SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to ____________________
COMMISSION FILE NO. 0-27432
CLEAN DIESEL TECHNOLOGIES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1393453
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
SUITE 702, 300 ATLANTIC STREET
STAMFORD, CT 06901
(203) 327-7050
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(Address and telephone number of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK $0.05 PAR VALUE PER SHARE
--------------------------------------
(Title of Class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the average bid and asked prices of March 2, 2001: $1.84.
Indicate number of shares outstanding of each of the registered classes of
Common Stock at March 2, 2001: 2,660,611 shares Common Stock, $0.05 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Proxy Statement for the annual meeting of stockholders
to be held in 2001 described in Parts II, III, and IV hereof are incorporated by
reference in this report.
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TABLE OF DEFINED TERMS
TERM TERM DEFINITIONS
- --------------------- ----------------
ARIS(TM) 2000 The Company's Advanced Reagent Injection System for Urea SCR
BUWAL Bundesamt fur Umwelt, Wald und Landschaft (Federal Office for Environment,
Forest and Landscape)
CARB California Air Resources Board
CDT Clean Diesel Technologies, Inc.
CNG Compressed Natural Gas
CO2 Carbon dioxide
DOCs Diesel Oxidizing Catalysts
DPFs Diesel Particulate Filters
EGR Exhaust Gas Recirculation
Fuel Tech Fuel-Tech N. V., an affiliate of the Company
HC Hydrocarbons
LOE-NOx(TM) The Company's diesel fuel water emulsion technology
NESCAUM North East States for Coordinated Air Use Management
NOx Nitrogen Oxide
PFCs Platinum Fuel Catalysts
Platinum Plus(R) DFX The Company's Platinum & Cerium fuel additive
PM Particulate Matter
SCR Selective Catalytic Reduction
US EPA United States Environmental Protection Agency
VERT Program in Germany and Switzerland to develop, test and certify diesel
particulate filter systems
2
PART I
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-K 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."
ITEM 1. BUSINESS
GENERAL
The Company ("CDT"), a Delaware corporation with a principal place of
business at 300 Atlantic Street, Stamford, Connecticut 06901, is a pollution
control company supplying fuel additives and systems that reduce harmful
emissions from internal combustion engines while improving fuel economy. The
Company's two main technology areas are Platinum Fuel Catalysts ("PFCs") for
emission control and fuel economy improvement in diesel and gasoline-fueled
engines, and nitrogen oxide ("NOx") reduction systems and chemicals for control
of NOx emissions from diesel engines. During December 1999 the Company received
EPA registration for it's platinum - cerium product and in the opinion of
management was no longer a development stage company.
The Company was formed in 1994 as a wholly owned subsidiary of Fuel-Tech
N.V. ("Fuel Tech"), which had conducted fundamental work regarding the Company's
technologies'. Fuel Tech spun off the Company in a 1995 Rights Offering, at
which time Fuel Tech retained 27.6% of the Company's outstanding stock.
Currently Fuel Tech holds a 21.6% interest in the Company. The Company's
technologies were acquired by assignment from Fuel Tech or developed internally.
GLOBAL TRENDS IN DIESEL EMISSION CONTROL
Throughout the world, combustion engine development is influenced by two
primary concerns. First is the increasing concern for global warming and second
is the concern over exhaust emissions, especially over particulate matter ("PM")
and NOx emissions. Each of these affects the environment and human health
because of the toxicity of particulates and the creation of ground-level ozone
by NOx.
Carbon dioxide ("CO2") emissions have been identified as contributing to
the greenhouse effect. The Kyoto Protocol (1997) set out to address the issue.
Since CO2 is the inevitable result of combustion of fossil fuels, the primary
way to reduce CO2 emissions is to reduce fuel consumption. The diesel engine is
the most fuel-efficient power unit. Thus the increasing use of diesel engines,
as opposed to gasoline engines, is considered one way to reduce fuel consumption
and thereby CO2 emissions.
Particulate and NOx emission concerns have been addressed by the US
Environmental Protection Agency ("US EPA") and the European Community, who
continue to set standards prescribing substantial reductions in PM and NOx. The
regulatory process is progressive. New vehicles in the year 1999/2000 had to
meet emission levels some 80% lower than ten years ago. Further regulations for
2007 require a further reduction of 90% from current levels.
Reducing diesel engine fuel consumption and PM on the one hand, and NOx on
the other, are opposing objectives: When diesel engines are retuned to minimize
fuel consumption or PM, their output of NOx is sharply increased and vice versa.
Moreover, while modern diesel engines have very low PM emissions by mass, the
number of fine particles emitted remains high. Modern diesel engines tend to
increase the particulate count while reducing total particulate mass. The only
proven way of reducing the number of fine PM particles is by using
after-treatment filters. Consequently, engine manufacturers are increasingly
looking to after- treatment systems for the reduction of both fine PM particles
and NOx.
Recent events that will have a major impact on the development and use of
after-treatment systems are:
EUROPEAN LIGHT-DUTY VEHICLES
PSA Peugeot has introduced diesel particulate filters on its large engines
(604 series) in 2000. PSA Peugeot has announced that it will introduce
particulate filters on all models starting in 2003. PSA Peugeot manufactures
some 1.3 million of the 4.0 million light-duty diesel engines made annually and
is understood to have invested heavily in new technology for light-duty diesel
engines. Ford Motor Company and PSA Peugeot have announced cooperation on
diesel engine development and manufacture. The PSA Peugeot particulate filters
currently use a cerium additive to regenerate the filters. All European
light-duty manufacturers are now actively developing particulate filter systems
using fuel additives.
3
EUROPEAN COMMUNITY REGULATIONS
New vehicle regulations for 2005 were approved by the European Union in
November 1999. These regulations are intended to force the use of particulate
filters by all new heavy-duty diesel engines beginning in 2005.
EUROPEAN RETROFIT PROGRAMS
Germany and Switzerland have taken a lead in requiring diesel particulate
filters to be fitted on all diesel engines used in mining and tunneling. The
regulations were developed as a result of a major government-industry
cooperative program "VERT" to develop, test and certify diesel particulate
filter systems. The VERT Test Protocol is now becoming a recognized standard
for testing additives with particulate filters. The Company completed the VERT
certification for Platinum Plus in 2001 and has been approved by BUWAL, the
Swiss regulatory authority.
The requirements, which apply to both new and retrofit applications, are
now being implemented on a progressive basis. As the performance and
reliability of these certified systems are demonstrated further programs are
being promoted to extend the requirement to use particulate filters for
construction equipment and urban buses.
US RETROFIT PROGRAM
The United States Environmental Protection Agency (USEPA), the California
Air Resources Board (CARB) and the North East States for Coordinated Air Use
Management (NESCAUM) have announced a program for application of retrofit
technologies. The voluntary retrofit program for emission reduction from diesel
engines will focus on reduction of particulates (PM) and NOx. The program
requires that the retrofit technologies are certified, provides for states to
regulate the use of such certified technology and also provides a basis for
fiscal incentives and state regulations. The company filed three technology
applications for certification in 2000.
TECHNOLOGIES FOR CONTROL OF NOX EMISSIONS FROM DIESEL ENGINES
There are two proven technologies that are candidates for adoption in
2002-2005:
EXHAUST GAS RECIRCULATION ("EGR")
Most, if not all, engine manufacturers have developed this technology. It
involves recycling a portion of the exhaust gas to modify the combustion process
in a way that reduces NOx. While the principle is simple, its application leads
to several problems:
- PM emissions increase significantly,
- Fuel consumption increases,
- Heat rejection is increased by 20-40% (requiring more radiator
space),
- Durability is reduced.
The problem with increased PM emissions is likely, in the Company's
opinion, to lead to a requirement for an after-treatment system to reduce PM
emissions from EGR applications. There are currently two proven devices: Diesel
Oxidizing Catalysts ("DOCs") and Diesel Particulate Filters ("DPFs"). See
"Products and Markets" below for further information.
In the Company's opinion, the EGR system is the most developed system and
is likely to be adopted in 2002 for on highway use, whether these engines will
need oxidizers (DOCs) or filters (DPFs) is not yet clear.
In the longer term, however, the EGR system alone is likely to be unable to
achieve the reduction in NOx levels anticipated. In that event, Selective
Catalytic Reduction ("SCR") technology is currently the only proven technology
that could be used.
SELECTIVE CATALYTIC REDUCTION ("SCR")
This technology has been in use for several years for large power
generation boilers and gas turbines and for very large stationary diesel
engines, 5000 HP and above. Its adoption for use, with stationary diesels in the
700 to 5000 HP ranges and for mobile diesels in the 250 to 600 HP range, has
been limited primarily by the lack of a cost-effective system.
4
The process is noninvasive to the engine, allowing the engine manufacturer
to optimize the engine for minimum fuel consumption and minimum particulates.
This configuration is also optimal for engine durability.
The system is comprised of a tank of urea (a non-hazardous chemical used
primarily as agriculture fertilizer), an injection system for metering and
mixing the urea with the exhaust gas, and a catalyst to react the reactant gases
(from the decomposed urea) with NOx. The system gives very high NOx reduction
performance of up to 90% or more but requires a separate urea tank and depends
on a urea infrastructure being in place.
SCR will likely be adopted for stationary engines and for many off road
applications where fuel economy and durability are priorities. The Company
believes that a near-term market is developing for SCR stationary diesel
engines, particularly for power generation, and that a market will develop for
mobile engines, both off road and on road. Most recently, a retrofit market has
been developed in California and Texas.
TECHNOLOGIES FOR CONTROL OF PARTICULATES
If SCR is fitted for NOx control, then the engine can be tuned for very low
particulate emissions. However, emission levels regulated for 2007 are expected
to require use of particulate filters in addition to SCR, and such systems are
in development.
DIESEL PARTICULATE FILTERS (DPFS)
Several filters are being used or being developed. There are several
different designs. The soot collected on the filter must be oxidized (burned),
otherwise the filter will eventually block. The soot will naturally burn at
temperatures above 560C but diesel exhaust temperatures are typically much lower
than this. Metallic combustion catalysts are one way of promoting oxidation at
lower temperatures. Other methods include the use of electrical heating or
diesel fuel burners.
The DPF typically reduces PM by 90-99%.
DIESEL OXIDIZING CATALYSTS (DOCS)
These are flow-through devices with a catalytic surface. They are most
effective in reducing gaseous hydrocarbons and carbon monoxide. PM emissions
normally contain absorbed hydrocarbons. The use of DOCs substantially reduces
the absorbed hydrocarbons but, on its own, will not significantly reduce the
carbon content. On engines without EGR, DOCs will reduce PM by 30-50%. On
engines with EGR, the absorbed hydrocarbons are significantly lower and DOCs
alone have demonstrated less than 10% PM reduction in two test programs
conducted for the Company.
PRODUCTS
PLATINUM PLUS (R) PLATINUM FUEL CATALYSTS (PFCs)
The Company has developed a family of fuel additives using precious metals
(primarily platinum) in minute concentrations in the fuel. Platinum is well
known to be one of the best combustion catalysts. The synergy of platinum and
cerium is also well known and used in catalysts for gasoline engines as well as
oxidizers for diesel engines. As a catalyst in the fuel, platinum-cerium
bimetallic is even more effective, at very low addition rates of 4 ppm to 8 ppm
of total metal, than cerium or other metallic additives at 20ppm to 100ppm.
The platinum and cerium are in the form of organo-metallic compounds, which
are soluble in diesel fuel where they are stable and mix easily.
PLATINUM PLUS IN THE ENGINE
Platinum and cerium form a mixed oxide during the combustion of the fuel.
This mixed oxide deposits on the metal surfaces of the engine and catalytically
improves combustion especially in the late stages. The results of improved
combustion are:
- Improved fuel economy (2-8%)
- Reduced engine emissions
Research shows that the above improvements build up over time. A test
showed that after 1,000 hours 96% of the platinum was being retained in the
engine.
5
PLATINUM PLUS FOR FUEL ECONOMY
Tests at an engine manufacturer in 1997 on a 5.9-liter engine fitted with
exhaust gas recirculation (EGR) showed 8% fuel economy improvement after 200
hours running on "additive fuel". Tests at Southwest Research Institute in 1998
on a Detroit Diesel Series 60 engine measured 4% to 5.5% fuel economy
improvement after 60 hours of treatment.
The company is conducting a number of fleet trials during the
test-marketing phase. Results from six fleets show fuel economy benefits
ranging from 3-5% and even as high as 10%, which supports the up to 8% benefit
found in engine bench test programs.
The fuel economy product is expected to show savings of two to three times
its cost depending on prices of fuel (which vary widely around the world and
from time to time) and the method of distribution.
PLATINUM PLUS FOR EMISSIONS REDUCTIONS
Used alone the PFC additive has shown the ability to reduce particulate
emissions by 10 - 30% as well as providing reductions in HC, CO and NOx. Tests
at SwRI demonstrated a 26% reduction in particulate emissions when running fuel
treated with the PFC. Several large power generation diesels in the State of
Maine using the PFC on a commercial basis reported particulate reduction of 29%
using treated fuel and an average of 45% particulate reduction and 15% NOx
reduction when using the PFC with engine modifications. The Company is
conducting tests to support the rise of fuel treated with the PFC for emissions
credits under the EPA voluntary retrofit/rebuild program.
PLATINUM PLUS WITH NEW ENGINES AND DIESEL OXIDIZER CATALYSTS (DOCS)
For the year 2001and thereafter, many new low emission engines will employ
Exhaust Gas Recirculation (EGR-see above) to reduce NOx. Alone this technology
increases PM emissions and fuel consumption.
The PM emissions from such systems have dry soot (low SOF high carbon
content). Oxidizers (DOCs) have low effectiveness on this dry soot. Tests show
that Platinum Plus is particularly effective on engines, which are tuned for low
NOx by improving fuel efficiency, and reducing engine out emissions. Platinum
Plus is compatible with and improves performance of oxidizers. Research also
shows that the platinum-cerium bimetallic catalyst is effective at oxidizing the
carbon content as well as the soluble organic fraction (SOF) of the soot and
therefore enhances the general performance of engine equipment with DOC's. In
one test at Southwest Research Institute overall particulate reduction increased
from 29% to 43% using the PFC and DOC while still reducing fuel consumption.
PLATINUM PLUS WITH DIESEL PARTICULATE FILTERS (DPFS)
The platinum-cerium additive oxidizes the soot that collects on the filter.
The challenge is to oxidize the soot at the lowest possible temperature with the
minimum amount of metal additive, because excess metal additive deposits on the
filter, such as ash, reduce the useful life of the filter and add to back
pressure which in turn increases fuel consumption. The platinum-cerium additive
reduces the temperature at which the soot oxidizes (regeneration temperature) by
200 to 250 C. This is 50 to 100 C lower than other metals. At the same time
it improves fuel economy and reduces emission of Carbon Monoxide (CO),
Hydrocarbons (HC) and NOx.
The dose rate of the platinum-cerium additive delivers a metal content of
4ppm to 8ppm of metal in the fuel compared to 25ppm to 100ppm for other metals.
The ultra low dose rate of the platinum-cerium additive gives a major reduction
of ash accumulation in the filters and extends the useful life of the filter.
PLATINUM PLUS AND NEW FUELS
Platinum Plus has been shown to be effective with both current fuels
(500ppm Sulfur) and lower sulfur fuels. Sulfur does not inhibit the catalytic
action of Platinum Plus nor is there a significant increase in sulfur emissions.
Low sulfur fuel is not required for use with Platinum Plus.
Tests at SwRI on a modern heavy-duty diesel engine using 368ppm sulfur fuel
and a Corning particulate filter demonstrated emission levels lower than an
identical compressed natural gas (CNG) engine certified to CARB's standards.
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12.7 liter Diesel Engine with DPF
EGR and Platinum Plus 368ppm Sulfur 12.7 liter CNG Engine
(gm/bhp-hr) (gm/bhp-hr)
------------- --------------
NOx 2.31 2.0
HC 0.15 0.8
PM 0.009 0.02
MARKETS FOR PLATINUM PLUS
Following receipt of registration for Platinum Plus from the US EPA in
December 1999 (see "Health Effects"below), the Company started test marketing
its product through diesel fuel distributors and fleets and is in discussion
with potential licensees and additive marketing companies to distribute the
product both in the US and Europe. Field trials are currently in progress in
the USA, Europe, Taiwan, Hong Kong and China.
The Company has established relationships with suppliers and blenders for
its products in the United States and is now doing so in Europe. Each 1 billion
gallons of fuel treated with the additive would represent revenues to the
Company of $20 to $30 million. The diesel fuel market worldwide is
approximately 200 billion gallons per year and the United States consumption is
estimated at 40 billion gallons annually.
ARIS 2000 - ADVANCED REAGENT INJECTION SYSTEM FOR UREA SCR (NOX REDUCTION)
The Company identified a market opportunity for SCR systems for use with
stationary diesel engines used primarily for power generation. The ARIS 2000 is
a single fluid injection and metering system complete with an electronic control
unit. The Company completed prototype testing of the ARIS 2000 system for
stationary diesels in 1999 and started sales of commercial systems for
evaluation programs to catalysts companies and engine companies.
The evaluation programs have demonstrated that using the ARIS 2000 system,
NOx reduction of 90% and more can be achieved on steady state conditions with
85% on transient conditions.
ARIS 2000 - FOR STATIONARY DIESELS
The Company decided that the most effective way to commercialize its ARIS
2000 technology was to license the technology and the related technologies for
NOx reduction. In February 2000, the Company completed an agreement with the
RJM Corporation, in Ridgefield, Connecticut to license the exclusive marketing
rights for the ARIS 2000 in North, Central and South America for stationary,
railroad and marine applications. The Company transferred its ARIS 2000
inventory and two technical staff members to RJM Corporation as part of the
agreement. The Company has also entered into an agreement with Mitsui & Co.
Ltd, under which Mitsui has an option for the exclusive rights for the ARIS 2000
technology for Japan.
The Company has retained the right to market and license the ARIS 2000 for
stationary use in Europe, Asia and Africa. The Company is seeking licensees for
those territories.
ARIS 2000 FOR MOBILE DIESELS
The Company has retained worldwide rights to the ARIS 2000 for mobile
applications. The ARIS 2000 was designed to be adaptable to automotive use and
to use automotive components. Mobile prototypes of the ARIS 2000 have been made
and installed on test vehicles. The Company is actively marketing the
technology for license. Patents offered for license are:
US Patent No. 5,975,475 - A fundamental concept patent of a return flow
injection system, which provides cooling of the injector and a solenoid
actuated injector, which precisely meters the flow of urea into the exhaust
gas. No compressed air is required.
US Patent No. 5,968,464 provides additional enhancement by converting
aqueous urea to ammonia within a pyrolysis chamber to assist decomposition.
US Patent No. 5,924,280 combines use of exhaust gas recirculation (EGR)
with urea SCR and combines the use of a diesel particulate filter with SCR
for simultaneous particulate and NOx control. Tests have shown such a
system demonstrates 85% NOx and 90% particulate reduction.
7
US Patent No. 5,809,775 covers the use of a solid reagent system for
generating ammonia.
A pending patent covers conversion of urea to ammonia for injection into
diesel exhaust.
EMULSION TECHNOLOGY FOR NOX AND PARTICULATES
The Company is offering for license its LOE-NOx (TM) diesel fuel water
emulsion technology and its enhanced emulsion technology which expands on the
use of emulsion to carry urea or ammonia based reagents. These technologies
provide low cost NOx reduction of 15-30% for diesel engines.
US Patent No. 5,404,841, 5584,694, and 5,535,708 cover emulsions containing
NOx reduction reagents where the water reduces peak flame temperature and
protects the reagent.
US Patent No 5,809,774 provides a means to emulsify urea solution with
diesel fuel at a dispensing pump and separate it "on board" a vehicle so
that the urea can be separately injected into exhaust gas. This avoids
loading urea as a second operation.
PLATINUM PLUS FOR GASOLINE
The Company has developed a platinum/rhodium based gasoline fuel additive
that has been demonstrated to rejuvenate the performance of aged catalytic
converters. This product was previously test marketed in Europe and the Company
is seeking a partner to complete development and commercialization of this
product. Use of such a product in the U.S. will require registration with the
EPA under fuel additive registration requirements. To date the Company has not
found a partner willing to fund the development and registration testing in the
U.S.
HEALTH EFFECTS AND REGISTRATION OF ADDITIVES
Metallic additives have come under scrutiny for their possible effects on
health. The Company registered its platinum additive in 1997 in both the US and
United Kingdom. The platinum - cerium bimetallic additive required further
registration in the US and that process involved a 1,000-hour engine test and
extensive emission measurements and analysis. The registration was completed in
1999 and issued in December 1999.
Germany, Austria and Switzerland have set up a protocol (VERT) for
approving diesel particulate filters and additive systems used with them. The
Company completed the required tests under the VERT protocol in 2000 and in
January 2001, the Swiss authority BUWAL approved the Platinum Plus fuel additive
for use with a filter.
Engine tests show that the amount of platinum emitted from the use of
Platinum Plus is roughly equivalent to platinum attrition from automotive
catalytic converters.
In December 1996 the United Kingdom Ministry of Health's Committee on
Toxicity reviewed the product and all the data submitted by the Company and in
its response stated "The Committee is satisfied that the platinum emission from
vehicles would not be in an allergenic form and that the concentrations are well
below those known to cause human toxicity." In 1997 Radian Associates reviewed
the Company's data and the literature on platinum health effects and concluded,
"the use of Clean Diesel Technologies Platinum containing diesel fuel additive
is not expected to have a adverse health effect on the population under the
condition reviewed." Radian also concluded that emissions of platinum from the
additive had a margin of safety ranging from 2,000 to 2,000,000.
SOURCES OF SUPPLY
The Company has outsourcing arrangements with two companies in the precious
metal refining industry and may make arrangements with others. The Company has
made the product itself in the past but considers outsourcing to a precious
metal refinery to be more cost effective. The Company has established several
sources of cerium to use in its bimetallic diesel additive.
RESEARCH AND DEVELOPMENT
During 2000 the Company employed 3 individuals, including two executive
officers, in engineering and product development. During the years ended
December 31, 2000, 1999, and 1998, the Company's research and development
expenses exclusive of patent costs totaled approximately $534,000, $827,000, and
$1,009,000, respectively. The Company expenses all development costs as
incurred.
8
PROTECTION OF PROPRIETARY INFORMATION
The Company holds the rights to a number of patents and patent applications
pending. There can be no assurance that pending patent applications will be
approved or that the issued patents or pending applications will not be
challenged or circumvented by competitors. Certain critical technology
incorporated in the Company's products is protected by trademark and trade
secret laws and confidentiality and licensing agreements. There can be no
assurance that such protection will prove adequate or that the Company will have
adequate remedies for disclosure of its trade secrets or violations of its
intellectual property rights.
INSURANCE
The Company maintains coverage for the customary risks inherent in its
operations. Although the Company believes its insurance policies to be adequate
in the amount and coverage for its current operations, no assurance can be given
that this coverage will, in fact, be or continue to be available in adequate
amounts or at a reasonable cost or that such insurance will be adequate to cover
any future claims against the Company.
EMPLOYEES
The Company has six full-time employees. In addition, one executive officer
of Fuel Tech provides management, and legal services for the Company pursuant to
a Management and Services Agreement between Fuel Tech and the Company on an
as-needed basis. The Company also retains two outside technical consultants on
specific projects related to platinum, engines and NOx reduction and retains
several outside marketing agents.
The Company enjoys good relations with its employees and is not a party to
any labor management agreements.
RISK FACTORS OF THE BUSINESS
Investors in the Company should be mindful of the following risk factors
relative to the Company's business:
LIQUIDITY - GOING CONCERN & CONTINUING OPERATING LOSSES
Prior to 2000, the Company was a development stage business and has
incurred losses since inception totaling $18,279,000 (excluding the effect of
non-cash preferred stock dividends). At the date of this report, the Company
has cash resources estimated to be sufficient for its needs through June 2001.
See the text below under the captions "Liquidity and Sources of Capital" in Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Report of Independent Auditors" in Item 8, "Financial
Statements." Accordingly, at December 31, 2000, there is substantial doubt as to
the Company's ability to continue as a going concern.
The Company has had minimal revenues through December 31, 2000. The
Company expects to continue to incur operating losses at least through 2001.
There can be no assurance that the Company will achieve or sustain significant
revenues or profitability in the future. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," elsewhere
herein.
COMPETITION
Competition in the diesel fuel additive market is from other additive
suppliers, supplying other metallic additives. The Company competes on the
basis of effectiveness, price, proprietary technology, and ease of use of the
PFCs.
Competition in the NOx control market is from other suppliers of
reagent-based post-combustion NOx control systems including large,
well-established catalyst and engine manufacturing companies. The Company has
proprietary technology.
NEED FOR REGISTRATION
The Company needs to comply with registration requirements for each
territory in which it sells its products. The Company received its registration
from USEPA under Tier 1 of 211(b) registration for its platinum - cerium
additive in December 1999. It can sell the product with its current
registration status, which provides for pass through rights for the additive
companies to use the product without further registration. However, there are
provisions in the Act under which EPA could require further testing. The EPA
has not exercised these powers yet for any additive. In Europe the Company has
registered in Switzerland and is registering in Germany. Further testing could
be needed in these or other territories.
9
NO ASSURANCES OF ADDITIONAL FUNDING
The Company is seeking additional funding in the form of a private offering
of additional shares of the Company's equity securities. Any offering of such
securities may result in dilution to the stockholders of the Company. The
ability of the Company to consummate financing will depend on the status of the
Company's marketing programs, and field trials, as well as conditions then
prevailing in the relevant capital markets. There can be no assurance that such
funding will be available when needed, or on terms acceptable to the Company. In
the event that the Company is unable to raise additional funds, the Company may
be required to delay, scale back, or severely curtail its operations or
otherwise impede its ongoing commercialization, which could have a material
adverse effect on the Company's business, operating results, financial condition
and long-term prospects. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," elsewhere herein.
POSSIBLE VOLATILITY OF STOCK PRICE
There has been significant volatility in the market prices of publicly
traded shares of emerging growth technology companies. Factors such as
announcements of technical developments, establishment of strategic alliances,
changes in governmental regulation, and developments in patent or proprietary
rights may have a significant effect on the market price of the Company's Common
Stock.
RELATIONSHIP WITH FUEL TECH; CONFLICTS OF INTEREST
Directors and officers of Fuel Tech and its subsidiaries are also directors
and officers of the Company, and Fuel Tech as the Company's largest stockholder,
is in a position involving the possibility of conflicts of interest with respect
to transactions concerning the Company. The Company currently has one director
independent of Fuel Tech. See Item 13, "Certain Relationships and Related
Transactions."
UNCERTAINTY OF MARKET ACCEPTANCE
The commercial success of the Company's products will depend upon
acceptance by the fuel additive, oil, and engine industries, and acceptance by
governmental regulatory bodies. This market acceptance will in turn depend upon
competitive developments and the Company's ability to demonstrate the
efficiency, cost effectiveness, safety, and ease of use of the PFCs and NOx
control products of the Company. The failure by the Company to receive market
acceptance for the PFCs and NOx control products would have an adverse effect on
the Company's business, operating results and financial condition. See "Products
and Markets" in Item 1, "Business."
NO ASSURANCE OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS
The Company holds licenses to a number of patents, holds certain patents,
and has patent applications pending. There can be no assurance that pending
patent applications will be approved or that the issued patents or pending
applications will not be challenged or circumvented by competitors. Certain
critical technology incorporated in the Company's products is protected by
trademark and trade secret laws and confidentiality and licensing agreements.
There can be no assurance that such protection will prove adequate or that the
Company will have adequate remedies for disclosure of its trade secrets or
violations of its intellectual property rights. See "Protection of Proprietary
Information" in Item 1, "Business."
PLATINUM PRICE
The cost of platinum may have a direct impact on the future pricing and
profitability of the PFCs. Although the Company intends to minimize this risk
through various purchasing and hedging strategies, there can be no assurance
that the Company will be able to do so. A significant prolonged increase in the
price of platinum could have a material adverse effect on the Company's
business, operating results and financial condition.
DEPENDENCE ON ATTRACTING AND RETAINING PERSONNEL
The success of the Company will depend, in large part, on the Company's
ability (i) to retain current key personnel; (ii) to attract and retain
additional qualified management, scientific, and manufacturing personnel; and
(iii) to develop and maintain relationships with research institutions and other
outside consultants. The loss of key personnel or the inability of the Company
to hire or retain qualified personnel, or the failure to assimilate effectively
such personnel could have a material adverse effect on the Company's business,
operating results and financial condition. See "Employees" in Item 1,
"Business."
NO DIVIDENDS
The Company has to date not paid dividends on its Common Stock and does not
intend to pay any dividends to its common stockholders in the foreseeable
future. The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business. Furthermore, while the Company does
not have an intention to pay dividends, its ability to pay any dividends would
be restricted by the dividend requirements of its Series A Convertible Preferred
Stock. See Item 5, "Market for Registrant's Common Equity and Related
Stockholder Matters."
10
ITEM 2. PROPERTIES
FACILITIES
The Company has leased for administrative purposes 2,900 square feet of
office space at 300 Atlantic Street, Stamford, Connecticut. The Company has a
signed a lease extension for the period March 1, 1999, through February 28,
2002, with the possibility of early termination. The annual base rent under the
lease extension is $81,200.
PATENTS AND TECHNOLOGY ASSIGNMENTS
The Company's technology is comprised of patents, patent applications,
trade or service marks, data, and know-how. This technology was acquired by
assignment from Fuel Tech or developed internally. The assignment agreement
provides for running royalties of 2.5% of gross revenues derived from the sale
of the PFCs, commencing in 1998 and terminating in 2008. The Company may at any
time terminate this royalty obligation by payment to Fuel Tech of amounts in
2001 of $8.7 million and declining annually to $1.1 million in 2008. The Company
as owner maintains the technology at its expense.
During 2000, the Company filed 4 additional US patent applications and 1
international patent application. The Company now has a total of 23 US patents
granted and 66 international patents. There are currently 8 US patent
applications pending and 65 international applications pending. These patents
and patent applications cover the means of controlling the four principal
emissions from diesel engines (NOx, particulates, CO, and HC).
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By executing forms of written consent effective November 22, 2000, the
holders of the Company's Series A Convertible Preferred Stock (the "Series A
Stock") by the affirmative vote of 11,803 or 88% of the then outstanding Series
A Stock, approved of an amendment of the Certificate of Designation for the
Series A Stock increasing the authorized number of shares of Series A Stock from
15,000 to 20,000. No consents were voted against the proposal and no consents
abstained.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK
The Company's shares are traded in the US in the over-the-counter market.
Reports of transactions of the Company's shares are available on the OTC
Electronic Bulletin Board (Symbol CDTI). At March 2, 2001 there are 126
registered holders and approximately 467 beneficial holders of Common Stock.
No dividends have been paid on the Company's Common Stock and the Company
does not intend to pay dividends on these shares in the foreseeable future.
Furthermore, while the Company does not have an intention to pay dividends, its
ability to pay dividends would be restricted by the dividend requirements of the
Series A Convertible Preferred Stock (the "Series A Preferred Stock").
STOCK PRICE DATE: HIGH LOW
- ----------------- ---- ---
1st Quarter 1999 . . . . . . . 1 3/32 5/8
2nd Quarter 1999 . . . . . . . 15/16 11/16
3rd Quarter 1999 . . . . . . . 4 1/8 7/8
4th Quarter 1999 . . . . . . . 3 7/8 1 1/4
1st Quarter 2000 . . . . . . . 3 3/4 1 5/8
2nd Quarter 2000 . . . . . . . 2 10/16 1 1/4
3rd Quarter 2000 . . . . . . . 2 1/2 1 5/8
4th Quarter 2000 . . . . . . . 2 1/16 13/16
11
SALES AND USES OF UNREGISTERED SECURITIES DURING THE PERIOD
Pursuant to a Regulation S exemption with respect to an offshore placement
and a Sec.4 (2) private placement exemption under the Securities Act of 1933
(the "Act"), the Company sold, effective April 28, 2000, 1,362 shares of its
Series A Convertible Preferred Stock. The price of the Series A Preferred Stock
was $750 per share. Each share of Series A Preferred Stock is convertible into
333.33 shares of the Company's Common Stock and pays dividends, in cash, of 9%
or, in kind, of additional shares of Series A Preferred Stock, of 11% of the
liquidation value. The directors have elected to pay dividends in kind. The
proceeds of the Series A Preferred Stock issuance of approximately $1.021
million will be used for general corporate purposes of the Company. There are,
as of the date of this report, 64 beneficial holders of the Series A Preferred
Stock. See also the text under the caption "Liquidity and Sources of Capital" in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" below. Additional information relating to the terms and
conditions of the Series A Preferred Stock is contained in the Company's Form
10-Q for the quarter ending June 30, 2000 and is incorporated by reference
herein.
Also pursuant to Regulation S and Sec.4 (2) exemptions from registration under
the Act, the Company, under a Loan Facility Agreement effective November 14,
2000, issued to private lenders $500,000 of its Senior Promissory Notes and
Warrants to purchase 75,000 shares of Company Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The Company was incorporated on January 19, 1994, as a wholly owned
subsidiary of Fuel Tech. Effective December 12, 1995, Fuel Tech completed a
Rights Offering of the Company's Common Stock, with Fuel Tech retaining a 27.6%
ownership interest in the Company. In 2000 and 1999, the Company obtained $1.021
million and $1.70 million of proceeds, respectively, through private placement
sale of shares of its Series A Convertible Preferred Stock (the "Series A
Preferred Stock"). As a participant in these financings, Fuel Tech owns 2,804
shares of the Company's Series A Preferred Stock, and along with its
approximately 689,000 shares of the Company's Common Stock, has an approximate
21.6% interest in the Company, on a fully converted basis, at December 31, 2000.
As discussed elsewhere herein, prior to December 1999, the Company was a
development stage business. Selected financial data of the Company for the
years ended December 31 are as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998 1997 1996
------- ------- ------ ------- -------
STATEMENTS OF OPERATIONS DATA (in thousands, except per share data)
Product Revenue $ 199 $ 142 $ 46 $ 199 $ --
License and Royalty Revenue 383
------- ------- ------ ------- -------
Total Revenues 582 142 46 199 --
Costs and expenses:
Cost of sales 133 81 29 132 --
General and administrative 1,799 1,585 1,515 1,730 1,842
Research and development 534 827 1,009 1,985 1,747
Patent filing and maintenance 152 134 156 237 223
------- ------- ------ ------- -------
Loss from operations $2,036 $2,485 $2,663 $3,885 $3,812
Interest (income) expense, net (35) (44) 57 (121) (323)
Cost of withdrawn Rights Offering -- -- 264 -- --
------- ------- ------ ------- -------
Net loss before preferred dividends 2,001 2,441 2,984 3,764 3,489
Preferred Stock Dividend (non-cash) 712 393 -- -- --
One-time imputed non-cash preferred dividend -- 1,750 -- -- --
------- ------- ------ ------- -------
Net loss attributable to common stockholders $2,713 $4,584 $2,984 $3,764 $3,489
====== ======== ====== ======= =======
Basic and diluted loss per common share $ 1.03 $ 1.77 $ 1.19 $ 1.50 $ 1.40
Weighted-average shares outstanding 2,631 2,594 2,517 2,517 2,500
Cash dividends paid $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
12
DECEMBER 31,
---------------------------------------
2000 1999 1998 1997 1996
------- ------ ------ ------ ------
BALANCE SHEET DATA (in thousands)
Current assets $ 965 $1,311 $1,940 $1,682 $5,595
Total assets 1,057 1,346 1,985 1,750 5,677
Current liabilities 400 494 686 894 1,486
Long-term liabilities 808 196 -- 395 --
Working capital 565 852 1,254 788 4,109
Stockholders' equity (deficit) (151) 656 1,299 461 4,191
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In prior years, the Company was a development stage enterprise and its
efforts were devoted to the research, development, and commercialization of
Platinum Fuel Catalysts and nitrogen oxide reduction technologies to reduce
emissions from diesel engines. During 1999, the Company received its EPA
registration for its platinum - cerium product and completed its first
commercial sales, accordingly, in the opinion of management, the Company was no
longer a development stage enterprise.
RESULTS OF OPERATIONS
2000 VERSUS 1999
Sales and Cost of sales were $582,000 and $133,000, respectively, in 2000
versus $142,000 and $81,000, respectively, in 1999. The 2000 sales consist of
Platinum Plus sales and license revenue, ARIS 2000 license revenue and royalties
and ARIS 2000 system sales.
The Company has received its EPA registration of the platinum-cerium
additive. Field trials of the platinum-cerium additive started in 1999 and have
continued in 2000. In 2000, sales of the platinum - cerium additive and license
revenue, totaled $115,000 and $77,000 respectively. Based on initial trial
results, ongoing revenues from sales of its Platinum Plus additives are expected
from sales to fleets and aftermarket products and in later years to engine
manufacturers for inclusion with an "onboard dosing" system on new vehicles.
The Company identified a market opportunity for urea selective catalytic
reduction (SCR) systems for use with stationary diesel engines primarily for
power generation. The ARIS 2000 is a single fluid injection and metering system
complete with an electronic control unit that can be integrated with engine
electronic and diagnostic systems. The Company has licensed the ARIS 2000
system for stationary diesel engines in North, South and Central America to the
RJM Corporation and completed a limited license with Mitsui for Japan. Total
sales of systems and license and royalties of the ARIS 2000 in 2000 was $84,000
and $306,000 respectively. The company and its licensee have sold and installed
26 systems. The Company believes that the ARIS 2000 NOx reduction system has
applications for both stationary engines and mobile engines. While the ARIS
2000 for stationary use is being sold commercially, the ARIS system for mobile
applications needs further development from the present prototype stage. The
Company believes that the ARIS 2000 system can most effectively be
commercialized through licensing several companies with a related business in
these markets. The Company is actively seeking to license the mobile technology
and the stationary technology in Europe and Asia.
General and administrative expenses increased to $1,799,000 in 2000 from
$1,585,000 in 1999. The increase is primarily the result of increased marketing
expense related to the commercialization of Platinum Plus. Research and
development expenses decreased to $534,000 in 2000 from $827,000 in 1999. The
continued reduction in 2000 is due to the shift in focus from research and
development to commercialization.
Patent filing and maintenance expenses increased slightly to $152,000 in
2000 versus $134,000 in 1999. The increase is due in part to maintaining the
patents and filing new applications. Interest income decreased slightly to
$38,000 in 2000 from $46,000 in 1999. Interest expense increased to $3,000 in
2000 from $2,000 in 1999 due to interest expenses associated with the Director's
and Officer's Insurance Policy, which is financed.
In 2000, the Company recorded $712,000 of in kind preferred stock dividends
on its Series A Preferred Stock. In 1999, the Company recorded $393,000 of in
kind preferred stock dividends on its Series A Preferred Stock. In addition, a
one-time non-cash charge reflected as a preferred stock dividend of $1.75
million was recognized for the difference between the conversion price of the
Preferred Stock and the quoted market price of the Company's common stock at the
date of issuance. (See Footnote 2, "Significant Accounting Policies" to the
accompanying financial statements).
13
1999 VERSUS 1998
Sales and Cost of sales were $142,000 and $81,000, respectively, in 1999
versus $46,000 and $29,000, respectively, in 1998. The 1999 sales relate to
sales of pre-production commercial units of the Company's Advanced Reagent
Injection System, the ARIS 2000, to several engine manufacturers, catalyst
companies, and industrial end-users as well as fleet trials of the Company's
platinum - cerium additive.
The Company has received its EPA registration of the platinum-cerium
additive. Field trials of the platinum-cerium additive started in the first
quarter of 1999. Sales of the platinum - cerium additive totaled $34,000 in
1999. Based on trials that were completed in 1999, commercial revenues from
sales of its Platinum Plus additives are initially expected from sales to fleets
and aftermarket products and in later years to engine manufacturers for
inclusion with an "onboard dosing" system on new vehicles.
The Company identified a market opportunity for urea selective catalytic
reduction (SCR) systems for use with stationary diesel engines primarily for
power generation. The ARIS 2000 is a single fluid injection and metering system
complete with an electronic control unit that can be integrated with engine
electronic and diagnostic systems. The Company has completed development of the
ARIS 2000 system for stationary diesel engines and sold initial units to major
engine manufacturers for evaluation purposes. Total sales of the ARIS 2000 in
1999 were $108,000. The Company believes that the ARIS 2000 NOx reduction
system has applications for both stationary engines and mobile engines. While
the ARIS 2000 for stationary use has completed development and is now being sold
commercially, the ARIS system for mobile applications needs further development
from the present prototype stage. The Company believes that the ARIS 2000
system can most effectively be commercialized through licensing a company or
companies with a related business in these markets.
General and administrative expenses increased slightly to $1,585,000 in
1999 from $1,515,000 in 1998. The increase is primarily the result of increased
marketing expense related to the commercialization of Platinum Plus. Research
and development expenses decreased to $827,000 in 1999 from $1,009,000 in 1998.
The continued reduction in 1999 is due to the shift in focus from research and
development to commercialization. Research and development expenses will
continue to decline in 2000 as a result of the RJM License deal, which
transferred two engineers to RJM.
Patent filing and maintenance expenses decreased to $134,000 in 1999 versus
$156,000 in 1998. The decrease is due in part to the shift in emphasis toward
commercialization as noted above. Interest income increased slightly to
$46,000 in 1999 from $41,000 in 1998. Interest expense decreased to $2,000 in
1999 from $98,000 in 1998 due to interest expenses associated with the $1.4
million bridge loan notes (the "Bridge Loan") issued during 1998 and
subsequently converted into the Company's Series A Preferred Stock.
In 1999, the Company recorded $393,000 of in kind preferred stock dividends
on its Series A Preferred Stock. In addition, a one-time non-cash charge
reflected as a preferred stock dividend of $1.75 million was recognized for the
difference between conversion price of the Preferred Stock and the quoted market
price of the Company's common stock at the date of issuance. (See Footnote 2,
"Significant Accounting Policies" to the accompanying financial statements).
During 1998, the Company incurred approximately $264,000 in expenses
associated with an effort to secure additional funding in the form of a Rights
Offering. The Company submitted a Registration Statement (Form S-1) to the
Securities and Exchange Commission in August 1998. The Registration Statement
was subsequently withdrawn on November 5, 1998, upon the Company receiving a
commitment for approximately $1.85 million, net of expenses, through a private
placement of shares of its Series A Preferred Stock. See "Liquidity and Sources
of Capital" below for further information.
LIQUIDITY AND SOURCES OF CAPITAL
Prior to 2000, the Company was primarily engaged in research & development
and has incurred losses since inception aggregating $18,279,000 (excluding the
effect of the preferred stock dividends). The Company expects to incur losses
through the foreseeable future as it further pursues its commercialization
efforts. Although the Company started selling limited quantities of product in
1997, sales to date have been insufficient to cover operating expenses, and the
Company continues to be dependent upon sources other than operations to finance
its working capital requirements.
In December 1995, the Company raised approximately $10.5 million, net of
offering expenses and broker-dealer commissions through the 1995 Rights Offering
of its shares by Fuel Tech. The Company then repaid Fuel Tech approximately
$2.3 million in inter-company loans. On February 17, 1998, Fuel Tech agreed to
provide the Company with up to $500,000 in order to fund its cash requirements
until such time as the Company obtained the long-term financing it was seeking.
On May 20, 1998, the $500,000 commitment was converted into a bridge loan (the
"Bridge Loan"). The Bridge Loan stipulated an automatic conversion into shares
of Preferred Stock upon the conclusion of a public or private financing that
contributed a minimum of $1.75 million of additional net proceeds to the
Company. In mid-1998, the Company also received an additional $900,000 of
financing under the same Bridge Loan (having the same terms and conditions) from
outside investors. As more fully described below, in November 1998, the Bridge
Loan automatically converted into 2,800 shares of Series A Preferred Stock.
14
In 1997, the Company repaid $250,000 of a $745,000 promissory demand note
with Fuel Tech and restructured the remaining amount into a $495,000 promissory
note (the "Term Note") with Platinum Plus, Inc. ("Platinum Plus"), a wholly
owned subsidiary of Fuel Tech. See below for further information concerning the
exchange of the Term Note for shares of the Company's Preferred Stock.
In November 1998, the Company obtained approximately $1.85 million in net
proceeds against the issuance of 3,753 shares of Preferred Stock through a
private placement. As the Company received net proceeds in excess of the $1.75
million minimum, and in accordance with the terms of the Bridge Loan agreement,
the $1.4 million Bridge Loan, mentioned above, converted into 2,800 shares of
Preferred Stock. Additionally, in an effort to retain its approximate 27%
interest in the Company (assuming conversion of the Preferred Stock into the
Company's Common Shares), Fuel Tech elected to exchange its $495,000 Term Note,
and $20,000 of associated accrued interest from its Bridge Loan and Term Note,
for 1,029 shares of Preferred Stock. As a result, Fuel Tech owned 2,029 shares
of the Company's Preferred Stock at December 31, 1998. These shares plus the
1999 and 2000 quarterly dividends and Fuel Tech's participation in the April
2000 preferred private placement, if converted, along with its Common Stock
ownership would give Fuel Tech an approximate 21.6% interest in the Company on a
fully converted basis at December 31, 2000.
In August/September 1999, the Company received gross proceeds of $1.75
million, excluding expenses of $29,000, from private investors against the
issuance of an additional 3,500 shares of Preferred Stock. In April 2000, the
Company completed a $1.021 million private placement offering of 1,362 Preferred
shares, excluding $13,833 of expenses. Therefore, the Company had 13,218 shares
of Preferred Stock issued and outstanding at December 31, 2000, versus 11,082
shares at December 31, 1999. As a result of the 2000 quarterly dividends, the
Company had an additional 1,424 shares of Preferred Stock issuable upon demand.
At December 31, 2000, the Company had a total of 14,642 issuable shares of
Preferred Stock, which are convertible into approximately 4.9 million shares of
the Company's Common Stock, ($0.05 par convertible at a rate of 1:333.33).
The Company signed an agreement with the RJM Corporation on February 2,
2000 that licensed RJM to sell CDT's ARIS 2000 NOx control system for all
stationary, marine, and locomotive applications in North, Central, and South
America. Under terms of the agreement CDT received an initial $360,000 license
and inventory payment and the opportunity to earn an additional $1,000,000 in
license revenue over the next 36 months based on the performance of the ARIS
2000. In addition to license revenue, CDT will earn a royalty on all future
ARIS 2000 sales.
In June 2000, the Company received a $160,000 payment from Mitsui & Co. Ltd
for a short-term exclusive license for Platinum Plus fuel borne catalyst and
ARIS 2000 diesel emission reduction technologies. In addition to the exclusive
license, Mitsui & Co. received an ARIS 2000 system, Platinum Plus product and
diesel emissions consulting services from CDT. The Company recognized sales
revenues for these products when they shipped and the license revenue was
prorated over the six-month license period.
Effective as of October 28, 1994, Fuel Tech granted two licenses to the
Company for all patents and rights associated with its Platinum Fuel Catalyst
("PFC") technology. Effective November 24, 1997, the licenses were canceled and
Fuel Tech assigned to the Company all such patents and rights on terms
substantially similar to the licenses. In exchange for the assignment, the
Company will pay Fuel Tech a royalty of 2.5% of its annual gross revenue from
sales of the PFCs, commencing in 1998. The royalty obligation expires in 2008.
The Company may terminate the royalty obligation to Fuel Tech by payment of
$8,727,273 in 2001 and declining annually to $1,090,910 in 2008. The Company as
assignee and owner will maintain the technology at its own expense. To date no
royalties have been paid to Fuel Tech.
For the years ended 2000, 1999, and 1998, the Company used cash of
$1,872,000, $2,518,000, and $2,849,000, respectively, in operating activities.
At December 31, 2000, and December 31, 1999, the Company had cash and cash
equivalents of $541,000 and $892,000, respectively. The decrease in cash and
cash equivalents in 2000 was the result of the Company's use of its resources to
fund operations in 2000, partially offset by the funds raised in the second and
fourth quarter of 2000. Working capital decreased to $565,000 at December 31,
2000, from $852,000 at December 31, 1999. The Company anticipates incurring
additional losses through at least 2001 as it further pursues its
commercialization efforts.
As a result of the Company's recurring operating losses, the Company has
been unable to generate a positive cash flow. In management's opinion, the
Company's cash balance at December 31, 2000, together with the remaining
$500,000 line of credit will be sufficient to fund the Company's operations
through June 2001. The Company will require additional capital to fund its
operations. Although the Company believes that it will be successful in its
15
capital-raising efforts, there is no guarantee that it will be able to raise
such funds on terms that will be satisfactory to the Company. The Company will
develop contingency plans in the event future financing efforts are not
successful. Such plans may include reducing expenses and selling or licensing
some of the Company's technologies. Accordingly, at December 31, 2000, there is
substantial doubt as to the Company's ability to continue as a going concern.
See "Liquidity Going Concern" elsewhere herein for additional information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the opinion of management, with the exception of exposure to
fluctuations in the cost of platinum, the Company is not subject to any
significant market risk exposure. See "Risk Factors of the Business - Platinum
Price" in Item 1, "Business."
16
ITEM 8. FINANCIAL STATEMENTS
Report of Independent Auditors
The Board of Directors and Stockholders
Clean Diesel Technologies, Inc.
We have audited the accompanying balance sheets of Clean Diesel
Technologies, Inc. as of December 31, 2000 and 1999, and the related statements
of operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clean Diesel Technologies, Inc.
at December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Clean Diesel Technologies, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses and has
a deficit in stockholders equity. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
March 14, 2001
17
CLEAN DIESEL TECHNOLOGIES, INC.
BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 541 $ 892
Accounts Receivable 50 46
Inventories 287 321
Other current assets 87 52
--------- ---------
TOTAL CURRENT ASSETS 965 1,311
Other assets 92 35
--------- ---------
TOTAL ASSETS $ 1,057 $ 1,346
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 400 $ 494
--------- ---------
TOTAL CURRENT LIABILITIES 400 494
Notes Payable 500
Deferred Compensation and Pension Benefits 308 196
--------- ---------
TOTAL LONG TERM LIABILITIES 808 196
STOCKHOLDERS' EQUITY(DEFICIT):
Preferred Stock, par value $0.05 per share,
authorized 80,000 and 85,000 shares,
no shares issued and outstanding
Series A Convertible Preferred Stock, par value $0.05 per share,
$500 per share liquidation preference, authorized 20,000 and
15,000 shares, issued and outstanding 13,218 and 11,082 shares,
involuntary liquidation value $7,321,000 (includes unissued
dividend shares of 1,424) and $5,934,000. 1 1
Common Stock, par value $0.05 per share, authorized
15,000,000 shares, issued and outstanding 2,660,611
And 2,594,456 shares 133 130
Additional paid-in capital 20,849 18,946
Accumulated Deficit (21,134) (18,421)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (151) 656
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,057 $ 1,346
========= =========
See accompanying notes.
18
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
------- ------- -------
Product revenue $ 199 $ 142 $ 46
License and royalty revenue 383
------- ------- -------
Total revenue 582 142 46
Costs and expenses:
Cost of sales 133 81 29
General and administrative 1,799 1,585 1,515
Research and development 534 827 1,009
Patent filing and maintenance 152 134 156
------- ------- -------
Loss from operations 2,036 2,485 2,663
Interest income (38) (46) (41)
Interest expense 3 2 98
Cost of withdrawn rights offering -- -- 264
------- ------- -------
Net loss before preferred stock dividends 2,001 2,441 2,984
Preferred stock dividends (non-cash) 712 393 --
One-time imputed non-cash preferred dividend -- 1,750 --
------- ------- -------
Net loss attributable to common stockholders 2,713 $4,584 $2,984
======= ======= =======
BASIC AND DILUTED LOSS PER
COMMON SHARE $ 1.03 $ 1.77 $ 1.19
======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,631 2,594 2,517
======= ======= =======
See accompanying notes.
19
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY(DEFICIT) (IN THOUSANDS)
Series A Convertible Total
Preferred Stock Common Stock Additional Accumulated Stockholders'
--------------- ------------ Paid-In Deficit Equity
Shares Amount Shares Amount Capital Stage (Deficit)
------ ------- ------ ------- -------- ---------- ----------------
BALANCE AT DECEMBER 31, 1997 -- -- 2,517 126 11,188 (10,853) 461
Net loss for year -- -- -- -- -- (2,984) (2,984)
Sale of Series A Preferred Stock 7.6 1 -- -- 3,790 -- 3,791
Stock options exercised -- -- 27 1 30 -- 31
------ ------- ------ ------- -------- ---------- ----------------
BALANCE AT DECEMBER 31, 1998 7.6 1 2,544 127 15,008 (13,837) 1,299
Net loss for year -- -- -- -- (2,441) (2,441)
Sale of Series A Preferred Stock 3.5 -- -- -- 1,750 -- 1,750
Stock options exercised -- -- 12 1 4 -- 5
Payment of director's fees in
common stock -- -- 38 2 41 -- 43
One-time preferred dividend -- -- -- -- 1,750 (1,750) --
Declared but not issued preferred
dividend -- -- -- -- 393 (393) --
------ ------- ------ ------- -------- ---------- ----------------
BALANCE AT DECEMBER 31, 1999 11.1 $ 1 2,594 $ 130 $ 18,946 $( 18,421) $ 656
Net loss for year -- -- -- -- -- (2,001) (2,001)
Issuance of preferred stock dividends .7 -- -- -- -- -- - --
Sale of Series A Preferred Stock 1.4 -- -- -- 1,021 -- 1,021
Issuance of common stock warrants -- -- -- -- 122 -- 122
Stock options exercised -- -- 27 1 6 -- 7
Payment of director's fees in
common stock -- -- 39 2 42 -- 44
Declared but not issued preferred
dividend -- -- -- -- 712 (712) --
------ ------- ------ ------- -------- ---------- ----------------
BALANCE AT DECEMBER 31, 2000 13.2 $ 1 2,660 $ 133 $ 20,849 $ (21,134) $ (151)
====== ======= ====== ======= ======== ========== ================
See accompanying notes.
20
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
-------- -------- -----------
OPERATING ACTIVITIES (IN THOUSANDS)
Net loss before preferred dividends $(2,001) $(2,441) $ (2,984)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 10 18 26
Deferred compensation -- -- 31
Conversion of bridge loan and term note accrued
interest into preferred stock -- -- 20
Compensatory stock warrant 61 -- --
Changes in operating assets and liabilities:
Account Receivable (4) (46) --
Inventories 34 (102) (14)
Other current assets (35) 6 180
Accounts payable and accrued expenses 63 47 (108)
-------- -------- -----------
Net cash used in operating activities (1,872) (2,518) (2,849)
-------- -------- -----------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 7 5 --
Proceeds from term loans 500 -- 1,400
Proceeds from issuance of preferred stock
1,021 1,750 1,876
-------- -------- -----------
Net cash provided from (used in) financing activities 1,528 1,755 3,276
-------- -------- -----------
INVESTING ACTIVITIES
Purchase of fixed assets (7) (8) (3)
-------- -------- -----------
Net cash (used in) provided by investing activities (7) (8) (3)
-------- -------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (351) (771) 424
Cash and cash equivalents at beginning of period 892 1,663 1,239
-------- -------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 541 $ 892 $ 1,663
======== ======== ===========
Cash payments for interest to Fuel-Tech N.V. -- -- 41
NON-CASH ACTIVITIES
Preferred dividend 712 393 --
One-time imputed non-cash preferred dividend -- 1,750 --
Stock compensation to directors 44 43 --
Conversion of bridge loan into Series A Convertible
Preferred Stock -- -- 1,400
Conversion of loan from Fuel-Tech N.V. into
Series A Convertible Preferred Stock -- -- 495
See accompanying notes.
21
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
BUSINESS
Clean Diesel Technologies, Inc. (the "Company") was incorporated in the
State of Delaware on January 19, 1994, as a wholly owned subsidiary of Fuel-Tech
N.V. ("Fuel Tech"). As more fully discussed in Note 4, effective December 12,
1995, Fuel Tech completed a Rights Offering of the Company's Common Stock, and
reduced its ownership in the Company's Common Stock to 27.6%. Fuel Tech
currently holds a 21.6% interest in the Company.
The Company is a pollution control company supplying fuel additives and
proprietary systems that reduce harmful emissions from internal combustion
engines while improving fuel economy. Prior to 2000 the Company was a
development stage enterprise devoted to research, development, and
commercialization of Platinum Fuel Catalysts (PFCs) and Nitrogen Oxide (NOx)
reduction technologies for diesel engines. During December 1999, the Company
received its EPA registration for its platinum - cerium product and recorded its
first commercial sales. Accordingly, in the opinion of management the Company
was no longer a development stage enterprise.
GOING CONCERN
The financial statements have been prepared assuming that the Company will
continue as a going concern and do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
the amount and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
As more fully described elsewhere herein, the Company received net proceeds
of approximately $1.021 million in 2000 and $1.75 million in 1999 through
private placements of its Series A Preferred Stock to assist in the pursuit of
its commercialization efforts. In addition during 2000 the company borrowed
$500,000 of an available $1,000,000 term loan. The term loan has a 10%
interest rate and the notes are due in full on May 14, 2002. The Company can
draw down up to $1,000,000 in increments of a minimum of $200,000. The success
of the Company's technologies' will depend upon the commercialization
opportunities of the technologies and governmental regulations, and
corresponding foreign and state agencies. The accomplishment of these objectives
by the Company will require additional capital and there can be no assurance
that such capital will be available.
As a result of the Company's recurring operating losses ($18,279,000 since
inception excluding non-cash preferred stock dividends), the Company has been
unable to generate a positive cash flow. The Company will require additional
capital in the future in order to fund its operations. The Company's current
cash position, coupled with the remaining $500,000 term loan will not be
sufficient to fund the Company's cash requirements. The Company is, however,
actively seeking additional financing through a private placement and/or joint
development agreements in order to fund its commercialization efforts. Without
any further funding or revenues from sales, demonstration programs, or license
fees, the Company expects to be able to fund operations through June 2001.
Although the Company believes that it will be successful in its capital-raising
efforts, there is no guarantee that it will be able to raise such funds on terms
that will be satisfactory to the Company. The Company has developed contingency
plans in the event its financing efforts are not successful. Such plans include
reducing expenses and selling or licensing the Company's technologies.
Accordingly, at December 31, 2000, there is substantial doubt as to the
Company's ability to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS
The Company considers all highly liquid investments with maturity of three
months or less when purchased to be cash equivalents. At December 31, 2000,
substantially all of the Company's cash and cash equivalents were on deposit
with one financial institution. All financial instruments are reflected in
the accompanying balance sheets at amounts that approximate fair market value.
22
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market and consist of
finished product. Cost is determined using the first-in, first-out (FIFO)
method.
REVENUE RECOGNITION
The Company recognizes revenue from sales of Platinum Plus fuel borne
catalyst and ARIS 2000 systems upon shipment.
In February 2000, the Company completed a license agreement with the RJM
Corporation for CDT's ARIS 2000 NOx control system for all stationary, marine
and locomotive applications in North, Central, and South America. The Company
received a $260,000 license payment in return for transferring the ARIS 2000
technology to the RJM Corporation. The company also received $100,000 from the
RJM Corporation for all of the remaining ARIS 2000 inventory. The license
payment is non-refundable and requires no ongoing services to be performed by
CDT. Clean Diesel has the opportunity to earn up to an additional $1,000,000 in
aggregate in license revenue on the first, second and third anniversaries of the
license agreement based on prior years' ARIS 2000 sales performance.
In June 2000, the Company received a $160,000 payment from Mitsui & Co. Ltd
for a short-term exclusive license for Platinum Plus fuel borne catalyst and
ARIS 2000 diesel emission reduction technologies. In addition to the exclusive
license, Mitsui & Co. received an ARIS 2000 system, Platinum Plus product and
diesel emissions consulting services from CDT. The Company recognized sales
revenues for these products when they shipped and the license revenue was
prorated over the six-month license period.
RESEARCH AND DEVELOPMENT COSTS
Costs relating to the research, development, and testing of products are
charged to operations as they are incurred. These costs include test program
costs, salaries and related costs, consultancy fees, materials, and certain
testing equipment. The cost of patent filings and maintenance are also charged
to operations as they are incurred. Included in accrued expenses at December
31, 2000 are liabilities for research and development at SwRI and VERT testing
for $36,000 and $29,000 respectively and Patent legal expense of $44,000 to
Ware, Fressola.
STOCK-BASED COMPENSATION
The Company accounts for stock option grants in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Under the Company'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 to employees. The Company has adopted
the disclosure provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation.
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic and diluted loss per share are calculated in accordance with SFAS No.
128, Earnings Per Share.
During the third quarter of 1999 the Company issued 3,500 shares of
Preferred Stock in exchange for $1.75 million, with each share being immediately
convertible into 333.33 shares of the Company's Common Stock. The Company was
actively marketing its Preferred Stock at a premium (i.e., the $1.50 conversion
price was above the market price at the time of the solicitation) and did in
fact receive commitments from European investors at a time when the stock price
was below $1.50 per share. Subsequent to receiving the commitments but prior to
receiving the funds, the price of the Company's stock increased to over $3 per
share. In connection therewith, as required by the Financial Accounting
Standards Board's Emerging Issues Task Force Statement 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingent
Adjustable Conversion Ratios to Certain Convertible Instruments" the Company is
required to record a one-time non-cash change for a preferred stock dividend of
approximately $1.75 million resulting from the difference between the conversion
price and the quoted market price of the Company's Common Stock as of the date
of issuance. The $1.75 million one-time non-cash change for a preferred stock
dividend has been recognized in the computation of a loss applicable to common
stockholders as a charge against the accumulated deficit with a corresponding
increase in additional paid-in capital. There is no actual dividend
distribution to Series A Preferred stockholders. The
23
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
potentially dilutive Series A Convertible Preferred Stock Securities were not
included in the diluted loss per share applicable to common stockholders as the
effect would be anti-dilutive.
RECLASSIFICATION
The Company has reclassified certain prior year amounts to conform with
current year presentations.
3. TAXATION
The Company accounts for income taxes in accordance with the "liability
method." Under this method, income tax provisions are based on income taxes
currently payable. Those deferred because of temporary differences between the
financial statements and tax basis of assets and liabilities.
At December 31, 2000 and 1999, the Company had tax losses available for
offset against future years' earnings of approximately $16.3 million and $14.4
million, respectively. Temporary differences were insignificant as of such
dates. The Company has provided a full valuation allowance to reduce the
related deferred tax asset to zero.
Approximately $0.9 million, $2.0 million, $3.2 million, $3.4 million, $3.0
million, $1.9 million and $1.9 million of the tax loss carry forwards expire in
2009, 2010, 2011, 2012, 2018, 2019 and 2020, respectively. The Company has not
recognized any benefit from the aforementioned tax loss carry forwards. The
Taxpayer Relief Act of 1997 modified the net operating loss provisions so that
losses arising for tax years beginning after the effective date of the Act
(August 5, 1997) would be eligible for carry forward for twenty years. Existing
losses would still be subject to a 15 year carry forward period.
Under the provisions of the United States Tax Reform Act of 1986,
utilization of the Company's US federal tax loss carry forwards for the period
prior to December 12, 1995 may be limited as a result of the ownership change in
excess of 50% related to the 1995 Fuel Tech Rights Offering (see "Stockholders'
Equity" below for further information). Losses subsequent to the aforementioned
date may be limited due to cumulative ownership changes in any three year
period.
4. STOCKHOLDERS' EQUITY
On December 12, 1995, Fuel Tech completed a Rights Offering to its existing
shareholders of 72.4% of the Company's Common Stock, retaining 27.6% of the
Common Stock outstanding. Two million of the 2.5 million Company shares held by
Fuel Tech were offered in the 1995 Rights Offering. Approximately 1.8 million
Company shares were purchased in the offering, which raised net proceeds of
approximately $10.5 million, all of which was contributed by Fuel Tech to the
Company.
During 2000 and 1999, the Company received proceeds of $1.021 million and
$1.75 million through private placements of 1,362 and 3,500 shares of its Series
A Preferred Stock, respectively. In addition, in 1998 $1.4 million of bridge
loans and $.5 million of term loans were converted into 2,800 and 1,029 shares
of Series A Preferred Stock. During 2000 $712,000 (1,424 shares) of dividends
were declared but unissued on the Series A Preferred Stock. At December 31,
2000, the Company has 13,218 shares of Series A Preferred Stock issued and
outstanding.
Each share of the Company's Series A Preferred Stock is convertible into
333.33 shares of the Company's Common Stock, which is equivalent to $1.50 per
Common Share. Preferred shareholders vote on all matters as if their shares
were converted into Common Stock. In addition, the preferred shareholders elect
two board members as a class. Assuming full conversion of the Series A
Preferred Stock, the Company would have approximately 7.5 million shares of
Common Stock outstanding, of which Fuel Tech would own approximately 1.6 million
shares, or a 21.6% interest in the Company.
Holders of the Company's Series A Preferred Stock are entitled to receive,
when, as, and if declared by the Board of Directors of the Company out of funds
of the Company legally available therefore, cash dividends at the annual rate of
9%. However, in lieu of making dividends in cash, the Company may elect to pay
cumulative dividends in kind at the annual rate of 11%. Cash dividends and
dividends in kind are each deemed "Preferred Dividends." Dividends payable to
the holders of the Series A Preferred Stock are payable quarterly in arrears. It
is presently anticipated that the Company will pay dividends on these shares in
additional shares of Series A Preferred Stock, and that any earnings that the
Company may realize in the
24
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
foreseeable future will be retained to finance the expansion of the Company. As
of December 31, 2000, earned but undeclared dividends on the Series A Preferred
Stock approximated $200,000.
The Company can force the holders of the Series A Preferred Stock to
convert their shares, in whole or in part, into Common Stock at any time on, or
after, the date that the average Closing Price (as defined in the Certificate of
Designation) of the Common Stock equals or exceeds $4.50 for 20 consecutive
trading days. Such conversion may, at the election of the holders of 60% of the
issued and outstanding shares of the Company's Series A Preferred Stock, be
scheduled to occur on a pro-rata basis quarterly over 18 months. The Series A
Preferred Stock shall be automatically converted into Common Stock should the
Company consummate a public offering of its Common Stock in excess of certain
prescribed amounts. In the event of such mandatory conversion, accrued and
unpaid dividends will also convert into Common Stock, on the same terms as the
underlying shares of Series A Preferred Stock.
On April 30, 2000, the Company issued 39,490 shares of Common Stock to its
Board of Directors in lieu of approximately $44,400 of Director's Fees
pertaining to their services for the year ended December 31, 1999. The share
price used represented the average of the Company's 1999-quarter end, high and
low trading prices. Such Director's Fees had been accrued and charged to
expense during 1999.
On February 24, 1999, the Company issued 38,000 shares of Common Stock to
its Board of Directors in lieu of approximately $43,000 of Director's Fees
pertaining to their services for the year ended December 31, 1998. The share
price used represented the average of the Company's 1998-quarter end, high and
low trading prices. Such Director's Fees had been accrued and charged to
expense during 1998.
5. STOCK OPTIONS AND WARRANTS
The Company maintains a stock award plan, the 1994 Incentive Plan (the
"Plan"). Under the Plan, awards may be granted to participants in the form of
non-qualified stock options, stock appreciation rights, restricted stock,
performance awards, bonuses, or other forms of share-based or non-share-based
awards, or combinations thereof. The Company grants awards at fair market value
on the date of grant with expiration dates typically ranging from seven to ten
years. Participants in the Plan may be such of the Company's directors,
officers, employees, consultants, and advisers (except consultants or advisers
in capital-raising transactions) as the directors determine are key to the
success of the Company's business. The Company includes 50%-owned subsidiaries
or affiliates. In 1996, stockholders amended the Plan to increase from 10% to
12.5% the percentage of outstanding Common Shares of the Company used to
determine the maximum number of awards to participants. In 1997, the percentage
was further increased from 12.5% to 17.5%. Also, in 1999 the stockholders
amended the Plan to extend the 17.5 % from not only the issued and outstanding
Common Shares but also the Common Shares into which issued and outstanding
convertible securities of the Company may be converted. In general, the policy
of the Board was to grant stock options vesting in three equal portions on the
first through third anniversaries of the grant date for grants prior to 1997,
and in equal portions on the grant date and the first and second anniversaries
of the grant date for grants awarded after 1997.
If compensation expense for the Company's plan had been determined based on
the fair value at the grant dates for awards under its plan, consistent with the
method described in SFAS No. 123, the Company's net loss and basic and
diluted loss per common share would have been increased to the pro forma amounts
indicated below:
2000 1999 1998
------ ------ ------
Net loss attributable to Common Stockholders (000's):
As reported $2,713 $4,586 $2,984
Pro forma 3,077 4,680 3,157
Basic and diluted loss per common share:
As reported $ 1.03 $ 1.77 $ 1.19
Pro forma 1.17 1.80 1.25
In accordance with the provisions of SFAS No. 123, for purposes of the pro
forma disclosures the estimated fair value of the options is amortized over the
option vesting period. The application of the pro forma disclosures presented
25
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
above are not representative of the effects SFAS No. 123 may have on operating
results and earnings (loss) per share in future years due to the timing of stock
option grants and considering that options vest over a period of three years.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
The fair value of each option grant, for pro forma disclosure purposes, was
estimated on the date of grant using the modified Black-Scholes option-pricing
model with the following weighted-average assumptions:
2000 1999 1998
------- ------- -------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 6.67% 5.72% 4.69%
Expected volatility 99.7% 104.9% 92.4%
Expected life of option 4 YEARS 4 years 4 years
The following table presents a summary of the Company's stock option
activity and related information for the years ended December 31:
2000 1999 1998
--------------------------- --------------------------- ---------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000'S) EXERCISE PRICE (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE
--------------------------- --------------------------- ---------------------------
Outstanding, beginning
of year 760 $ 2.48 440 $ 3.41 365 $ 3.77
Granted 246 2.48 335 1.16 78 1.75
Exercised (27) .24 (12) .40 -- --
Forfeited (5) 1.93 (3) .90 (3) 2.00
--------------------------- --------------------------- ---------------------------
Outstanding, end
of year 974 $ 2.54 760 $ 2.48 440 $ 3.41
=========================== =========================== ===========================
Exercisable, end
of year 744 $ 2.72 537 $ 2.98 340 $ 3.47
Weighted-average
fair value of
options granted
during the year $ 1 .78 $ .69 $ 1.02
The following table summarizes information about stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------- ----------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER OF REMAINING WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- ---------------- --------- ---------------- ----------------- --------- -----------------
$ .20 - $2.50 487,500 7.34 $ 1.37 384,170 $ 1.39
$2.50 - 4.63 422,500 7.51 3.26 295,832 3.59
$5.63 - 6.82 64,450 5.03 6.70 64,450 6.70
- ---------------- --------- ---------------- ----------------- --------- -----------------
$ .20 - $6.82 974,450 7.26 $ 2.54 744,452 $ 2.72
26
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pursuant to a financial consulting agreement, an investment bank has a
warrant to purchase 50,000 shares of the Company's Common Stock, with an
exercise price of $6.50 per share (an 18% premium over market price on the date
of issue). The warrants expire on March 1, 2001.
In March 1997, in consideration of his undertaking to assist the Company in
obtaining sources of permanent financing, the Company granted a director of the
Company a warrant to purchase 25,000 shares of the Company's Common Stock for
$10.00 per share which exceeded the fair market value of the Company's Common
Stock at the date of grant.
In June 1999, in consideration of their undertaking to assist the Company
in obtaining sources of permanent financing the Company granted warrants to two
directors for 58,333 and 29,167 shares at $1.50 per share, which exceeded the
fair market value of the Company's Common Stock at the date of grant.
In March 2000, Pursuant to a financial consulting agreement, the company
granted an investment bank 25,000 warrants to purchase the Company's common
stock, at an exercise price of $3.00 per share. The value of such warrants was
$61,000 and was charged to earnings.
In April 2000, in consideration of their undertaking to assist the Company
in obtaining sources of permanent financing the Company granted warrants to two
directors for 27,675 and 12,150 shares at $2.25 per share. The value of such
warrants was $78,000 and was included in the cost of capital.
In November 2000, the Company granted the lenders a total of 100,000
warrants in conjunction with a $1,000,000 term loan agreement. 50,000 of the
warrants were awarded in November 2000, 25,000 of the warrants were awarded in
December 2000 when $500,000 of the term loan was borrowed and the remaining
25,000 warrants will be awarded when the remaining $500,000 is borrowed. The
warrants were priced at $2.00 per share. The value of the warrants issued was
$61,000 and have been capitalized as a deferred financing cost and will be
amortized over the life of the loan.
6. COMMITMENTS
The Company is obligated under a sublease agreement for its principal
office. In January 1999, the Company signed an extension to its original
sublease agreement, which runs from March 1, 1999, through February 28, 2002,
unless it is terminated sooner pursuant to the terms of the sublease. The
Company's minimum lease payments are as follows:
2001-$81,200, and 2002-$13,533. For the years ended December 31, 2000, 1999,
and 1998, rental expense approximated $81,200, $82,000, and $81,000,
respectively.
Effective October 28, 1994, Fuel Tech granted two licenses to the Company
for all patents and rights associated with its Platinum Fuel Catalyst
technology. Effective November 24, 1997, the licenses were canceled and Fuel
Tech assigned to the Company all such patents and rights on terms substantially
similar to the licenses. In exchange for the assignment, the Company will pay
Fuel Tech a royalty of 2.5% of its annual gross revenue from sales of the
Platinum Fuel Catalysts commencing in 1998. The royalty obligation expires in
2008. The Company may terminate the royalty obligation to Fuel
Tech by payment of $8,727,273 in 2001 and declining annually to $1,090,910 in
2008. The Company as assignee and owner will maintain the technology at its own
expense. Royalties payable to Fuel Tech at December 31, 2000 were not
significant.
7. RELATED PARTY TRANSACTIONS
On July 1, 1995, the Company entered into a $745,000 promissory demand note
(the "Demand Note") with Fuel Tech bearing an interest rate of 8% per annum. In
the first quarter of 1997, the Company repaid $250,000 of this note. Throughout
the life of the note, the Company made monthly interest payments on the unpaid
balance. Interest at a rate of 8% per annum was payable on the unpaid balance
on each principal payment date. As discussed in Note 4, in November 1998, Fuel
Tech converted such note, along with the associated accrued interest from such
note and its Bridge Loan, into 1,029 shares of the Company's Series A Preferred
Stock.
27
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During 1998, Fuel Tech executed a $500,000 Bridge Loan to the Company. On
November 11, 1998, as more fully described in Footnote 4, and pursuant to the
terms of the Bridge Loan, the entire $1.4 million Bridge Loan, inclusive of Fuel
Tech's portion, was converted into 2,800 shares of the Company's Series A
Preferred Stock. $250,000 of the $1,000,000 term loan in November 2000 was from
Fuel Tech and they received 25,000 of the 100,000 warrants granted.
The Company has a Management and Services Agreement with Fuel Tech. The
agreement requires the Company to reimburse Fuel Tech for management, services,
and administrative expenses incurred on behalf of the Company. The Company
agreed to pay Fuel Tech a fee equal to an additional 3-10% of the costs paid on
the Company's behalf, dependent upon the nature of the costs incurred. Certain
of Fuel Tech's officers and directors serve as officers and directors of the
Company, and the Company received management and administrative support from
Fuel Tech's staff. The financial statements include charges from Fuel Tech of
certain management and administrative costs, which approximate $77,385,
$106,000, and $168,000 for the years ended December 31, 2000, 1999, and 1998,
respectively. In the opinion of the Company's management, such costs are fair
and reasonable and are on terms no less favorable than could be obtained from a
third party.
Average trade balances due to Fuel Tech for the years ended December 31,
2000 and 1999, approximated $9,000 and $57,000, respectively.
The Company has a deferred salary plan with its Chief Executive Officer in
which he defers $62,500 of his annual salary until the company reaches $5m in
sales. For the years ended December 31, 2000 and 1999 $62,500, and $62,500 of
expense was deferred and accrued in connection with such arrangement. At
December 31, 2000 and 1999, total obligations were $125,000 and $62,500
pertaining to this plan.
The Company makes annual pension payments or accruals pursuant to a
deferred compensation plan on behalf of its Chief Executive Officer. For the
years ended December 31, 2000, 1999 and 1998, $50,000, $50,000 and $50,000 of
expense were recognized in connection with such plan. At December 31, 2000 and
1999, total obligations were $182,700 and $132,700, respectively.
8. MARKETING AND JOINT DEVELOPMENT AGREEMENTS
The Company and AMBAC International reached an agreement in December 1997
under which the parties will jointly share in the cost of development of the
ARIS injector for urea SCR. The Company holds the exclusive marketing rights to
the injector for a period of five years subject to certain minimum purchases of
injectors from AMBAC. The Company has agreed to purchase injectors exclusively
from AMBAC until November 3, 2002 or to pay AMBAC for 50% of AMBAC's development
cost and a royalty on injectors made elsewhere for the Company. The Company has
assigned its rights with AMBAC to the RJM Corporation as part of its License
Agreement.
No rights or licenses have been granted by either party to the other on
patents or inventions conceived prior to the agreement. However, the parties
have filed a joint patent on the specific ARIS injector. The Company has
retained all rights to its underlying patents including the fundamental
return-flow injection concept on which the US patent office has issued a "notice
of allowance."
AMBAC is currently assembling complete ARIS 2000 injector systems for the
Company according to the Company's proprietary design. The Company considers its
relationship with AMBAC to be good.
9. SUBSEQUENT EVENTS
In March 2001, the Board of Directors of the Company approved the issuance
of the Company's Common Stock in consideration of their accrued directors' fees
at December 31, 2000 (totaling $41,000), and for all future fees. A director may
choose to receive either all stock or 20% cash and 80% stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Company
will be set forth under the captions "Election of Directors" and "Directors and
Executive Officers of the Company" in the Company's Proxy Statement related to
the 2001 annual meeting of stockholders (the "Proxy Statement") and is
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and is incorporated by reference
herein excluding, however, the information under the captions "Report of the
Board of Directors on Executive Compensation" and "Performance Graph," which is
not incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be set forth under the caption
"Principal Stockholders and Stock Ownership of Management" in the Proxy
Statement and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The Financial Statements identified below and required by Part II,
Item 8 of this Form 10-K are set forth above.
Report of Independent Auditors
Balance Sheets as of December 31, 2000, and 1999
Statements of Operations for the years ended December 31, 2000,
1999, and 1998
Statements of Changes in Stockholders' Equity(Deficit) for the
years ended December 31, 2000, 1999, and 1998
Statements of Cash Flows for the years ended December 31, 2000,
1999, and 1998
(2) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because of the absence of the conditions
under which they are required or because the required information
where material is shown in the financial statements or the notes
thereto.
29
(3) EXHIBITS
Exhibit No. Title
------------ -----
*3(i) Certificate of Incorporation.
<><>3(ii) Certificate of Amendment of Certificate of Incorporation, effective
June 22, 1998.
*3(iii) By-Laws.
++3(iv) Certificate of Designation for Series A Convertible Preferred Stock.
<>3(v) Certificate of Amendment of Certificate of Designation for Series
A Convertible Preferred Stock.
<><>3(vi) Second Certificate of Amendment of Certificate of Designation for
Series A Preferred Stock.
**3(v) Third Certificate of Amendment of Certificate of Designation for
Series A Preferred Stock
*4a Specimen Stock Certificate, Common Stock.
++4b Specimen Stock Certificate, Series A Convertible Preferred Stock.
+10a Assignment of Intellectual Property Rights Fuel-Tech N.V. to
Platinum Plus, Inc. as of November 5, 1997.
+10b Assignment of Intellectual Property Rights Fuel Tech, Inc. to
Clean Diesel Technologies, Inc. as of November 5, 1997.
+10c Assignment Agreement as of November 5, 1997, among
Platinum Plus, Inc., Fuel-Tech N.V., and Clean Diesel Technologies, Inc.
*****10d 1994 Incentive Plan, as amended through August 8, 1996.
<><>10e Amendment of Section 5.1 of 1994 Incentive Plan, effective June 9, 1999.
****10f Management Services Agreement between Clean Diesel Technologies, Inc.,
Fuel Tech, Inc., and Fuel-Tech N.V. as of June 1, 1996.
***10g Office Premises Lease of January 26, 1996.
+10h Registration Rights Agreement between Clean Diesel Technologies, Inc.
and Fuel-Tech N.V. of November 5, 1997.
+++10i Registration Rights Agreement between Clean Diesel Technologies, Inc.
and the holders of Series A Convertible Preferred Stock as of November 11, 1998.
++10j Bridge Loan Agreement between Clean Diesel Technologies, Inc.
and the several lenders set forth on Schedule A thereto-dated May 8, 1998.
+++10k Loan Note Agreement between Clean Diesel Technologies, Inc. and the
several lenders set forth on Schedule A thereto-dated November 11, 1998.
*+10l Material Foreign Patents.
++++10m License Agreement as of 31 January 2000 between Clean Diesel
Technologies, Inc. and RJM Corporation.
++++10n NOx Reduction Assets Purchase Agreement as of 31 January 2000
between Clean Diesel Technologies, Inc. and RJM Corporation.
** 10 o Loan Facility Agreement of November 14, 2000 with exhibits.
**23.1 Consent of Auditors, Ernst & Young LLP.
- ---------------------------
* Previously filed as Exhibit to Registration Statement on Form S-1
of August 16, 1995, No. 33-95840.
** Filed herewith.
*** Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1995.
**** Previously filed as Exhibit to Form 10-Q for the quarter ended
September 30, 1996.
***** Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1996.
<> Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1998.
+ Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1997.
++ Previously filed as Exhibit to Form 8-K dated May 26, 1998.
+++ Previously filed as Exhibit to Form 10-Q for the quarter ended
September 30, 1998.
<><> Previously filed as Exhibit to forms 10-K for the year ended
December 31, 2000.
++++ Previously filed as Exhibit to Form 8-K dated February 1, 2000.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K for the fourth quarter of
2000.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Clean Diesel Technologies, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC.
March 23, 2001 By: /s/ Jeremy D. Peter-Hoblyn
- --------------------- ----------------------------------
Date Jeremy D. Peter-Hoblyn
Chief Executive Officer,
President, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
the following persons on behalf of Clean Diesel Technologies, Inc. and in the
capacities and on the date indicated have duly signed this report below.
/s/ Ralph E. Bailey Director and Chairman of the Board of Directors
- --------------------------
Ralph E. Bailey
/s/ Jeremy D. Peter-Hoblyn Chief Executive Officer, President, and Director
- -------------------------- (principal executive officer)
Jeremy D. Peter-Hoblyn
/s/ David W. Whitwell Chief Financial Officer, Vice President, and Treasurer
- -------------------------- (principal financial and accounting officer)
David W. Whitwell
/s/ Douglas G. Bailey Director
- --------------------------
Douglas G. Bailey
/s/ John A. de Havilland Director
- --------------------------
John A. de Havilland
/s/ Derek R. Gray Director
- --------------------------
Derek R. Gray
/s/ Charles W. Grinnell Director, Vice President, and Corporate Secretary
- --------------------------
Charles W. Grinnell
/s/ James M. Valentine Director, Chief Operating Officer, and
- -------------------------- Executive Vice President
James M. Valentine
Dated: March 23, 2001
31