10-Q 1 b314629_10q.txt REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number: 000-21724 FUEL-TECH N.V. (Exact name of registrant as specified in its charter) Netherlands Antilles N.A. -------------------- ----------------- (State of Incorporation) (I.R.S. Employer Identification No.) Fuel-Tech N.V. Fuel Tech, Inc. (Registrant) (U.S. Operating Subsidiary) Castorweg 22-24 Suite 703, 300 Atlantic Street Curacao, Netherlands Antilles Stamford, CT 06901 (599) 9-461-3754 (203) 425-9830 (Address and telephone number of principal executive offices) 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of November 12, 2001, there were outstanding 18,651,097 shares of Common Stock, par value $0.01 per share, of the registrant. ================================================================================ FUEL-TECH N.V. Form 10-Q for the three and nine-month periods ended September 30, 2001 INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of September 30, 2001 1 and December 31, 2000 Condensed Consolidated Statements of Operations for the Three and Nine-Month Periods Ended September 30, 2001 and 2000 2 Condensed Consolidated Statements of Cash Flows for the Nine- Month Period Ended September 30, 2001 and 2000 3 Notes to the Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of 8 Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Defaults upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FUEL-TECH N.V. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of U.S. Dollars, except share data)
September 30, December 31, 2001 2000 --------------- --------------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 9,844 $ 8,987 Accounts receivable, net 3,439 7,550 Prepaid expenses and other current assets 965 1,181 ------------- --------------- Total current assets 14,248 17,718 Equipment, net of accumulated depreciation of $5,002 and $4,489, respectively 1,625 1,584 Goodwill, net of accumulated amortization of $840 and $590, respectively 2,200 2,450 Other intangibles, net of accumulated amortization of $840 and $809, respectively 467 458 Other 694 879 --------------- --------------- Total assets $ 19,234 $ 23,089 =============== =============== Liabilities and stockholders' equity Current liabilities: Current portion of note payable $ 900 $ 900 Accounts payable 1,390 2,480 Accrued expenses 1,088 1,796 --------------- --------------- Total current liabilities 3,378 5,176 Note payable 2,025 2,700 Other liabilities 496 646 --------------- --------------- Total liabilities 5,899 8,522 Stockholders' equity: Common stock, par value $0.01 per share, authorized 40,000,000 shares, 18,623,347 and 18,526,972 shares issued, respectively 186 185 Additional paid-in capital 86,194 86,097 Accumulated deficit (75,802) (74,574) Accumulated other comprehensive income 35 97 Treasury stock (1,098) (1,058) Nil coupon perpetual loan notes 3,820 3,820 --------------- --------------- Total stockholders' equity 13,335 14,567 --------------- --------------- Total liabilities and stockholders' equity $ 19,234 $ 23,089 =============== ===============
See notes to condensed consolidated financial statements. 1 FUEL-TECH N.V. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands of U.S. dollars, except share data)
Three Months Ended Nine Months Ended September 30 September 30 2001 2000 2001 2000 -------------------- --------------------- Net sales $ 4,194 $ 5,981 $ 12,090 $ 16,287 Costs and expenses: Cost of sales 1,984 2,944 5,926 8,992 Selling, general and administrative 2,073 1,826 6,205 5,432 Research and development 295 229 851 705 Closing costs related to German subsidiary -- -- -- 528 ---------- ---------- ----------- ---------- Operating (loss) income (158) 982 (892) 630 Loss from equity interest in affiliates (93) (80) (267) (206) Interest expense (56) (90) (194) (273) Other income (expense): Gain on sale of German subsidiary's chemical business -- -- -- 269 Cumulative translation loss related to German subsidiary -- -- -- (231) Other income, net 51 20 126 22 ---------- ---------- ----------- ---------- (Loss) income before taxes (256) 832 (1,227) 211 Income taxes -- (79) -- (79) ---------- ---------- ----------- ---------- Net (loss) income $ (256) $ 753 $ (1,227) $ 132 ========== ========== =========== ========== Net (loss) income per common share: Basic $ (.01) $ .04 $ (.07) $ .01 ========== ========== =========== ========== Diluted $ (.01) $ .04 $ (.07) $ .01 ========== ========== =========== ========== Average number of common shares outstanding: Basic 18,558,000 18,411,000 18,530,000 18,384,000 ========== ========== ========== ========== Diluted 18,558,000 19,633,000 18,530,000 19,760,000 ========== ========== ========== ==========
See notes to condensed consolidated financial statements. 2 FUEL-TECH N.V. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands of U.S. dollars) Nine Months Ended September 30 2001 2000 ------------------------------ Operating activities Net cash provided by operating activities $ 2,216 $ 2,429 ------------- ------------- Investing activities Investments in affiliates -- (341) Loan to affiliate (125) -- Purchases of equipment and patents (608) (505) ------------- ------------- Net cash used in investing activities (733) (846) ------------- ------------- Financing activities Exercise of stock options 100 336 Purchase of treasury shares (39) -- Repayment of borrowings (675) (450) ------------- ------------- Net cash used in financing activities (614) (114) ------------- ------------- Effect of exchange rate fluctuations on cash (12) (104) ------------- ------------- Net increase in cash and cash equivalents 857 1,365 Cash and cash equivalents at beginning of period 8,987 8,959 ------------- ------------- Cash and cash equivalents at end of period $ 9,844 $ 10,324 ============= ============= See notes to condensed consolidated financial statements. 3 FUEL-TECH N.V. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) Note A: Basis of Presentation The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods covered have been included. Operating results for the nine-month period ended September 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The balance sheet at December 31, 2000, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Fuel-Tech N.V.'s annual report on Form 10-K for the year ended December 31, 2000. Fuel-Tech N.V., including its subsidiaries (the "Company"), is a technology company active in the business of air pollution control through its wholly owned subsidiary Fuel Tech, Inc. ("FTI") and its affiliate Clean Diesel Technologies, Inc. ("CDT"). Fuel-Tech N.V., incorporated in 1987 under the laws of the Netherlands Antilles, is registered at Castorweg 22--24 in Curacao under No. 1334/N.V. Note B: Close of German Subsidiary In the second quarter of 2000, the Company announced that it would concentrate its European resources in its Italian company, Fuel Tech Srl, and shut down Fuel Tech GmbH, a wholly owned subsidiary in Germany. At that time, a charge of $528,000 was recorded related to the closure of the entity. The charge included accruals of $343,000 primarily for severance obligations for four employees, lease termination costs and other costs related to the closure of the entity. This charge was recorded as part of operating income in the condensed consolidated statement of operations. As of September 30, 2001, the Company has remitted approximately $305,000 related to the reserved closing costs. 4 Note C: Earnings Per Share Data Basic earnings per share excludes the dilutive effects of stock options and warrants and of the nil coupon non-redeemable convertible unsecured loan notes. Diluted earnings per share includes the dilutive effect of stock options and warrants and of the nil coupon non-redeemable convertible unsecured loan notes. The following table sets forth the weighted-average shares (in thousands) used in calculating the earnings per share for the three and nine-month periods ended September 30, 2001 and 2000: Three months ended Nine months ended 2001 2000 2001 2000 --------------------- ------------------- Basic weighted-average shares 18,558 18,411 18,530 18,384 Conversion of unsecured loan notes -- 471 -- 486 Unexercised options and warrants -- 751 -- 890 -------------------- ------------------- Diluted weighted-average shares 18,558 19,633 18,530 19,760 ==================== =================== Note D: Total Comprehensive Income Total comprehensive income for the Company is comprised of net income, the impact of foreign currency translation, and the change in fair value of the interest rate swap for the three and nine-month periods ended September 30, 2001 and 2000. Total comprehensive income was $(206,000) and $675,000 for the three month periods ended September 30, 2001 and 2000, respectively. Total comprehensive income was $(1,289,000) and $259,000 for the nine month periods ended September 30, 2001 and 2000, respectively.
For the three months ended For the nine months ended September 30 September 30 ----------------------------------------------------------- 2001 2000 2001 2000 ------------- ------------ ------------ ----------- Comprehensive income: Net (loss) income $ (256,000) $ 753,000 $(1,227,000) $ 132,000 Foreign currency translation 60,000 (78,000) (12,000) (104,000) Change in fair value of -- -- interest rate swap (10,000) (50,000) Foreign currency loss on German subsidiary -- -- -- 231,000 ------------ ----------- -------------- ---------- $(206,000) $ 675,000 $(1,289,000) $259,000 ============ =========== ============== ==========
5 Note E: Derivative Financial Instruments Effective January 1, 2001, the Company adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated other comprehensive income or loss, and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. Interest Rate Risk Management: The Company is exposed to interest rate risk due to its long-term debt arrangement. The Company uses an interest rate derivative instrument (an interest rate swap) to manage exposure to interest rate changes. The Company has entered into an interest rate swap transaction that fixes the rate of interest at 8.91% on approximately 50% of the outstanding principal balance during the term of the loan. The term of the swap is from October 22, 1999 until October 22, 2002. At the date of adoption, January 1, 2001, the Company recorded the fair value of the interest rate swap, a credit of approximately $20,000, as an "other liability" with a corresponding decrease to "accumulated other comprehensive income." As of September 30, 2001 the Company has reduced further the fair value of the interest rate swap by $30,000, thus increasing the "other liability" with a corresponding decrease to "accumulated other comprehensive income" for this amount. The impact of the ineffectiveness calculation at this same date was immaterial. Foreign Currency Risk Management: The Company's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. The Company does not enter into foreign currency forward contracts or into foreign currency option contracts to manage this risk due to the immaterial nature of the transactions involved. 6 Note F: Accounting for Goodwill and Other Intangible Assets Effective January 1, 2002, the Company will adopt FASB (Financial Accounting Standards Board) Statement No. 142, Goodwill and Other Intangible Assets which was approved on September 29, 2001. Under the guidance of this statement, Goodwill and indefinite-lived intangible assets will no longer be amortized but will be reviewed annually, or more frequently if impairment indicators arise, for impairment. For the nine months ended September 30, 2001, the Company recorded goodwill amortization of $250,000. Note G: Business Segment and Geographic Disclosures The Company operates in one business segment providing air pollution control chemicals and equipment. Information concerning the Company's operations by geographic area is provided below. Operating earnings represent sales less cost of products sold and operating expenses. Foreign operating expenses include direct expenses incurred outside of the United States by foreign corporations controlled by the Company plus an allocation of domestic selling and general expenses directly related to the foreign operations. Assets are those directly associated with operations in the geographic area.
For the three months ended For the nine months ended September 30 September 30 ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------- ------------ ------------- ------------- Revenues: Domestic $ 3,470,000 $ 4,865,000 $10,030,000 $ 13,868,000 Foreign 724,000 1,116,000 2,060,000 2,419,000 ----------- ----------- ------------ ------------ $ 4,194,000 $ 5,981,000 $ 12,090,000 $ 16,287,000 =========== =========== ============ ============ Operating Earnings: Domestic $ (53,000) $ 990,000 $ (710,000) $ 1,579,000 Foreign (105,000) (8,000) (182,000) (949,000) ---------- ----------- ------------ ------------ $ (158,000) $ 982,000 $ (892,000) $ 630,000 ========== =========== ============ ============
September 30, December 31, 2001 2000 ------------ ------------ Assets: Domestic $16,891,000 $19,640,000 Foreign 2,343,000 3,449,000 ----------- ----------- $19,234,000 $23,089,000 =========== =========== 7 FUEL-TECH N.V. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales for the three months ended September 30, 2001 and 2000 were $4,194,000 and $5,981,000, respectively while net sales for the nine months ended September 30, 2001 and 2000 were $12,090,000 and $16,287,000, respectively. The year on year decline is attributable to the decrease in domestic NOx reduction industrial and utility project revenues. The decline in domestic industrial project revenue is due to a NOx reduction regulation, as mandated in Title III of the Clean Air Act Amendments of 1990 (CAAA), requiring municipal solid waste incinerators to significantly reduce their NOx emissions by December 1, 2000. This regulation had a significant positive impact on industrial project revenues in 2000, and it was expected that these revenues would not repeat in 2001. NOx reduction utility revenue had been negatively impacted by the delay in obtaining a final ruling on the Environmental Protection Agency's (EPA) SIP Call regulation. As discussed further below, the uncertainty regarding this regulation has been substantially lifted and the Company expects demand for its NOx reduction technologies to increase significantly during the next few years. Domestic fuel treatment chemical revenues for the three and nine month periods ended September 30, 2001 were in excess of the prior year periods by approximately $700,000 and $2,700,000, respectively. The favorable results were attributable to two primary factors, namely, the extensive burning of oil at key customer locations and to the continued development of new business opportunities for the Company's patented targeted-in-furnace-injection technology. The "SIP Call" is the federal mandate introduced in 1998 to further reduce NOx in 22 states by May 2003. This mandate was an extension of Phase II of Title I of the CAAA. In May 1999 a stay was imposed on this regulation. On March 3, 2000, an appellate court of the D.C. Circuit upheld the validity of the SIP Call for 19 of the 22 states and, on June 22, 2000, the same court made a final ruling upholding the EPA's SIP call regulation and denying the appeal of the states and utilities. Subsequent to this court ruling, the stay on the SIP Call was lifted. Although the NOx reduction requirement date was moved back one year to May of 2004, nineteen states were required to complete and issue their State Implementation Plans for NOx reduction by October of 2000. These plans, which the EPA had until October 2001 to approve, will potentially impact 700 to 800 utility boilers and 400 to 500 industrial units. In February 2001, the United States Supreme Court, in a unanimous decision, upheld EPA's authority to revise the National Ambient Air Quality Standard for ozone to 0.080 parts per million averaged through an eight-hour period from the current 0.120 parts per million for a one-hour period. This more stringent standard provides clarity and impetus for 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 again stay the SIP Call, effectively exhausting all means of appeal. In addition to the SIP Call regulation, the so-called Section 126 Petitions, which enable downwind states to obtain relief from pollutants arising from their upwind neighbors, require major emissions sources in 12 of the 19 aforementioned states to comply with the 85% aggregate NOx reduction requirement by May 1, 2003. The May 1, 2003 deadline was recently suspended by the US Circuit Court of Appeals for the District of Columbia, pending the EPA's submission of additional documentation regarding projected NOx growth rates. At most, the deadline for compliance by these effected sources will fall back to May 31, 2004, as these sources face similar requirements under the SIP Call, discussed above. Based on these regulatory developments, the Company expects to see project bookings from utilities resume towards the end of 2001 and beyond. Cost of sales for the third quarter and nine month year to date periods has improved on a percentage basis from the same periods of the prior year, reflecting a favorable product mix, as domestic fuel treatment chemical 8 revenues comprised a larger percent of total revenues throughout the first nine months of 2001. The sale of the Company's chemical business in Germany in June of 2000 also contributed to the margin improvement, as this business was highly competitive and contributed lower margins than similar product sales in the U.S. Selling, general and administrative expenses were $2,073,000 in the third quarter of 2001 versus $1,826,000 in the comparable period in 2000. For the nine months ended September 30, 2001 and 2000, selling, general and administrative expenses increased to $6,205,000 from $5,432,000 in 2000. The increase is due primarily to a refocusing of the Company's engineering resources towards planning efforts for the anticipated increase in NOx project business and towards refinement of new proprietary technologies (e.g. NOxOUT Ultra). Engineering resources, whose time in prior quarters would have been charged to cost of sales, were charged instead to selling, general and administrative expenses or research and development expenses. Research and development expenses for the nine months ended September 30, 2001 and 2000 were $851,000 and $705,000, respectively. The Company continues to pursue commercial applications for its technologies outside of its traditional markets, with a particular focus on its Virtual Vantage(TM) advanced visualization software and its NOxOUT Ultra process. For the nine months ended September 30, 2001, the Company recognized a loss of $66,000 on its equity investment in Fuel Tech CS GmbH, a 49 percent-owned entity, the majority of which being attributable to a non-cash charge related to a decrease in the amortization period for goodwill. A loss of $201,000 was recognized on the Company's equity investment in Clean Diesel Technologies, Inc., its 21.6 percent-owned affiliate. For the nine months ended September 30, 2001, the Company recorded other income of $126,000 versus $22,000 in the comparable period in 2000. The increase stems largely from a decrease in the amortization period for the deferred gain that was recorded in the second quarter of 2000 at the time of sale of the Company's German chemical business to Fuel Tech CS GmbH. The amortization periods for the goodwill on the books of Fuel Tech CS GmbH, mentioned above, and for the deferred gain on the books of the Company, are the same. Interest expense for the nine months ended September 30, 2001 was reduced to $194,000 from $273,000 in the comparable period in 2000, the decrease being attributable to a reduction in the average outstanding principal balance on the Company's term loan, as well as to a reduction in short term interest rates. There was no income tax expense recorded in the first nine months of 2001. Liquidity and Sources of Capital For the nine months ended September 30, 2001 and 2000, the Company generated cash from operating activities of $2,216,000 and $2,429,000, respectively. The increased cash generation stems primarily from a reduction in trade working capital in both periods. At September 30, 2001 and December 31, 2000, the Company had cash and cash equivalents of $9,844,000 and $8,987,000, respectively. Working capital decreased to $10,870,000 at September 30, 2001 from $12,542,000 at December 31, 2000 due primarily to a reduction in accounts receivable related to NOx reduction projects which has been driven by lower NOx reduction revenues. 9 Forward-Looking Statements Statements in this Form 10-Q 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 the Company's filings with the Securities and Exchange Commission. See "Risk Factors of the Business" in Item 1, "Business," and also Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Form 10-K for the year ended December 31, 2000. 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K None 11 FUEL-TECH N.V. SIGNATURES 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: November 12, 2001 By: /s/Ralph E. Bailey --------------------------------------- Ralph E. Bailey Chairman, Managing Director and Chief Executive Officer Date: November 12, 2001 By: /s/Scott M. Schecter --------------------------------------- Scott M. Schecter Chief Financial Officer, Vice President and Treasurer 12