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, 2002
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 April 26, 2002, there were outstanding 19,349,384 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, 2002
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2002 1
Condensed Consolidated Statements of Operations for the Three- 2
Month Periods Ended March 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows for the three- 3
Month Periods ended March 31, 2002 and 2001
Notes to the Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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,
2002 2001
-------- --------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 9,140 $ 9,338
Accounts receivable, net 4,597 5,368
Prepaid expenses and other current assets 877 857
-------- --------
Total current assets 14,614 15,563
Equipment, net of accumulated depreciation of
$4,478 and $4,222, respectively 1,741 1,756
Goodwill, net of accumulated amortization of
$924 and $924, respectively 2,126 2,126
Other intangibles, net of accumulated amortization of
$795 and $786, respectively 409 411
Other 393 472
-------- --------
Total assets $ 19,283 $ 20,328
======== ========
Liabilities and stockholders' equity
Current liabilities:
Current portion of note payable $ 2,475 $ 2,700
Accounts payable 1,396 1,978
Deferred revenue -- 319
Accrued expenses 1,276 1,705
-------- --------
Total current liabilities 5,147 6,702
Other liabilities 442 491
-------- --------
Total liabilities 5,589 7,193
Stockholders' equity:
Common stock, par value $0.01 per share,
authorized 40,000,000 shares, 19,274,034
and 18,984,097 shares issued, respectively 193 190
Additional paid-in capital 90,014 87,720
Accumulated deficit (75,895) (76,207)
Accumulated other comprehensive loss (52) (68)
Treasury stock (1,098) (1,098)
Nil coupon perpetual loan notes 532 2,598
-------- --------
Total stockholders' equity 13,694 13,135
-------- --------
Total liabilities and stockholders' equity $ 19,283 $ 20,328
======== ========
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
2002 2001
----------------------------
Net sales $ 5,221 $ 3,155
Costs and expenses:
Cost of sales 2,583 1,717
Selling, general and administrative 2,355 2,067
Research and development 293 239
------------ ------------
Operating loss (10) (868)
Income (loss) from equity interest in affiliates 238 (118)
Interest expense (43) (72)
Other income, net 77 16
------------ ------------
Income (loss) before taxes 262 (1,042)
Income tax benefit 50 --
------------ ------------
Net income (loss) $ 312 $ (1,042)
============ ============
Net income (loss) per common share:
Basic $ .02 $ (.06)
============ ============
Diluted $ .01 $ (.06)
============ ============
Average number of common shares outstanding:
Basic 19,177,000 18,433,000
============ ============
Diluted 22,632,000 18,433,000
============ ============
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
2002 2001
----------------------------
Operating activities
Net cash (used in) provided by
operating activities $ (195) $ 147
------------ ------------
Investing activities
Repayment from/loan to affiliate 250 (125)
Proceeds from sale of equipment 17 --
Purchases of equipment and patents (277) (197)
------------ ------------
Net cash used in investing activities (10) (322)
------------ ------------
Financing activities
Exercise of stock options 230 --
Repayment of borrowings (225) (225)
Net cash provided by (used in) ------------ ------------
financing activities 5 (225)
------------ ------------
Effect of exchange rate fluctuations on cash 2 (39)
------------ ------------
Net decrease in cash and cash equivalents (198) (439)
Cash and cash equivalents at beginning
of period 9,338 8,987
------------ ------------
Cash and cash equivalents at
end of period $ 9,140 $ 8,548
============ ============
See notes to condensed consolidated financial statements.
3
FUEL-TECH N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(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, 2002, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
The balance sheet at December 31, 2001, 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, 2001.
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. As of March 31, 2002, the Company has remitted approximately $331,000
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-month periods ended
March 31, 2002 and 2001:
Three months ended March 31
2002 2001
----------------------
Basic weighted-average shares 19,177 18,433
Conversion of unsecured loan notes 86 --
Unexercised options and warrants 3,369 --
----------------------
Diluted weighted-average shares 22,632 18,433
======================
Note D: Total Comprehensive Income (Loss)
Total comprehensive income (loss) for the Company is comprised of net
income (loss), 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,
2002 and 2001. Total comprehensive income (loss) was $328,000 and $(1,121,000)
for the three month periods ended March 31, 2002 and 2001, respectively.
For the three months ended
March 31
------------------------------
2002 2001
----------- -----------
Comprehensive income:
Net income (loss) $ 312,000 $(1,042,000)
Foreign currency translation 2,000 (39,000)
Change in fair value of
interest rate swap 14,000 (40,000)
----------- -----------
$ 328,000 $(1,121,000)
=========== ===========
5
Note E: Derivative Financial Instruments
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 December 31, 2001, the Company recorded the fair value of the
interest rate swap, a credit of approximately $42,000, as an "other liability"
with a corresponding decrease to "accumulated other comprehensive income."
As of March 31, 2002 the Company has increased the fair value of the
interest rate swap by $14,000, thus decreasing the "other liability" with a
corresponding increase 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 adopted FASB (Financial
Accounting Standards Board) Statement No. 142, "Goodwill and Other Intangible
Assets." Under the guidance of this statement, goodwill and indefinite-lived
intangible assets will no longer be amortized but will be reviewed for
impairment annually, or more frequently, if impairment indicators arise. For the
three months ended March 31, 2001, the Company recorded goodwill amortization of
$83,000.
For the three months ended
March 31
-------------------------------
2002 2001
------------- -------------
Reported net income (loss) $ 312,000 $ (1,042,000)
Add back: Goodwill amortization -- 83,000
------------- -------------
Adjusted net income (loss) $ 312,000 $ (959,000)
============= =============
Basic earnings per share:
Reported net income (loss) $ .02 $ (.06)
Add back: Goodwill amortization -- .01
------------- -------------
Adjusted net income (loss) $ .02 $ (.05)
============= =============
Diluted earnings per share:
Reported net income (loss) $ .01 $ (.06)
Add back: Goodwill amortization -- .01
------------- -------------
Adjusted net income (loss) $ .01 $ (.05)
============= =============
The Company has completed Step 1 of the transitional goodwill
impairment test as of January 1, 2002, and there is no evidence of impairment.
Further, the estimated amortization expense related to the Company's
intangible patent assets is expected to approximate $40,000 per year for the
five-year period ending December 31, 2006.
Note G: Debt
On September 1, 1999, Fuel Tech, Inc. (FTI) entered into a $3.0 million
revolving credit facility expiring August 31, 2002, which is collateralized by
all personal property owned by FTI. FTI can use this facility for cash advances
and standby letters of credit. Cash advances under this facility bear interest
at the bank's prime rate, or at an optional rate that can be selected by FTI
which is based on the bank's Interbank Offering Rate plus 2.25%.
Also, on September 1, 1999, FTI entered into a term loan agreement with
the same bank for a total principal balance of $4.5 million. The principal
balance was to be repaid in quarterly installments of $225,000 commencing on
December 31, 1999, with a final principal payment of $2,025,000 due on August
31, 2002. Further, FTI entered into an interest rate swap transaction that fixes
the rate of interest at 8.91% on approximately 50% of the outstanding principal
balance during the term of the loan. The remaining principal balance bears
interest at the bank's prime rate, or an optional rate that can be selected by
FTI, and is based on the bank's Interbank Offering Rate plus 2.25%. The
borrowings under this facility are collateralized by all personal property owned
by FTI.
7
In 2001, amendments to this debt agreement were approved to increase
the line of credit to $6,000,000, and to extend the expiration date of both the
line of credit and the term loan to January 31, 2003. Further, on March 7, 2002
an additional amendment to the agreement required FTI to maintain a $6,500,000
compensating balance in support of the debt facility, so long as credit is
available and until the bank is repaid in full. At December 31, 2001, the full
outstanding balance of the term loan was classified as short term to reflect
FTI's intent to repay or refinance this balance during the first six months of
2002 on favorable terms to the Company, and also, uncertainty concerning FTI's
ability to comply with a debt covenant at September 30, 2002. The covenant for
the period ended September 30, 2002 and beyond, negotiated in 1999, did not
reflect the deferral in NOx reduction revenues the Company experienced due to
the delay in obtaining a final ruling on the SIP Call regulation.
Effective March 31,2002 an additional amendment eliminated the
$6,500,000 compensating balance requirement, and modified certain covenants to
more favorably support the nature of Company's business.
8
Note H: 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 selling and general expenses incurred in the
United States that are directly related to the foreign operations. Assets are
those directly associated with operations in the geographic area.
For the three months ended
March 31
----------------------------
2002 2001
------------ ------------
Revenues:
United States $ 4,603,000 $ 2,480,000
Foreign 618,000 675,000
------------ ------------
$ 5,221,000 $ 3,155,000
============ ============
Operating loss:
United States $ 4,000 $ (849,000)
Foreign (14,000) (19,000)
------------ ------------
$ (10,000) $ (868,000)
============ ============
March 31, December 31,
2002 2001
------------ ------------
Assets:
United States $ 18,033,000 $ 18,952,000
Foreign 1,250,000 1,376,000
------------ ------------
$ 19,283,000 $ 20,328,000
============ ============
9
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 March 31, 2002 and 2001 were
$5,221,000 and $3,155,000, respectively. The improvement is attributable to the
increase in domestic NOx reduction industrial and utility project revenues, as
project bookings in the fourth quarter of 2001 and the first quarter of 2002 are
beginning to generate revenues during their early phases of completion. NOx
reduction utility revenue had been negatively impacted by the delay in obtaining
a final ruling on the Environmental Protection Agency's (EPA) SIP (State
Implementation Plan) Call regulation. As discussed further below, the
uncertainty regarding this regulation has been substantially lifted and the
Company expects demand for its NOx reduction technologies to increase
significantly during the next few years. Fuel treatment chemical revenues for
the three-month period ended March 31, 2002 were at the same level as the prior
year. The first three months of the year included shipments to PacifiCorp, the
Company's new strategic agreement partner, and to a demonstration on a
Midwestern coal-fired utility boiler. Both of these utilities are using the
Company's patented Targeted-In-Furnace-Injection (TIFI) process to control the
formation of slag deposits in boilers burning Western coals. The Company
believes that utilities burning Western coals represent the largest market
opportunity for its fuel treatment chemical business. To this end, in April
2002, the Company announced a strategic agreement with PacifiCorp, which will
enable the Company's TIFI process to be expanded in the PacifiCorp network of
facilities. Offsetting the strong performance in the Western coals segment of
the fuel treatment chemical market, was a deterioration in the oil-fired
business as the high price of oil vis a vis gas has caused customers in this
segment to switch fuels, negatively impacting results.
The "SIP Call" is the federal mandate that, when introduced in 1998,
required 22 states to reduce NOx emissions 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 large 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.
Based on these regulatory developments, the Company is enjoying
accelerated interest in its programs that have led to significant project
bookings late in 2001 and early in 2002.
Cost of sales for the first quarter was improved on a percentage basis
from the same period of the prior year, reflecting improved margin performance
in both the APC and Fuel treatment chemical businesses. The primary drivers for
the improvement are the timing of progress on higher margin APC projects, and a
combination of improved logistics management and favorable product mix for the
fuel treatment chemical business.
Selling, general and administrative expenses were $2,355,000 in the
first quarter of 2002 versus $2,067,000 in the comparable period in 2001. The
increase is due primarily to revenue-related expenses, as revenue increased by
65% from the first quarter of 2001.
10
Research and development expenses for the three months ended March 31,
2002 were $293,000, an increase of $54,000 over the first three months of 2001.
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 three months ended March 31, 2002, the Company recognized a
gain of $250,000 on its equity investment in Clean Diesel Technologies, Inc.
(CDT), its 16 percent-owned affiliate. The gain results from CDT's repayment of
the full principal amount of loans made by the Company to CDT in 2000 and 2001.
Because of the continuing losses incurred by CDT, the carrying value of the
loans was reduced to zero as of December 31, 2001, based on the Company's
pro-rata share of the losses incurred. In addition, the Company recorded a
$12,000 loss on its investment in Fuel Tech CS GmbH (FTCS), a 49 percent-owned
entity. During the first three months of 2001, the Company recognized a loss of
$125,000 on its equity investment in CDT, while income of $7,000 was recorded on
its investment in FTCS.
Interest expense for the three months ended March 31, 2002 was reduced
to $43,000 from $72,000 in the comparable period in 2001, 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.
For the three months ended March 31, 2002, the Company recorded other
income of $77,000 versus $16,000 in the comparable period in 2001. The increase
stems largely from the elimination of goodwill amortization effective January 1,
2002.
An income tax benefit of $50,000 was recorded in the first quarter of
2002 which represented a reduction in the reserve for prior years' state income
tax refunds receivable. There was no income tax expense recorded in the first
three months of 2001.
Liquidity and Sources of Capital
For the three months ended March 31, 2002, the Company used cash for
operating activities in the amount of $195,000, while $147,000 was provided by
operating activities in the first quarter of 2001. The utilization of cash for
operating activities in the current quarter was driven by a slight increase in
working capital requirements as work commenced on the project bookings realized
in the fourth quarter of 2001 and the first quarter of 2002.
At March 31, 2002 and December 31, 2001, the Company had cash and cash
equivalents of $9,140,000 and $9,338,000, respectively.
11
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, 2001.
12
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
13
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 6, 2002 By: /s/ Ralph E. Bailey
---------------------------------------
Ralph E. Bailey
Chairman, Managing Director and
Chief Executive Officer
Date: May 6, 2002 By: /s/ Scott M. Schecter
---------------------------------------
Scott M. Schecter
Chief Financial Officer, Vice President
and Treasurer
14