UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-27432
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CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1393453
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(State of Incorporation) (I.R.S. Employer Identification No.)
Clean Diesel Technologies, Inc.
300 Atlantic Street - Suite 702
Stamford, CT 06901-3522
(Address of principal executive offices) (ZipCode)
(203) 327-7050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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As of May 7, 2002, there were outstanding 11,241,379 shares of Common Stock, par
value $0.05 per share, of the registrant.
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CLEAN DIESEL TECHNOLOGIES, INC.
Form 10-Q for the Quarter Ended March 31, 2002
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of March 31, 2002, 3
and December 31, 2001
Statements of Operations for the Three 4
Months Ended March 31, 2002 and 2001
Statements of Cash Flows for the Three 5
Months Ended March 31, 2002 and 2001
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands except share data)
March 31, December 31,
2002 2001
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,254 $ 4,023
Accounts receivable 13 197
Inventories 291 296
Other current assets 105 96
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Total current assets 3,663 4,612
Other assets 44 46
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Total assets $ 3,707 $ 4,658
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- 250
Accounts payable and accrued expenses 411 558
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Total current liabilities 411 808
Deferred compensation and pension benefits 381 368
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Total long term liabilities 381 368
Stockholders' deficit:
Preferred stock, par value $.05 per share,
authorized 80,000 shares, no shares issued
and outstanding -- --
Series A convertible preferred stock, par
value $.05 per share, $500 per share
liquidation preference, authorized 20,000
shares, no shares issued and outstanding -- --
Common stock, par value $0.05 per share,
authorized 15,000,000 shares, issued and
outstanding 11,214,280 shares 561 561
Additional paid-in capital 27,153 27,058
Accumulated deficit (24,799) (24,137)
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Total stockholders' equity 2,915 3,482
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Total liabilities and stockholders' equity $ 3,707 $ 4,658
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See notes to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except per share data)
Three Months Ended
March 31
2002 2001
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Revenue:
Product revenue $ 60 $ 13
License and royalty revenue 11 11
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Total revenue 71 24
Costs and expenses:
Cost of sales 44 7
General and administrative 556 435
Research and development 111 84
Patent filing and maintenance 28 48
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Loss from operations (668) (550)
Interest income (15) (3)
Interest expense 9 12
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Net loss before preferred stock dividend (662) (559)
Preferred stock dividend (non-cash) -- 201
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Net loss attributed to common stockholders $ (662) $ (760)
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Basic and diluted loss per common share $ (0.06) $(0.29)
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Weighted average number of common shares
Outstanding - basic and diluted 11,214 2,661
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See notes to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31
2002 2001
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OPERATING ACTIVITIES
Net loss before preferred stock dividend $ (662) $ (559)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 3 3
Amortization of deferred financing cost 7 12
Compensatory stock warrants 95 --
Changes in operating assets and liabilities:
Accounts receivable 184 34
Inventories 5 11
Other current assets (9) 18
Accounts payable and accrued expenses (134) (8)
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Net cash used in operating activities (511) (489)
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FINANCING ACTIVITIES
Proceeds/(repayment) from/(of) term loan (250) 500
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Net cash (used in) provided by financing activities (250) 500
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INVESTING ACTIVITIES
Purchase of fixed assets (8) (2)
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Net cash used in investing activities (8) (2)
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NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (769) 9
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Cash and cash equivalents at beginning of period 4,023 541
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,254 $ 550
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NON-CASH ACTIVITIES
Preferred stock dividend -- 201
See notes to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
NOTEs TO FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included. All such adjustments are of a normal recurring nature. Operating
results for the three-month period ended March 31, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. For further information, refer to the Financial Statements and footnotes
thereto included in the Company's Form 10-K for the year ended December 31,
2001.
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 that reduced its ownership in
the Company to 27.6%. Fuel Tech currently holds a 16.3% interest in the Company
as of March 31, 2002.
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.
Prior to 2000, the Company was primarily engaged in research and
development and has incurred losses since inception totaling $20,047,000
(excluding non-cash preferred stock dividends). In management's opinion, the
Company's cash balance at March 31, 2002 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.
INVENTORIES
Inventories are stated at the lower of cost or market and consist of
finished product. Cost is determined using the first-in, first-out (FIFO)
method.
REVENUE RECOGNITION
The Company recognizes revenue from sales of Platinum Plus fuel borne
catalyst and ARIS 2000 systems upon shipment.
In 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
ARIS sales of stationary, marine or locomotive applications by RJM.
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In August 2001, the Company completed a license agreement with Mitsui & Co.
Ltd 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 were 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.
NOTES PAYABLE
In November 2000, the Company arranged a $1,000,000 term loan with three
private lenders. The term loan had a 10% interest rate and was payable in full
on May 14, 2002. The Company drew down $500,000 in November 2000 and the
remaining $500,000 in March of 2001. 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. The remaining $250,000 portion of the
term loan plus accrued interest was paid in cash on January 18, 2002.
STOCKHOLDERS' EQUITY
During December 2001, the Company received proceeds of $3.721 million (net
of $0.644 million in expenses and $0.817 million in term loan re-payment)
through private placements of 2,580,664 of its Common Stock. In 2000, the
Company received $1.021 million through private placements of 1,362 shares of
its Series A Preferred Stock. 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 dividend and conversion premium were declared
for the 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).
EARNINGS PER SHARE
Employee stock options and stock purchase warrants were not included in the
computation of diluted earnings per share because either the Company reported a
loss for the period or their exercise prices were greater than the average
market price of the common stock and therefore would be antidilutive.
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. In December 2001, $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. In January 2002, the Company
repaid the remaining $250,000 term loan payable to Fuel Tech Inc. plus accrued
interest.
The Company has a Management and Services Agreement with Fuel Tech. Under
the agreement, the Company pays 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. Currently, a fee of 3% is assessed on all costs billed to the
Company from Fuel Tech. Charges to the Company, inclusive of the administrative
fee, were approximately $17,300 in both the first quarter of 2002 and 2001.
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COMMITMENTS
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. The 2001
royalties of $2,673 were paid to Fuel Tech in 2002 and royalties payable to Fuel
Tech at March 31, 2002 were not significant.
MARKETING AND LICENSE AGREEMENTS
In March 2001, the Company licensed the Lubrizol Corporation to distribute
and blend the Company's patented Platinum Plus fuel borne catalyst in Europe for
use with particulate filters. The seven year exclusive agreement includes
minimum annual sales performance requirements.
In June 2001 the Company announced a non-exclusive distribution license
agreement with Baker Petrolite, a division of Baker Hughes. Baker Petrolite
will distribute CDT's patented Platinum Plus diesel fuel combustion catalyst to
refineries and fuel terminals in the U.S. and Canada.
In August 2001, the Company completed a license agreement with Mitsui & Co.
Ltd 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 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 September 2001, the Company signed a license agreement with Global
Companies LLC for bulk treatment of diesel fuel with the Platinum Plus fuel
additive. Global Companies LLC of Waltham, MA will be the exclusive terminal
blender of the Platinum Plus diesel fuel combustion catalyst in New England for
delivery to select fuel marketers and fleet customers.
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CLEAN DIESEL TECHNOLOGIES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q that are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See "Risk Factors of the Business" in Item 1, "Business," and also
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Company's Form 10-K for the year ended December 31, 2001.
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 December 1999, the Company received its
US EPA registration for its platinum-cerium fuel catalyst product and completed
its first commercial sales.
Product sales and cost of sales were $71,000 and $44,000 respectively for
the first quarter of 2002 versus $24,000 and $7,000 for 2001. Platinum Plus
fuel catalyst sales of $13,000 were recorded in the first quarter of 2002 and
2001, respectively. Commercial sales of Platinum Plus fuel catalyst began in
December 1999 and the Company is in the process of completing additional
distribution agreements with several companies. ARIS product sales of $47,000
were recorded in the first quarter of 2002.
Included in the 2002 and 2001 revenue is $11,000 of royalty income from the
RJM Corporation for the ARIS 2000 NOx reduction technology. CDT will earn a
royalty on all future RJM sales of the ARIS 2000.
General and administrative expenses increased $121,000 to $556,000 in the
first quarter 2002 versus $435,000 in the same period of 2001. The rise in
spending is related to increases in salaries and travel related to the marketing
of the Company's products as well as the expensing of non-cash compensatory
stock warrants ($95,000) issued in 2001 but vesting in 2002 for public relation
services.
Research and development expenses increased $27,000 to $111,000 in 2002
versus $84,000 in the comparable period in 2001. The increase is attributable
to the start of several verification and certification projects for Platinum
Plus.
Patent filing expense decreased $20,000 to $28,000 in 2002 versus $48,000
in the comparable 2001 period. The decrease is due the timing of patent filing
and when the annuity payments come due.
Interest income increased $12,000 in 2002 to $15,000 from $3,000 in the
comparable period in 2001. This was a result of an increase in the amount of
cash and cash equivalents on hand in the first quarter of 2002.
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LIQUIDITY AND SOURCES OF CAPITAL
Prior to 2000, the Company was primarily engaged in research and
development and has incurred losses since inception aggregating $ 20,047,000
(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 three months ended March 31, 2002 and 2001, the Company used cash
of $511,000 and $489,000 respectively, in operating activities.
At March 31, 2002 and December 31, 2001, the Company had cash and cash
equivalents of $3,254,000 and $4,023,000, respectively. The decrease in cash
and cash equivalents in 2002 was the result of payments made for expenses
related to the stock offering in December 2001 and the normal on-going
operations of the Company. 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 which 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 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
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. The remaining $250,000 plus accrued interest was paid in cash
in January 2002.
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.
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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 March 31, 2002 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.
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.
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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
January 10, 2002
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CLEAN DIESEL TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC.
Date: May 7, 2002 By: /s/ Jeremy D. Peter-Hoblyn
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Jeremy D. Peter-Hoblyn
Chairman and Chief Executive Officer
Date: May 7, 2002 By: /s/ David W. Whitwell
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David W. Whitwell
Vice President and Chief Financial Officer
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