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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 June 30, 2004
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 22-24 695 East Main 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 July 30, 2004, there were outstanding 19,514,835 shares of Common Stock,
par value $0.01 per share, of the registrant.
===============================================================================
FUEL-TECH N.V.
Form 10-Q for the six-month period ended June 30, 2004
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2004 1
and December 31, 2003
Condensed Consolidated Statements of Operations for the Three and Six 2
Month Periods Ended June 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for the Six 3
Month Periods Ended June 30, 2004 and 2003
Notes to the Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 8
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 13
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)
June 30, December 31,
2004 2003
--------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,147 $ 7,812
Accounts receivable, net 6,454 6,095
Prepaid expenses and other current assets 1,830 1,107
--------------- ---------------
Total current assets 13,431 15,014
Equipment, net of accumulated depreciation of
$6,528 and $6,165, respectively 3,012 2,127
Goodwill 2,119 2,119
Other intangible assets, net of accumulated amortization
of $72 and $24, respectively 1,226 1,274
Other 845 1,064
--------------- ---------------
Total assets $ 20,633 $ 21,598
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,095 $ 2,244
Accrued expenses 724 1,744
--------------- ---------------
Total current liabilities 3,819 3,988
Other liabilities 291 299
--------------- ---------------
Total liabilities 4,110 4,287
Stockholders' equity:
Common stock, par value $0.01 per share,
authorized 40,000,000 shares, 19,514,835
and 19,621,503 shares issued, respectively 195 196
Additional paid-in capital 88,584 89,698
Accumulated deficit (72,807) (72,030)
Accumulated other comprehensive income 19 48
Treasury stock -- (1,133)
Nil coupon perpetual loan notes 532 532
--------------- ---------------
Total stockholders' equity 16,523 17,311
--------------- ---------------
Total liabilities and stockholders' equity $ 20,633 $ 21,598
=============== ===============
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 Six Months Ended
June 30 June 30
2004 2003 2004 2003
-------------------- ---------------------
Net sales $ 7,352 $ 9,968 $ 13,504 $ 18,004
Costs and expenses:
Cost of sales 4,196 6,411 7,412 11,820
Selling, general and administrative 3,114 2,750 6,266 5,604
Research and development 270 295 573 606
---------- --------- ---------- ---------
Operating (loss) income (228) 512 (747) (26)
Interest expense -- (9) -- (25)
Other (loss) income, net (43) 97 (30) 134
---------- --------- ---------- ---------
Income before taxes (271) 600 (777) 83
Income taxes -- -- -- --
---------- --------- ---------- ---------
Net (loss) income $ (271) $ 600 $ (777) $ 83
========== ========= ========== =========
Net (loss) income per common share:
Basic $ (.01) $ .03 $ (.04) $ --
========== ========= ========== ==========
Diluted $ (.01) $ .03 $ (.04) $ --
========== ========= ========== ==========
Average number of common shares outstanding:
Basic 19,512,000 19,582,000 19,508,000 19,571,000
========== ========== ========== ==========
Diluted 19,512,000 22,147,000 19,508,000 22,089,000
========== ========== ========== ==========
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)
Six Months Ended
June 30
2004 2003
------------------------------
OPERATING ACTIVITIES
Net cash used in
operating activities $ (1,152) $ (2,426)
------------- -------------
INVESTING ACTIVITIES
Purchases of equipment and patents (1,505) (668)
------------- -------------
Net cash used in investing activities (1,505) (668)
------------- -------------
FINANCING ACTIVITIES
Exercise of stock options 21 153
Purchase of treasury shares -- (35)
Repayment of borrowings -- (1,800)
------------- -------------
Net cash provided by (used in)
financing activities 21 (1,682)
------------- -------------
Effect of exchange rate fluctuations on cash (29) (3)
------------- -------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (2,665) (4,779)
Cash and cash equivalents at beginning
of period 7,812 10,939
------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,147 $ 6,160
============= =============
See notes to condensed consolidated financial statements.
3
FUEL-TECH N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(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 six-month period ended June 30, 2004, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004.
The balance sheet at December 31, 2003, 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, 2003.
Fuel-Tech N.V. through its subsidiaries (the "Company"), is a technology
company active in the business of air pollution 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. Such amounts have been excluded for the three and six-month periods ended
June 30, 2004, as they are antidilutive to the net loss for these periods. The
following table sets forth the weighted-average shares (in thousands) used in
calculating the earnings per share for the three and six month periods ended
June 30, 2004 and 2003:
Three months ended Six months ended
2004 2003 2004 2003
---------------------- -------------------
Basic weighted-average shares 19,512 19,582 19,508 19,571
Conversion of unsecured loan notes -- 85 -- 85
Unexercised options and warrants -- 2,480 -- 2,433
---------------------- --------------------
Diluted weighted-average shares 19,512 22,147 19,508 22,089
====================== ===================
NOTE C: TOTAL COMPREHENSIVE (LOSS) INCOME
Total comprehensive (loss) income for the Company is comprised of net
(loss) income and the impact of foreign currency translation. The total
comprehensive (loss) income was $(278,000) and $592,000 for the three-month
periods ended June 30, 2004 and 2003, respectively. The total comprehensive
(loss) income was $(806,000) and $81,000 for the six-month periods ended June
30, 2004 and 2003, respectively.
For the three months ended June 30 For the six months ended June 30
------------------------------------------ --------------------------------------
2004 2003 2004 2003
------------------ ------------------- ---------------- --------------------
Comprehensive (loss) income:
Net (loss) income $ (271,000) $ 600,000 $ (777,000) $ 83,000
Foreign currency translation (7,000) (8,000) (29,000) (2,000)
------------------ ------------------- ---------------- ------------------
$ (278,000) $ 592,000 $ (806,000) $ 81,000
================== =================== ================ ==================
5
NOTE D: DERIVATIVE FINANCIAL INSTRUMENTS
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.
NOTE E: STOCK-BASED COMPENSATION
Fuel Tech accounts for stock option grants in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Under Fuel Tech's current plan, options may be granted at not less
than the fair market value on the date of grant, and therefore, no compensation
expense is recognized for the stock 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, "Accounting for Stock-Based Compensation,"
Fuel Tech's net loss and loss per share would have been adjusted as follows for
the three and six-month periods ended June 30, 2004 and 2003:
(in thousands) For the three months For the six months ended
ended June 30 June 30
2004 2003 2004 2003
------------------------------------------------------------
Net (loss) income
As reported $(271) $600 $ (777) $ 83
As adjusted (532) 334 (1,206) (339)
Basic and diluted
(loss) income per share:
Basic - as reported $(.01) $.03 $(.04) $ -
Basic - as adjusted $(.03) $.02 $(.06) $(.02)
Diluted - as reported $(.01) $.03 $(.04) $ -
Diluted - as adjusted $(.03) $.02 $(.06) $(.02)
The application of the "As adjusted" disclosures presented above are not
representative of the effects SFAS No. 123 may have on such operating results in
future years due to the timing of stock option grants and considering that
options vest over a period of immediately to four years.
6
NOTE F: DEBT
Fuel Tech, Inc. (FTI) had a $10.0 million revolving credit facility
expiring July 31, 2004, which was collateralized by all personal property owned
by FTI. Effective June 30, 2004, FTI amended the facility to increase the line
to $15,000,000, and to extend the expiration date until July 31, 2006. FTI can
use this facility for cash advances and standby letters of credit. Cash advances
under this facility bear interest based on the following:
- The Bank Prime Rate reduced by a range of zero to 50 basis points, or
- The Bank Interbank Offering Rate increased by a range of 200 to 250
basis points
The Company can choose which rate to apply to borrowings. At June 30, 2004,
there are no borrowings outstanding on the facility.
NOTE G: BUSINESS SEGMENT AND GEOGRAPHIC DISCLOSURES
The Company operates in one business segment providing technology
solutions, including equipment and specialty chemicals, to operators of utility
and industrial boilers that improve boiler performance and reduce emissions of
nitrogen oxides.
Information concerning the Company's operations by geographic area is
provided below. Operating income (loss) represents 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 June 30 For the six months ended June 30
------------------------------------------ ---------------------------------------
2004 2003 2004 2003
------------------ ------------------- ----------------- ------------------
Revenues:
United States $6,352,000 $8,948,000 $10,929,000 $15,858,000
Foreign 1,000,000 1,020,000 2,575,000 2,146,000
------------------ ------------------- ----------------- ------------------
$7,352,000 $9,968,000 $13,504,000 $18,004,000
================== =================== ================= ==================
Operating income (loss):
United States $ (110,000) $669,000 $ (689,000) $ 97,000
Foreign (118,000) (157,000) (58,000) (123,000)
------------------- ------------------- ----------------- ------------------
$ (228,000) $ 512,000 $ (747,000) $ (26,000)
=================== =================== ================= ==================
June 30, December 31,
2004 2003
------------------ -------------------
Assets:
United States $19,045,000 $19,487,000
Foreign 1,588,000 2,111,000
------------------ -------------------
$20,633,000 $21,598,000
================== ===================
7
FUEL-TECH N.V.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Net sales for the three months ended June 30, 2004 and 2003 were
$7,352,000 and $9,968,000, respectively, while net sales for the six months
ended June 30, 2004 and 2003 were 13,504,000 and 18,004,000, respectively. The
year on year decline for both periods reflects the expected reduction in
revenues derived from the NOx reduction project business. As referred to in
previous filings, although the Environmental Protection Agency's (EPA) SIP
(State Implementation Plan) Call regulation is effective as of May 31, 2004,
there are several factors that have led to a slowing of equipment orders in the
air pollution control business in recent months. Depressed NOx allowance prices
for 2004, which are the result of weak demand for power and the existence of a
shortened ozone season, have caused some utilities to delay capital spending and
to meet their requirements on a short-term basis through the purchase of
allowances and other temporary means. In addition, many utilities continue to
experience significant capital constraints. Based on these market factors, the
air pollution control business did weaken during the latter portion of 2003, and
was expected to be weak during the first half of 2004. It is expected that the
second half of 2004 will start to show improvement, with increased strength in
2005 and 2006. Fuel Tech continues to work towards developing alliance
agreements with critical customers as they look to finalize their compliance
plans.
The decline in NOx reduction project revenues for the quarter was
partially offset by a 67% increase in Fuel treatment chemical revenues, as this
product line contributed revenues at record levels during the first half of
2004. Revenues derived from Western coal-fired utility boilers had the largest
year on year impact. Contributions from the customer accounts acquired from
Martin Marietta Magnesia Specialties, LLC on September 30, 2003, also
contributed to the increase.
Fuel Tech believes that its success on several Western coal-fired utility
boilers, along with intensely focused sales and marketing efforts and the
utilization of strategic partners in related businesses, will lead to further
penetration of the Western coal-fired utility market in the near future. This
market represents the largest market opportunity for the fuel treatment chemical
business and penetration into this market is a priority. The Company's TIFI
(targeted in-furnace injection) technology alleviates the slagging and fouling
issues associated with burning coals that are high in low-melting-point ash
constituents, such as sodium. Fuel Tech has received three orders for
demonstrations on coal-fired boilers at critical utilities in 2004, and
additional orders are expected.
Cost of sales as a percentage of net sales for the three-month period
ended June 30, 2004 declined to 57% from 64% in the second quarter of the prior
year. On a year to date basis the cost of sales percentage is 55% and 66%,
respectively for 2004 and 2003. A significantly larger percentage of the
revenues for the second quarter and first six months of 2003 were generated by
NOx reduction projects (in particular lower margin turnkey projects) than in
2004. Gross margins from the fuel treatment chemical product line are greater
than the NOx reduction project business.
Selling, general and administrative expenses were $3,114,000 and
$2,750,000 for the three months ended June 30, 2004 and 2003, respectively while
these expenses for the six months ended June 30, 2004 and 2003 were $6,266,000
and $5,604,000, respectively. The increase is due primarily to the addition of
sales resources for the fuel treatment chemical business.
Research and development expenses for the quarter ended June 30, 2004 and
on a year to date basis, are at the same level as the prior year. The Company
continues to pursue commercial applications for its technologies outside of its
traditional markets.
There was no interest expense recorded for the quarter or six month period
ended June 30, 2004. In the second quarter of 2003 the Company paid off the
entirety of its outstanding debt balance.
8
The decline in other income and expense for the three and six month
periods ended June 30, 2004 versus the prior year was due to a reduction in
interest income resulting from a reduction in the average outstanding cash
balance and to the non recurrence of a favorable impact from foreign currency
translation in the prior year.
A provision for federal or state income taxes was not recorded during the
three or six month periods ended June 30, 2004 due to the net loss.
9
LIQUIDITY AND SOURCES OF CAPITAL
For the six months ended June 30, 2004, the Company used cash for
operating activities in the amount of $1,152,000, while $2,426,000 was used by
operating activities for the same period in 2003. The reduction in the use of
cash from operations was due primarily to a lesser reduction in accounts payable
and accrued expenses during the first six months of 2004 than was experienced
during the first quarter of 2003.
At June 30, 2004 and December 31, 2003, the Company had cash and cash
equivalents of $5,147,000 and $7,812,000, respectively, while working capital
for the same two periods was $9,612,000 and $11,026,000, respectively. The
decline in cash and working capital from December 31, 2003 was driven by the net
loss, and by the investment in equipment to support the fuel treatment chemical
business.
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, 2003.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures and internal
controls designed to ensure that information required to be disclosed in the
Company's filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The Company's management,
with the participation of its principal executive and financial officers, has
evaluated the effectiveness of the Company's disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-Q. The
Company's principal executive and financial officers have concluded, based on
such evaluation, that such disclosure controls and procedures were effective for
the purpose for which they were designed as of the end of such period.
There was no change in the Company's internal control over financial
reporting that was identified in connection with such evaluation that occurred
during the period covered by this Quarterly Report on Form 10-Q that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Fuel Tech Annual Meeting on June 3, 2004, 15,016,831 common shares,
par value $0.01 per share, or, according to the records of Fuel Tech's Transfer
Agent, 76.97% of Fuel Tech's issued and outstanding common shares as of April 5,
2004, were represented in person or by proxy; and
(i) the proposal to approve the Report of Management and the Financial
Statements for the year ended December 31, 2003 was approved by a vote of
14,878,183 for, 2,130 against and 136,498 abstaining;
(ii) the proposal to elect seven nominees as Managing Directors was approved by
a vote as to each individual nominee, as follows:
Shares Shares
Name For Withheld
---- --- --------
Douglas G. Bailey 14,253,851 762,980
Ralph E. Bailey 14,446,152 570,679
Miguel Espinosa 14,859,321 157,510
Charles W. Grinnell 14,832,461 184,370
John D. Morrow 14,478,951 537,880
Samer S. Khanachet 14,859,351 157,480
Thomas S. Shaw 14,833,861 182,970
(iii) the proposal to ratify the appointment of Ernst & Young LLP as the
independent auditors for the year 2004 was approved by a vote of
14,900,578 for, 0 against and 116,253 abstaining.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 31.1 and 31.2 are filed herewith
Exhibit 32 is furnished herewith
b. Reports on Form 8-K
The Company filed form 8-K on May 6, 2004. This filing included the
Company's financial results for the first quarter ended March 31, 2004.
12
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: August 9, 2004 By: /s/ Ralph E. Bailey
-------------------
Ralph E. Bailey
Chairman, Managing Director
and Chief Executive Officer
Date: August 9, 2004 By: /s/ Vincent J. Arnone
---------------------
Vincent J. Arnone
Chief Financial Officer,
Vice President and
Treasurer
13