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 March 31, 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 May 3, 2001, there were outstanding 18,538,743 shares of Common Stock, par
value $0.01 per share, of the registrant.
===========================================================================
FUEL-TECH N.V.
Form 10-Q for the three-month period ended March 31, 2001
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2001 1
and December 31, 2000
Condensed Consolidated Statements of Operations for the Three 2
Month Periods Ended March 31, 2001 and 2000
Condensed Consolidated Statements of Cash Flows for the Three 3
Month Periods Ended March 31, 2001 and 2000
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)
March 31, December 31,
2001 2000
--------------- ---------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 8,548 $ 8,987
Accounts receivable, net 5,519 7,550
Prepaid expenses and other current assets 1,051 1,181
--------------- ---------------
Total current assets 15,118 17,718
Equipment, net of accumulated depreciation of
$4,622 and $4,489, respectively 1,591 1,584
Goodwill, net of accumulated amortization of
$673 and $590, respectively 2,366 2,450
Other intangibles, net of accumulated amortization of
$818 and $809, respectively 461 458
Other 684 879
--------------- ---------------
Total assets $ 20,220 $ 23,089
=============== ===============
Liabilities and stockholders' equity
Current liabilities:
Current portion of note payable $ 900 $ 900
Accounts payable 1,643 2,480
Accrued expenses 1,157 1,796
--------------- ---------------
Total current liabilities 3,700 5,176
Note payable 2,475 2,700
Other liabilities 600 646
--------------- ---------------
Total liabilities 6,775 8,522
Stockholders' equity:
Common Stock, par value $0.01 per share,
authorized 40,000,000 shares,
18,526,972 shares issued for both periods 185 185
Additional paid-in capital 86,097 86,097
Accumulated deficit (75,617) (74,574)
Accumulated other comprehensive income (loss) 18 97
Treasury stock (1,058) (1,058)
Nil coupon perpetual loan notes 3,820 3,820
--------------- ---------------
Total stockholders' equity 13,445 14,567
Total liabilities and stockholders' equity $ 20,220 $ 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
March 31
2001 2000
--------- ----------
Net sales $ 3,155 $ 4,455
Costs and expenses:
Cost of sales 1,717 2,777
Selling, general and administrative 2,067 1,633
Research and development 239 241
--------- ---------
Operating loss (868) (196)
Loss from equity interest in affiliates (118) --
Interest expense (72) (90)
Other income (expense) 16 (10)
--------- ---------
Loss before taxes (1,042) (296)
Income taxes -- --
--------- ---------
Net loss $ (1,042) $ (296)
========= =========
Net loss per common share:
Basic $ (.06) $ (.02)
========= =========
Diluted $ (.06) $ (.02)
========= =========
Average number of common shares outstanding:
Basic 18,433,000 18,358,000
========== ==========
Diluted 18,433,000 18,358,000
========== ==========
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)
Three Months Ended
March 31
2001 2000
------------------------------
Operating activities
Net cash provided by (used in)
operating activities $ 147 $ (1,078)
------------- ------------
Investing activities
Loan to affiliate (125) --
Purchases of equipment and patents (197) (163)
------------- ------------
Net cash used in investing activities (322) (163)
------------- ------------
Financing activities
Exercise of stock options -- 249
Repayment of borrowings (225) (225)
Net cash (used in) provided by
------------- ------------
financing activities (225) 24
------------- ------------
Effect of exchange rate fluctuations on cash (39) (53)
------------- ------------
Net decrease in cash and cash equivalents (439) (1,270)
Cash and cash equivalents at beginning
of period 8,987 8,959
------------- ------------
Cash and cash equivalents at
end of period $ 8,548 $ 7,689
============= ============
See notes to condensed consolidated financial statements.
3
FUEL-TECH N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 three-month period ended March 31, 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
includes 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 March 31, 2001, the Company has
remitted approximately $277,000 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 basic weighted-average shares for the periods ended March 31, 2001
and 2000 were 18,433,000 and 18,358,000, respectively. The diluted
weighted-average shares are the same for these periods as the inclusion of the
effect of stock options and warrants and of the nil coupon non-redeemable
convertible unsecured loan notes would have been anti-dilutive.
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-month periods ended March 31, 2001 and 2000.
Total comprehensive loss was $(1,121,000) and $(349,000) for the three month
periods ended March 31, 2001 and 2000, respectively.
For the three months ended
March 31
------------------------------------------
2001 2000
------------------ -------------------
Comprehensive (loss) income:
Net loss $ (1,042,000) $ (296,000)
Change in fair value of
interest rate swap (40,000) --
Foreign currency translation (39,000) (53,000)
------------------ -------------------
$ (1,121,000) $ (349,000)
================== ===================
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."
At March 31, 2001, the Company reduced further the fair value of the interest
rate swap by approximately $20,000, thus increasing the "other liability" with a
corresponding decrease to "accumulated other comprehensive income" for this
amount. The impact of the ineffectiveness calculation 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: 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 of foreign corporations controlled by the
Company plus an allocation of domestic selling and general expenses directly
related to the foreign operations. Assets are those directly associated with
operations in the geographic area.
For the three months ended
March 31
----------------------------------
2001 2000
------------ ------------
Revenues:
Domestic $ 2,728,000 $ 3,717,000
Foreign 427,000 738,000
------------ ------------
$ 3,155,000 $ 4,455,000
============ ============
Operating loss:
Domestic $ (725,000) $ (77,000)
Foreign (143,000) (119,000)
------------ ------------
$ (868,000) $ (196,000)
============ ============
March 31, December 31,
2001 2000
------------ ------------
Assets:
Domestic $ 17,139,000 $ 19,640,000
Foreign 3,081,000 3,449,000
------------ ------------
$ 20,220,000 $ 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 first quarter of 2001 and 2000 were $3,155,000 and
$4,455,000, respectively. The year on year decline is primarily attributable to
the decrease in domestic NOx reduction utility and industrial project revenues.
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, most of the uncertainty regarding this
regulation has now been removed and the Company expects demand for its NOx
reduction technologies to increase significantly during the next few years. The
decline in domestic industrial project revenue is due to a reduction in
industrial project backlog year on year. Domestic industrial project revenue was
heightened late in 1999 and early in 2000 by environmental emissions requirement
deadlines, primarily, Title III of the Clean Air Act Amendments of 1990 (CAAA).
Domestic fuel treatment chemical revenues for the first quarter of the year were
significantly ahead of prior year. The favorable quarterly 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 has 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 stay the SIP Call, effectively exhausting all means of appeal.
In addition to the SIP Call regulation, the so-called Section 126
Petitions, which enable downwind states to obtain relief from pollutants
arising from their upwind neighbors, require major emissions sources in 12 of
the 19 aforementioned states to comply with the 85% aggregate NOx reduction
requirement by May 1, 2003.
Based on these regulatory developments, the Company expects to see
project bookings from utilities resume in the second quarter of 2001 and
beyond.
Cost of sales for the first quarter of 2001 was improved on a percentage
basis from that of the prior year, reflecting a favorable product mix impact as
domestic fuel treatment chemical revenues comprised a larger percent of total
revenues during the first quarter of 2001. The sale of the Company's chemical
business in Germany 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 increased to $2,067,000 in
the first quarter of 2001 from $1,633,000 in the comparable period 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.
Engineering resources, whose time in prior quarters would have been charged to
cost of sales, were charged to selling, general and administrative expenses.
8
Research and development expenses for the first quarter of 2001 were at
the same level as the prior year. The Company continues to pursue commercial
applications for its technologies outside of its traditional markets of NOx
reduction systems and fuel treatment chemicals, with a particular focus on it's
advanced visualization and NOxOUT Ultra products.
In the first quarter of 2001, the Company recognized income of $7,000 on
its equity investment in Fuel Tech CS GmbH, while a loss of $125,000 was
recognized on its equity investment in Clean Diesel Technologies, Inc., its 21.6
percent owned affiliate.
Interest expense was reduced to $72,000 in the first quarter of 2001 from
$90,000 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 a reduction in short term interest rates.
There was no income tax expense recording in either the first three
months of 2001 or 2000.
Liquidity and Sources of Capital
For the three months ended March 31, 2001 the Company generated cash from
operating activities of $147,000, while the company used cash of $1,078,000 for
the same period in 2000. The increased cash generation stems primarily from a
reduction in trade working capital, which served to offset the Company's
operating loss during the period.
At March 31, 2001 and December 31, 2000, the Company had cash and cash
equivalents of $8,548,000 and $8,987,000, respectively.
Working capital decreased to $11,418,000 at March 31, 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: May 4, 2001 By: /s/Ralph E. Bailey
---------------------------------------
Ralph E. Bailey
Chairman, Managing Director and Chief Executive Officer
Date: May 4, 2001 By: /s/Scott M. Schecter
---------------------------------------
Scott M. Schecter
Chief Financial Officer, Vice President and Treasurer