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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(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
- ------------------------------ --------------
(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
---------------------------------------------------------
(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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ITEM 8. FINANCIAL STATEMENTS (As amended April 9, 2001 to add unaudited
quarterly financial data.)
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
2
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.
3
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.
4
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.
5
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.
6
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.
7
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
8
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
9
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
10
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
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.
11
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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
12
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
13
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Quarterly Financial Data (Unaudited) (000s)
FIRST SECOND THIRD FOURTH YEAR
- ------------------------------------------------------------------------------------------------
2000
Net sales $ 306 $ 59 $ 112 $ 105 $ 582
Gross profit 284 34 71 60 449
Net loss attributable to common stockholders (462) (829) (682) (740) (2,713)
Basic loss per share (0.18) (0.32) (0.26) (0.27) (1.03)
Diluted loss per share (0.18) (0.32) (0.26) (0.27) (1.03)
- ------------------------------------------------------------------------------------------------
1999
Net sales $ 9 $ 50 $ 41 $ 42 $ 142
Gross profit 4 17 22 18 61
Net loss attributable to common stockholders (704) (664) (2,429) (a) (787) (4,584)
Basic loss per share (0.28) (0.26) (0.94) (0.29) (1.77)
Diluted loss per share (0.28) (0.26) (0.94) (0.29) (1.77)
Note: The sum of the quarters' earnings per share may not equal the full year
per share amounts.
a. Includes one-time imputed non-cash preferred dividend.
14
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.
Dated: April 9, 2001 /s/ D. W. Whitwell
----------------------------------
David W. Whitwell
Vice President, Treasurer
and Chief Financial Officer
15