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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
[X] 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 A-1
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 October 29, 2004, there were outstanding 19,520,812 shares of Common
Stock, par value $0.01 per share, of the registrant.
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FUEL-TECH N.V.
Form 10-Q for the nine-month period ended September 30, 2004
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2004 1
and December 31, 2003
Condensed Consolidated Statements of Income for the Three and Nine- 2
Month Periods Ended September 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for the Nine- 3
Month Periods Ended September 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 10
Item 4. Controls and Procedures 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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, December 31,
2004 2003
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,281 $ 7,812
Accounts receivable, net 7,221 6,095
Prepaid expenses and other current assets 1,821 1,107
-------- --------
Total current assets 14,323 15,014
Equipment, net of accumulated depreciation of
$6,847 and $6,165, respectively 3,077 2,127
Goodwill 2,119 2,119
Other intangible assets, net of accumulated amortization
of $97 and $24, respectively 1,201 1,274
Other 806 1,064
-------- --------
Total assets $ 21,526 $ 21,598
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,374 $ 2,244
Accrued expenses 1,304 1,744
-------- --------
Total current liabilities 3,678 3,988
Other liabilities 277 299
-------- --------
Total liabilities 3,955 4,287
Stockholders' equity:
Common stock, par value $0.01 per share,
authorized 40,000,000 shares, 19,520,812
and 19,621,503 shares issued, respectively 195 196
Additional paid-in capital 88,586 89,698
Accumulated deficit (71,769) (72,030)
Accumulated other comprehensive income 27 48
Treasury stock - (1,133)
Nil coupon perpetual loan notes 532 532
-------- --------
Total stockholders' equity 17,571 17,311
-------- --------
Total liabilities and stockholders' equity $ 21,526 $ 21,598
======== ========
See notes to condensed consolidated financial statements.
1
FUEL-TECH N.V.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands of U.S. dollars, except share data)
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 9,577 $ 10,178 $ 23,081 $ 28,182
Costs and expenses:
Cost of sales 4,813 5,592 12,225 17,412
Selling, general and administrative 3,398 2,961 9,664 8,565
Research and development 322 314 895 920
------------ ------------ ------------ ------------
Operating income 1,044 1,311 297 1,285
Interest expense - - - (25)
Other (loss) income, net (6) 6 (36) 140
------------ ------------ ------------ ------------
Income before taxes 1,038 1,317 261 1,400
Income taxes - - - -
------------ ------------ ------------ ------------
Net income $ 1,038 $ 1,317 $ 261 $ 1,400
============ ============ ============ ============
Net income per common share:
Basic $ .05 $ .07 $ .01 $ .07
============ ============ ============ ============
Diluted $ .05 $ .06 $ .01 $ .06
============ ============ ============ ============
Average number of common shares outstanding:
Basic 19,519,000 19,744,000 19,512,000 19,629,000
============ ============ ============ ============
Diluted 22,149,000 22,748,000 22,127,000 22,325,000
============ ============ ============ ============
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
2004 2003
-------- --------
OPERATING ACTIVITIES
Net cash used in
operating activities $ (611) $ (1,520)
-------- --------
INVESTING ACTIVITIES
Proceeds from sale of equipment 6 -
Acquisition of fuel additive business - (1,348)
Purchases of equipment and patents (1,926) (780)
-------- --------
Net cash used in investing activities (1,920) (2,128)
-------- --------
FINANCING ACTIVITIES
Exercise of stock options 21 323
Purchase of treasury shares - (35)
Repayment of borrowings - (1,800)
-------- --------
Net cash provided by (used in)
financing activities 21 (1,512)
-------- --------
Effect of exchange rate fluctuations on cash (21) 12
-------- --------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (2,531) (5,148)
Cash and cash equivalents at beginning
of period 7,812 10,939
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,281 $ 5,791
======== ========
See notes to condensed consolidated financial statements.
3
FUEL-TECH N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine-month period ended September 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. The following table sets forth the weighted-average shares (in thousands)
used in calculating the earnings per share for the three and nine-month periods
ended September 30, 2004 and 2003:
Three months ended Nine months ended
2004 2003 2004 2003
---------------------- -------------------
Basic weighted-average shares 19,519 19,744 19,512 19,629
Conversion of unsecured loan notes 85 85 85 85
Unexercised options and warrants 2,545 2,919 2,530 2,611
---------------------- -------------------
Diluted weighted-average shares 22,149 22,748 22,127 22,325
====================== ===================
NOTE C: TOTAL COMPREHENSIVE INCOME
Total comprehensive income for the Company is comprised of net income and
the impact of foreign currency translation as follows:
For the three months ended For the nine months ended
September 30 September 30
--------------------------------- -----------------------------
2004 2003 2004 2003
-------------- -------------- ----------- -------------
Comprehensive income:
Net income $ 1,038,000 $1,317,000 $ 261,000 $1,400,000
Foreign currency translation 8,000 14,000 (21,000) 12,000
-------------- -------------- ----------- ------------
$ 1,046,000 $1,331,000 $ 240,000 $1,412,000
============== ============== =========== ============
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 income and income per share would have been
adjusted as follows for the three and nine month periods ended September 30,
2004 and 2003:
For the three months ended For the nine months ended
September 30 September 30
2004 2003 2004 2003
---------- ---------- -------- ------
Net Income (loss)
As reported $1,038,000 $1,317,000 $261,000 $1,400,000
As adjusted 878,000 1,172,000 (329,000) 833,000
Basic and
diluted income
(loss) per share:
Basic - as reported $.05 $.07 $.01 $.07
Basic - as adjusted $.05 $.06 $(.02) $.04
Diluted - as reported $.05 $.06 $.01 $.06
Diluted - as adjusted $.04 $.05 $(.02) $.04
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 $15.0 million, 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 September 30, 2004,
there were 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, general and administrative 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
-------------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- ------------ -------------
Revenues:
United States $ 8,807,000 $ 8,924,000 $19,736,000 $24,782,000
Foreign 770,000 1,254,000 3,345,000 3,400,000
------------- ------------ ------------ ------------
$ 9,577,000 $10,178,000 $23,081,000 $28,182,000
============= ============ ============ ============
Operating income (loss):
United States $ 1,167,000 $ 1,171,000 $ 478,000 $ 1,268,000
Foreign (123,000) 140,000 (181,000) 17,000
------------- ------------- ------------ ------------
$ 1,044,000) $ 1,311,000 $ 297,000 $ 1,285,000
============= ============= ============ ============
September 30, December 31,
2004 2003
------------- ------------
Assets:
United States $19,696,000 $19,487,000
Foreign 1,830,000 2,111,000
------------- ------------
$21,526,000 $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 September 30, 2004 and 2003 were
$9,577,000 and $10,178,000, respectively, while net sales for the nine months
ended September 30, 2004 and 2003 were $23,081,000 and $28,182,000,
respectively. The year on year decline for both periods reflects a 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 became effective as of May 31, 2004,
there were several factors that led to a slowing of equipment orders in the air
pollution control business. Depressed NOx allowance prices for 2004, which
resulted from weak demand for power and the existence of a shortened ozone
season, caused some utilities to delay capital spending while meeting their
requirements on a short-term basis through the purchase of allowances and other
temporary means. In addition, many utilities continued to experience significant
capital constraints. Based on these market factors, the air pollution control
business weakened during the latter portion of 2003 and the first half of 2004.
As expected, the second half of 2004 has begun to show improvement with the
receipt of several air pollution control project orders. Increased strength in
this business is expected in 2005 and 2006. Fuel Tech continues to work towards
developing alliance agreements with critical customers looking to finalize their
compliance plans.
The decline in NOx reduction project revenues for the quarter and year to
date was partially offset by record fuel treatment chemical revenues. Revenues
for the Fuel Chem business are up in excess of 70% over the prior year. Revenues
derived from Western coal-fired utility boilers have had the largest year on
year impact, and contributions from the customer contracts acquired from Martin
Marietta Magnesia Specialties, LLC on September 30, 2003, also contributed to
the increase.
Fuel Tech believes that attaining success on several Western coal-fired
utility boilers will lead to further penetration of the Western coal-fired
utility market. Sales and marketing efforts are intensely focused on penetrating
this market as it represents the largest opportunity for the fuel treatment
chemical business. 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.
Cost of sales as a percentage of net sales for the three month period
ended September 30, 2004 declined to 50% from 55% in the third quarter of the
prior year. On a year to date basis, the cost of sales percentage is 53% and
62%, respectively, for 2004 and 2003. A significantly larger percentage of the
revenues for the third quarter and nine months ended September 30 of 2003 were
generated by NOx reduction projects (in particular, lower margin turnkey
projects) than in 2004. The gross margins realized by the fuel treatment
chemical product line are greater than the NOx reduction project business.
Selling, general and administrative expenses were $3,398,000 and
$2,961,000 for the three months ended September 30, 2004 and 2003, respectively,
while these expenses for the nine months ended September 30, 2004 and 2003 were
$9,664,000 and $8,565,000, respectively. The increase is due primarily to
selling expenses related to the fuel treatment chemical business.
Research and development expenses for the quarter ended September 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 nine-month
period ended September 30, 2004. In the second quarter of 2003, the Company
paid off the entirety of its outstanding debt balance.
The decline in other income and expense for the three and nine-month
periods ended September 30, 2004 versus the prior year is due to a reduction in
interest income resulting from a reduction in the average outstanding cash
balance. Additionally, the nine months ended September 30, 2003 were impacted
favorably by foreign currency translation which has not reoccurred in 2004.
8
A provision for federal or state income taxes was not recorded during the
three or nine month periods ended September 30, 2004 due to the existence of
net operating loss carryforwards.
LIQUIDITY AND SOURCES OF CAPITAL
For the nine months ended September 30, 2004, the Company used cash for
operating activities in the amount of $611,000, while $1,520,000 was used by
operating activities for the same period in 2003. At September 30, 2004 and
December 31, 2003, the Company had cash and cash equivalents of $5,281,000 and
$7,812,000, respectively, while working capital for the same two periods was
$10,645,000 and $11,026,000, respectively. The decline in cash and working
capital from December 31, 2003 was driven primarily by the investment in
equipment to support the fuel treatment chemical business.
9
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.
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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
Exhibit 31.1 and 31.2 are filed herewith
Exhibit 32 is furnished herewith
b. Reports on Form 8-K
None
11
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 8, 2004 By: /s/ Ralph E. Bailey
-------------------------------
Ralph E. Bailey
Chairman, Managing Director
and Chief Executive Officer
Date: November 8, 2004 By: /s/ Vincent J. Arnone
-------------------------------
Vincent J. Arnone
Chief Financial Officer,
Vice President and
Treasurer
12