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, 2002March 31, 2003
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
----- -------- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 under the Securities Exchange Act of 1934).
Yes X No
--- ---
As of NovemberMay 1, 2002,2003, there were outstanding 19,612,06719,683,642 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 September 30, 2002March 31, 2003
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2002March 31, 2003 1
and December 31, 20012002
Condensed Consolidated Statements of Operations for the Three and Nine- 2
Month Periods Ended September 30,March 31, 2003 and 2002 and 2001
Condensed Consolidated Statements of Cash Flows for the Three and Nine- 3
Month Periods Ended September 30,March 31, 2003 and 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
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
Item 4. Controls and Procedures 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES AND CERTIFICATIONS 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FUEL-TECH N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. Dollars,dollars, except share data)
September 30,March 31, December 31,
2003 2002 2001
--------------- ---------------
(Unaudited)
Assets
Current assets:
Assets
Current assets:
Cash and cash equivalents $ 8,1698,328 $ 9,33810,939
Accounts receivable, net 8,422 5,3688,496 8,849
Prepaid expenses and other current assets 1,386 857
-------------1,267 1,164
--------------- ---------------
Total current assets 17,977 15,56318,091 20,952
Equipment, net of accumulated depreciation of
$4,905$5,336 and $4,222,$5,118, respectively 2,034 1,7562,223 2,123
Goodwill, net of accumulated amortization of
$924 and $924, respectively 2,126 2,1262,119 2,119
Other 797 883675 675
--------------- ---------------
Total assets $ 22,93423,108 $ 20,32825,869
=============== ===============
Liabilities and stockholders' equity
Current liabilities:
Current portion of note payable $ 2,025 $ 2,700
Accounts payable 3,119 1,978
Deferred revenue -- 3193,649 5,065
Accrued expenses 1,950 1,7051,260 1,940
--------------- ---------------
Total current liabilities 7,094 6,7024,909 7,005
Long-term debt 1,575 1,800
Other liabilities 383 491257 259
--------------- ---------------
Total liabilities 7,477 7,1936,741 9,064
Stockholders' equity:
Common stock, par value $0.01 per share,
authorized 40,000,000 shares, 19,612,06719,683,642
and 18,984,09719,613,817 shares issued, respectively 197 196 190
Additional paid-in capital 90,312 87,72090,424 90,315
Accumulated deficit (74,487) (76,207)(73,669) (73,150)
Accumulated other comprehensive income (loss) 2 (68)16 10
Treasury stock (1,098)(1,133) (1,098)
Nil coupon perpetual loan notes 532 2,598532
--------------- ---------------
Total stockholders' equity 15,457 13,13516,367 16,805
--------------- ---------------
Total liabilities and stockholders' equity $ 22,93423,108 $ 20,32825,869
=============== ===============
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
2003 2002
2001 2002 2001
-------------------- ------------------------------- --------
Net sales $ 8,0338,036 $ 4,194 $ 21,275 $ 12,0905,221
Costs and expenses:
Cost of sales 4,462 1,984 11,175 5,9265,409 2,583
Selling, general and administrative 2,717 2,073 7,725 6,2052,854 2,355
Research and development 394 295 1,041 851
--------- --------- --------- ---------311 293
---------- --------
Operating income (loss) 460 (158) 1,334 (892)
(Loss) incomeloss (538) (10)
Income from equity interest in affiliates (27) (93) 196 (267)- 238
Interest expense (37) (56) (114) (194)(16) (43)
Other (expense) income, net (17) 51 254 126
--------- --------- --------- ---------
Income (loss)37 77
---------- --------
(Loss) income before taxes 379 (256) 1,670 (1,227)(517) 262
Income taxes -- --tax benefit - 50
--
--------- --------- --------- ------------------- --------
Net (loss) income $ (517) $ 312
========== ========
Net (loss) $ 379 $ (256) $ 1,720 $ (1,227)
========= ========= ========= =========
Net income (loss) per common share:
Basic $ (.03) $ .02
$ (.01) $ .09 $ (.07)
========= ========= ========= =================== ========
Diluted $ .02(.03) $ (.01) $ .08 $ (.07)
========= ========= ========= =========.01
========== ========
Average number of common shares outstanding:
Basic 19,454,000 18,558,000 19,299,000 18,530,000
========== ==========19,552,000 19,177,000
========== ==========
Diluted 22,422,000 18,558,000 22,565,000 18,530,000
========== ==========19,552,000 22,632,000
========== ==========
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)
NineThree Months Ended
September 30March 31
2003 2002
2001
-----------------------------------------------------------
Operating activities
Net cash (used in) provided byused in
operating activities $ (298)(2,137) $ 2,216
--------------(195)
------------- ------------
Investing activities
Repayment from/(loan to)from affiliate - 250 (125)
Proceeds from sale of equipment - 17 --
Purchases of equipment and patents (1,026) (608)
--------------(328) (277)
------------- ------------
Net cash used in investing activities (759) (733)
--------------(328) (10)
------------- ------------
Financing activities
Exercise of stock options 530 100108 230
Purchase of treasury shares (35) - (39)
Repayment of borrowings (675) (675)(225) (225)
------------- -------------------------
Net cash used in(used in) provided by
financing activities (145) (614)
-------------- --------------(152) 5
------------- ------------
Effect of exchange rate fluctuations on cash 33 (12)6 2
------------- --------------------------
Net (decrease) increasedecrease in cash and
cash equivalents (1,169) 857(2,611) (198)
Cash and cash equivalents at beginning
of period 10,939 9,338
8,987
------------- -------------------------
Cash and cash equivalents at
end of period $ 8,1698,328 $ 9,8449,140
============= =========================
See notes to condensed consolidated financial statements.
3
FUEL-TECH N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002March 31, 2003
(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, 2002,March 31, 2003, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.2003.
The balance sheet at December 31, 2001,2002, 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, 2001.2002.
Fuel-Tech N.V., including through 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.,control. The Company,
incorporated in 1987 under the laws of the Netherlands Antilles, is registered
at Castorweg 22--24 in Curacao under No. 1334/N.V.
4
Note B: 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.notes for the three-month period ended March 31, 2002. Such amounts have been
excluded for the three months ended March 31, 2003 as they are antidilutive due
to the net loss for the three months. 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,March 31, 2003 and 2002:
Three months ended
2003 2002
---------------------
Basic weighted-average shares 19,552 19,177
Conversion of unsecured loan notes - 86
Unexercised options and 2001:
Three months ended Nine months ended
2002 2001 2002 2001
--------------------- --------------------
Basic weighted-average shares 19,454 18,558 19,299 18,530
Conversion of unsecured loan notes 85 -- 85 --
Unexercised options and warrants 2,883 -- 3,181 --
--------------------- --------------------
Diluted weighted-average shares 22,422 18,558 22,565 18,530warrants - 3,369
---------------------
Diluted weighted-average shares 19,552 22,632
===================== ====================
Note C: Total Comprehensive (Loss) Income (Loss)
Total comprehensive (loss) income (loss) for the Company is comprised of net
(loss) 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, 2002March 31,
2003 and 2001.2002. Total comprehensive (loss) income (loss) was $385,000$(511,000) and $(206,000)$328,000 for
the three-month periods ended September 30,March 31, 2003 and 2002, and 2001,
respectively.
Total comprehensiveFor the three months ended
March 31
--------------------------------------
2003 2002
-------------- --------------
Comprehensive (loss) income:
Net (loss) income (loss) was $1,790,000 and $(1,289,000)
for the nine-month periods ended September 30, 2002 and 2001, respectively.
For the three months ended For the nine months ended
September 30 September 30
------------------------------------------ ---------------------------------------
2002 2001 2002 2001
------------------ ------------------- ----------------- -----------------
Comprehensive income (loss):
Net income (loss) $ 379,000 $ (256,000) $1,720,000 $ (1,227,000)
Foreign currency translation (6,000) 60,000 32,000 (12,000)
Change in fair value of
interest rate swap 12,000 (10,000) 38,000 (50,000)
------------------ ------------------- ----------------- -----------------
$ 385,000 $ (206,000) $1,790,000 $ (1,289,000)
================== =================== ================= =================
$ (517,000) $ 312,000
Foreign currency translation 6,000 2,000
Change in fair value of interest
rate swap - 14,000
-------------- --------------
$ (511,000) $ 328,000
============== ==============
5
Note D: 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 ratedoes not currently use any derivative instrument (an
interest rate swap)instruments 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 fair value of the interest rate swap was a
credit of approximately $42,000, and was recorded as an "other liability" with a
corresponding decrease to "accumulated other comprehensive income."
As of September 30, 2002 the Company has increased the fair value of
the interest rate swap by $38,000, thus decreasing the "other liability" with a
corresponding increase to "accumulated other comprehensive income" for this
amount. The impact of the ineffectiveness calculation for all periods presented
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 E: Stock-Based Compensation
Fuel Tech accounts for stock option grants in accordance with Accounting
Principles Board (APB) Opinion No. 25, "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.Stock Issued to
Employees." Under Fuel Tech's current plans, options may be granted at not less
than the guidancefair market value on the date of this statement, goodwillgrant, and indefinite-lived
intangible assets aretherefore, no longer amortized, but are reviewedcompensation
expense is recognized for impairment
annually, or more frequently, if impairment indicators arise. For the nine
monthsstock options granted.
If compensation expense for Fuel Tech's plans had been determined based
on the fair value at the grant dates for awards under its plans, consistent with
the method described in SFAS No. 123, Fuel Tech's net income (loss) and income
(loss) per share would have been adjusted as follows for the three-month periods
ended September 30, 2001, the Company recorded goodwill amortization of
$250,000.March 31, 2003 and 2002:
For the nine months ended
September 30
---------------------------------------------------------------------- ---------------------------- ----------------- ------------------
(in thousands) 2003 2002
2001---------------------------- ---------------------------- ----------------- ------------------ -------------------
Reported net
Net income (loss)
$1,720,000 $(1,227,000)
Add back: Goodwill amortization -- 250,000
------------------ -------------------
Adjusted netAs reported $(517) $312
As adjusted (673) 164
Basic and diluted income
(loss) $1,720,000 $ (977,000)
================== ===================
Basic earnings per share:
Reported net income (loss) $ .09 $ (.07)
Add back: Goodwill amortization -- .02
------------------ -------------------
Adjusted net income (loss) $ .09 $ (.05)
================== ===================Basic - as reported $(.03) $.02
Basic - as adjusted $(.03) $.01
Diluted earnings per share:
Reported net income (loss) $ .08 $ (.07)
Add back: Goodwill amortization -- .02
------------------ -------------------
Adjusted net income (loss) $ .08 $ (.05)
================== ===================- as reported $(.03) $.01
Diluted - as adjusted $(.03) $.01
In accordance with the provisions of SFAS No. 123, the "As adjusted"
disclosures include only the effect of stock options granted after 1994. The
Company has completed Step 1application of the transitional goodwill
impairment test as"As adjusted" disclosures presented above are not
representative of January 1, 2002, and there is no evidence of impairment.
Further, the estimated amortization expense relatedeffects SFAS No. 123 may have on such operating results in
future years due to the Company's
intangible patent assets is expectedtiming of stock option grants and considering that
options vest over a period of immediately to approximate $40,000 per year for the
five-year period ending December 31, 2006.five years.
Note F: Debt
Fuel Tech, Inc. (FTI) has a $6.0$10.0 million revolving credit facility
expiring JanuaryJuly 31, 2003,2004, 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,The borrowings under this facility
are collateralized by all personal property owned by FTI.
FTI has entered intoalso had 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 $1,575,000 due on January 31, 2003. Further, FTI entered
into an interest rate swap transaction that fixesfixed the rate of interest at 8.91%
on approximately 50% of the outstanding principal balance during the term of the
loan. This swap expired on October 22, 2002. The remaining principal balance
bearsbore interest at the bank's prime rate, or an optional rate that can be selected
by FTI, and iswas based on the bank's Interbank Offering Rate plus 2.25%. The
borrowings under this facility arewere collateralized by all personal property
owned by FTI.
The $10.0 million revolving credit facility was obtained via an
amendment, effective December 31, 2002, that increased the then existing credit
facility from $6.0 million to $10.0 million and extended the agreement until
July 31, 2004. The term loan was paid in full on January 31, 2003 using proceeds
from the line of credit.
7
Note G: Business Segment and Geographic Disclosures
The Company operates in one business segment providing air pollution
control chemicals and equipment.
Information concerning the Company's operations by geographic area is
provided below. Operating earnings represent sales less cost of products sold
and operating expenses. Foreign operating expenses include direct expenses
incurred outside of the United States by foreign corporations controlled by the
Company plus an allocation of 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
------------------------------------------ ---------------------------------------
2002 2001 2002 2001
------------------ ------------------- ----------------- ------------------
Revenues:
United States $ 7,176,000 $ 3,287,000 $19,154,000 $ 9,364,000
Foreign 857,000 907,000 2,121,000 2,726,000
------------------ ------------------- ----------------- ------------------
$ 8,033,000 $ 4,194,000 $21,275,000 $12,090,000For the three months ended
March 31
----------------------------------------
2003 2002
---------------- ------------------
Revenues:
United States $ 6,879,000 $ 4,603,000
Foreign 1,157,000 618,000
---------------- ------------------
$ 8,036,000 $ 5,221,000
================ ==================
Operating Earnings:
United States $ (585,000) $ 4,000
Foreign 47,000 (14,000)
---------------- ------------------
$ (538,000) $ (10,000)
================ ==================
March 31, December 31,
2003 2002
---------------- ------------------
Assets:
United States $21,707,000 $24,393,000
Foreign 1,401,000 1,476,000
---------------- ------------------
$23,108,000 $25,869,000
================ ================== =================== ================= ==================
Operating Earnings:
United States $ 517,000 $ (150,000) $ 1,558,000 $(1,049,000)
Foreign (57,000) (8,000) (224,000) 157,000
------------------ ------------------- ----------------- ------------------
$ 460,000 $ (158,000) $ 1,334,000 $ (892,000)
================== =================== ================= ==================
September 30, December 31,
2002 2001
------------------ -------------------
Assets:
United States $21,031,000 $18,952,000
Foreign 1,903,000 1,376,000
------------------ -------------------
$22,934,000 $20,328,000
================== ===================
8
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, 2003 and 2002 were
$8,036,000 and 2001 were
$8,033,000 and $4,194,000, respectively, while net sales for the nine months
ended September 30, 2002 and 2001 were $21,275,000 and $12,090,000,$5,221,000, respectively. The improvement is attributable to thean
increase in domestic NOx reduction utility project revenues as project bookings
in the fourth quarter of
2001 and the first quarter offrom 2002 are generatingcontinue to generate revenues duringfrom their various phases of completion.
NOx reduction utility revenue in 2001 had been negatively2002 was favorably impacted by the delay in obtaining a final ruling on the
Environmental Protection Agency's (EPA) SIP (State Implementation Plan) Call
regulation. As
discussedregulation (discussed further below, the uncertainty regarding this regulation has been
liftedbelow) that requires 19 states to reduce NOx
emissions by May 31, 2004, and the Company expects demand for its NOx reduction technologies to continue to increase significantly during the next few years.be impacted favorably by
this regulation throughout 2003 and beyond. Fuel treatment chemical revenuesrevenue for
the nine-monththree-month period ended September 30, 2002 continued
to beMarch 31, 2003 was favorably impacted by shipments
to utilities burning Western coals.western coals and by the acquisition of new oil-fired
business outside of the continental U.S. The Company believes that utilities
burning Western coals represent the largest market opportunity for its fuel
treatment chemical business and that penetration into this market isremains a
priority. In additionThe investment in new personnel in 2002 to shipmentsaddress this opportunity
has begun to PacifiCorp,pay off, as demonstrations are expected to commence in the Company's strategic agreement partner, a successful demonstration on a
midwestern coal-fired utility boiler is now in a long-term optimization phase,
and an additional demonstration on another midwestern coal-fired utility boiler
commenced before the endsecond
quarter of the third quarter.2003 at several new utilities. All of these utilities arewill be using
the Company's patented Targeted-In-Furnace-Injection (TIFI) process to control
the formation of slag deposits in boilers burning western coals. Offsetting the
strong performance in the Western coals segment of the fuel treatment chemical
market, was the continued deterioration in the oil-fired business as the high
price of oil vis a vis natural 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, and anticipates strong demand for its air pollution control
technologies over the next several years.
Cost of sales as a percentage of net sales for the third quarter and
nine-month periodsthree-month period
ended September 30, 2002, is greater thanMarch 31, 2003 increased to 67% versus 49% in the same periodsperiod of the prior
year. TheThis increase reflects a change in product mix, in favoras a larger percentage of
therevenues was realized from lower margin NOx reduction project business versus
the FUEL CHEM(R) business relative to the prior year. 9
Additionally, within the
NOx reduction project business, a significantly larger percentage of the
revenues for the first quarter of 2003 was generated by turnkey projects versus
the comparable period in 2002. When the Company is responsible for the turnkey
installation of the equipment as part of the project scope, overall project
revenues and margin dollars increase, however, the overall project margin
becomes diluted. Installation scope is not afforded the same margin in the
market place as is the sale of the Company's patented technology.
Selling, general and administrative expenses were $2,717,000$2,854,000 and
$2,073,000,$2,355,000, respectively, for the three months ended September 30, 2002March 31, 2003 and 2001, and $7,725,000 and $6,205,000, respectively for the nine months ended
September 30, 2002 and 2001.2002.
The increase is due primarily to revenue-related
expenses, as revenue increased significantly from the prior year, and
secondarily to the addition of sales personnelresources for the fuel
treatment chemical business.business and, to a lesser degree, to the addition of
resources in support of the marketing and development of the Company's
ACUITIV(TM) advanced visualization software. As noted above, market penetration
of the Company's TIFI technology is a strategic priority.
9
Research and development expenses for the quarter and nine monthsthree-months ended September 30, 2002March 31,
2003 increased marginally over the similar periodsperiod of 2001 as the2002. The Company continues
to pursue commercial applications for its technologies outside of its
traditional markets, with a particular focus on its Virtual Vantage(TM)ACUITIV advanced
visualization software and its NOxOUT Ultra process.software. The Virtual VantageACUITIV software product was commercially introduced
on June 6, 2002, and the Company recently received its firstsecond commercial order
for the software. The software from oneis currently being demonstrated at 12 additional
sites. In addition, ACUITIV version 3.2 was released during the first quarter of
its
beta sites.2003, with the primary enhancement being compatibility with Windows(R) 2000.
Although this confirms the validity of the product has been confirmed, the Company does not
expect revenues related to this product to be material for the remainder of the
year.
The Company recorded lossesIn the first quarter of $27,000 and $54,000, respectively, for
the quarter and nine months ended September 30, 2002 on its investment in Fuel
Tech CS GmbH (FTCS), a 49 percent-owned entity. For the quarter ended March 31, 2002, the Company recognized a gainincome of $250,000
on its equity investment in Clean Diesel Technologies, Inc. (CDT), its 15
percent-owned affiliate.affiliate, which was partially offset by a loss of $12,000 that
was realized on its 49 percent ownership interest in Fuel Tech CS Gmbh. The
gainincome in 2002's first quarter from CDT resulted from CDT's repayment of the full principal amount of loans
made by the Company to CDT in 2000 and 2001. Because the Company's pro-rata
share of the continuingCDT's losses incurred by
CDT,reduced the carrying value of the loans was reduced to zero as ofat
December 31, 2001, based on the Company's pro-rata shareentire loan repayment was recorded as equity income in
the first quarter of 2002. In the losses incurred. During thefirst quarter and nine months ended September 30, 2001,of 2003, the Company recognized losses
of $17,000 and $66,000, respectively ondid not
realize any income or loss from its equity investment in FTCS, while
losses of $76,000 and $211,000 were recorded on the Company's investment in CDT
for the similar periods.investments.
Interest expense for the quarter and ninethree months ended September 30,
2002March 31, 2003 was reduced
from the comparable periodsperiod in 2001, the decrease being
attributable2002 due to a reduction in the Company's average
outstanding principaldebt balance, on the
Company's term loan, as well as to a reduction in short term interest
rates.
The decline in other income and (expense) for the quarter ended September 30, 2002March 31,
2003 versus the prior year was due primarily to a reduction in interest income
from the
similar period of the prior year resulting from the decrease in short-term rates noted above.
The increase in otherNo provision for federal or state income fortaxes was recorded during the
nine monthsquarter ended September
30,March 31, 2003 due to the existence of net operating loss
carryforwards. In the first quarter of 2002, versus the comparable period in 2001 stems largely from the elimination
of goodwill amortization effective January 1, 2002, which has been offset
somewhat by reductions in interest income.
Anan 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.
No provision for federal or state income taxes was
recorded in any period due to the existence of net operating loss carryforwards.
Liquidity and Sources of Capital
For the ninethree months ended September 30, 2002,March 31, 2003, the Company used cash for
operating activities in the amount of $(298,000),$2,137,000, while $2,216,000$195,000 was provided
byused in
operating activities for the same period in 2001.2002. The slight use of cash for operating
activities in 20022003 stems largely from a reduction in accounts payable and
accrued expenses, and to a lesser extent, the timing of completion of the
NOx reduction projects. Although the Company recognizes revenue using the
percentage of completion method of accounting for long-term contracts, the
invoicing of customers typically occurs when specified contractual milestones
are achieved. The correlation between the two acts can vary from project to
project.first quarter's operating loss.
At September 30, 2002March 31, 2003 and December 31, 2001,2002, the Company had cash and cash
equivalents of $8,169,000$8,328,000 and $9,338,000,$10,939,000, respectively, while working capital
for the same two periods of time was $10,883,000$13,182,000 and $8,861,000,$13,947,000, respectively.
As mentioned in Note F, the final principal payment on FTI's term
loan of $1,575,000 is due on January 31, 2003. FTI intends to repay or finance
this amount on terms favorable to the Company.
10
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, 2001.2002.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Please refer to Note D.
Item 4. Controls and Procedures
Within 90 days prior to the filing date of this report, the Company's
certifying officers performed an evaluation of the effectiveness of the
Company's disclosure controls and procedures. The disclosure controls and
procedures were determined to be sufficient to ensure that material information
relating to the Company, including its consolidated subsidiaries, is made known
to the certifying officers by others within those entities, particularly during
the period in which this quarterly report is being prepared.
There were no significant changes in the registrant's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
11
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
NoneAdditional Exhibits 99.1 and 99.2 are furnished herewith
b. Reports on Form 8-K
None
12
FUEL-TECH N.V.
SIGNATURES &AND CERTIFICATIONS
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.
The undersigned in their capacities as Chief Executive Officer and
Chief Financial Officer of the Registrant do hereby certify that:
(i) this report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(ii) information contained in the report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant as of, and for, the periods presented in the report.
Date: November 1, 2002May 10, 2003 By: /s/ Ralph E. Bailey
-------------------
Ralph E. Bailey
Chairman, Managing Director
and Chief Executive Officer
Date: November 1, 2002May 10, 2003 By: /s/ Scott M. Schecter
---------------------
Scott M. Schecter
Chief Financial Officer,
Vice President and
Treasurer
13
I, Ralph E. Bailey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fuel-Tech N.V.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules l3a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
13
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 1, 2002May 10, 2003 By: /s/ Ralph E. Bailey
-------------------
Ralph E. Bailey
Chairman, Managing Director
and Chief Executive Officer
I, Scott M. Schecter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fuel-Tech N.V.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules l3a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
14
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 1, 2002May 10, 2003 By: /s/ Scott M. Schecter
---------------------
Scott M. Schecter
Chief Financial Officer,
Vice President and
Treasurer
15