the lessee to make future
payments to FTI. The sublease obligations noted below are related to a sublease
agreement between FTI and American Bailey Corporation (ABC). ABC will reimburse
FTI for its share of lease and lease-related expenses under FTI's January 29,
2004 lease of its executive offices in Stamford, Connecticut. Please refer to
Note 8 to the consolidated financial statements for a discussion of the relation
between FTI and ABC.
----------------------------------------------------------------------------------------------------------------------------
RENTAL PAYMENTS DUE TO FTI BY PERIOD IN THOUSANDS OF U.S. DOLLARS
----------------------------------------------------------------------------------------------------------------------------
CONTRACTUAL CASH TOTAL LESS THAN 1 2-3 YEARS 4-5 YEARS THEREAFTER
OBLIGATIONS YEAR
---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Sublease $ 394 $ 96 $ 193 $ 105 $ -
---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Fuel Tech, in the normal course of business, uses bank performance guarantees
and letters of credit in support of construction contracts with customers as
follows:
- - in support of the warranty period defined in the contract, or
- - in support of the system performance criteria that are defined in the
contract
In addition, Fuel Tech uses letters of credit as security for other obligations
as needed in the normal course of business. As of December 31, 2005, Fuel Tech
has outstanding bank performance guarantees and letters of credit as noted in
the table below:
----------------------------------------------------------------------------------------------------------------------------
COMMITMENT EXPIRATION BY PERIOD IN THOUSANDS OF U.S. DOLLARS
----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL COMMITMENTS TOTAL LESS THAN 1 2-3 YEARS 4-5 YEARS THEREAFTER
YEAR
---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
Standby letters of
credit and bank
guarantees $ 2,704 $ 2,150 $ 554 $ - $ -
---------------------------- ------------------ ------------------ ------------------ ------------------- ------------------
FORWARD-LOOKING INFORMATION
From time to time, information provided by Fuel Tech, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Annual Report) may contain statements that
are not historical facts, so-called "forward-looking statements." These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Fuel Tech's actual future
results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, risk of dependence on significant customers, third-party
suppliers and intellectual property rights, risks in product and technology
development and other risk factors detailed in the text under the caption "Risk
Factors of the Business" in Item 1 "Business" above Part I of this Annual Report
and in Fuel Tech's Securities and Exchange Commission filings.
14
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, 2006.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Fuel Tech's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule
13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the
Exchange Act, Fuel Tech's management carried out an evaluation, with the
participation of Fuel Tech's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of its internal control over financial reporting
as of the end of the last fiscal year. The framework on which such evaluation
was based is contained in the report entitled "Internal Control--Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the "COSO Report").
Fuel Tech's system of internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Based on its assessment, management has concluded that Fuel Tech maintained
effective internal control over financial reporting as of December 31, 2005,
based on criteria in "Internal Control--Integrated Framework" issued by the
COSO.
Management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2005, has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their report
which is included elsewhere herein.
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FUEL-TECH N.V.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Fuel-Tech
N.V. maintained effective internal control over financial reporting as of
December 31, 2005 based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Fuel-Tech N.V.'s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Fuel-Tech N.V. maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, Fuel-Tech N.V. has maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Fuel-Tech N.V. as of December 31, 2005 and 2004 and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2005 of Fuel-Tech N.V. and our report
dated March 8, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
March 8, 2006
16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Fuel-Tech N.V.
We have audited the accompanying consolidated balance sheets of Fuel-Tech N.V.
as of December 31, 2005 and 2004, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2005. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Fuel-Tech N.V. at
December 31, 2005 and 2004, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2005, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Fuel-Tech
N.V.'s internal control over financial reporting as of December 31, 2005, based
on criteria established in internal control-integrated framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 8, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
March 8, 2006
17
FUEL-TECH N.V.
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data)
2005 2004
------------------------------------
DECEMBER 31
ASSETS
Current assets:
Cash and cash equivalents $10,375 $4,031
Short-term investments 6,000 2,500
Accounts receivable, net of allowances for doubtful
accounts of $150 and $74, respectively 12,184 7,358
Inventories 358 311
Deferred income taxes 3,043 500
Prepaid expenses and other current assets 1,072 960
------------------------------------
Total current assets 33,032 15,660
Equipment, net of accumulated depreciation of $7,900 and
$7,209, respectively 4,045 2,863
Goodwill 2,119 2,119
Other intangible assets, net of accumulated amortization of
$1,087 and $968, respectively 1,224 1,342
Deferred income taxes 1,579 1,144
Other assets 1,027 700
------------------------------------
Total assets $43,026 $23,828
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,493 $2,705
Accrued liabilities:
Employee compensation 2,005 706
Other accrued liabilities 4,944 957
------------------------------------
Total current liabilities 13,442 4,368
Other liabilities 448 505
------------------------------------
Total liabilities 13,890 4,873
Shareholders' equity:
Common stock, $.01 par value, 40,000,000 shares
authorized, 20,424,133 and 19,529,952 shares issued,
respectively 204 195
Additional paid-in capital 91,559 88,600
Accumulated deficit (62,870) (70,458)
Accumulated other comprehensive (loss) income (39) 86
Nil coupon perpetual loan notes 282 532
------------------------------------
Total shareholders' equity 29,136 18,955
------------------------------------
Total liabilities and shareholders' equity $43,026 $23,828
====================================
See notes to consolidated financial statements.
18
FUEL-TECH N.V.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of U.S. dollars, except share data)
2005 2004 2003
------------- -------------- -------------
FOR THE YEARS ENDED DECEMBER 31
NET SALES $52,928 $30,832 $35,736
COSTS AND EXPENSES:
Cost of sales 27,118 16,566 21,789
Selling, general and administrative 17,414 12,775 11,659
Research and development 1,211 1,242 1,287
------------- -------------- -------------
45,743 30,583 34,735
------------- -------------- -------------
OPERATING INCOME 7,185 249 1,001
Interest expense - - (25)
Other (expense) income, net (16) (83) 144
------------- -------------- -------------
INCOME BEFORE TAXES 7,169 166 1,120
Income tax benefit 419 1,406 -
------------- -------------- -------------
NET INCOME $ 7,588 $ 1,572 $ 1,120
============= ============== =============
NET INCOME PER COMMON SHARE
Basic $ 0.38 $ 0.08 $ 0.06
Diluted $ 0.33 $ 0.07 $ 0.05
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic 20,043,000 19,517,000 19,637,000
Diluted 23,066,000 22,155,000 22,412,000
See notes to consolidated financial statements.
19
FUEL-TECH N.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Accumulated
Additional Other Treasury Stock Nil Coupon
Common Stock Paid-in Accumulated Comprehensive -------------- Perpetual
Shares Amount Capital Deficit Income (Loss) Shares Amount Loan Notes Total
------ ------ ---------- ----------- -------------- ------ ------ ---------- ---------
BALANCE AT JANUARY 1, 2003 19,614 $196 $90,315 $(73,150) $ 10 110 $(1,098) $ 532 $16,805
-------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 1,120 1,120
Foreign currency
translation adjustments 38 38
---------
Comprehensive income 1,158
Exercise of stock options
and warrants 282 3 320 323
Purchase of shares for
retirement (274) (3) (937) (940)
Other 8 (35) (35)
-------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 19,622 196 89,698 (72,030) 48 118 (1,133) 532 17,311
2003
-------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 1,572 1,572
Foreign currency
translation adjustments 38 38
---------
Comprehensive income 1,610
Exercise of stock options
and warrants 26 34 34
Share retirement (118) (1) (1,132) (118) 1,133 -
-------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 19,530 195 88,600 (70,458) 86 - - 532 18,955
2004
-------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 7,588 7,588
Foreign currency
translation
adjustments (125) (125)
---------
Comprehensive income 7,463
Exercise of stock options
and warrants 856 9 1,221 1,230
Conversion of nil coupon
perpetual loan notes into
Common Shares 38 250 (250) -
Tax benefit from stock
compensation expense 1,488 1,488
-------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 20,424 $204 $91,559 $(62,870) $(39) - $ - $282 $29,136
2005
=======================================================================================================
See notes to consolidated financial statements.
20
FUEL-TECH N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
2005 2004 2003
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31
OPERATING ACTIVITIES
Net income $7,588 $1,572 $1,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,566 1,225 1,047
Amortization 127 137 65
Provision for doubtful accounts 26 92 425
Loss on equipment disposals/impaired assets 32 109 32
Deferred income tax (2,978) (1,520) (36)
Tax benefit from stock compensation expense 1,488 - -
Changes in operating assets and liabilities:
Accounts receivable (4,852) (1,355) 2,329
Inventories (47) - 108
Prepaid expenses, other current assets
and other noncurrent assets (439) (197) (454)
Accounts payable 3,788 461 (2,821)
Accrued liabilities and other
noncurrent liabilities 5,229 125 (156)
Other 3 65 -
--------------------------------------------
Net cash provided by operating activities 11,531 714 1,659
INVESTING ACTIVITIES
Proceeds from sale of equipment - 13 -
Acquisition of fuel additive business - - (1,348)
Purchases and sales of short-term investments (3,500) - 2,900
Purchases of equipment and patents (2,792) (2,080) (1,024)
--------------------------------------------
Net cash (used in) provided by investing activities (6,292) (2,067) 528
FINANCING ACTIVITIES
Proceeds from exercise of stock options and warrants 1,230 34 323
Purchase of treasury shares - - (35)
Purchase of shares to be retired - - (940)
Repayment of borrowings - - (1,800)
--------------------------------------------
Net cash provided by (used in) financing activities 1,230 34 (2,452)
Effect of exchange rate fluctuations on cash (125) 38 38
--------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,344 (1,281) (227)
Cash and cash equivalents at beginning of year 4,031 5,312 5,539
--------------------------------------------
Cash and cash equivalents at end of year $ 10,375 $ 4,031 $5,312
============================================
See notes to consolidated financial statements.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Fuel-Tech N.V. ("Fuel Tech") is a holding company that provides advanced
engineering solutions for the optimization of combustion systems in utility and
industrial applications. Fuel Tech's primary focus, through its wholly owned
subsidiary, Fuel Tech, Inc. ("FTI"), is on the worldwide marketing and sale of
its NOxOUT(R) Process and related technologies as well as its FUEL CHEM(R) fuel
treatment chemical product line. The NOxOUT Process reduces nitrogen oxide
("NOx") emissions from boilers, furnaces and other stationary combustion
sources. FTI's FUEL CHEM program is based on proprietary TIFI(TM) Targeted
In-Furnace Injection(TM) technology in the unique application of specialty
chemicals to improve the performance of combustion units. Fuel Tech's business
is materially dependent on the continued existence and enforcement of air
quality regulations, particularly in the United States. Fuel Tech has expended
significant resources in the research and development of new technologies in
building its proprietary portfolio of air pollution control, fuel treatment
chemicals, computer modeling and advanced visualization technologies.
International revenues were $11.2 million, $4.7 million and $4.8 million for the
years ended December 31, 2005, 2004 and 2003, respectively. These amounts
represented 21%, 15% and 13% of Fuel Tech's total revenues for the respective
periods of time. Foreign currency changes did not have a material impact on the
calculation of these percentages.
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 includes cash and investments having a maturity of three months or
less at the time of acquisition in cash and cash equivalents. Short-term
investments consist of highly-liquid, available-for-sale, municipal variable
rate demand notes, which are recorded at cost, and may be redeemed at par upon
twenty-eight days notice. The cost of these securities closely approximates
their fair market value due to their variable interest rates, which typically
reset every twenty-eight days. All securities held had maturities of greater
than 10 years. Fuel Tech has never incurred realized or unrealized holding gains
or losses on these securities. Income resulting from short-term investments
is recorded as interest income. Fuel Tech reclassified short-term investments
from 2004 and 2003 to conform to the current year presentation.
At December 31, 2005, substantially all of Fuel Tech's cash, cash equivalents
and short-term investments are on deposit with two financial institutions.
FOREIGN CURRENCY RISK MANAGEMENT
Fuel Tech's earnings and cash flow are subject to fluctuations due to changes in
foreign currency exchange rates. Fuel Tech does not enter into foreign currency
forward contracts or into foreign currency option contracts to manage this risk
due to the immaterial nature of the transactions involved.
22
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, 2005 and 2004, unbilled receivables were
approximately $1,229,000 and $93,000, respectively. The allowance for doubtful
accounts is established based on Fuel Tech's historical level of write-off
activity and management's review of specific accounts at each reporting date.
GOODWILL AND OTHER INTANGIBLES
Effective January 1, 2002, Fuel Tech adopted Financial Accounting Standards
Board (FASB) Statement No. 142, "Goodwill and Other Intangible Assets." Under
the guidance of this statement, goodwill and indefinite-lived intangible assets
are no longer amortized, but rather, are required to be reviewed annually or
more frequently if indicators arise for impairment. The evaluation of impairment
involves comparing the current fair value of the business to the recorded value.
Fuel Tech uses a discounted cash flow model (DCF) to determine the current fair
value of its reporting units. A number of significant assumptions and estimates
are involved in the application of the DCF model to forecast operating cash
flows, including markets and market share, sales volumes and prices, costs to
produce and working capital changes. Management considers historical experience
and all available information at the time the fair values of its reporting units
are estimated. However, actual fair values that could be realized in an actual
transaction may differ from those used to evaluate the impairment of goodwill.
Fuel Tech allocates goodwill to reporting units based on the relative excess of
fair value over carrying value of the reporting units. Fair value is determined
as noted above. The ratio of each reporting unit's excess of fair value over
carrying value, to the total excess of fair value over carrying value, is used
as the basis for the allocation of the goodwill balance. Fuel Tech's annual fair
value measurement test revealed no evidence of impairment.
On September 30, 2003, FTI, acquired the fuel additive business of Martin
Marietta Magnesia Specialties, LLC (MMMS). The aggregate purchase price was
$1,348,000, paid in cash. The following table summarizes the estimated fair
values of the assets acquired.
- -------------------------------------------- ------------------
Equipment $ 50,000
- --------------------------------------------- -----------------
Customer list 1,198,000
- -------------------------------------------- ------------------
Covenant not to compete 100,000
- -------------------------------------------- ------------------
Total $1,348,000
- -------------------------------------------- ==================
The amount of $1,298,000, representing the value of the customer list and the
covenant not to compete, was recorded in other intangible assets on the
consolidated balance sheet. The customer list is being amortized over a period
of 15 years while the covenant not to compete is being amortized over six years.
The estimated amortization expense related to these intangible assets is
expected to approximate $100,000 per year for the four-year period ending
December 31, 2009, and then $80,000 in 2010.
Included with other intangible assets on the consolidated balance sheet are
third-party costs related to the development of patents. As of December 31, 2005
and 2004, the net patent asset balance was $144,000 and $165,000, respectively.
The third-party costs capitalized during the years ended December 31, 2005 and
2004 were $38,000 and $47,000, respectively. Third-party costs are comprised of
legal fees that relate to the review and preparation of patent disclosures and
filing fees incurred to present the patents to the required governing body.
Fuel Tech's intellectual property has been the primary building block for the
Air Pollution Control and Fuel treatment chemical product lines. The patents are
essential to the generation of revenue for Fuel Tech's businesses and are
essential to protect Fuel Tech from competition in the markets in which it
serves. These costs are being amortized on the straight-line method over a
period of 10 years from the date of patent issuance. Patent maintenance fees are
charged to operations as incurred. Further, the estimated amortization expense
related to Fuel Tech's intangible patent assets is expected to approximate
$20,000 per year for the five-year period ending December 31, 2010.
Fuel Tech reviews other intangible assets, which include a customer list, a
covenant not to compete and patent assets, for impairment on a recurring basis
or when events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. In the event the sum of the expected undiscounted
future cash flows resulting from the use of the asset is less than the carrying
amount of the asset, an impairment loss equal to the excess of the asset's
carrying value over its fair value is recorded. Management considers historical
experience and all available information at the time the estimates of future
cash flows are made, however, the actual cash values that could be realized may
differ from those that are estimated. The impact of impairment losses on Fuel
Tech was $30,000 and $113,000 for the years ended December 31, 2005 and 2004,
respectively, and such amounts are recorded in the "Other income, net," line
item in the Consolidated Statements of Income.
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
Field equipment.............................3-4 years
Vehicles......................................3 years
Computer equipment and software.............2-3 years
23
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 construction costs incurred and total
estimated costs at completion. Sales and gross profit are adjusted for revisions
in completion estimates and contract values in the period in which the facts
giving rise to the revisions become known. 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 income.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
At each reporting period, for financial statement purposes, Fuel Tech reviews
the valuation allowance that has historically been recorded to offset the tax
benefit of deductible temporary differences and net operating loss and tax
credit carryforwards. Fuel Tech considers the following when reviewing the
requirement for a valuation allowance: taxable temporary differences that
generate taxable income in the future; the ability to carryback the net
operating losses or credits; projections of future taxable income; and tax
planning strategies that can be readily implemented. Fuel Tech is a company
whose revenues are generated from a customer base that is heavily regulated.
This fact lends some uncertainty to the ability of the Company to project
forward-looking income with precision.
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
(APB No.25)." 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.
24
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 Statement of Financial Accounting Standards (SFAS) No. 123,
"Share-Based Payment," Fuel Tech's net income and income per share would have
been adjusted as follows for the years ended December 31:
-------------------------------------- --------------- ---------- ----------- ----------
(in thousands, except share data) 2005 2004 2003
-------------------------------------- --------------- ---------- ----------- ----------
-------------------------------------- --------------- ---------- ----------- ----------
Net income:
-------------------------------------- --------------- ---------- ----------- ----------
As reported $ 7,588 $ 1,572 $1,120
-------------------------------------- --------------- ---------- ----------- ----------
As adjusted 6,636 807 363
-------------------------------------- --------------- ---------- ----------- ----------
Basic and diluted income per share:
-------------------------------------- --------------- ---------- ----------- ----------
Basic - as $ 0.38 $ 0.08 $ 0.06
reported
-------------------------------------- --------------- ---------- ----------- ----------
Basic - as $ 0.33 $ 0.04 $ 0.02
adjusted
-------------------------------------- --------------- ---------- ----------- ----------
-------------------------------------- --------------- ---------- ----------- ----------
Diluted - as $ 0.33 $ 0.07 $ 0.05
reported
-------------------------------------- --------------- ---------- ----------- ----------
Diluted - as $ 0.29 $ 0.04 $ 0.02
adjusted
-------------------------------------- --------------- ---------- ----------- ----------
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 four years.
In December 2004, the Securities and Exchange Commission issued SFAS No. 123
(revised 2004), "Share-Based Payment," (SFAS No. 123R). SFAS No. 123R eliminates
the intrinsic value method under APB No. 25, and requires Fuel Tech to use a
fair-value based method of accounting for share-based payments. Under APB No.
25, no compensation cost related to stock options is recognized in the
Consolidated Statements of Income. SFAS No. 123R requires that compensation cost
for employee services received in exchange for an award of equity instruments be
recognized in the Consolidated Statements of Income based on the grant-date fair
value of that award. That cost recognized at the grant date will be amortized in
the Consolidated Statements of Income over the period during which an employee
is required to provide service in exchange for that award (requisite service
period). The provisions of SFAS No. 123R are effective as of the first interim
period that begins after June 15, 2005. On April 14, 2005, the Securities and
Exchange Commission announced that it would permit companies to delay
implementation of SFAS No. 123R. Fuel Tech will implement the revised standard
on January 1, 2006 and will begin expensing stock options in the first quarter
of 2006 using the modified prospective transition method. The modified
prospective method requires that compensation expense be recorded for both new
awards and awards previously granted but not fully vested as of the adoption
date. Fuel Tech anticipates that it will continue to use the Black-Scholes
option-pricing model to determine the fair value of options granted to
employees. Fuel Tech expects the adoption of SFAS 123R will have a material
impact on the consolidated statements of income and earnings per share. Fuel
Tech has no reason to believe that the amounts reported as a result of the
adoptions will be materially different from our currently disclosed pro forma
amounts.
BASIC AND DILUTED EARNINGS PER COMMON SHARE
Basic earnings per share exclude the dilutive effects of stock options and of
the nil coupon non-redeemable convertible unsecured loan notes (see Note 4).
Diluted earnings per share include 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):
------------------------------------ ----------- ------------ -----------
2005 2004 2003
------------------------------------ ----------- ------------ -----------
Basic weighted-average shares 20,043 19,517 19,637
------------------------------------ ----------- ------------ -----------
Conversion of unsecured loan notes 59 85 85
------------------------------------ ----------- ------------ -----------
Unexercised options and warrants 2,964 2,553 2,690
------------------------------------ ----------- ------------ -----------
Diluted weighted-average shares 23,066 22,155 22,412
------------------------------------ =========== ============ ===========
25
2. TAXATION
The components of income (loss) before taxes for the years ended December 31 are
as follows (in thousands):
--------------------------------------- --------- --------- ---------
ORIGIN OF INCOME (LOSS) BEFORE TAXES 2005 2004 2003
--------------------------------------- --------- --------- ---------
United States $7,823 $1,218 $2,210
--------------------------------------- --------- --------- ---------
Foreign (654) (1,052) (1,090)
--------------------------------------- --------- --------- ---------
Income before taxes $7,169 $ 166 $1,120
--------------------------------------- ========= ========= =========
Significant components of the income tax benefit for the years ended December 31
are as follows (in thousands):
2005 2004 2003
--------- --------- ---------
Current:
Federal $ 582 $ 20 $ 36
State 455 94 -
Other 34 - -
--------- --------- ---------
Total current 1,071 114 36
Deferred:
Federal 2,179 1,512 5,072
State 630 204 725
Change in valuation allowance (4,299) (3,236) (5,833)
--------- --------- ---------
Total deferred (1,490) (1,520) (36)
--------- --------- ---------
Income tax benefit $ (419) $(1,406) $ -
========= ========= =========
A reconciliation between the provision for income taxes calculated at the U.S.
federal statutory income tax rate and the consolidated income tax benefit in the
consolidated statements of income for the years ended December 31 is as follows
(in thousands):
- ------------------------------------------- -------- --------- ------
2005 2004 2003
- ------------------------------------------- -------- --------- ------
Provision at the U.S. federal statutory
rate $ 2,509 $ 58 $ 392
- ------------------------------------------- -------- --------- ------
State taxes, net of federal benefit 303 94 -
- ------------------------------------------- -------- --------- ------
Foreign losses without tax benefit 263 368 382
- ------------------------------------------- -------- --------- ------
Other 805 - -
- ------------------------------------------- -------- --------- ------
Valuation allowance adjustment (4,299) (1,926) (774)
- ------------------------------------------- -------- --------- ------
Income tax benefit $ (419) $(1,406) $ -
- ------------------------------------------- ======== ========= ======
26
The deferred tax assets and liabilities at December 31 are as follows:
2005 2004
------------- -------------
Deferred tax assets:
Net operating loss carryforwards 2,268,000 5,140,000
Research and development credit 1,663,000 813,000
Accrued liability for compensation 344,000 -
Alternative minimum tax credit 261,000 144,000
Equipment 159,000 -
Warranty reserve 94,000 55,000
Accounts receivable 57,000 30,000
Deferred rent liability 42,000 -
Vacation accrual 28,000 -
Charitable contribution 8,000 -
------------- -------------
Total deferred tax assets 4,924,000 6,182,000
Valuation allowances for deferred tax assets (45,000) (4,344,000)
------------- -------------
Deferred tax assets net of valuation allowances 4,879,000 1,838,000
Deferred tax liabilities:
Patents $ (54,000) $ (66,000)
Goodwill (203,000) (128,000)
------------- -------------
Total deferred tax liabilities (257,000) (194,000)
------------- -------------
Net deferred tax asset $4,622,000 $1,644,000
============= =============
Fuel Tech's income tax benefit of $419,000 for 2005 predominantly represents the
recording of the reduction in the deferred tax asset valuation allowance
representing the anticipated utilization of net operating loss and research and
development tax credit carryforwards. Based on a review of both historical and
projected taxable income, Fuel Tech concluded that it was more likely than not
that the net operating losses and the research and development tax credits would
be utiized in subsequent periods and the valuation allowance was no longer
required.
Fuel Tech's income tax benefit of $1,406,000 for 2004 predominantly represents
the recording of a reduction in the deferred tax asset valuation allowance
representing the anticipated utilization of net operating loss carryforwards in
subsequent years as noted above. Based on a review of both historical and
projected taxable income, Fuel Tech concluded that it is more likely than not
that some portion of the net operating losses will be utilized in subsequent
years and that a reduction in the deferred tax asset valuation allowance needed
to be recorded. The $94,000 in tax expense that offsets this amount primarily
represents state income tax expense.
Fuel Tech did not record a financial impact from income taxes in 2003.
The $4,299,000 reduction in the valuation allowance from December 31, 2004 to
December 31, 2005 is primarily due to the anticipated utilization of net
operating loss and research and development tax credit carryforwards. The
remaining valuation allowance at December 31, 2005 represents research and
development tax credit carryforwards at the state level that more likely than
not will not be utilized in subsequent periods.
State and Federal Tax payments during the years ended December 31, 2005, 2004
and 2003 were $326,000, $76,000, and $142,000, respectively.
27
The management of Fuel Tech periodically estimates the probable tax obligations
of the Company using historical experience in tax jurisdictions and informed
judgments. There are inherent uncertainties related to the interpretation of tax
regulations in the jurisdictions in which the Company transacts business. The
judgments and estimates made at a point in time may change based on the outcome
of tax audits, as well as changes to or further interpretations of regulations.
If such changes take place, there is a risk that the tax rate may increase or
decrease in any period. Tax accruals for tax liabilities related to potential
changes in judgements and estimates for both federal and state tax issues are
included in current liabilities on the consolidated balance sheet.
At December 31, 2005, FTI had tax losses available for offset against future
years' earnings of $6,479,000 in the United States. In 2004, approximately $3.7
million in tax losses expired while $.9 million were utilized. Under the
provisions of the U.S. Tax Reform Act of 1986, utilization of Fuel Tech's U.S.
federal income tax loss carryforwards may be limited should ownership changes
exceed 50% within a three-year period. The remaining U.S. federal tax loss
carryforwards expire as follows (in thousands):
2006 $1,104
2007 2,325
2008 1,480
2009 220
2010 309
2011 884
2012 40
2021 117
------------------
$6,479
==================
3. COMMON SHARES
At December 31, 2005, Fuel Tech had 20,424,133 Common Shares issued, with an
additional 46,326 shares reserved for issuance upon conversion of the nil coupon
non-redeemable convertible unsecured loan notes (see Note 4) and 2,799,000
shares reserved for issuance upon the exercise of stock options, 1,687,375 of
which are currently exercisable (see Note 5).
4. NIL COUPON NON-REDEEMABLE CONVERTIBLE UNSECURED LOAN NOTES
At December 31, 2005, 2004 and 2003, Fuel Tech had $282,000, $532,000 and
$532,000 principal amount of nil coupon non-redeemable convertible unsecured
perpetual loan notes (the "Loan Notes") outstanding. The Loan Notes are
convertible at any time into Common Shares at rates of $6.50 or $11.43 per
share. The Loan Notes bear no interest and have no maturity date. They are
generally repayable only in the event of Fuel Tech's dissolution and,
accordingly, have been classified within shareholders' equity in the
accompanying balance sheet.
In 2005, Loan Notes in the principal amount of $250,000 were converted into
38,461 Common Shares. There were no conversions in 2004 or 2003.
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 2004
amendment to the 1993 Plan is 12.5% of outstanding shares calculated on a
fully-diluted basis. In 2005, 2004 and 2003, 557,000, 408,000 and 475,500
options, respectively, were granted to employees and directors. These awards
have a 10-year life and they vest as follows: 50% after the second anniversary
of the award date, 25% after the third anniversary, and the final 25% after the
fourth anniversary of the award date. Fuel Tech calculates stock compensation
expense on a straight-line basis over the four-year vesting period of the
option.
The modified Black-Scholes option-pricing model was used to estimate the fair
value of employee stock options for the SFAS 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:
28
2005 2004 2003
---------- ----------- ----------
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 4.38% 3.60% 2.80%
Expected volatility 48.0% 62.3% 59.1%
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:
2005 2004 2003
---------------------------------------------------------------------------------------------
NUMBER WEIGHTED- NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE OF AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE
PRICE
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
OUTSTANDING AT BEGINNING OF YEAR 2,810,000 $ 3.24 2,447,050 $ 3.00 2,207,000 $ 2.71
GRANTED 557,000 7.84 408,000 4.67 475,500 3.93
EXERCISED (529,250) 2.32 (19,425) 1.74 (207,950) 2.16
EXPIRED OR FORFEITED (38,750) 5.97 (25,625) 4.82 (27,500) 3.99
---------------------------------------------------------------------------------------------
OUTSTANDING AT END OF YEAR 2,799,000 $ 4.29 2,810,000 $ 3.24 2,447,050 $ 3.00
---------------------------------------------------------------------------------------------
EXERCISABLE AT END OF YEAR 1,687,375 $ 2.87 1,806,125 $ 2.65 1,436,050 $ 2.28
WEIGHTED-AVERAGE FAIR VALUE OF
OPTIONS GRANTED DURING THE YEAR $ 3.35 $ 2.31 $ 1.89
The following table summarizes information about stock options outstanding at
December 31, 2005:
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
-----------------------------------------------------------------------------------------------------------------------
$1.47 - $4.20 1,497,000 4.92 years $ 2.50 1,314,250 $ 2.31
$4.39 - $8.46 1,302,000 8.57 years $ 6.35 373,125 $ 4.81
-------------- --------------
$1.47 - $8.46 2,799,000 6.62 years $ 4.29 1,687,375 $ 2.87
-----------------------------------------------------------------------------------------------------------------------
In addition to the above, Fuel Tech has 2,107,000 warrants outstanding to
purchase Common Shares at an exercise price of $1.75. The warrants expire on
April 30, 2008.
6. COMMITMENTS
OPERATING LEASES
Fuel Tech leases office space, autos and certain equipment under agreements
expiring on various dates through 2011. Future minimum lease payments under
noncancellable operating leases that have initial or remaining lease terms in
excess of one year as of December 31, 2005 are as follows (in thousands):
--------------------------------- ------------------------
YEAR OF PAYMENT AMOUNT
--------------------------------- ------------------------
2006 $504
--------------------------------- ------------------------
2007 463
--------------------------------- ------------------------
2008 444
--------------------------------- ------------------------
2009 337
--------------------------------- ------------------------
2010 33
--------------------------------- ------------------------
Thereafter 6
--------------------------------- ------------------------
For the years ended December 31, 2005, 2004 and 2003, rent expense approximated
$778,000, $640,000 and $618,000, respectively.
29
Fuel Tech has a sublease agreement that obligates the lessee to make future
payments. The sublease obligations noted below are related to a sublease
agreement between FTI and American Bailey Corporation (ABC). ABC will reimburse
FTI for its share of lease and lease-related expenses under FTI's January 29,
2004 lease of its executive offices in Stamford, Connecticut. Please refer to
Note 8 to the consolidated financial statements for a discussion of the relation
between FTI and ABC. The future minimum lease payments under this noncancellable
sublease as of December 31, 2005 are as follows (in thousands):
--------------------------------- ------------------------
YEAR OF PAYMENT AMOUNT
--------------------------------- ------------------------
2006 $96
--------------------------------- ------------------------
2007 97
--------------------------------- ------------------------
2008 96
--------------------------------- ------------------------
2009 97
--------------------------------- ------------------------
2010 8
--------------------------------- ------------------------
Thereafter -
--------------------------------- ------------------------
The terms of the two primary lease arrangements are as follows:
- The Batavia, Illinois building lease term runs from June 1, 1999 to
May 31, 2009. Fuel Tech has the option to extend the lease term for two
successive terms of five years each at market rates to be agreed upon
between Fuel Tech and the lessor.
- The current Stamford, Connecticut building lease term runs from
February 1, 2004 to January 31, 2010. Fuel Tech has the option to
extend the lease term for one successive term of five years at a market
rate to be agreed upon between Fuel Tech and the lessor. Fuel Tech was
provided with a 10 month "free rent" period under this lease, and the
total minimum lease payments are being amortized over the lease term.
The deferred rent liability is $177,000 at December 31, 2005, of which
$20,000 and $157,000 are recorded in current "Other accrued
liabilities" and long-term "Other liabilities," respectively, on the
consolidated balance sheet. Under the sublease noted above, ABC was
also provided with a 10-month "free rent" period, and the total minimum
lease rentals are also being amortized over the lease term. The
deferred rent receivable is $67,000 at December 31, 2005, of which
$8,000 and $59,000 are recorded in current "Prepaid expenses and other
current assets" and long-term "Other assets", respectively, on the
consolidated balance sheet.
None of Fuel Tech's lease arrangements are adjusted based on an index feature.
PERFORMANCE GUARANTEES
The majority of Fuel Tech's long-term equipment construction contracts contain
language guaranteeing that the performance of the system that is being sold to
the customer will meet specific criteria. On occasion, bank performance
guarantees and letters of credit are issued to the customer in support of the
construction contracts as follows:
- - in support of the warranty period defined in the contract, or
- - in support of the system performance criteria that are defined in the
contract
As of December 31, 2005, Fuel Tech has outstanding bank performance guarantees
and letters of credit in the amount of $2,604,000 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
FTI had a $10.0 million revolving credit facility expiring July 31, 2004, which
was collateralized by all personal property owned by FTI. Effective June 30,
2004, FTI amended the facility to increase the line to $15.0 million, and extend
the expiration date until July 31, 2006. FTI can use this facility for cash
advances and standby letters of credit. Cash advances under this facility bear
interest based on the following:
- - The Bank Prime Rate reduced by a range of zero to 50 basis points, or
- - The Bank Interbank Offering Rate increased by a range of 200 to 250
basis points
The Company can choose which rate to apply to borrowings.
At December 31, 2005, the bank had provided standby letters of credit,
predominantly to customers, totaling approximately $2,704,000 in connection with
contracts in process. This amount includes the $2,604,000 in bank performance
guarantees and letters of credit as referred to in Note 6 to the consolidated
financial statements. FTI is committed to reimbursing the issuing bank for any
payments made by the bank under these letters of credit. At December 31, 2005
and 2004, there were no cash borrowings under the revolving credit facility and
approximately $12,296,000 was available.
There were no required interest payments in 2005 or 2004, and interest payments
were $39,000 for the year ended December 31, 2003.
30
8. RELATED PARTY TRANSACTIONS
As of December 31, 2005, Fuel Tech has a 7% common stock ownership interest in
Clean Diesel Technologies, Inc. (CDT), which is being accounted for using the
cost method. Fuel Tech is precluded from selling its interest in CDT except
pursuant to a registration statement, or in a broker/dealer transaction within
the limitations of Rule 144 of the Securities and Exchange Commission (SEC), or
in an exempt private placement within the limitations of Rule 144 of the SEC.
Fuel Tech's investment in CDT, whose shares are publicly traded on the OTC
Bulletin Board and the Alternative Investment Market of the London Stock
Exchange, had a market value of $1.8 million at December 31, 2005, which is not
reflected on Fuel Tech's balance sheet. Fuel Tech also owns 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. The value assigned to the warrants
on the consolidated balance sheet at December 31, 2005 and 2004 is not
significant.
On August 3, 1995, Fuel Tech signed a Management and Services Agreement with
CDT. According to the agreement, CDT is to reimburse Fuel Tech for management,
services and administrative expenses incurred by Fuel Tech on behalf of CDT.
Additionally, Fuel Tech charges CDT an additional 3% of such costs annually. For
the years ended December 31, 2005, 2004 and 2003, $71,000, $70,000 and $69,000,
respectively, was charged to CDT as a management fee.
Pursuant to an assignment agreement of certain technology to CDT, Fuel Tech is
due royalties from CDT of 2.5% of CDT's annual revenue from sales of CDT's
Platinum Fuel Catalyst, commencing in 1998. The royalty obligation expires in
2008. CDT may terminate the royalty obligation to Fuel Tech by payment of $12
million commencing in 1998 and declining annually to $1,090,910 in 2008. CDT as
assignee and owner will maintain the technology at its own expense. To date,
Fuel Tech has received approximately $21,000 in royalties. Fuel Tech intends to
record royalties from CDT on a cash basis.
On April 30, 1998, FTI entered into an agreement with ABC for it to provide
certain management and consulting services to FTI. Persons now or formerly
associated with ABC currently own 24% of Fuel Tech's Common Shares and warrants
to purchase an additional 2.1 million shares, which expire on April 30, 2008. No
fees were to be payable under the agreement for the first 24 months. This
agreement was amended in 1999 to extend its term to April 30, 2002, and provide
for the payment of a management fee of $10,417 per month commencing September 1,
1999, through May 1, 2000, and $20,833 per month until the termination of the
agreement. The agreement was further amended effective May 1, 2002 to increase
the management fee to $29,167 per month until the termination of the agreement
as of April 30, 2004. Effective January 1, 2004, this agreement was terminated.
As of January 1, 2004, two former employees of ABC who were Directors of Fuel
Tech became employees of FTI. Concurrently, in early 2004, a new agreement was
put in place between FTI and ABC. Effective January 1, 2004, a compensation
agreement was established whereby ABC will reimburse FTI for certain services
that employees of FTI will provide to ABC. In addition, ABC is a sublessee under
FTI's January 29, 2004 lease of its executive offices in Stamford, Connecticut.
ABC will reimburse FTI for its share of lease and lease-related expenses under
the sublease agreement. Please refer to Note 6 to the consolidated financial
statements for a further discussion of this topic. $37,000 is due from ABC at
December 31, 2005 related to the compensation and sublease agreements.
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 $285,000, $300,000 and $341,000 in
2005, 2004 and 2003, respectively.
31
10. BUSINESS SEGMENT, GEOGRAPHIC AND QUARTERLY FINANCIAL DATA
BUSINESS SEGMENT FINANCIAL DATA
Fuel Tech is organized into three reportable segments, two that provide advanced
engineering solutions for the optimization of combustion systems in utility and
industrial applications, and one that markets and sells visualization software.
The two segments that comprise the advanced engineering solutions product
offerings are as follows:
- - The nitrogen oxide reduction technology segment, which includes the
NOxOUT, NOxOUT CASCADE, and NOxOUT-SCR processes for the reduction of
nitrogen oxide emissions in flue gas from boilers, incinerators,
furnaces and other stationary combustion sources, and
- - The fuel treatment chemical segment, which uses chemical processes for
the control of slagging, fouling, and corrosion and for plume abatement
in furnaces and boilers through the addition of chemicals into the fuel
or via a TIFI Targeted In-Furnace Injection program.
The visualization software segment was discontinued in the first quarter of 2005
and it does not meet the materiality test for disclosure. This segment is
aggregated in "Other" below. In addition, "Other" also includes those profit and
loss items not allocated by Fuel Tech to each reportable segment. Lastly, there
are no intersegment sales that require elimination.
Fuel Tech evaluates performance and allocates resources based on reviewing gross
margin by reportable segment. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies. Fuel Tech does not review assets by reportable segment, but rather, in
aggregate for Fuel Tech as a whole.
Information about reporting segment net sales and gross margin are provided
below:
(in thousands)
For the year ended Nitrogen Oxide Fuel Treatment Other Total
December 31, 2005 Reduction Chemical
- ------------------------------------ ----------------------- ----------------------- -------------------- ----------------------
Net sales from external customers $32,650 $20,272 $ 6 $52,928
Cost of sales 16,744 10,096 278 27,118
----------------------- ----------------------- -------------------- ----------------------
Gross margin 15,906 10,176 (272) 25,810
Selling, general and administrative - - 17,414 17,414
Research and development - - 1,211 1,211
----------------------- ----------------------- -------------------- ----------------------
Operating income (loss) $15,906 $10,176 $(18,897) $ 7,185
======================= ======================= ==================== ======================
For the year ended Nitrogen Oxide Fuel Treatment Other Total
December 31, 2004 Reduction Chemical
- ------------------------------------ ----------------------- ----------------------- -------------------- ----------------------
Net sales from external customers $14,602 $16,216 $ 14 $30,832
Cost of sales 8,458 7,797 311 16,566
----------------------- ----------------------- -------------------- ----------------------
Gross margin 6,144 8,419 (297) 14,266
Selling, general and administrative - - 12,775 12,775
Research and development - - 1,242 1,242
----------------------- ----------------------- -------------------- ----------------------
Operating income (loss) $ 6,144 $ 8,419 $(14,314) $ 249
======================= ======================= ==================== ======================
For the year ended Nitrogen Oxide Fuel Treatment Other Total
December 31, 2003 Reduction Chemical
- ------------------------------------ ----------------------- ----------------------- -------------------- ----------------------
Net sales from external customers $25,404 $10,315 $ 17 $35,736
Cost of sales 16,886 4,672 231 21,789
----------------------- ----------------------- -------------------- ----------------------
Gross margin 8,518 5,643 (214) 13,947
Selling, general and administrative - - 11,659 11,659
Research and development - - 1,287 1,287
----------------------- ----------------------- -------------------- ----------------------
Operating income (loss) $ 8,518 $ 5,643 $(13,160) $ 1,001
======================= ======================= ==================== ======================
32
GEOGRAPHIC SEGMENT FINANCIAL DATA
Information concerning Fuel Tech's operations by geographic area is provided
below. Revenues are attributed to countries based on the location of the
customer. Assets are those directly associated with operations of the geographic
area.
For the years ended December 31 (in thousands) 2005 2004 2003
----------------------------------------------------
Net sales:
United States $ 41,721 $ 26,093 $ 30,965
Foreign 11,207 4,739 4,771
---------------------------------------------------
$ 52,928 $ 30,832 $ 35,736
====================================================
December 31 2005 2004 2003
----------------------------------------------------
Assets:
United States $ 39,006 $ 21,641 $ 19,487
Foreign 4,020 2,187 2,111
----------------------------------------------------
$ 43,026 $ 23,828 $ 21,598
====================================================
During 2005, Fuel Tech realized 13.1% of its revenues from one customer. This
customer utilized the product line offered by Fuel Tech's Nitrogen Oxide
Reduction business segment.
QUARTERLY FINANCIAL DATA
Set forth below are the unaudited quarterly financial data for the fiscal years
ended December 31, 2005 and 2004.
FOR THE QUARTERS ENDED: March 31 June 30 September 30 December 31
---------------------------------------------------------------------
(in thousands, except share data)
2005 (b)
Net sales $ 12,051 $ 11,780 $ 12,821 $ 16,276
Cost of sales 6,397 6,053 6,467 8,201
Net income 753 3,172 1,048 2,615
Net income per Common Share:
Basic $0.04 $0.16 $0.05 $0.13
Diluted $0.03 $0.14 $0.05 $0.11
2004 (a)
Net sales $ 6,152 $ 7,352 $ 9,577 $ 7,751
Cost of sales 3,216 4,196 4,813 4,341
Net (loss) income (531) (308) 1,001 1,410
Net (loss) income per Common Share:
Basic $(0.03) $(0.02) $0.05 $0.07
Diluted $(0.03) $(0.02) $0.05 $0.06
(a) Based on a review of both historical and projected taxable income, Fuel Tech
concluded that it is more likely than not that some portion of its net operating
losses would be utilized in subsequent years and that a reduction in the
deferred tax asset valuation allowance needed to be recorded. Fuel Tech recorded
a reduction in the deferred tax asset valuation allowance of $1,500,000 in the
fourth quarter of 2004, representing the anticipated utilization of net
operating loss carryforwards in subsequent years.
33
(b) Based on a review of both historical and projected taxable income, at June
30, 2005 Fuel Tech concluded that it is more likely than not that some portion
of its net operating losses would be utilized in subsequent years and that a
reduction in the deferred tax asset valuation allowance needed to be recorded.
Fuel Tech recorded a reduction in the deferred tax asset valuation allowance of
$2,200,000 in the second quarter of 2005 representing the anticipated
utilization of net operating loss carryforwards in subsequent years.
In the fourth quarter ended December 31, 2005, Fuel Tech recorded a $2,099,000
reduction in the deferred tax asset valuation allowance primarily due to the
anticipated utilization of net operating loss and research and development tax
credit carryforwards. Based on a review of both historical and projected taxable
income at the end of December 31, 2005, Fuel Tech concluded that it was more
likely than not that carryforwards would be utilized in subsequent periods and
that a reduction in the deferred tax valuation allowance was required.
The total of the basic and diluted net (loss) income amounts per share for the
four quarters ending December 31, 2004 does not sum to the amounts presented on
the Consolidated Statement of Income for the year ending December 31, 2004.
34
11. PARENT COMPANY FINANCIAL STATEMENTS
BALANCE SHEETS AT DECEMBER 31 (in thousands) 2005 2004
-------------- ---------------
Assets:
Receivable and other current assets $ 116 $ 145
Investments in subsidiaries 29,359 18,958
-------------- ---------------
Total assets $29,475 $19,103
============== ===============
Liabilities and shareholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 339 $ 148
Shareholders' equity 29,136 18,955
-------------- ---------------
Total liabilities and shareholders' equity $29,475 $19,103
============== ===============
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31 2005 2004 2003
(in thousands)
-------------- --------------- ----------------
Loss from operations $(1,024) $ (772) $ (763)
Income from equity investment in subsidiary 8,612 2,344 1,883
-------------- --------------- ----------------
Net income $ 7,588 $1,572 $1,120
============== =============== ================
STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31 2005 2004 2003
(in thousands)
-------------- --------------- ----------------
Operating activities:
Net cash used in operating activities $ (804) $ (764) $ (880)
-------------- --------------- ----------------
Investing activities:
-------------- --------------- ----------------
Net cash provided by investing activities - - -
Financing activities:
Repayments from FTI (426) 730 1,532
Exercise of stock options 1,230 34 323
Purchase of treasury stock/other - - (35)
Purchase of shares to be retired - - (940)
-------------- --------------- ----------------
Net cash provided by investing activities 804 764 880
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.
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), Fuel Tech's management carried out an evaluation,
with the participation of Fuel Tech's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of Fuel Tech's disclosure controls and
procedures, as of the end of the last fiscal quarter.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2005, Fuel Tech's disclosure controls
and procedures were operating effectively to ensure that information required to
be disclosed by Fuel Tech in the reports that Fuel Tech files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms.
Internal Control Over Financial Reporting
Management's Report on Internal Control over Financial Reporting and our
Independent Registered Public Accounting Firm's Attestation Report are included
at Item 8.
Change in Internal Control Over Financial Reporting
There were no significant changes in internal controls or in other factors that
could significantly affect these controls during the quarter ended December 31,
2005.
36
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 2006 Annual Meeting of Shareholders (the "Proxy
Statement") and is incorporated by reference.
Fuel Tech has adopted a Code of Ethics and Business Conduct (the "Code") that
applies to all employees, officers and directors, including the Chief Executive
Officer, Chief Financial Officer and Controller. A copy of the Code is available
free of charge to any person on written or telephone request to Fuel Tech's
Investor Relations at the address or telephone number set out in Fuel Tech's
Annual Report to Shareholders. The Code is also available on Fuel Tech's website
at www.fueltechnv.com.
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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item will be set forth under the caption "Approval
of Appointment of Auditors" in the Proxy Statement and is incorporated by
reference.
37
PART IV
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.
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Income for Years Ended December 31, 2005,
2004 and 2003
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FUEL-TECH N.V.
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
------------------------ ---------------------- ------------------ -------------------- --------------------
Year Balance at Charged to costs (Deductions)/Other Balance at
January 1 and expenses December 31
------------------------ ---------------------- ------------------ -------------------- --------------------
2003 $107,000 $425,000 $(221,000) $311,000
------------------------ ---------------------- ------------------ -------------------- --------------------
2004 311,000 92,000 (329,000) 74,000
------------------------ ---------------------- ------------------ -------------------- --------------------
2005 74,000 26,000 50,000 150,000
------------------------ ---------------------- ------------------ -------------------- --------------------
All other schedules have been omitted because of the absence of the conditions
under which they are required or because the required information where material
is shown in the financial statements or the notes thereto.
38
(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 Fuel Tech, Inc. Form of 1992 Substitute Stock Option Agreement
* 3.2 Fuel-Tech N.V. Form of 1992 Substitute Stock Option Agreement
* 3.3 Fuel-Tech N.V. Form of 1993 Stock Option Agreement as amended through August 3, 1999
& 3.4 The 1993 Incentive Plan of Fuel-Tech N.V. as amended through August 3, 1999
* 3.5 License Implementation Agreement dated June 10, 1991 among NFT, Nalco Fuel Tech, B.V., and Foster Wheeler Energy
Corporation
* 3.6 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.
* 3.7 License Implementation Agreement dated May 22, 1991 among NFT, Nalco Fuel Tech, B.V., and Wheelabrator Air
Pollution Control, Inc.
* 3.8 Agreement dated July 3, 1990 between NFT and Arcadian Corporation
* 3.9 License Agreement dated September 12, 1991 between NFT and BP Chemicals Inc.
* 3.10 Agreement dated November 5, 1990 between NFT and Cargill, Incorporated
* 3.11 Agreement dated August 30, 1990 between NFT and Nitrochem, Inc.
* 3.12 License Agreement dated December 27, 1990 between NFT and Union Oil Company of California dba Unocal
* 3.13 Agreement dated September 30, 1990 between NFT and W.H. Shurtleff Company
** 3.14 Securities Purchase Agreement dated as of March 23, 1998, between Fuel-Tech N.V., and the several Investors
signatory thereto, including exhibits.
#& 3.15 License Agreement dated November 18, 1998 between The Gas Technology Institute and Fuel Tech, Inc. relating to the
FLGR Process
#& 3.16 Amendment No. 1, dated February 28, 2000, to License Agreement of November 18, 1998 between The Gas Technology
Institute and Fuel Tech, Inc.
ooo 3.17 The Amended and Restated Business Loan Agreement dated as of August 31, 1999 between Bank of America, National
Association and FTI; as amended through June 30, 2004
o 3.18 Employment Agreement as of February 28, 2006 between John (Johnny) F. Norris, Jr. and Fuel Tech, Inc.
oo 19.2 Those portions of the Proxy Statement to be distributed to Shareholders of Fuel Tech for the 2006 Annual Meeting
of Shareholders of Fuel-Tech N.V. specifically incorporated by reference into this Annual Report on Form10-K.
o 23.1 Consent of Independent Registered Public Accounting Firm
o 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
o 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
o 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* 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 2006 Annual Meeting
ooo Filed with Registrant's report on Form 10-K for the year 2002
# 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
- - The Company filed form 8-K on November 2, 2005. This filing included
the Company's earnings press release for the third quarter ended
September 30, 2005.
39
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.
Date: March 10, 2006 By: /s/ Ralph E. Bailey
-----------------------
Ralph E. Bailey
Executive Chairman, Managing Director
and Chief Executive Officer
Date: March 10, 2006 By: /s/ Vincent J. Arnone
-----------------------
Vincent J. Arnone
Chief Financial Officer,
Senior Vice President and
Treasurer
40
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.
Date: March 10, 2006
/s/ Ralph E. Bailey Executive Chairman, Managing Director and Chief Executive Officer
------------------- (Principal Executive Officer)
Ralph E. Bailey
/s/ Vincent J. Arnone Chief Financial Officer, Senior Vice President and Treasurer
--------------------- (Principal Financial and Accounting Officer)
Vincent J. Arnone
/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/ John D. Morrow Managing Director
------------------
John D. Morrow
/s/ Thomas L. Jones Managing Director
-------------------
Thomas L. Jones
/s/ Charles W. Grinnell Managing Director, Vice President, General Counsel and Corporate Secretary
-----------------------
Charles W. Grinnell
41