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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, 2001
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
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COMMISSION FILE NO. 0-27432
CLEAN DIESEL TECHNOLOGIES, INC.
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(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
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(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
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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 15, 2002: $2.90
Indicate number of shares outstanding of each of the registered classes of
Common Stock at March 15, 2002: 11,241,379 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 2002 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
AIM Alternative Investment Market of the London Stock Exchange
Bhp Break horsepower per hour
BUWAL Bundesamt fur Umwelt, Wald und Landschaft (German Federal
Office for Environment, Forest and Landscape)
CARB California Air Resources Board
CDT Clean Diesel Technologies, Inc.
CNG Compressed Natural Gas
CO Carbon Monoxide
CO2 Carbon dioxide
DOCs Diesel Oxidizing Catalysts
DPFs Diesel Particulate Filters
EGR Exhaust Gas Recirculation
FBC Fuel Born Catalyst
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) The Company's Platinum & Cerium fuel additive
PM Particulate Matter
SCR Selective Catalytic Reduction
US EPA United States Environmental Protection Agency
Usg US gallons
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
Combustion engine development is influenced by concern over global warming
caused by CO2 emissions from fossil fuels and concern over toxic exhaust
emissions. Since CO2 is the result of combustion of fossil fuels, the primary
way to reduce CO2 emissions is to reduce fuel consumption. The diesel engine is
as much as 40% more fuel-efficient than gasoline engines. Thus, increased use
of diesel engines relative to gasoline engines is one way to reduce overall fuel
consumption and thereby significantly reduce CO2 emissions. Diesel engines,
however, emit higher levels of two toxic pollutants, namely particulates and
NOx, than gasoline engines fitted with auto catalysts. Each of these pollutants
affects human health and the environment.
Clean Diesel Technologies, Inc. "the Company", a Delaware corporation with
a principal place of business at 300 Atlantic Street, Stamford CT 06901, was
formed in 1994 as a wholly owned subsidiary of Fuel Tech to develop technologies
for cleaning up harmful emissions from diesel engines while reducing fuel
consumption. The Company was spun-off from Fuel Tech in December 1995 by way of
a rights issue. Over the past six years, the Company has developed its
technologies and is now commercializing Platinum Plus(R) fuel borne catalyst,
and the ARISTM 2000 NOx reduction system.
Management has worked together for over 15 years in the chemical, power,
fuel and emission control fields and have brought the Company to the
commercialization stage on a cost effective basis by co-operative funding for
development and demonstration programs with industry partners. The Company has
a strong patent position with 26 US patents issued and five US patent
applications pending as well as 63 other international patents issued and 68
international patent applications pending.
TECHNOLOGIES AND PRODUCTS
The Company's products, combined with other devices, can reduce particulate
emissions and NOx from diesel engines to or below the emission levels of natural
gas engines, while also reducing fuel consumption. This results in a reduction
in fuel costs and greenhouse gas emissions, primarily CO2, as well as in
emissions of particulates, NOx, CO and unburnt hydrocarbons.
PLATINUM PLUS(R)
Platinum Plus is a patented, fuel soluble, fuel borne catalyst, which
contains minute amounts of platinum and cerium catalysts. Platinum Plus takes
the catalytic action into engine cylinders where it improves combustion thereby
reducing particulates, unburnt hydrocarbons and CO emissions as well as
improving fuel economy. Recent fleet tests using Platinum Plus have shown
improvement in fuel economy of between 3% and 12%. Platinum Plus can be used on
its own with either regular or ultra low sulphur diesel fuel to reduce
particulate emissions by 10% to 25% while also improving the performance of
particulate filters (which trap up to 95% of particulates but in doing so clog
up with soot) by burning off the soot particles and further reducing toxic
emission components of CO and unburnt hydrocarbons.
From 1996 to 1999, the Company defined and managed several research and
development programs on platinum fuel catalysts which were conducted by Delft
Technical University (Netherlands), Ricardo Consulting Engineers (UK), Cummins
Engine Company (USA) and Southwest Research Institute (USA). Through its
strategy of using independent test houses, the Company's small technical team
has been able to run several programs on a cost effective basis while bringing
in a wide range of expertise. Most importantly, the results have been
independently derived.
Development of Platinum Plus was completed in 1999. In December of that
year, the Company received its US EPA registration of Platinum Plus for use in
bulk fuel by refiners, distributors and fleets. In 2000, the Company completed
the European VERT certification protocol for particulate filters and additives
for use with particulate filters and in 2001 BUWAL approved Platinum Plus for
use as a fuel borne catalyst with particulate filters.
Over the past 18 months, seven large fleet demonstration trials have been
carried out in the US in a range of industries including the beverage delivery,
waste hauling, grocery and fuel delivery. The improvement in fuel economy from
3
using Platinum Plus ranged from 3% to 12% with an average 6% improvement. The
best results were generally attributable to short haul "stop and go" driving
where Platinum Plus has the greatest opportunity to improve the combustion
process. The field testing programs have confirmed the 3% to 8% improvement
measured on engine test beds at both Cummins Engine Company and the Southwest
Research Institute.
ARIS 2000(TM)
The ARIS 2000 (advanced reagent injection system) is a patented injection
system for the reduction of NOx emissions from diesel engines. The system
comprises a single fluid computer-controlled injector that provides precise
injection of non-toxic urea-based reagents into the exhaust of a stationary or
mobile engine where it converts NOx across a catalyst to nitrogen and water
vapor. The system has shown NOx reductions of up to 90% or more on a steady
state operation and of up to 85% in transient operations. This process, known
as selective catalytic reduction (SCR), has been in use for many years in power
stations and is considered by management to be well proven. ARIS 2000 is a
miniature version of the SCR injection system. It is designed for volume
production and is applicable to both stationary diesel engines for power
generation and mobile diesels used in trucks, buses, trains and boats.
In 1996, the Company recruited a small team to develop an injection system
for NOx control. The Company's target technical specifications for the system
were based on the assumption that new emission control requirements would force
NOx emission levels from diesel engines down very significantly to levels
similar to those required for gasoline engines fitted with auto catalysts. From
1997 to 1998, the Company investigated and patented several methods of achieving
this by using urea and other ammonia precursors in both liquid and solid form.
In 1998 and 1999, the Company produced prototypes, which were tested both by
potential customers and on a test rig. Subsequently, pre-production units were
made and supplied to engine manufacturers for selected test programs. The
Company sold the first commercial systems in late 1998 and in early 1999.
During 1998 and 1999, the Company also produced prototypes of the mobile ARIS
system. Both systems use the same controls and injectors. The Company is
seeking partners to complete the development and commercialization of the mobile
ARIS system.
THE MARKET AND THE REGULATORY ENVIRONMENT
Clean Diesel estimates that worldwide annual consumption of diesel fuel
amounts to approximately 200 billion usg. Consumption in the major markets is
summarized as follows:
Annual consumption of
diesel fuel - billion usg/year
United States 50
Europe 60
Pacific Rim 50
Rest of the World 40
----------------
200
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NEW DIESEL ENGINES
While engine manufacturers have, to date, met emissions regulations by
engine design changes (which tend to increase fuel consumption), management
believes that further reductions can only be achieved by using combinations of
cleaner burning fuels and after treatment systems such as diesel particulate
filters and catalytic systems for NOx reduction.
There is an immediate market for NOx reduction systems for stationary
diesel engines, many of which are used in power generation. Some 9,000 new high
horse power engines are sold each year. An SCR system comprising an ARIS 2000
injection system and a suitable catalyst is being sold into this market by the
RJM Corporation (a licensee of the ARIS 2000 technology).
In the last two years, emissions regulations for new mobile diesel engines
in the major world markets have continued to tighten. Emission levels which
came into effect in 1999 for new vehicles were some 40% to 90% less than levels
of the mid 1980s. Regulations for introduction over the next seven years in
Europe, the United States and Japan should reduce emission levels by 85% to 99%
below the mid 1980s levels. The market for mobile NOx reduction systems is
expected by management to develop between 2004 and 2007 in conjunction with the
release of these new regulations, which are expected to call for particulate
emissions and NOx limits of 0.01 and 0.2g/bhp hour respectively on new engines.
In the opinion of management, the US market for diesel engines is expected
to grow significantly in the next few years based on fuel economy considerations
if NOx and particulate emissions can be controlled. Engine manufacturers have
indicated that the regulations for 2007 cannot be met without NOx and/or
particulate after treatment.
4
In Europe, where diesel vehicles represent nearly 26% of all new vehicles
sold, two of the larger manufacturers have announced plans to introduce vehicles
with additive/filter systems. In this application, the additive is part of an
onboard dosing system. In Europe, regulations for heavy-duty vehicles for 2005
may require the use of particulate filters. Japan is proposing requirements for
particulate filters as early as 2003 on new heavy duty diesels.
EXISTING DIESEL ENGINES AND THE RETROFIT MARKET
While much of the regulatory pressure and the response from engine
manufacturers has been focused on new engine emissions, there is increasing
concern over pollution from existing diesel engines which have a life of some 30
years or more and hence there is a growing interest in the potential for
retrofitting diesel engines with emission reduction systems. These include
stationary diesels, construction equipment and public transportation vehicles
such as buses as well as truck fleets.
In 1998, CARB declared diesel particulates to be toxic and in 2000, it
proposed reductions in particulate emissions from over one million existing
engines in California as well as more stringent controls for new engines. In
March 2000, the US EPA announced a program to provide emissions credits for
reduction in emissions from existing heavy-duty diesel engines. The US EPA has
stated its objective for retrofitting more than 100,000 vehicles with
particulate controls by the end of 2002. In response, areas such as Houston,
Sacramento and Seattle are known to be proposing retrofit programs.
Japan has announced a retrofit program, which would require all diesel
vehicles residing or passing through Tokyo to install particulate matter traps
phasing in between April 2003 and April 2006.
MARKET OPPORTUNITY
Continuing tightening of clean air standards, emission control regulations,
pressure for fuel efficiency and growing international awareness of the
greenhouse effect provide the Company with a substantial opportunity in world
markets.
Without compromising the fuel economy benefits of diesel, a significant
reduction of particulate and NOx emissions can only be achieved using
combinations of improved engine design, cleaner burning fuels and after
treatment systems such as diesel particulate filters and catalytic systems. The
Company's Platinum Plus (which improves combustion catalytically) and the ARIS
2000 technology (which allows engines to be tuned for best fuel economy while
reducing NOx emissions) can form key components of both these after treatment
systems.
The convergence of requirements for emission compliance and the high cost
of fuel, make the use of the Company's products economical. With diesel fuel
selling at about $1.50 per usg in the United States, the fuel economy
improvement alone pays for the use of Platinum Plus. A fuel saving of 3% will
provide a payback to US fleet operators. Platinum Plus in controlled fleet
tests showed an average of 6% fuel economy improvement. In Europe, where in
some countries diesel fuel retails for as much as $4.00 per gallon, because of
the high tax component, fuel economy benefits are even more pronounced.
Accordingly, there are two basic market drivers for the Company's products,
namely from customers who want fuel economy or customers who need to reduce
emissions. Most customers for Platinum Plus can be categorized as: OEM engine
manufacturers for emission control; retrofit of existing engines for emission
control; and fuel economy customers (fleets).
MARKETING STRATEGY AND COMMERCIALIZATION
The Company's plan is to supply finished fuel additive products direct in
certain North American markets and to license its ARIS 2000 NOx reduction
technology and Platinum Plus products for international markets and in some
sectors of the North American market. Large chemical and additive companies
will be supplied platinum concentrate by the Company and they will blend and
market Platinum Plus. The Company believes its strategy of licensing represents
the most efficient way to gain widespread distribution quickly and exploit
worldwide demand for its technologies.
Over the past 18 months, the Company has entered into a number of license and/or
marketing agreements.
- The Company has licensed the RJM Corporation to market exclusively the
ARIS 2000 technology for stationary, marine and railroad diesels in
the Americas. The market in the US alone is estimated at over 9,000
new engines per year with an installed base of over 150,000 engines.
Clean Diesel received $1.1 million in license revenue over the first
18 months from the RJM Corporation and is receiving a $1,500 to $2,500
royalty on each unit sold.
- The Company has exclusively licensed Mitsui & Co., Ltd. ("Mitsui" ) to
market the ARIS 2000 technology for stationary engines in Japan. The
Company received $495,000 in non-refundable up front license fees and
will earn a $1,500 to $2,500 royalty on each unit sold.
5
- Mobile ARIS licenses - Several parties are in discussions with the
Company for non-exclusive licenses for the mobile NOx retrofit market
in the United States and Mitsui has an option for exclusive marketing
and sales rights for the ARIS 2000 mobile technology in Japan.
- The Lubrizol Corporation is exclusively licensed for the use of
Platinum Plus for filter applications in Europe.
- Baker Petrolite Corporation (a division of Baker Hughes) is licensed
for the non-exclusive distribution of Platinum Plus to refiners and
terminals in the United States.
- Global Companies, LLC is licensed to supply Platinum Plus to fleets in
New England, as the exclusive refiner distributor.
- An agreement has been signed with ValvTect Petroleum Products (a
division of RPM, Inc.) for the supply of Platinum Plus to fleets and
oil jobbers in the United States.
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 times below
workplace standards.
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 2001, the Company employed 3 individuals, including two executive
officers, in engineering and product development. During the years ended
December 31, 2001, 2000, and 1999, the Company's research and development
expenses exclusive of patent costs totaled approximately $365,000, $534,000, and
$827,000, respectively. The Company expenses all research and development costs
as incurred.
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.
6
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 & CONTINUING OPERATING LOSSES
Prior to 2000, the Company was a development stage business and has
incurred losses since inception totaling $19,385,000 (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 the second
quarter 2003. 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," elsewhere herein.
The Company has had minimal revenues through December 31, 2001. The
Company expects to continue to incur operating losses at least through 2002.
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 provisions 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.
The Company's business is impacted by air quality regulations and
regulations governing vehicle emissions as well as emissions from stationary
engines. If such regulations were to be abandoned or held invalid, the
Company's prospects would be adversely affected.
NO ASSURANCES OF ADDITIONAL FUNDING
The Company may seek 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 if needed, or on terms acceptable to the Company. In
the event that the Company needs additional funds and is unable to raise such
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,
7
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
One Director/Officer of Fuel Tech and its subsidiaries is also a
Director/Officer of the Company, and Fuel Tech as a 16.3% common stockholder, is
in a position involving the possibility of conflicts of interest with respect to
transactions concerning the Company, if any transactions were to occur. The
Company currently has four directors independent of Fuel Tech, see Item 13,
"Certain Relationships and Related Transactions" and Subsequent Events footnote
in Item 8.
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 Platinum Plus FBCs. 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.
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, and agreed to a six month lease extension through August 2002, with 3
months notice to terminate after that through December 2002. The lease has an
annual cost of $116,000.
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. This 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
2002 of $7.6 million and declining annually to $1.1 million in 2008. The
Company, as owner, maintains the technology at its expense.
8
During 2001, the Company filed two additional US patent applications and
15 international patent application. The Company now has a total of 26 US
patents granted and 63 international patents. There are currently five US
patent applications pending and 68 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
On December 10, 2001 CDT requested the Preferred Stockholders consent to
the conversion of the Preferred Stock. In return, the mandatory conversion rate
was increased to 373.33.
The amendment approved with CDT receiving 3,936,960 (81%) affirmative
votes, 0 negative (0%) votes and the holders of 937,324 (19%) votes did not
return their consent. According to the Certificate, 2,924,570 (60%) votes were
required to adopt the amendment. The Preferred Stock votes on the basis of
333.33 votes for each share of Preferred Stock of which there were 14,623 shares
outstanding and of record on December 10, 2001, entitled to a total of 4,874,284
votes.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's Common Stock is traded in the US in the over-the-counter
(OTC) market and on the London Stock Exchange through the AIM. Reports of
transactions of the Company's shares are available on the OTC Electronic
Bulletin Board (Symbol CDTI) and on the London Stock exchange (Symbol CDT and
CDTS). At March 14, 2002, there are 179 registered holders and approximately
979 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.
OTC LONDON STOCK EXCHANGE
BULLETIN BOARD AIM
(IN US$) (IN GBP)
STOCK PRICE DATE: HIGH LOW HIGH LOW
--------------------------------------- ----------- -------- -------- --------
1st Quarter 2000. . . . . . . . . . . . . . 3.75 1.63 -- --
2nd Quarter 2000. . . . . . . . . . . . . . 2.63 1.25 -- --
3rd Quarter 2000. . . . . . . . . . . . . . 2.50 1.63 -- --
4th Quarter 2000. . . . . . . . . . . . . . 2.06 0.81 -- --
1st Quarter 2001. . . . . . . . . . . . . . 1.19 0.81 -- --
2nd Quarter 2001. . . . . . . . . . . . . . 2.38 1.48 -- --
3rd Quarter 2001. . . . . . . . . . . . . . 2.15 1.50 -- --
4th Quarter 2001. . . . . . . . . . . . . . 2.65 1.60 1.63 1.64
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 December 28, 2001, 2,580,664 shares of
its Common Stock. The price of the Common Stock was 1.40 GBP per share
(approximately $2.00 per share). The Company also converted 15,897 shares of
Series A Preferred Stock into 5,934,829 shares of Common Stock, which reflects a
12% premium (373.33 common shares per one Series A Preferred share). The
proceeds of the Common Stock issuance and Series A Preferred Stock conversion of
approximately $3.721 million (net of expenses and $0.817 million in term loan
re-payment) will be used for general corporate purposes of the Company.
Also pursuant to Regulation S and Sec.4 (2) exemptions from registration
under the Act, the Company, under a $1 million 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 the Company's Common
Stock. In March 2001, the Company issued an additional $500,000 of its Senior
Promissory Notes and Warrants to purchase 25,000 shares of the Company's Common
9
Stock. In December 2001, in exchange for Common Stock, the Company retired
$750,000 of its Senior Promissory Notes including accrued interest of 10% per
annum.
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 2001 and 2000, the Company obtained $3.721
million and $1.021 million of proceeds, respectively, through private placement
sale of shares of its Common Stock and Series A Convertible Preferred Stock (the
"Series A Preferred Stock"), respectively. As a participant in these
financings, Fuel Tech owns 1,825,119 shares of the Company's Common Stock and
has an approximate 16.3% interest in the Company at December 31, 2001.
As discussed elsewhere herein, prior to 2000, the Company was a development
stage business. The following selected data are derived from the financial
statements of Clean Diesel Technologies, Inc. The data should be read in
conjunction with the financial statements, related notes and other financial
information herein.
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999 1998 1997
------ ------- ------- ------ -------
STATEMENTS OF OPERATIONS DATA (in thousands, except per share data)
Product Revenue $ 176 $ 199 $ 142 $ 46 $ 199
License and Royalty Revenue 1,424 383
------ ------- ------- ------ -------
Total Revenues 1,600 582 142 46 199
Costs and expenses:
Cost of product sales 117 133 81 29 132
General and administrative 1,858 1,799 1,585 1,515 1,730
Research and development 365 534 827 1,009 1,985
Patent filing and maintenance 196 152 134 156 237
------ ------- ------- ------ -------
Loss from operations 936 2,036 2,485 2,663 3,885
Interest (income) expense, net 170 (35) (44) 57 (121)
Cost of withdrawn Rights Offering -- -- -- 264 --
------ ------- ------- ------ -------
Net loss before preferred stock dividends 1,106 2,001 2,441 2,984 3,764
Preferred Stock Dividend (non-cash) 621 712 393 -- --
One-time Preferred Stock conversion premium 1,276 -- -- -- --
One-time imputed non-cash preferred dividend -- -- 1,750 -- --
Net loss attributable to common stockholders $3,003 $2,713 $4,584 $2,984 $3,764
====== ======= ======= ====== =======
Basic and diluted loss per common share $ 1.08 $ 1.03 $ 1.77 $ 1.19 $ 1.50
Weighted-average shares outstanding 2,777 2,631 2,594 2,517 2,517
Cash dividends paid $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
DECEMBER 31,
-----------------------------------------
2001 2000 1999 1998 1997
------ ------- ------- ------ -------
BALANCE SHEET DATA (in thousands)
Current assets $4,612 $ 965 $1,311 $1,940 $1,682
Total assets 4,658 1,057 1,346 1,985 1,750
Current liabilities 808 400 494 686 894
Long-term liabilities 368 808 196 -- 395
Working capital 3,804 565 817 1,254 788
Stockholders' equity (deficit) 3,482 (151) 656 1,299 461
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Prior to 2000, 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
2001 VERSUS 2000
Revenues and cost of product sales were $1,600,000 and $117,000,
respectively, in 2001 versus $582,000 and $133,000, respectively, in 2000. The
2001 revenues consist of Platinum Plus sales, ARIS 2000 system sales and ARIS
license revenue and royalties.
The Company has received its EPA registration of the platinum-cerium
additive. Field trials of the platinum-cerium additive started in 2000 and have
continued in 2001. In 2001, sales of the platinum-cerium additive totaled
$114,000. Based on initial trial results and licensing agreements, ongoing
revenues from sales of its Platinum Plus additive are expected from
distributors, refiners, additive marketing companies and fleets.
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 license with Mitsui for Japan with an option on
the mobile ARIS technology. Total sales of systems and license/royalties of the
ARIS 2000 in 2001 was $62,000 and $1,424,000 respectively versus $84,000 and
$306,000 in 2000 respectively. The Company and its licensee have sold and
installed over 100 systems. The Company believes that the ARIS 2000 NOx
reduction system has applications for both stationary engines and mobile
engines. While the ARIS system 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 $1,858,000 in 2001 from
$1,799,000 in 2000. The increase is the result of non-cash warrant expense
associated with investor relation activities partially offset by lower travel
expense in 2001. Research and development expenses decreased to $365,000 in 2001
from $534,000 in 2000. The continued reduction in 2001 is due to the shift in
focus from research and development to commercialization.
Patent filing and maintenance expenses increased to $196,000 in 2001 versus
$152,000 in 2000. The increase is due in part to maintaining the patents and
filing new applications. Interest income decreased to $11,000 in 2001 from
$38,000 in 2000. Interest expense increased to $181,000 in 2001 from $3,000 in
2000 due to interest expenses associated with the Term Loan financing
arrangement.
In 2001, the Company recorded $1,897,000 of in-kind preferred stock
dividends on its Series A Preferred Stock. In 2000, the Company recorded
$712,000 of in-kind preferred stock dividends on its Series A Preferred Stock.
2000 VERSUS 1999
Revenues and cost of product sales were $582,000 and $133,000,
respectively, in 2000 versus $142,000 and $81,000, respectively, in 1999. The
2000 revenues consist of Platinum Plus sales and license revenues, ARIS 2000
license revenues 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
11
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).
LIQUIDITY AND SOURCES OF CAPITAL
Prior to 2000, the Company was primarily engaged in research and
development and has incurred losses since inception aggregating $19,385,000
(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 1999 and licensing revenue in 2000 and 2001, sales and
revenue 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.
For the years ended 2001, 2000, and 1999, the Company used cash of
$725,000, $1,872,000, and $2,518,000, respectively, in operating activities.
At December 31, 2001, and December 31, 2000, the Company had cash and cash
equivalents of $4,023,000 and $541,000, respectively. The increase in cash and
cash equivalents in 2001 was due to $3.7 million raised through the issuance of
the Company's Common Stock in December 2001. Working capital increased to
$3,803,000 at December 31, 2001, from $562,000 at December 31, 2000. The
Company anticipates incurring additional losses through at least 2002 as it
further pursues its commercialization efforts.
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
fee and inventory payment.
In April 2001, the Company amended its February 2000 ARIS Stationary NOx
Reduction license agreement with the RJM Corporation. Under the amended terms
of the license agreement, the Company received two fixed non-refundable payments
of $412,500 each on June 1 and September 1 in lieu of potentially receiving
$1,040,000 on the second or third anniversary of the license agreement. The
Company will continue to receive unit royalties on future sales of stationary,
marine or locomotive applications by RJM.
In June 2000, the Company received a $160,000 payment from Mitsui 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 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 pro-rated over the
six-month license period.
In August 2001, the Company completed a license agreement with Mitsui for
CDT's ARIS 2000 NOx control system for all stationary diesel power generators in
Japan. Under the agreement, the Company received non-refundable upfront license
12
payments of $495,000 and will receive ongoing standard royalties on each system
sold by Mitsui. Mitsui also has an option to license the ARIS technology for
mobile applications in Japan for an additional license fee.
In November 2000, the Company secured a $1,000,000 privately financed term
loan facility. In December 2000, the Company drew down $500,000 of the term
loan facility and in March 2001 the remaining $500,000 of the term loan was
drawn down. As part of the private placement stock transaction in December
2001, $750,000 of the outstanding term loan plus accrued interest was converted
to common stock.
In December 2001, the Company received $3.721 million (net of expenses and
term loan repayment) through a private placement of 2,580,664 shares of its
common stock. In conjunction with the private placement, the Company converted
all of its Series A Preferred Stock to Common Stock. All of the Company's
Common Stock shares were registered to trade on the AIM of the London Stock
Exchange.
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, 2001 will be sufficient to fund the
Company's operations through the second quarter 2003. The Company may require
additional capital to fund its future operations. 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 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.
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."
The Company generally receives all income in United States dollars. The
Company typically makes several small payments monthly in various foreign
currencies for patent expenses, product tests and registration, local marketing
and promotion and consultants.
13
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, 2001 and 2000, and the related statements
of operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 2001. 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 above present fairly, in
all material respects, the financial position of Clean Diesel Technologies, Inc.
at December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Stamford, Connecticut
March 4, 2002
14
CLEAN DIESEL TECHNOLOGIES, INC.
BALANCE SHEET (IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
2001 2000
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,023 $ 541
Accounts receivable 197 50
Inventories 296 287
Other current assets 96 87
--------- ---------
TOTAL CURRENT ASSETS 4,612 965
Other assets 46 92
--------- ---------
TOTAL ASSETS $ 4,658 $ 1,057
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 250 $ --
Accounts payable and accrued expenses 558 400
--------- ---------
TOTAL CURRENT LIABILITIES 808 400
Notes payable -- 500
Deferred compensation and pension benefits 368 308
--------- ---------
TOTAL LONG TERM LIABILITIES 368 808
STOCKHOLDERS' EQUITY(DEFICIT):
Preferred Stock, par value $0.05 per share,
authorized 80,000 , no shares issued and outstanding
Series A Convertible Preferred Stock, par value $0.05 per share,
$500 per share liquidation preference, authorized 20,000 shares,
14,623 shares issued and outstanding in 2000. -- 1
Common Stock, par value $0.05 per share, authorized
15,000,000 shares, issued and outstanding 11,214,280
and 2,660,611 shares 561 133
Additional paid-in capital 27,058 20,849
Accumulated deficit (24,137) (21,134)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 3,482 (151)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,658 $ 1,057
========= =========
See accompanying notes.
15
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Product revenue $ 176 $ 199 $ 142
License and royalty revenue 1,424 383 -
--------- --------- ---------
Total revenue 1,600 582 142
Costs and expenses:
Cost of sales 117 133 81
General and administrative 1,858 1,799 1,585
Research and development 365 534 827
Patent filing and maintenance 196 152 134
--------- --------- ---------
Loss from operations 936 2,036 2,485
Interest income (11) (38) (46)
Interest expense 181 3 2
--------- --------- ---------
Net loss before preferred stock dividends 1,106 2,001 2,441
Preferred Stock dividends (non-cash) 621 712 393
Preferred Stock conversion premium (non-cash) 1,276 -- --
One-time imputed non-cash preferred dividend -- -- 1,750
--------- --------- ---------
Net loss attributable to common stockholders $ 3,003 $ 2,713 $ 4,584
========= ========= =========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ 1.08 $ 1.03 $ 1.77
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,777 2,631 2,594
========= ========= =========
See accompanying notes.
16
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY(DEFICIT) (IN THOUSANDS)
Series A Convertible Total
Preferred Stock Common Stock Additional Stockholders'
----------------- --------------- Paid-In Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
------- -------- ------ ------- ------------ ------------- ----------------
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 directors' 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 directors' fees in
common stock -- -- 39 2 42 -- 44
Declared but not issued preferred
dividend 1.4 -- -- -- 712 (712) --
------- -------- ------ ------- ------------ ------------- ----------------
BALANCE AT DECEMBER 31, 2000 14.6 $ 1 2,660 $ 133 $ 20,849 $ (21,134) $ (151)
Net loss for year -- -- -- -- -- (1,106) (1,106)
Issuance of common stock warrants -- -- -- -- 157 -- 157
Payment of directors' fees in
common stock -- -- 26 1 40 41
Stock options exercised -- -- 13 1 2 -- 3
Declared but not issued preferred
dividend 1.2 -- -- -- 621 (621) --
Conversion of Preferred Shares to
common stock (15.8) (1) 5,299 265 (264) -- --
Premium (12%) paid to preferred
shareholders for conversion to
common stock -- -- 636 32 1,244 (1,276) --
Issuance of common stock -- -- 2,175 109 3,612 -- 3,721
Term loan and related interest
conversion to common stock -- -- 405 20 797 -- 817
------- -------- ------ ------- ------------ ------------- ----------------
BALANCE AT DECEMBER 31, 2001 -- $ -- 11,214 $ 561 $ 27,058 $ (24,137) $ 3,482
======= ======== ====== ======= ============ ============= ================
See accompanying notes.
17
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- ----------
OPERATING ACTIVITIES
Net loss before preferred dividends $ (1,106) $ (2,001) $ (2,441)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 11 10 18
Amortization of deferred financing costs 91 -- --
Interest expense from term loans converted to common
shares 65 -- --
Compensatory stock warrant 120 61 --
Changes in operating assets and liabilities:
Account receivable (147) (4) (46)
Inventories (9) 34 (102)
Other current assets (9) (35) 6
Accounts payable and accrued expenses 259 63 47
--------- --------- ----------
Net cash used in operating activities (725) (1,872) (2,518)
--------- --------- ----------
INVESTING ACTIVITIES
Purchase of fixed assets (17) (7) (8)
--------- --------- ----------
Net cash used in investing activities (17) (7) (8)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 3 7 5
Proceeds from term loans 500 500 --
Proceeds from issuance of common stock, net 3,721 1,021 1,750
--------- --------- ----------
Net cash provided by financing activities 4,224 1,528 1,755
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,482 (351) (771)
Cash and cash equivalents at beginning of period 541 892 1,663
--------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,023 $ 541 $ 892
========= ========= ==========
NON-CASH ACTIVITIES
Preferred Stock dividend $ 621 $ 712 $ 393
Preferred Stock conversion premium (non-cash) 1,276 -- --
One-time imputed non-cash preferred dividend -- -- 1,750
Conversion of term loans and related interest into
common stock 817 -- --
See accompanying notes.
18
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
Clean Diesel Technologies, Inc. (the "Company" or "CDT") was incorporated
in the State of Delaware on January 19, 1994, as a wholly owned subsidiary of
Fuel-Tech N.V. ("Fuel Tech"). 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%. As a result of additional equity offerings
in subsequent years, Fuel Tech currently holds a 16.3% interest in the Company
as of December 31, 2001.
The Company is a specialty chemical and energy technology 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. 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.
As a result of the Company's recurring operating losses ($19,385,000 since
inception excluding non-cash preferred stock dividends), the Company has been
unable to generate a positive cash flow. In management's opinion, the Company's
cash balance at December 31, 2001 will be sufficient to fund the Company's
operations through the second quarter 2003. The Company may require additional
capital to fund its future operations and working capital needs. Although the
Company believes that it would be successful in raising additional capital,
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.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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, 2001,
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.
INVENTORIES
Inventories are stated at the lower of cost or market and consist of
finished product and platinum metal. 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 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 significant ongoing services to be
performed by CDT.
19
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In April 2001, the Company amended its February 2000 ARIS Stationary NOx
Reduction license agreement with the RJM Corporation. Under the amended terms
of the license agreement, the Company received two fixed non-refundable payments
of $412,500 each on June 1 and September 1 in lieu of potentially receiving
$1,040,000 on the second or third anniversary. The Company recognized the
$825,000 as license revenue in 2001. The Company receives unit royalties on all
sales of stationary, marine or locomotive applications by RJM.
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 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.
In August 2001, the Company completed a license agreement with Mitsui for
CDT's ARIS 2000 NOx control system for all stationary diesel power generators in
Japan. Under the agreement, the Company received a non-refundable upfront
license payment of $495,000, and will receive ongoing standard royalties on each
system sold by Mitsui. The Company recognized the license payment as revenue in
2001, as there is no significant ongoing services to be performed by the
Company. Mitsui also has an option to license the ARIS technology for mobile
applications in Japan for an additional license fee.
Royalty fees are recognized by the Company when earned.
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 programs,
salary and benefits, consultancy fees, materials, and certain testing equipment.
The cost of patent filings and maintenance have been charged to operations as
they are incurred. Included in accrued expenses at December 31, 2001 are
liabilities for research and development of $20,000 and patent legal expense of
$15,000.
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. Basic earnings per share are computed by dividing net
earnings by the weighted average shares outstanding during the reporting period.
Diluted earnings per share are computed similar to basic earnings per share
except that the weighted average shares outstanding are increased to include
additional shares from the assumed exercise of stock options, if dilutive.
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 common 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 was
required to record a one-time non-cash charge 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 charge 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 in 1999. There was no actual dividend
distribution to
20
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Series A Preferred stockholders. The 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.
3. INCOME TAXES
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, 2001 and 2000, the Company had tax losses available for
offset against future years' earnings of approximately $ 17.2 million and $16.3
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, $1.9 million and $0.8 million of the tax loss carry
forwards expire in 2009, 2010, 2011, 2012, 2013, 2019, 2020 and 2021,
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. Losses subsequent
to the aforementioned date may be limited due to cumulative ownership changes in
any three year period.
4. STOCKHOLDERS' EQUITY
During 2001 and 2000, the Company received proceeds of $3.721 million (net
of $0.644 million in expenses and $0.817 million in term loan re-payment) and
$1.021 million through private placements of 2,580,664 and 1,362 shares of its
Common Stock and Series A Preferred Stock, respectively. In addition, in 1999
$1.75 million was raised through a private placement of 3,500 Series A preferred
stock shares and 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 2001, $1,897,000 of dividends were declared for Series A preferred stock
and converted into the Company's Common Stock. On December 28, 2001, the Company
converted all outstanding Series A Preferred Stock (15,897 shares) including
accrued stock dividends, into Common Stock (5,934,829 shares).
In May 2001 and April 2000 the Company issued 25,676 and 39,490 shares,
respectively of Common Stock to its Board of Directors, in lieu of approximately
$40,800 and $44,400 of Director's Fees pertaining to their services for the
years ended December 31, 2000 and 1999. The share price used represented the
average of the Company's quarter end, high and low trading prices. Such
Director's Fees had been accrued and charged to expense during 2000 and 1999.
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 percentage of outstanding Common Shares
of the Company used to determine the maximum number of awards to participants is
17.5%. 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.
21
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED
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:
2001 2000 1999
------ ------ ------
Net loss attributable to Common Stockholders (000's):
As reported $3,003 $2,713 $4,584
Pro forma 3,425 3,077 4,680
Basic and diluted loss per common share:
As reported $ 1.08 $ 1.03 $ 1.77
Pro forma 1.23 1.17 1.80
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
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:
2001 2000 1999
-------- -------- --------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 4.66% 6.67% 5.72%
Expected volatility 94.2% 99.7% 104.9%
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:
2001 2000 1999
--------------------------- --------------------------- ---------------------------
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 974 $ 2.54 760 $ 2.48 440 $ 3.41
Granted 240 1.97 246 2.48 335 1.16
Exercised (12) .20 (27) .24 (12) .40
Forfeited (63) 2.00 (5) 1.93 (3) .90
-------------------------------------------------------- ---------------------------
Outstanding, end
of year 1,139 $ 2.48 974 $ 2.54 760 $ 2.48
======================================================== ===========================
Exercisable, end
of year 939 $ 2.55 744 $ 2.72 537 $ 2.98
Weighted-average
fair value of options
granted during the year $ 1.38 $ 1.78 $ .69
22
The following table summarizes information about stock options outstanding
at December 31, 2001:
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 - $2.49 652,500 8.05 $ 1.55 515,003 $ 1.44
$ 2.50 - 4.63 422,500 6.51 3.26 359,168 3.40
$ 5.63 - 6.82 64,450 4.03 6.70 64,450 6.70
- ---------------- --------- ---------------- ----------------- --------- -----------------
$ .20 - $6.82 1,139,450 7.25 $ 2.48 938,621 $ 2.55
In March 1997, in consideration of his assistance to 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 and was
included in the cost of capital.
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 were awarded when the remaining $500,000 was borrowed in March
2001. The warrants were priced at $2.00 per share. The value of the warrants
issued was $60,750 and have been capitalized as a deferred financing cost and
will be amortized over the life of the loan. The value of the 25,000 warrants
issued in March 2001 was $37,250 and have been capitalized as a deferred
financing cost. In December 2001, the Company converted $750,000 of the
outstanding $1,000,000 loan into Common Stock and expensed $16,100 of the
remaining capitalized warrant expense.
In February 2001, in consideration of their performing investor relations
on behalf of the Company in the UK, the Company granted Equity Development
Limited two 50,000 blocks of warrants at $1.50 per share. The first 50,000
block of warrants has a 1 year term and vests when the Company's stock price
remains above $2.50 for 7 consecutive days. The second 50,000 block of warrants
has a term of two years and vests when the Company's stock price remains above
$3.00 for 7 consecutive days. The value of such warrants was $119,500 and
charged to earnings in 2001.
In conjunction with the Company's December 2001 AIM listing and private
placement of Common Stock, the Company granted its financial advisor, Nabarro
Wells Limited, 51,613 warrants at $2.00 per share on December 28, 2001 and was
considered cost of capital.
CDT Warrants
2001 2000 1999
-------------------------- -------------------------- --------------------------
Warrants EXERCISE PRICE Warrants EXERCISE PRICE Warrants EXERCISE PRICE
(000'S) PER SHARE (000'S) PER SHARE (000'S) PER SHARE
-------------------------- -------------------------- --------------------------
Outstanding, beginning
of year 302 N/A 163 N/A 75 $ 6.50 - $10.00
Granted 177 $ 1.50 - 2.00 139 $ 1.50 - 2.00 88 $ 1.50
Exercised - - - - - -
Forfeited 50 $ 6.50 - - - -
------------------------------------------------------ --------------------------
Outstanding, end
of year 429 $ 1.50 - 10.00 302 $ 1.50 - 10.00 163 $ 1.50 - 10.00
====================================================== ==========================
23
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
- ----------------------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER OF REMAINING (YEARS) WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES WARRANTS EXERCISE LIFE EXERCISE PRICE EXERCISABLE PRICE
- ----------------------------------------------------------------- ------------------------------
$1.50 - $2.00 339,113 5.54 $ 1.72 239,113 $ 1.82
2.25 - 3.00 64,825 6.41 2.54 64,825 2.54
10.00 25,000 2.33 10.00 25,000 10.00
- ----------------------------------------------------------------- ------------------------------
$1.50 - $10.00 428,938 5.36 $ 2.33 328,938 $ 2.58
6. COMMITMENTS
The Company is obligated under a sublease agreement for its principal
office. In January 1999, the Company extended to its original sublease
agreement, which runs from March 1, 1999, through February 28, 2002. The Company
has agreed to a six month extension with three month notice for termination of
the lease through December 2002, at an annual rate of $116,000. The Company's
minimum lease payments for 2002 is $71,500. For the years ended December 31,
2001, 2000, and 1999, rental expense approximated $81,500, $81,200, and $82,000,
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 $7,636,364 in 2002 and declining annually to $1,090,910 in 2008. The Company
as assignee and owner will maintain the technology at its own expense. Minimum
royalties were paid to Fuel Tech in 2001 and royalties payable to Fuel Tech at
December 31, 2001 were not significant.
7. RELATED PARTY TRANSACTIONS
In November 2000, the Company secured a $1,000,000 term loan facility at a
10% interest rate from several preferred shareholders, including Fuel Tech Inc.
which pledged $250,000. In 2000 and 2001 the Company drew down the entire
$1,000,000 term loan and at December 31, 2001, the Company had $250,000 term
loan payable to Fuel Tech plus accrued interest. The remaining $750,000 of term
loan and accrued interest was repaid as part of the December 2001 private
placement of common stock discussed in the stock holders equity note.
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. The financial statements include charges from Fuel Tech of certain
management and administrative costs, which approximate $70,00, $77,000, and
$106,000 for the years ended December 31, 2001, 2000, and 1999, 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,
2001 and 2000, approximated $6,000 and $9,000, respectively.
The Company had a deferred salary plan with its Chief Executive Officer in
which he deferred $62,500 of his annual salary until the Company reaches $5
million in revenue. This agreement was terminated in March 2001 and the
executive's salary was returned to full pay. For the years ended December 31,
2001 and 2000 $10,400, and $62,500 of expense was accrued in connection with
such arrangement. At December 31, 2001 and 2000, total obligations were $135,400
and $125,000 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
three years ended December 31, 2001, $50,000, $50,000 and $50,000 of expense was
recognized per year in connection with such plan. At December 31, 2001 and 2000,
total obligations were $232,700 and $182,700 pertaining to this plan.
24
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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."
9. SUBSEQUENT EVENTS
Effective March 1, 2002, Ralph E. Bailey Chairman and non-executive
director of the Company and Douglas G. Bailey, non-executive director of the
Company have resigned from the Company's board of directors in order to
concentrate their attention on the activities of Fuel Tech. The Board
subsequently elected CEO Jeremy Peter-Hoblyn to Chairman and reduced its size
from seven to five directors.
In March 2002, 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, 2001 (totaling $52,000), and for all future fees. A director may
choose to receive either all stock or 20% cash and 80% stock.
In January 2002, the Company retired its outstanding notes payable by
paying $250,000 plus accrued interest of $24,100 to the note holders.
10. RECENT ACCOUNTING PRONOUNCEMENTS
Business Combinations
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
applies to business combinations occurring after June 30, 2001. SFAS No. 141
requires that the purchase method of accounting be used and includes guidance on
the initial recognition and measurement of goodwill and other intangible assets
acquired in the combination.
Goodwill and Other Intangible Assets
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 no longer permits the amortization of goodwill
and indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS No.
121. The goodwill impairment test under SFAS No. 142 requires a two-step
approach, which is performed at the reporting unit level, as defined in SFAS No.
142. Step one identifies potential impairments by comparing the fair value of
the reporting unit to its carrying amount. Step two, which is only performed if
there is a potential impairment, compares the carrying amount of the reporting
unit's goodwill to its implied value, as defined in SFAS No. 142. If the
carrying amount of the reporting unit's goodwill exceeds the implied fair value
of that goodwill, an impairment loss is recognized for an amount equal to that
excess. The Company will adopt SFAS No. 142 effective January 1, 2002 and does
not expect the impact of the adoption of SFAS No. 142 to have a material effect
on the Company's results of operations or financial position.
Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard provides the accounting for the cost of
legal obligations associated with the retirement of long-lived assets. SFAS No.
143 requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and
capitalize that amount as a part of the book value of the long-lived asset.
That cost is then depreciated over the remaining life of the underlying
long-lived asset. The Company is required to adopt SFAS No. 143 effective
January 1, 2003 and does not expect the impact of the adoption of SFAS No. 143
to have a material effect on the Company's results of operations or financial
position.
25
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144. This standard supersedes
SFAS No. 121 and the provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" with
regard to reporting the effects of a disposal of a segment of a business. SFAS
No. 144 establishes a single accounting model for assets to be disposed of by
sale and addresses several SFAS No. 121 implementation issues. The Company is
required to adopt SFAS No. 144 effective January 1, 2002 and does not expect the
impact of the adoption of SFAS No. 144 to have a material effect on the
Company's results of operations or financial position.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Ended 3/31/01 Ended 6/30/01 Ended 9/30/01 Ended 12/31/01 Total Year
Unaudited Unaudited Unaudited Unaudited 2001
---------------------------------------------------------------------------------
TOTAL REVENUE $ 24 $ 919 $ 499 $ 158 $ 1,600
GROSS PROFIT 17 868 449 149 1,483
NET (LOSS)/PROFIT (760) 44 (364) (1,923) (3,003)
BASIC LOSS PER SHARE (0.29) 0.02 (0.13) (0.63) (1.08)
DILUTED LOSS PER SHARE (0.29) 0.01 (0.13) (0.63) (1.08)
- -------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Ended 3/31/00 Ended 6/30/00 Ended 9/30/00 Ended 12/31/00 Total Year
Unaudited Unaudited Unaudited Unaudited 2000
---------------------------------------------------------------------------------
Total revenue $ 306 $ 59 $ 112 $ 105 $ 582
Gross profit 284 34 71 60 449
Net loss (462) (829) (682) (740) (2,713)
Basic and Diluted loss per share (0.18) (0.32) (0.26) (0.27) (1.03)
- -------------------------------------------------------------------------------------------------------------------
<FN>
Note: The sum of the quarters' earnings per share may not equal the full year per share amounts
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 2002 annual meeting of stockholders (the "Proxy Statement") and is
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
26
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, 2001, and 2000
Statements of Operations for the years ended December 31, 2001,
2000, and 1999
Statements of Changes in Stockholders' Equity(Deficit) for the
years ended December 31, 2001, 2000, and 1999
Statements of Cash Flows for the years ended December 31, 2001,
2000, and 1999
(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.
27
(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(vii) 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 Form 8-K for the issuance of new stock in the fourth
quarter of 2001.
28
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 4, 2002 By: /s/ Jeremy D. Peter-Hoblyn
- ----------------------- ----------------------------------
Date Jeremy D. Peter-Hoblyn
Chief Executive Officer and
Chairman of the Board of Directors
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/ Jeremy D. Peter-Hoblyn Chief Executive Officer and Chairman of the
--------------------------- Board of Directors
Jeremy D. Peter-Hoblyn (principal executive officer)
/s/ David W. Whitwell Chief Financial Officer, Vice President,
--------------------------- and Treasurer (principal financial and
David W. Whitwell accounting officer)
/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 and President
---------------------------
James M. Valentine
Dated: March 4, 2002
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