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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, 2000
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 3, 2000, there were outstanding 18,526,972 shares of Common
Stock, par value $0.01 per share, of the registrant.
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FUEL-TECH N.V.
Form 10-Q for the three and nine month periods ended September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000 1
and December 31, 1999
Condensed Consolidated Statements of Operations for the Three and Nine 2
Month Periods Ended September 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the Nine 3
Month Periods Ended September 30, 2000 and 1999
Notes to the Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
<PAGE>
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)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,324 $ 8,959
Accounts receivable, net 5,835 9,636
Prepaid expenses and other current assets 1,066 698
------------- ---------------
Total current assets 17,225 19,293
Equipment, net of accumulated depreciation of
$4,246 and $3,948, respectively 1,506 1,428
Goodwill, net of accumulated amortization of
$506 and $256, respectively 2,533 2,784
Other intangibles, net of accumulated amortization of
$862 and $826, respectively 554 579
Other 875 380
--------------- ---------------
Total assets $ 22,693 $ 24,464
=============== ===============
Liabilities and stockholders' equity
Current liabilities:
Current portion of note payable $ 900 $ 900
Accounts payable 2,223 4,077
Accrued expenses 1,677 2,190
--------------- ---------------
Total current liabilities 4,800 7,167
Note payable 2,925 3,375
Other liabilities 681 231
Stockholders' equity:
Common Stock, par value $0.01 per share,
authorized 40,000,000 shares, 18,526,972 and
18,328,673 shares issued and outstanding, respectively 185 182
Additional paid-in capital 86,101 85,693
Accumulated deficit (74,859) (74,989)
Accumulated other comprehensive income (loss) 102 (25)
Treasury stock (1,058) (1,058)
Nil coupon perpetual loan notes 3,816 3,888
--------------- ---------------
Total liabilities and stockholders' equity $ 22,693 $ 24,464
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
1
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FUEL-TECH N.V.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands of U.S. dollars, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales $ 5,981 $ 7,288 $ 16,287 $ 24,468
Costs and expenses:
Cost of sales 2,944 4,016 8,992 14,178
Selling, general and administrative 1,826 2,036 5,432 6,284
Research and development 229 261 705 541
Closing costs related to German subsidiary -- -- 528 --
-------- ---------- -------- --------
Operating income 982 975 630 3,465
Loss from equity interest in affiliates (80) -- (206) --
Interest expense (90) (96) (273) (239)
Other income (expense):
Gain on sale of German subsidiary's
chemical business -- -- 269 --
Cumulative translation loss related to
German subsidiary -- -- (231) --
Other income, net 20 24 22 78
--------- -------- -------- -------
Income before taxes 832 903 211 3,304
Income taxes (79) (365) (79) (1,040)
----------- --------- ----------- ----------
Net income $ 753 $ 538 $ 132 $ 2,264
========== ======== ========== ========
Net income per common share:
Basic $ .04 $ .03 $ .01 $ .13
=========== ========== =========== =========
Diluted $ .04 $ .03 $ .01 $ .12
=========== ========== =========== =========
Average number of common shares outstanding:
Basic 18,411,000 17,683,000 18,384,000 17,475,000
========== ========== ========== ==========
Diluted 19,633,000 19,970,000 19,760,000 18,985,000
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
2
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FUEL-TECH N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
2000 1999
------------------------------
<S> <C> <C>
Operating activities
Net cash provided by operating activities $ 2,429 $ 2,096
------------- -------------
Investing activities
Investment in affiliates (341) --
Purchase of 50% investment in Nalco Fuel Tech -- (1,958)
Purchases of equipment and patents (505) (688)
------------- -------------
Net cash used in investing activities (846) (2,646)
------------- -------------
Financing activities
Issuance of common shares -- (45)
Exercise of stock options 336 178
Purchase and retirement of nil coupon loan notes -- (444)
Repayment of borrowings (450) (3,000)
Proceeds from borrowings -- 4,500
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Net cash (used in) provided by
financing activities (114) 1,189
------------- -------------
Effect of exchange rate fluctuations on cash (104) (60)
------------- -------------
Net increase in cash and cash equivalents 1,365 579
Cash and cash equivalents at beginning
of period 8,959 5,792
------------- -------------
Cash and cash equivalents at
end of period $ 10,324 $ 6,371
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
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FUEL-TECH N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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, 2000,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
The balance sheet at December 31, 1999, 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, 1999.
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
The Company's net income on a consolidated basis for the nine months
ended September 30, 2000 included a net charge of $490,000 related to the
restructure of its European operations in an effort to consolidate its business
and enhance profitability in this market. In the second quarter, 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. As part of the restructure, the following transactions were recorded
at June 30, 2000:
Fuel Tech GmbH's NOxOUT chemical business has been sold to a new entity
in Germany in which the Company will retain a 49% ownership interest. The
selling price is dependent on future results of the chemical business, but will
not be less than 1,250,000 Deutchmarks (approximately $600,000), paid out over 3
years. The gain on this transaction of $269,000 was recorded in other income and
expense in the condensed consolidated statement of operations.
Fuel Tech GmbH has recorded a charge of $528,000 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 September
30, 2000, the Company has remitted approximately $285,000 related to the
reserved closing costs.
Lastly, the cumulative foreign currency translation loss related to Fuel
Tech GmbH of $231,000, which is a non-cash charge, was recognized as other
income and expense in the condensed consolidated statement of operations.
4
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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, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
2000 1999 2000 1999
---------------------- -------------------
<S> <C> <C> <C> <C>
Basic weighted-average shares 18,411 17,683 18,384 17,475
Conversion of unsecured loan notes 471 477 486 629
Unexercised options and warrants 751 1,810 890 881
-------------------- -------------------
Diluted weighted-average shares 19,633 19,970 19,760 18,985
==================== ===================
</TABLE>
Note D: Total Comprehensive Income
Total comprehensive income for the Company is comprised of net income and
the impact of foreign currency translation for the three and nine month periods
ended September 30, 2000 and 1999. Total comprehensive income was $675,000 and
$645,000 for the three month periods ended September 30, 2000 and 1999,
respectively. The foreign currency translation adjustment component of total
comprehensive income was $(78,000) and $107,000 for the three month
periods ended September 30, 2000 and 1999, respectively.
Total comprehensive income was $259,000 and $2,204,000 for the nine month
periods ended September 30, 2000 and 1999, respectively. The foreign currency
translation adjustment component of total comprehensive income was $(104,000)
and $(60,000) for the nine month periods ended September 30, 2000 and 1999,
respectively. Accumulated other comprehensive income on the condensed
consolidated balance sheet increased by $231,000 during the second quarter of
2000 to reflect the transfer to income of the cumulative foreign currency loss
on the German subsidiary.
<TABLE>
<CAPTION>
For the three months ended September 30 For the nine months ended September 30
------------------------------------------ ---------------------------------------
2000 1999 2000 1999
------------------ ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Comprehensive income:
Net income $ 753,000 $ 538,000 $ 132,000 $ 2,264,000
Foreign currency translation (78,000) 107,000 (104,000) (60,000)
Foreign currency loss on German
subsidiary -- -- 231,000 --
----------- --------- ----------- -----------
$ 675,000 $ 645,000 $ 259,000 $ 2,204,000
=========== ========= =========== ===========
</TABLE>
5
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Note E: 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 of the geographic area.
<TABLE>
<CAPTION>
For the three months ended September 30 For the nine months ended September 30
------------------------------------------ ---------------------------------------
2000 1999 2000 1999
------------------ ------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Domestic $ 4,865,000 $ 5,708,000 $ 13,868,000 $ 17,618,000
Foreign 1,116,000 1,580,000 2,419,000 6,850,000
----------- ----------- ------------ ------------
$ 5,981,000 $ 7,288,000 $ 16,287,000 $ 24,468,000
=========== =========== ============ ============
Operating Earnings:
Domestic $ 990,000 $978,000 $ 1,579,000 $ 2,574,000
Foreign (8,000) (3,000) (949,000) 891,000
----------- ----------- ------------ ------------
$ 982,000 $ 975,000 $ 630,000 $ 3,465,000
=========== =========== ============ ============
September 30, December 31,
2000 1999
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Assets:
Domestic $19,493,000 $22,020,000
Foreign 3,200,000 2,444,000
----------- -----------
$22,693,000 $24,464,000
=========== ===========
</TABLE>
6
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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 third quarter of 2000 and 1999 were $5,981,000 and
$7,288,000, respectively while net sales for the nine months ended September 30,
2000 and 1999 were $16,287,000 and $24,468,000, respectively. The year on year
decline is primarily attributable to the decrease in domestic NOx reduction
utility project revenue due to 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 during the next few years. The impact of high crude oil prices, which
had negatively impacted revenues derived from the sale of fuel treatment
chemicals in the United States, has lessened as some of the Company's customers
have switched fuels back to oil from the use of natural gas. The Company has
continued to focus its efforts on the industrial sector of the NOx reduction
market both in the United States and in Europe, with emphasis on municipal solid
waste facilities. The Company's year to date results have benefited from the
improved performance in these markets.
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 Clean Air Act Amendments of 1990 (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. Although the NOx
reduction requirement date was moved back one year to May of 2004, nineteen
states must now complete and issue their State Implementation Plans for NOx
reduction by late October of this year. These plans will potentially impact
seven to eight hundred utility boilers and four to five hundred industrial
units.
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 22
aforementioned states to comply with the 85% aggregate NOx reduction by May 1,
2003.
The Company expects to see project bookings from utilities resume in
early 2001 and beyond due to these regulations.
In October, 2000 the Company and American Electric Power ("AEP"), one of
the United States' largest generators of electricity with more than 38,000
megawatts of generating capacity, announced that they had executed an agreement
for the potential use of the Company's Selective Non-Catalytic Reduction (SNCR)
technology on AEP's coal-fired power plants. The Company will be the sole-source
SNCR provider to AEP for the term of the agreement, which expires on the earlier
of December 31, 2007 or through the date that AEP achieves all required Federal,
State and Local NOx and Ozone requirements. The agreement gives AEP guaranteed
priority status for Fuel Tech's services on units in AEP's generating fleet on
which AEP decides to use SNCR technology during an expected period of
unprecedented demand for the technology. This agreement with AEP also provides
the Company with additional flexibility in an emissions reduction procurement
marketplace that will become increasingly dynamic as NOx reduction deadlines
approach (May 2003 and May 2004).
Towards the end of the second quarter, the Company announced that it had
obtained a worldwide license agreement with SFA International, Inc., a producer
of high purity specialty chemicals, for that entity's intellectual property
related to the manufacturing of liquid petroleum fuel additives. This agreement
is expected to strengthen the Company's fuel treatment chemical business
internationally.
7
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Cost of sales for the third quarter of 2000 was reduced on a percentage
basis from that of the prior year reflecting improved margins on fuel treatment
chemical sales in the United States and on NOx reduction industrial project
business. Full year gross margin percentages remain slightly ahead of prior year
driven by the cost performance of domestic and international NOx reduction
industrial projects.
Selling, general and administrative expenses decreased to $1,826,000 in
the third quarter of 2000 from $2,036,000 in the comparable period in 1999. For
the nine months ended September 30, 2000 and 1999, administrative expenses
declined to $5,432,000 from $6,284,000. The decrease is due primarily to a
reduction in revenue-based expenses, such as sales commissions to employees and
agents.
Research and development expenses were $229,000 in the third quarter of
2000 versus $261,000 in the comparable period in 1999. On a year to date basis,
the increase in research and development expenses to $705,000 from $541,000 is
due to work performed on the Company's advanced computing and visualization
technologies. The Company is actively pursuing commercial applications for its
technologies outside of its traditional markets of NOx reduction systems and
fuel treatment chemicals.
In the third quarter of 2000, the Company recognized income of $19,000 on
it's equity investment in Fuel Tech CS, GmbH, the company which purchased the
NOxOUT chemical business from Fuel Tech GmbH, a wholly owned subsidiary of the
Company, as noted previously. Also in the third quarter of 2000, the Company
recognized a loss of $99,000 on its equity investment in Clean Diesel
Technologies, Inc (CDTI). This loss reduced the basis of the Company's
investment in CDTI to zero as of September 30, 2000.
Interest expense was reduced to $90,000 in the third quarter of 2000 from
$96,000 in the comparable period in 1999. For the nine months ended September
30, 2000 and 1999, interest expense increased to $273,000 from $239,000. The
increase is attributable to the take down of a $4.5 million term loan from the
Company's existing bank on September 1, 1999, which was used to satisfy the
Company's remaining obligations to Nalco Chemical Company ("Nalco"). Refer to
the Company's annual report on Form 10K for information regarding this
transaction. Among the obligations repaid was a $2.5 million loan due to Nalco,
as well as a contingent payment obligation.
Income tax expense of $79,000 was recorded in the third quarter of 2000.
The 1999 expense for the three and nine months ended September 30, 1999 was
$365,000 and $1,040,000 respectively. This expense was largely a non-cash charge
because the Company effected a quasi-reorganization on March 31, 1985, and
reduced the value of certain assets. Tax benefits resulting from the utilization
of tax loss carryforwards existing as of the date of the quasi-reorganization
are required to be excluded from the Company's results of operations and
recorded as an increase to additional paid-in capital when realized. In 1999,
the Company utilized the remaining tax loss carryforwards that were generated in
periods prior to the Company's quasi-reorganization.
Liquidity and Sources of Capital
For the nine months ended September 30, 2000 and 1999, the Company
generated cash of $2,429,000 and $2,096,000, respectively, from operating
activities.
At September 30, 2000 and December 31, 1999, the Company had cash and
cash equivalents of $10,324,000 and $8,959,000, respectively. The cash increase
stems largely from the completion of several large projects during the first
half of 2000.
Working capital increased slightly to $12,425,000 at September 30, 2000
from $12,126,000 at December 31, 1999.
Derivative Financial Instruments
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.
8
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The Company is also exposed to changes in interest rates primarily due to
its long-term debt arrangement. The Company uses interest rate derivative
instruments (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. A hypothetical 100 basis point adverse move
in interest rates along the entire interest rate yield curve would not have had
a materially adverse effect on interest expense during the quarter ended
September 30, 2000.
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, 1999.
9
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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
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
10
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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 3, 2000 By: /s/Ralph E. Bailey
---------------------------------------
Ralph E. Bailey
Chairman, Managing Director and Chief
Executive Officer
Date: November 3, 2000 By: /s/Scott M. Schecter
---------------------------------------
Scott M. Schecter
Chief Financial Officer, Vice President
and Treasurer
11
