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, 2001March 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[X]     No -----          -----[ ]

As of November 12, 2001,April 26, 2002, there were outstanding 18,651,09719,349,384 shares of Common Stock,
par value $0.01 per share, of the registrant.

================================================================================




                                 FUEL-TECH N.V.
            Form 10-Q for the three and nine-month periodsthree-month period ended September 30, 2001March 31, 2002

                                      INDEX

                                                                            Page
                                                                            ----

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

         Condensed Consolidated Balance Sheets as of September 30, 2001March 31, 2002           1
            and December 31, 2000

         Condensed Consolidated Statements of Operations for the Three
            and Nine-MonthThree-       2
         Month Periods Ended September 30,March 31, 2002 and 2001 and 2000           2

         Condensed Consolidated Statements of Cash Flows for the Nine-three-       3
         Month Period Ended September 30,Periods ended March 31, 2002 and 2001 and 2000                     3

         Notes to the Condensed Consolidated Financial Statements             4

Item 2.  Management's Discussion and Analysis of                              89
         Financial Condition and Results of Operations


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                   1113
Item 2.  Changes in Securities                                               1113
Item 3.  Defaults upon Senior Securities                                     1113
Item 4.  Submission of Matters to a Vote of Security Holders                 1113
Item 5.  Other Information                                                   1113
Item 6.  Exhibits and Reports on Form 8-K                                    1113


SIGNATURES                                                                   1214





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,March 31, December 31, 2002 2001 2000 --------------- ----------------------- -------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 9,8449,140 $ 8,9879,338 Accounts receivable, net 3,439 7,5504,597 5,368 Prepaid expenses and other current assets 965 1,181 ------------- ---------------877 857 -------- -------- Total current assets 14,248 17,71814,614 15,563 Equipment, net of accumulated depreciation of $5,002$4,478 and $4,489,$4,222, respectively 1,625 1,5841,741 1,756 Goodwill, net of accumulated amortization of $840$924 and $590,$924, respectively 2,200 2,4502,126 2,126 Other intangibles, net of accumulated amortization of $840$795 and $809,$786, respectively 467 458409 411 Other 694 879 --------------- ---------------393 472 -------- -------- Total assets $ 19,23419,283 $ 23,089 =============== ===============20,328 ======== ======== Liabilities and stockholders' equity Current liabilities: Current portion of note payable $ 9002,475 $ 9002,700 Accounts payable 1,390 2,4801,396 1,978 Deferred revenue -- 319 Accrued expenses 1,088 1,796 --------------- ---------------1,276 1,705 -------- -------- Total current liabilities 3,378 5,176 Note payable 2,025 2,7005,147 6,702 Other liabilities 496 646 --------------- ---------------442 491 -------- -------- Total liabilities 5,899 8,5225,589 7,193 Stockholders' equity: Common stock, par value $0.01 per share, authorized 40,000,000 shares, 18,623,34719,274,034 and 18,526,97218,984,097 shares issued, respectively 186 185193 190 Additional paid-in capital 86,194 86,09790,014 87,720 Accumulated deficit (75,802) (74,574)(75,895) (76,207) Accumulated other comprehensive income 35 97loss (52) (68) Treasury stock (1,098) (1,058)(1,098) Nil coupon perpetual loan notes 3,820 3,820 --------------- ---------------532 2,598 -------- -------- Total stockholders' equity 13,335 14,567 --------------- ---------------13,694 13,135 -------- -------- Total liabilities and stockholders' equity $ 19,23419,283 $ 23,089 =============== ===============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 Nine Months Ended September 30 September 30March 31 2002 2001 2000 2001 2000 -------------------- ------------------------------------------------- Net sales $ 4,1945,221 $ 5,981 $ 12,090 $ 16,2873,155 Costs and expenses: Cost of sales 1,984 2,944 5,926 8,9922,583 1,717 Selling, general and administrative 2,073 1,826 6,205 5,4322,355 2,067 Research and development 295 229 851 705 Closing costs related to German subsidiary -- -- -- 528 ---------- ---------- ----------- ----------293 239 ------------ ------------ Operating loss (10) (868) Income (loss) income (158) 982 (892) 630 Loss from equity interest in affiliates (93) (80) (267) (206)238 (118) 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)(43) (72) Other income, net 51 20 126 22 ---------- ---------- ----------- ---------- (Loss) income77 16 ------------ ------------ Income (loss) before taxes (256) 832 (1,227) 211262 (1,042) Income taxestax benefit 50 -- (79) -- (79) ---------- ---------- ----------- ---------------------- ------------ Net income (loss) $ 312 $ (1,042) ============ ============ Net income $ (256) $ 753 $ (1,227) $ 132 ========== ========== =========== ========== Net (loss) income per common share: Basic $ (.01).02 $ .04 $ (.07)(.06) ============ ============ Diluted $ .01 ========== ========== =========== ========== Diluted $ (.01) $ .04 $ (.07) $ .01 ========== ========== =========== ==========(.06) ============ ============ Average number of common shares outstanding: Basic 18,558,000 18,411,000 18,530,000 18,384,000 ========== ========== ========== ==========19,177,000 18,433,000 ============ ============ Diluted 18,558,000 19,633,000 18,530,000 19,760,000 ========== ========== ========== ==========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) 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 ============= =============
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 September 30, 2001March 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 nine-monththree-month period ended September 30, 2001,March 31, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001.2002. The balance sheet at December 31, 2000,2001, 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, 2000.2001. 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. This charge was recorded as part of operating income in the condensed consolidated statement of operations. As of September 30, 2001,March 31, 2002, the Company has remitted approximately $305,000$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 and nine-monththree-month periods ended September 30, 2001March 31, 2002 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 ==================== ===================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 and nine-monththree-month periods ended September 30, 2001March 31, 2002 and 2000.2001. Total comprehensive income (loss) was $(206,000)$328,000 and $675,000$(1,121,000) for the three month periods ended September 30,March 31, 2002 and 2001, and 2000, respectively. Total comprehensiveFor the three months ended March 31 ------------------------------ 2002 2001 ----------- ----------- Comprehensive income: Net 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 ============(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 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,December 31, 2001, the Company recorded the fair value of the interest rate swap, a credit of approximately $20,000,$42,000, as an "other liability" with a corresponding decrease to "accumulated other comprehensive income." As of September 30, 2001March 31, 2002 the Company has reduced furtherincreased the fair value of the interest rate swap by $30,000,$14,000, thus increasingdecreasing the "other liability" with a corresponding decreaseincrease 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 adoptadopted FASB (Financial Accounting Standards Board) Statement No. 142, Goodwill"Goodwill and Other Intangible Assets which was approved on September 29, 2001.Assets." Under the guidance of this statement, Goodwillgoodwill 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 impairment.arise. For the ninethree months ended September 30,March 31, 2001, the Company recorded goodwill amortization of $250,000.$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 domestic 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 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 ========== ===========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 ============ ============
September 30,Operating loss: United States $ 4,000 $ (849,000) Foreign (14,000) (19,000) ------------ ------------ $ (10,000) $ (868,000) ============ ============ March 31, December 31, 2002 2001 2000 ------------ ------------ Assets: Domestic $16,891,000 $19,640,000United States $ 18,033,000 $ 18,952,000 Foreign 2,343,000 3,449,000 ----------- ----------- $19,234,000 $23,089,000 =========== =========== 71,250,000 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 September 30,March 31, 2002 and 2001 were $5,221,000 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,$3,155,000, respectively. The year on year declineimprovement is attributable to the decreaseincrease in domestic NOx reduction industrial and utility project revenues. The declinerevenues, as project bookings in domestic industrial project revenue is duethe fourth quarter of 2001 and the first quarter of 2002 are beginning to a NOx reduction regulation, as mandated in Title IIIgenerate revenues during their early phases 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.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. Domestic fuelFuel treatment chemical revenues for the three-month period ended March 31, 2002 were at the same level as the prior year. The first three and nine month periods ended September 30, 2001 were in excessmonths of the prior year periods by approximately $700,000 and $2,700,000, respectively. The favorable results were attributableincluded shipments to two primary factors, namely,PacifiCorp, the extensive burning of oil at key customer locationsCompany's new strategic agreement partner, and to the continued developmenta demonstration on a Midwestern coal-fired utility boiler. Both of new business opportunities forthese utilities are using the Company's patented targeted-in-furnace-injection technology.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 further reduce NOx in 22 statesemissions 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. 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 expectsis enjoying accelerated interest in its programs that have led to seesignificant project bookings from utilities resume towards the end oflate in 2001 and beyond.early in 2002. Cost of sales for the thirdfirst quarter and nine month year to date periods haswas improved on a percentage basis from the same periodsperiod 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 as domesticfor the 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.business. Selling, general and administrative expenses were $2,073,000$2,355,000 in the thirdfirst quarter of 20012002 versus $1,826,000$2,067,000 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 2000.2001. The increase is due primarily to a refocusingrevenue-related expenses, as revenue increased by 65% from the first quarter 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.2001. 10 Research and development expenses for the ninethree months ended September 30, 2001 and 2000March 31, 2002 were $851,000 and $705,000, respectively.$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 ninethree months ended September 30,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 $66,000$125,000 on its equity investment in Fuel Tech CS GmbH, a 49 percent-owned entity, the majorityCDT, while income of which being attributable to a non-cash charge related to a decrease in the amortization period for goodwill. A loss of $201,000$7,000 was recognizedrecorded on the Company's equityits investment in Clean Diesel Technologies, Inc., its 21.6 percent-owned affiliate. ForFTCS. Interest expense for the ninethree months ended September 30, 2001, the Company recorded other income of $126,000 versus $22,000March 31, 2002 was reduced to $43,000 from $72,000 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. 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 ninethree months of 2001. Liquidity and Sources of Capital For the ninethree months ended September 30,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 2000, the Company generated cash from operating activitiesfirst quarter 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.2002. At September 30, 2001March 31, 2002 and December 31, 2000,2001, the Company had cash and cash equivalents of $9,844,000$9,140,000 and $8,987,000,$9,338,000, 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. 911 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. 102001. 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 1113 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, 2001May 6, 2002 By: /s/Ralph E. Bailey --------------------------------------- Ralph E. Bailey Chairman, Managing Director and Chief Executive Officer Date: November 12, 2001May 6, 2002 By: /s/Scott M. Schecter --------------------------------------- Scott M. Schecter Chief Financial Officer, Vice President and Treasurer 1214