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As filed with the Securities and Exchange Commission on February 25, 2000
Commission File No. 333-88207
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United States Securities And Exchange Commission
Washington, D.C. 20549
Pre-Effective Amendment No. 1 To Form SB-2
Registration Statement Under The Securities Act Of 1933
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
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Delaware 3598 98-0211550
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number.) Identification No.)
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John P. Thuot
7087 MacPherson Avenue
Burnaby, British Columbia, Canada, V5J 4N4
(604) 435-9339
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
(Name, Address and Telephone Number of Agent for Service of Process)
Approximate date of proposed sale to public: As soon as possible after this
registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [_]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
Calculation of Registration Fee
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Proposed Proposed Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Share Offering Price Fee
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Common stock, $0.0001 par value 5,437,803 $0.0001(1) $543.78 $0.14(3)
Common stock, $0.0001 par value 1,158,019 $0.0001(2) $115.80 $0.03(3)
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(1) Estimated solely for purposes of computing registration fee pursuant to
Rule 457. Arbitrary price set at par value as there is no sales price for
these shares and no trading market is contemplated or value established.
(2) Sales price set under this prospectus.
(3) Previously paid in connection with the initial filing of this registration
statement.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the registration statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
S
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 25, 2000
Prospectus
[LOGO]
Combustion Systems Inc.
6,595,822 Shares of Common Stock
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This prospectus relates to the offer and sale or distribution by some of our
stockholders of up to 6,595,822 shares of our common stock pursuant to the
following transactions:
. The sale of up to 1,158,019 shares at a price of $0.001 per share by five
of our stockholders; and
. The distribution of up to 5,437,803 shares by three of our corporate-
stockholders to their respective stockholders as part of a dividend by
each of these corporate-stockholders.
There is no public market for the common stock to be offered and sold or
distributed under this prospectus, and we cannot give you any assurance that any
public market for these shares will develop at any time in the future. Clean
Energy will not receive any payment of cash or other property as part of the
sales or distributions under this prospectus.
_____________
An investment in the common stock which is being sold or distributed under this
prospectus involves a high degree of risk. See "Risk Factors" beginning on page
3 of this prospectus.
_____________
Neither the United States Securities and Exchange Commission nor any state or
provincial securities administrator, including the British Columbia Securities
Commission, has approved or disapproved of the common stock which is being sold
or distributed under this prospectus, or determined that this prospectus is
complete or accurate. It's illegal for anyone to tell you otherwise.
_____________
The information in this prospectus is not complete and may be changed. We are
not allowed to sell or distribute the common stock offered by this prospectus
until the registration statement containing this prospectus that we have filed
with the Securities and Exchange Commission is declared effective by the
Securities and Exchange Commission. This prospectus is not an offer to sell or
distribute our common stock--and doesn't solicit offers to receive sales or
distributions--in any state or province where this offer or sale or
distribution is not otherwise permitted.
The date of this prospectus is February 25, 2000
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7087 MacPherson Avenue, Burnaby, British Columbia, Canada V5J 4N4
(604) 435-9339
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Table Of Contents
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Risk Factors.................................................................................................. 3
Risks Relating to Our Company and Our Business.......................................................... 3
Risks Relating to Our Common Stock...................................................................... 9
Capitalization................................................................................................ 13
Determination of Offering Price............................................................................... 13
Use of Proceeds............................................................................................... 13
Dividend Policy............................................................................................... 14
Business...................................................................................................... 14
Overview................................................................................................ 14
Our Corporate History................................................................................... 16
How Our Pulse Combustion Technology Works............................................................... 16
Competing Pulse Combustion Products..................................................................... 18
Competitive Advantages Of Our Pulse Combustion Technology............................................... 19
Markets For Burner Units................................................................................ 26
Marketing Strategy...................................................................................... 27
Pending Proposals For Our Technology.................................................................... 27
Additional Applications Of Our Technology We Intend To Target In The Near Future........................ 30
Manufacturing Capacity And Suppliers.................................................................... 31
Research And Development................................................................................ 31
License Agreements Governing Our Technologies........................................................... 31
Patents And Proprietary Rights.......................................................................... 34
Employees............................................................................................... 35
Facilities.............................................................................................. 35
Government Regulation................................................................................... 35
Legal Proceedings....................................................................................... 35
Management's Discussion And Analysis Of Financial Condition And Results Of Operations......................... 36
General................................................................................................. 36
Overview................................................................................................ 36
Results Of Operations................................................................................... 36
Liquidity And Capital Resources......................................................................... 36
Plan Of Operation And Prospective Capital Requirements.................................................. 37
Other Matters........................................................................................... 38
Management.................................................................................................... 39
Identity................................................................................................ 39
Business Experience..................................................................................... 39
Board of Directors...................................................................................... 41
Employment Agreements and Executive Compensation........................................................ 42
Indemnification of Directors, Executive Officers And Agents............................................. 42
Change of Control Arrangements.......................................................................... 44
Principal Stockholders........................................................................................ 44
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Certain Relationships And Related Transactions................................................................ 46
Transactions With Management and Others................................................................. 46
Indebtedness Of Clean Energy To Management And Others................................................... 47
Indebtedness Of Management And Others To Clean Energy................................................... 47
Description Of Our Securities................................................................................. 48
General................................................................................................. 48
Common Stock............................................................................................ 48
Series "A" Preferred Stock.............................................................................. 49
Series "B" And Series "C" Preferred Stock............................................................... 52
Non-Designated Preferred Stock.......................................................................... 54
Provisions In Our Certificate Of Incorporation and Bylaws Governing Rights Of Stockholders.............. 54
Founding Stockholders Agreement......................................................................... 55
OTC Bulletin Board Lock-up Restrictions................................................................. 57
1999 Clean Energy Stock Plan............................................................................ 58
Delaware Business Combination Act....................................................................... 60
Plan of Distribution.......................................................................................... 61
Selling or Distributing Stockholders.......................................................................... 62
Market For Our Securities..................................................................................... 63
General................................................................................................. 63
Intent to Establish a Limited Public Market for Common Stock on The NASD OTC
Electronic Bulletin Board............................................................................... 63
Compliance With Penny Stock Rules....................................................................... 64
Restrictions On Transfer of Securities in the United States Without Compliance With State
"Blue Sky" Securities Laws.............................................................................. 64
Restrictions On Transfer of Securities in Canada Without Compliance With
Provincial Securities Laws.............................................................................. 65
OTC Bulletin Board Lock-up Restrictions................................................................. 66
Restrictions On Sale Imposed Under Rule 144............................................................. 66
Transfer Agent and Registrar.................................................................................. 67
Legal Matters................................................................................................. 67
Experts....................................................................................................... 67
Where You Can Find More Information........................................................................... 67
Index To Financial Statements................................................................................. 69
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Risk Factors
You should consider our common stock to be an investment that involves a high
degree of risk. In order to attain an appreciation for these risks, you should
read this prospectus in its entirety and consider all of the information and
advisements contained in this prospectus, including the following risk factors.
Any of the risk factors described below or elsewhere in this prospectus could
materially adversely affect our business, operating results and financial
condition, and could result in a complete loss of any value in our common stock.
Although we have attempted to provide a comprehensive list of risks, there may
be other risks and uncertainties that may also materially adversely affect our
business and financial condition that we have not yet identified or that we
currently think are immaterial.
You should rely only on the information contained in this prospectus to evaluate
our business and prospects and the value of our common stock. We have not
authorized anyone to provide you with information different from that contained
in this prospectus.
Clean Energy conducts its transactions in the currency of both the United States
and Canada, although it considers the United States dollar to be its functional
currency. All references to "dollars" in this prospectus refer to United States,
or U.S., dollars unless specific reference is made to Canadian, or Cdn.,
dollars. The rate of exchange of Canadian dollars to United States dollars as of
October 31, 1999, is Cdn. $1.49 to U.S. $1.
Risks Relating To Our Company and Our Business
Our Limited Operating History Could Adversely Affect Our Business
We were only recently organized, on March 1, 1999, and have a limited operating
history. Our activities through the date of this prospectus have encompassed:
. developing our business plan;
. obtaining license rights to our burner technologies;
. establishing administrative offices and laboratory facilities; engaging
administrative and research and development personnel; and
. commencing work on various burner proto-types under certain proposals intended
to lead to commercial contracts.
We are subject to all the risks and issues inherent in the establishment and
expansion of a new business enterprise including, among others, problems of
entering new markets, marketing new technologies, hiring and training personnel,
acquiring reliable facilities and equipment, and implementing operational
controls. In general, startup businesses are subject to risks and or levels of
risk that are often greater than those encountered by companies with established
operations and relationships. Startups often require significant capital from
sources other than operations. The management and employees of startup business
shoulder the burdens of the business operations and a workload associated with
company growth and capitalization that is disproportionately greater than that
for an established business. Our limited operating history makes it difficult,
if not impossible, to predict future operating results. We cannot give you any
assurance that we will successfully address these risks. Our failure to
successfully address these risks could have a material, adverse effect on our
business, financial condition and operating results.
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We Have Accumulated Losses Since Our Inception, And We Anticipate That We Will
Continue To Incur Operating Losses For The Foreseeable Future
We are a developmental stage company since we have not commenced commercial
sales of our burner technologies and have no revenues to date. We do not
anticipate that we will generate revenues for at least four to six months at the
earliest, assuming that one or more of our pending projects lead to a commercial
contract. We have, as a result of our lack of revenues, incurred operating
losses in the amount of $508,048 from our inception in March 1999 through
October 31, 1999, and we anticipate that we will continue to incur substantial
operating losses for the foreseeable future, despite any revenues we may receive
in the short-term from any of our pending projects, due to the significant costs
associated with the development and marketing of our burner technologies.
If We Do Not Raise Additional Working Capital Funds To Pay Our Operating And
Project Expenses, We Will Not Be Able To Sustain Our Operations
We currently have insufficient working capital to fund our projected operating
and project costs for more than one month. We also anticipate that we will need
to raise at least $700,000 to fund our projected operating and project costs
over the next twelve months, and at least $2 million, including the $700,000
noted above, in additional working capital to fully implement our longer-term
business plan and marketing strategies. We have no current arrangements for
obtaining this additional capital, and will seek to raise it in one or more
increments through contract advances, public or private sales of debt or equity
securities, debt financing or short-term loans, or a combination of the
foregoing. We cannot give you any assurance that we will be able to secure the
additional capital we require to continue our operation at all, or on terms
which will not be objectionable to our company or our stockholders, including
substantial dilution or the sale or licensing of our technologies. Unless we
unexpectedly generate sufficient working capital to continue operations through
revenue-generating contracts, our inability to raise sufficient additional
working capital in the near future would likely force us to suspend our
operations, and possibly even liquidate our assets and wind-up and dissolve our
company.
Note number one to our financial statements states that if we do not raise
sufficient capital there is a substantial doubt as to our ability to continue as
a going concern. Our independent auditors, Deloitte & Touche LLP, stated in
their report accompanying our financial statement that they would be required to
express a going concern opinion were our financial statements prepared in
accordance with United States reporting standards for auditors.
We May Never Become Profitable
Although we are working on proto-types under several pending proposals, we have
not entered into any revenue-generating contracts to date, and our ability to do
so will be dependent in primary part upon our ability to satisfactorily complete
the proto-types, to raise sufficient capital to fund these efforts, and to
otherwise successfully implement our various market strategies under our
business plan. Even if we enter into revenue-generating contracts, we cannot
give you any assurance that we will attain or sustain operating profitability as
a result of these contracts.
Should We Fail In Our Efforts To Enter Into Any Revenue-Generating Contracts In
The Near Future, We May Be Forced To Suspend Our Operations
If our efforts to enter into revenue-generating contracts in the near future
based upon our pending project proposals are unsuccessful, we would likely be
forced to suspend our operations, and possibly even liquidate our assets and
wind-up and dissolve our company, unless we are otherwise able to raise
sufficient working capital to fund our continuing operations until we enter into
revenue-generating contracts in the farther future.
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Burner Products Based Upon Our Our Burner Technologies Will Be New And Unique
And May Not Be Accepted By The Market
Products using our burner technologies must compete with established
conventional steady-state burner technologies and conventional "tubular" pulse
combustion technologies which have already achieved market acceptance. The
design for our burner technologies is new and unique, and no products based upon
our technologies and configurations have been commercially produced or sold to
date, either by our company or by any of our competitors. Additionally, although
there is a market for pulse combustion burner products using differently
configured pulse burner technology designs, these products are not widely
accepted by the market, and therefore not particularly useful as a precedent for
the introduction of our pulse combustion burner technology. As is typical in the
case of any new technology, demand and market acceptance for products based upon
new technologies are subject to a high level of uncertainty and risk, including
the risk that the marketplace may not accept, or be receptive to, the potential
benefits of these new products. The extent and pace of market acceptance of new
burner products based upon our burner technologies will ultimately be a function
of many variables, including the following:
. the efficacy, performance and attributes of these new products;
. the ability to obtain necessary regulatory approvals to commercially market
these new products;
. the effectiveness of marketing and sales efforts, including educating
potential customers as to the distinctive characteristics and benefits of
these new products; and
. the ability to meet manufacturing and delivery schedules; and product
pricing.
The extent and pace of market acceptance of products based upon our burner
technologies will also depend upon general economic conditions affecting
customers' purchasing patterns. Because the market for our burner technologies
is new and evolving, it is difficult, if not impossible, to predict the future
growth rate, and the size of the potential market. We cannot give you any
assurance that a market for our burner technologies will develop or, if
developed, will be sustainable. The failure of our burner products to achieve or
sustain market acceptance would likely force us to suspend our operations,
liquidate our assets, and wind-up and dissolve our company.
We May Be Forced To Rely On Strategic Partners Or Third Parties To Market And
Distribute Our Products
We currently have no internal sales, marketing and distribution capabilities,
and will likely be forced to rely extensively on strategic partners or third
party marketing and distribution companies. Accordingly, our ability to
effectively market and distribute our burner products may be dependent in large
part on the strength and financial condition of others, the expertise and
relationships of our strategic partners or distributors and marketers with
customers, and the interest of these parties in selling and marketing our
products. Our prospective strategic partners and marketing and distribution
parties may also market and distribute the products of other companies. Our
failure to generate substantial sales through any strategic partners or
distribution arrangements we procure or to otherwise develop our own internal
sales, marketing and distribution capabilities will have a material adverse
effect on our business, financial condition and results of operations. If our
relationships with any strategic partners or third party marketing and
distribution partners were to terminate, we would need to either develop
alternative relationships or develop our own internal sales and marketing forces
to continue to sell our products. Even if we are able to develop our internal
sales, marketing and distribution capabilities, these efforts would require
significant cash and other resources that would be diverted from other uses, if
available at all, and could cause delays or interruptions in our product supply
to customers, which could result in the loss of significant sales or customers.
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We May Be Forced To Depend Upon Strategic Partners Or Third Party Suppliers To
Satisfy Our Manufacturing Requirements
We currently have no internal manufacturing capability, and will likely be
forced to rely extensively on strategic partners or third party contract
manufacturers or suppliers. Should we be forced to manufacturer our burner
products, we cannot give you any assurance that we will be able to develop or
internal manufacturing capability or procure third party suppliers. Moreover, we
cannot give you any assurance that any contract manufacturers or suppliers we
procure will be able to supply our product in a timely or cost effective manner
or in accordance with applicable regulatory requirements or our specifications.
A delay or interruption in the supply of components or finished products would
significantly impair our ability to compete and would have a material adverse
effect on our business, financial condition and results of operations.
Our Ability To Complete Project Proto-types and Procure Contracts Is Constrained
By Our Limited Research And Development Resources
Due to the early developmental stage of our business, we have expended only
limited amounts on research and development of our burner products to date,
including development of project proto-types, and currently have very limited
resources to devote to future research and development. Unless we are able to
obtain and devote resources to our research and development efforts, including
project proto-types, we may only be able to develop limited product offerings in
the future and our ability to procure contracts or otherwise achieve market
acceptance for our burner products will be limited. As a result, we may fail to
achieve significant growth in revenues or profitability in the future.
The Intense Competition That Is Prevalent In The Conventional Burner Industry
Could Have A Material Adverse Effect On Our Business
Products based upon our burner technologies will face intense domestic and
foreign competition in all markets in which they are introduced from
conventional products and technologies already being sold in these markets.
Additionally, many of our prospective competitors have significantly greater
financial, technical and marketing resources and trade name recognition than
ours, which may enable them to successfully develop and market products based on
technologies or approaches similar to ours, or develop products based on other
technologies or approaches which are, or may be, competitive with our burner
technologies. The development by our competitors new or improved products,
processes or technologies may make our burner technologies less competitive or
obsolete. We will be required to devote significant financial and other
resources to continue to develop our burner technologies in view of potential
competition. We cannot give you any assurance that we will be able to initially
penetrate or compete successfully within the heat transfer industry. If we
cannot successfully meet competitive challenges, our business, operating results
and financial condition could be materially adversely affected.
We Could Lose Our Technology Licenses If We Fail To List Our Common Stock On A
National Exchange
The licensors of our pulse combustion and diesel technologies reserved certain
termination rights as a condition for their licensing these technologies to our
company. Specifically:
. 818879 Alberta, Ltd., the licensor of our pulse combustion technology,
reserves the right to terminate the Pulse Combustion Technology License if
our common stock does not actively trade on a "National Exchange," which we
define as The New York Stock Exchange, The American Stock Exchange or The
Nasdaq Stock Market, on or after March 4, 2002. Should 818879 Alberta,
Ltd., exercise this termination right, we reserve the right to over-ride
818879 Alberta, Ltd.'s exercise by purchasing the pulse combustion
technology outright for a formula-based cash payment.
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. Mr. John D. Chato, the licensor of our diesel combustion technology,
reserves the right to terminate the Diesel Fuel Combustion Technology
License if the 818879 Alberta, Ltd. terminates the Pulse Combustion
Technology License for the reasons stated above.
In addition, if we acquire title to our pulse combustion technology from 818879
Alberta, Ltd. by reason of our success in developing an active trading market on
a National Market, 818879 Alberta, Ltd. will retain the right to repurchase the
pulse combustion technology from us should we declare bankruptcy or become
insolvent.
The loss of either of our technology licenses would have a material adverse
effect on our business, results of operations and financial condition, and would
likely force us to suspend our operations, liquidate our assets, and wind-up and
dissolve our company.
Our Inability To Retain Our Key Managerial And Research And Development
Personnel Could Have A Material Adverse Effect On Our Business
Our success depends to a significant extent on the continued efforts of our
research and development and senior management team, which currently is composed
of a small number of individuals, including Mr. John D. Chato, our head of
research and development and the inventor of our licensed technologies, Mr. John
P. Thuot, our President, Mr. Barry A. Sheahan, our Chief Financial Officer, and
Mr. James V. DeFina, our Projects Director. Although Messrs. Chato, Thuot,
Sheahan and DeFina have signed employment agreements, we cannot give you any
assurance that one or more of these employees will not leave our company. We
also do not carry key person life insurance on any of our key management
personnel. The loss of the services of any of our key personnel could have a
material adverse effect on our business, results of operations and financial
condition.
We May Be Unable To Attract The Qualified Personnel Engineering, Managerial,
Sales And Marketing And Administrative Personnel Required To Implement Our
Growth Strategies
Our ability to implement our growth strategies will also be dependent upon our
continuing ability to attract and retain highly qualified engineering,
managerial, sales and marketing and administrative personnel. Competition for
the type of personnel we require is intense and we cannot give you any assurance
that we will be able to retain our key managerial and technical employees, or
that we will be able to attract and retain additional highly qualified
managerial and technical personnel in the future. Our inability to attract and
retain the necessary personnel could impede our growth.
We May Be Unable To Effectively Manage Our Expected Growth
Our success will depend upon the rapid expansion of our business. Expansion will
place a significant strain on our financial, management and other resources, and
will require us, among other things, to:
. change, expand and improve our operating, managerial and financial systems
and controls;
. improve he coordination between our various corporate functions; and
. hire additional engineering, sales and marketing, customer service and
managerial personnel.
We cannot give you any assurance that our efforts to hiring or retain these
personnel will be successful, or that we will be able to manage the expansion of
our business effectively. Our inability to effectively manage our growth, or the
failure of our new personnel to achieve anticipated performance levels, would
have a material adverse effect on our business, results of operations and
financial condition.
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We May Be Unable To Protect Our Patents and Proprietary Rights
Our ability to compete effectively will be materially dependent upon the
proprietary nature of our designs, processes, technologies and materials.
Although we protect our proprietary property, technologies and processes through
a combination of patent law, trade secrets and non-disclosure agreements, we
cannot give you any assurance that these measures will prove to be effective.
For example, in the case of patents, we cannot give you any assurance that our
or our licensors' existing patents will not be invalidated, that any patents
that we or our licensors' currently or prospectively apply for will be granted,
or that any of these patents will ultimately provide significant commercial
benefits. Moreover, it is possible that competing companies may circumvent any
patents that we or our licensors may hold by developing products which closely
emulate but do not infringe our or our these patents, and thereby market
products that compete with our products without obtaining a license from us. In
addition to patented or potentially patentable designs, technologies, processes
and materials, we also rely on proprietary designs, technologies, processes and
know-how not eligible for patent protection. We cannot give you any assurance
that our competitors will not independently develop the same or superior
designs, technologies, processes and know-how as we possess.
We believe that the international market for our products and technologies is as
important as the domestic market, and we will therefore seek patent protection
for our products and technologies or those of our licensors in selected foreign
countries. Because of the differences in foreign patent and other laws
concerning proprietary rights, our products and technologies may not receive the
same degree of protection in certain foreign countries as they would in the
United States.
We cannot give you any assurance that we will be able to successfully defend our
patents and proprietary rights. The invalidation or circumvention of key patents
or proprietary rights which we own or license could have a material adverse
effect on our business prospects. We cannot give you any assurance that we will
not be required to defend against litigation involving the patents or
proprietary rights of others, or that we will be able to obtain licenses for
these rights. Legal and accounting costs relating to prosecuting or defending
patent infringement litigation may be substantial.
Our Business May Be Adversely Affected By Currency Fluctuation, Regulatory,
Political And Other Risks Associated with International Transactions
We intend to sell our products and technologies internationally as well as to
the United States and within Canada which will subject us to several potential
risks, including risks associated with:
. fluctuating exchange rates,
. the regulation by the governments of the United States and Canada as well as
foreign governments of fund transfers and export and import duties and
tariffs; and
. political instability.
We cannot give you any assurance that any of these risks will not have a
material adverse effect upon our business. We do not currently engage in
activities to mitigate the effects of foreign currency fluctuations, and we
anticipate we will be paid in U.S. dollars with respect to any international
transactions we may enter into. If earnings from international operations
increase, our exposure to fluctuations in foreign currencies may increase, and
we may utilize forward exchange rate contracts or engage in other efforts to
mitigate foreign currency risks. We can give no you assurance as to the
effectiveness of these efforts in limiting any adverse effects of foreign
currency fluctuations on our international operations and our overall results of
operations.
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Risks Relating to Our Common Stock
There Is No Public Trading Market For Our Common Stock, And No Public Trading
Market May Ever Develop
There is no public market for our securities, including the common stock to be
sold or distributed under this prospectus, and we cannot give you any assurance
that any active or liquid public market for our common stock will develop or be
sustained at any time in the future. Our common stock does not now, and may
never qualify for, quotation or listing on any over-the-counter market or on any
exchange.
In The Absence Of A Public Market For Our Common Stock, Your Ability To Sell Our
Common Stock Will Limited To Privately Negotiated Transactions, And You Will
Face Difficulties In Finding Purchasers For Your Shares
In the absence of a public market for our common stock on an over-the-counter
market or an exchange, you will not be able to sell any shares you receive under
this prospectus through normal brokerage channels, and your ability to sell
these shares will be limited to privately negotiated transactions. You will
likely face difficulties in finding a purchaser for your shares, particularly in
view of our limited operating history, our absence of revenues, profits and
dividends, our need for additional capital, your position as a minority
stockholder, and the other risk factors discussed in this prospectus relating to
an investment in our common stock. Lenders will also not readily accept your
shares as collateral for these same reasons. Also, our company and our officers,
directors, stockholders and agents are under no obligation to purchase these
shares from you. As a result of these factors, you may not be able to sell or
liquidate these shares should you need to do so due to a financial emergency or
other exigent circumstances, including your death or disability. Moreover, if
you do find a purchaser for your shares, the price you receive may be less than
the price you believe to be warranted. Consequently, you should consider the
common stock to be sold or distributed under this prospectus only as an illiquid
long-term investment.
Purchasers of Common Shares Being Sold Under This Prospectus Will Incur Dilution
With Respect To Their Investment
The offering price for the 1,158,019 shares of common stock to be sold under
this prospectus has been fixed by the selling stockholders at $0.0001 per share,
which equals the par value of these shares. This offering price is substantially
higher than the net tangible book value of each of these shares. Specifically,
after taking into consideration the liquidation preference payable to our series
"A" and series "B" preferred stockholders, our net tangible book value per share
of common stock is a deficit of $0.054 per share based upon our capitalization
as of October 31, 1999. Since none of the proceeds from the purchase of the
shares of common stock to be sold under this prospectus will be paid to our
company, the purchasers of these shares will consequentially incur immediate and
substantial dilution $0.0541 per share.
You Should Not Ascribe Any Value To Our Common Stock
There is no public market for the trading of our common stock or other indicia
of value upon which the value of the shares to be sold or distributed under this
prospectus may be establish or supported. We have not obtained any independent
valuation of the shares to be sold or distributed under this prospectus from any
investment banker, appraiser or other expert in the valuation of securities and
businesses, and we have no plans and are under no obligation to do so. You
should not ascribe any value to our common stock in view of the foregoing as
well as their noted deficit net tangible book value per share, our limited
operating history, our absence of revenues, profits and dividends, our need for
additional capital, your position as a minority stockholder, and the other risk
factors discussed in this prospectus relating to an investment in our common
stock.
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Our Common Stock May Never Be Quoted On The OTC Bulletin Board
Although we have promised certain of our stockholders that we would use our best
efforts to procure a market makers to file a Form 15c2-11 application with the
NASD in order to quote our common stock on the OTC Bulletin Board, we have not
procured any sponsoring market maker to date, and we cannot give you any
assurance that we will be able to procure a sponsoring market maker or that an
active or liquid public market for our common stock will develop or be sustained
if the NASD eventually accepts our common stock for quotation.
Even If A Public Market For Our Common Stock Were To Develop, Your Ability To
Sell Shares On That Market Will Be Circumscribed By A Number Of Regulatory And
Contractual Restrictions
Even if a public market for our common stock is eventually developed through its
quotation on the OTC Bulletin Board or later quotation or listing on a National
Market, your ability to sell our common stock on that public market will be
circumscribed by the following regulatory and contractual considerations:
. the disclosure and investor suitability rules promulgated under the Penny
Stock Reform Act of 1990 and limitations mandated by Rule 15c-2-6
promulgated by the Securities and Exchange Commission;
. the necessity of complying with any state "Blue Sky" or Canadian provincial
securities laws which may be applicable;
. certain contractual volume restrictions on sale imposed on certain holders
of blocks of more than 3,000 shares of our common stock, including the
common stock to be sold or distributed under this prospectus, upon whom we
have imposed lock-up restrictions as a condition to our cooperation in
establishing a public market for our common stock on the OTC Electronic
Bulletin Board; and
. the amount of shares which you may freely trade under Rule 144 if
applicable.
Should a public market for our common stock develop, no prediction can be made
as to the effect, if any, that the sale of shares or the availability of shares
for sale will have on the market price prevailing from time to time. Moreover,
sales of substantial amounts of our common stock on the public market, or the
perception that substantial sales could occur, could adversely affect the
prevailing market prices for our common stock and also, to the extent the
prevailing market price for our common stock is reduced, adversely impact our
ability to raise additional capital in the equity markets.
Even If A Public Market For Our Common Stock Were To Develop, Our Stock Price
Would Likely Be Volatile Due To Market Considerations Beyond Our Control
The securities markets have from time to time experienced significant price and
volume fluctuations that can be unrelated to the operating performance or
financial condition of any particular company. This is especially true with
respect to emerging companies such as ours. Announcements of technology
innovations or new products by other companies, release of reports by securities
analysts, regulatory developments, economic or other external factors, as well
as quarterly fluctuation in our or in our competitors' operating results, could
have a significant impact on our stock price were a public market develop for
our common stock.
You Should Not Expect To Receive A Liquidation Distribution
If we were to wind-up and dissolve our company and liquidate and distribute our
assets, you would share ratably with our other common stockholders in our assets
only after we satisfy the following obligations:
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. any amounts we would owe to our creditors ($155,638 as of October 31,
1999);
. any amounts we would owe to our series "A" preferred stockholders as a
liquidation preference ($1,000 as of the date of this prospectus);
. any amounts we would owe to our series "B" preferred stockholders as a
liquidation preference ($500,002 as of the date of this prospectus); and
. any amounts we would owe to our series "C" preferred stockholders as a
liquidation preference (currently $0).
If our liquidation were attributable to our inability to profitably operate our
business, then it is likely that we would have material liabilities at the time
of liquidation or dissolution. Accordingly, we cannot give you any assurance
that sufficient assets will remain available after the payment of our creditors
and preferred stockholders to enable you to receive any liquidation distribution
with respect to the shares sold or distributed to you under this prospectus.
Our Current Principal Stockholders Will Continue To Control Our Company
Our present executive officers and directors will, as a group, continue to hold
57.6% of our common stock following the completion of the sales and
distributions contemplated by this prospectus, and will therefore retain the
power to elect a majority of our Board of Directors. Our Board, in turn, has the
power to appoint our officers and to determine, in accordance with their
fiduciary duties and the business judgment rule, our direction, objectives and
policies, including:
. our business expansion or acquisition policies;
. whether we should raise additional capital through financing or equity
sources, and in what amounts;
. whether we should retain cash reserves for future product development, or
distribute them as a dividend, and in what amounts;
. whether we should sell all or a substantial portion of our assets, or
should merge or consolidate with another corporation; and
. transactions which may cause or prevent a change in control or the winding-
up and dissolution of our company.
An investment in our common stock will entail you entrusting these and similar
decisions to our present management subject, of course, to their fiduciary
duties and the business judgment rule.
Our Right To Issue Additional Capital Stock At Any Time Could Have An Adverse
Effect On Your Proportionate Ownership And Voting Rights
Our Certificate of Incorporation authorizes us to issue 15,000,000 shares of
common stock, and 1,000,000 shares of preferred stock. We may sell and issue:
. up to 4,689,249 additional shares of common stock, after taking into
consideration:
. 9,643,750 previously issued common shares, and
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. 667,001 common shares we have reserved for issuance upon (1) the
exercise of options and warrants previously granted to purchase
416,000 common shares, and (2) the conversion of 251,001 previously
issued shares of convertible preferred stock described below, and
. up to 748,999 additional shares of preferred stock, after taking into
consideration 251,001 previously issued shares of series "A" and series
"B" convertible preferred stock.
You should note that 748,999 additional shares of preferred stock which we may
issue include:
. 500,000 shares of series "C" preferred stock recently approved by our Board
of Directors; and
. 248,999 shares of serial or "blank check" preferred stock that will contain
rights, preferences and privileges to be prospectively fixed by our Board
of Directors at the time of issuance--without stockholder consent or
approval--based upon any factors our Board may deem relevant at that time.
Your proportionate ownership and voting rights as a common stockholder could be
adversely effected by the issuance of additional shares of our common stock or
our series "C" convertible or "blank check" preferred stock, depending on their
rights, preferences and privileges, including a substantial dilution in your net
tangible book value per share. We cannot give you any assurance that we will not
issue shares of either our common stock or our series "C" convertible or "blank
check" preferred stock under circumstances we may deem appropriate at the time.
See that section of this prospectus captioned "Description Of Our Securities"
for information concerning our capitalization, including the rights, preferences
and privileges of our preferred stock.
"Anti-Takeover" Provisions Contained In Our Charter Documents Or Under Delaware
Law Could Make A Third Party Acquisition Of Our Company Difficult
Certain provisions of our charter documents and Delaware corporate law may
discourage certain types of transactions involving an actual or potential change
in control of our company, and may limit the ability of our stockholders to
approve transactions that they may deem to be in their best interests. For
example, our Certificate of Incorporation and Bylaws:
. reserve the right to fill any vacancies in any Non-Series A Director
positions exclusively to our Board of Directors;
. stipulate that our Non-Series A Directors can only be removed for cause;
. require any action to be taken by our common and series "B" preferred
stockholders to be effected at a duly called annual or special meeting of
these stockholders, and prohibit these stockholders from effecting an
action by written consent unless approved by a two-thirds affirmative vote
of these stockholders;
. reserve the right to call special meetings of our common and series "B"
preferred stockholders exclusively to our Board of Directors and certain
designated officers; and
. require any amendments to the aforesaid provisions to be approved by a two-
thirds affirmative vote of our stockholders.
We are also subject to Section 203 of the Delaware General Corporation Law which
generally prohibits a Delaware corporation from engaging in any of a broad range
of business combinations with any "interested stockholder" for a period of three
years following the date that stockholder became an interested stockholder.
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Our Board of Directors also has the authority to fix the rights and preferences
of and issue shares of our "blank check" preferred stock without the approval of
our common stockholder and, in certain cases, our series "B" and series "C"
preferred stockholders. Any "blank check" preferred stock we issue could also be
utilized under certain circumstances as a method for raising additional capital
or discouraging, delaying or preventing a change in control of our company. We
cannot give you any assurance that we will not issue "blank check" preferred
stock under circumstances we may deem appropriate at the time.
Capitalization
The following table shows our capitalization as of October 31, 1999. The sales
or distributions of our common stock contemplated by this prospectus will not
result in any changes to our capitalization other than that attributable to our
payment of the expenses associated with this transaction.
<TABLE>
<CAPTION>
October 31,
1999
----------------
<S> <C>
Debt:
Current........................................................................................ $ 155,638
--------------
Total debt............................................................................... $ 155,638
--------------
Stockholders' deficiency:
Series "A" preferred stock, $0.0001 par value, $1.00 liquidation
preference(1):
Shares authorized, issued and outstanding-- 1,000........................................
Series "B" preferred stock, $0.0001 par value, $2.00 liquidation preference (1):
Shares authorized-- 475,000(2); Shares issued and outstanding--250,000................... 250
Common stock, $0.0001 par value (1):
Shares authorized-- 15,000,000; Shares issued and outstanding-- 9,643,750................ 964
Additional paid in capital................................................................... 500,285
Accumulated deficit.......................................................................... (508,048)
--------------
Total stockholders' deficiency........................................................... $ (6,548)
==============
Total Capitalization........................................................................... $ 149,090
==============
</TABLE>
______________________________________
(1) Does not give effect to the possible exercise of presently outstanding
options and warrants, or any options or warrants we may issue under our
existing stock option plans or other compensatory arrangements; or the
possible conversion of our outstanding shares of series "A" or series "B"
preferred stock.
(2) The authorized number of shares of series "B" preferred stock was reduced
to 250,001 on November 12, 1999.
Determination of Offering Price
The offering price for the 1,158,019 shares to be sold under this prospectus has
been fixed by the selling stockholders in their sole discretion at $0.0001 per
share, or the par value of these shares. No offering price has been fixed for
the 5,437,803 shares to be distributed as a dividend under this prospectus since
no recipient of these distributions will be required to pay any cash or other
consideration for their receipt of these shares.
Use of Proceeds
The proceeds from the sale of the shares to be sold under this prospectus will
be retained by the selling stockholders, and will not be paid or remitted or
otherwise made available to our company.
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Dividend Policy
We have never paid any cash dividends on shares of our capital stock, and we do
not anticipate that we will pay any dividends in the foreseeable future. Our
current business plan is to retain any future earnings to finance the expansion
development of our business. Any future determination to pay cash dividends will
be at the discretion of our Board of Directors, and will be dependent upon our
financial condition, results of operations, capital requirements and other
factors as our Board may deem relevant at that time.
Business
OVERVIEW
Clean Energy Combustion Systems, Inc. is a development stage company
incorporated in Delaware and organized on March 1, 1999. We have one wholly-
owned research and development subsidiary, Clean Energy Technologies (Canada)
Inc. Our principal executive offices and research facilities are located at 7087
MacPherson Avenue, Burnaby, British Columbia, Canada, V5J 4N4, and our telephone
number is (604) 435-9339.
Our company was formed to market "burner units" based upon two patented and
innovative burner designs we acquired under license. These designs were
originally invented by one of our founders, Mr. John D. Chato, and are now in a
position to be introduced to the market having completed their primary
development stage. Each design has a large number of potential industrial,
commercial and residential applications.
A burner unit is a furnace or other combustion chamber which uses the combustion
process to convert the chemical energy contained in various fuel sources, such
as natural gas, propane, gasoline, diesel fuel, oil, or coal, into heat energy
measured in "British Thermal Units" or "BTUs." The use of a burner unit to
create heat energy is typically the first of a number of steps in which the heat
energy is generated for use in a multiplicity of residential, commercial or
industrial settings, ranging from simple one-step residential and light
commercial applications where the heat energy is used merely to heat air or
water, such as the case of space or water heaters, to complicated industrial
multi-step applications where the heat energy is subsequently converted into one
or more other forms of energy. An illustration of a multi-step industrial
application would be electricity generation, where a public utility company
first burns oil, natural gas or coal to create heat energy, then uses this form
of energy to heat water in a boiler system to create steam energy, then uses
this form of energy to run a turbine to create mechanical energy, and ultimately
uses this form of energy to create a magnetic field to generate electrical
energy. Since the heat generated by burner units is generally "transferred" for
other purposes as the end result of the first step in a process, the industry in
which we compete, namely, manufacturers and sellers of products incorporating
burner units, is commonly referred to as the "heat transfer" industry.
The first of our designs, which we refer to as our "pulse combustion
technology," is a linear-configured pulse burner technology which can operate on
a variety of fuels, including natural gas, propane, powdered coal, and hydrogen.
This design can be used to manufacture highly-compact burner units that are more
energy-efficient, and emit significantly lower levels of pollutants, than
conventional steady-state and tubular pulse combustion designs. Due to the
compactness, simplicity of design and lack of moving parts inherent in our
technology, our design also allows burner units to be more inexpensively, easily
and quickly manufactured, installed and serviced than conventional steady-state
and tubular pulse combustion designs.
We are currently working on production proto-types under pending proposals for
the following applications of this technology:
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. a number of natural gas fueled burner units, ranging from 30,000 BTU//hour
to 69 million BTU/hour, to be used to create a low oxygen content (0.05%)
exhaust flue reducing gas required for the effective operation of catalytic
absorption pollution control systems;
. a natural gas-fueled burner unit which will provide a heat source for the
operation of an external combustion engine;
. a natural gas-fueled burner unit used to burn residual flare gases emitted
from producing oil wells, and to convert the heat energy created into
electricity through a turbo-generator; and
. a natural gas fueled 400,000 to 500,000 BTU/hour instantaneous water
heater.
Most of our testing of our pulse combustion technology to date, as well as our
pending proposals, are fueled by natural gas, although our pulse combustion
technology has the capability to use any carbon-based fuel as its energy source.
Natural gas is the logical fuel choice reflecting the trend of increased natural
gas usage in North America due to its abundant supply and clean-burning
characteristics. We believe the demand for natural gas as the fuel of choice
will continue as clean air legislation and public environmental pressures
increase. Even though our current focus is on natural gas burning applications,
our pulse combustion technology can also, as noted above, use any other carbon-
based fuel as its energy source. We have, for example, also successfully burned
gasoline, propane, powdered coal and hydrogen, and believe our technology will
be equally successful in burning diesel and oil.
The second of our designs, which we refer to as our "diesel fuel combustion
technology," is a burner technology which enables certain types of conventional
steady-state burner units to burn diesel fuel instead of natural gas or propane.
This design not only allows a user to use diesel as his fuel of choice where
warranted by price or supply considerations, but also results in lower levels of
pollutants than that emitted through the burning of natural gas or propane in
these types of burner units. We are currently working on production proto-types
under pending proposals for the adaptation of two natural gas fueled burner
units to burn diesel fuel.
The ability to efficiently burn fuel in order to conserve energy resources,
while eliminating or minimizing the various pollutants resulting from the
combustion process, has become worldwide economic and political issue as a
result of increasing awareness and concerns over the past 25 years relative to
energy conservation and the impact of pollution on our environment and health.
One of the consequences of these concerns has been the imposition of ever
increasing levels of regulatory restraints on emission levels and, to a lesser
degree, fuel usage, particularly in the developing countries of the world. In
the United States, for example, not only does the United States Environmental
Protection Agency impose nationwide emission standards, but various States and
their political subdivisions impose even more stringent emission standards. The
best example of this is the State of California, which imposes the most
stringent automobile emission standards in the world, and the South Coast Air
Quality Management District, a California regional governmental agency which
imposes the strictest pollution control requirements in the world on a broad
range of industrial and commercial emissions in the four counties comprising the
Los Angeles metropolitan area.
We believe that our pulse combustion technology, in particular, has the
potential to bring dramatic improvements in both efficiency and pollution
control, particularly in view of the existing limitations of conventional
steady-state combustion and pollution control technologies which we believe are
approaching, if not at, their theoretical limits of effectiveness. We anticipate
that the various advantages of our technologies will afford us the opportunity
to ultimately develop and introduce a large variety of different burner units
cutting across a broad number of diverse industrial, commercial and residential
heat
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transfer markets through a variety of commercial arrangements with established
heat transfer industry partners, including licensing, royalty, joint venture and
manufacturing agreements.
Our Corporate History
Our company was formed and organized on March 1, 1999 under the name Clean
Energy Technologies, Inc., by two groups of founders, whom we refer to as the
"BO Group" and the "Alberta Group." We changed our corporate name to Clean
Energy Combustion Systems, Inc. on May 20, 1999.
The "BO Group" is comprised of BO Tech Burner Systems Ltd. and Messrs. John D.
Chato, John P. Thuot, Barry A. Sheahan, James V. DeFina and Robert Alexander. BO
Tech Burner Systems Ltd., in turn, is part of a group of three affiliated
British Columbia corporations, whom we refer to as the "BO Companies," who
expended over Cdn. $4 million in primary development for our pulse combustion
technology over the ten year period ended December 31, 1998. The other two
member of the BO Companies are BO Gas Limited, a majority-owned subsidiary of BO
Tech Burner Systems Ltd., and BO Development Enterprises Ltd., the majority-
owned parent of BO Tech Burner Systems Ltd.
Mr. John D. Chato is the inventor of both our pulse combustion and diesel fuel
combustion technologies, as well as the owner and licensor of our diesel fuel
combustion technology. Messrs. Chato, Thuot, Sheahan and Alexander are also
officers and directors of each of the BO Companies, as well as direct or
indirect stockholders of each of these companies through BO Development
Enterprises Ltd. Mr. DeFina is a key employee of the BO Companies, as well as a
direct or indirect stockholders of each of these companies.
Messrs. Chato, Thuot and Sheahan were appointed as executive officers and
directors, and Mr. DeFina as one of our executive officers, as part of our
formation, while Mr. Alexander serves as an unpaid advisor. In connection with
our formation, we issued 6,525,713 shares of our common stock to BO Tech Burner
Systems Ltd., and a total of 1,074,287 shares of our common stock to Messrs.
Chato, Thuot, Sheahan, DeFina and Alexander. BO Tech Burner Systems Ltd.
subsequently distributed 2,599,084 of our common shares held by it to BO
Development Enterprises Ltd. in January 2000, while at the same time
transferring an additional 753,724 shares to BO Gas.
The Alberta Group is comprised of 818879 Alberta, Ltd., an Alberta corporation
which currently owns and licenses our pulse combustion technology to us, and
Ravenscraig Properties Limited, an affiliate of 818879 Alberta, Ltd. Both 818879
Alberta, Ltd. and Ravenscraig Properties Limited are owned and controlled by Mr.
R. Dirk Stinson, who became one of our directors in January 2000. Neither of
these companies or Mr. Stinson are related to any of the members of the BO Group
or their respective principals. In connection with our formation, we issued
2,043,750 shares of our common stock to Ravenscraig Properties Limited and 1,000
shares of our series "A" preferred stock to 818879 Alberta, Ltd.
On February 16, 1999, our founders caused our wholly-owned research and
development Canadian subsidiary, Clean Energy Technologies (Canada) Inc., a
British Columbia corporation which we refer to as "Clean Energy Canada," to be
incorporated and organized, and we acquired all of the common stock of Clean
Energy Canada on March 1, 1999.
How Our Pulse Combustion Technology Works
Our pulse combustion burner technology is a burner unit design comprised of two
geometrically-configured adjoining channels and chambers--a combustion chamber
and an exhaust channel or "tailpipe." In operation, fuel and air are first
injected from an intake channel into the combustion chamber where they are
ignited with an ignition rod and commence burning. The heat created by the
combustion process then generates a pressure wave which travels from the
combustion chamber through
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the tailpipe, carrying with it various gases or "effluents" resulting from the
combustion process. As the effluent gases exit the tailpipe and the exterior of
the combustion chamber cools, a partial vacuum is created within the combustion
chamber which, in turn, pulls a new supply of air and fuel into the combustion
chamber from the intake channel. This new fuel-air mixture is then compressed by
effluent returning or "pulsing back" from the tailpipe, and ignites on its own
without the need of the ignition rod as a result of this pressure increase and
the remaining heat within the combustion chamber, causing the entire process to
repeat. Our pulse combustion technology, for example, operates at anywhere from
350 to 650 cycles per second depending upon the configuration and application.
It is this oscillating or "pulsating" condition--hence, "pulse" combustion--
which differentiates pulse combustion from conventional steady-state combustion,
where combustion is steady or continuous rather than pulsed.
We use two different pulse combustion designs depending upon the application
required--a "linear" configuration and a "cylindrical" configuration. Set forth
below is a diagram of a "linear" configured water or space heating system
containing three combustion chambers:
================================================================================
[DIAGRAM APPEARS HERE]
================================================================================
Note the elongated shape of each burner chamber as indicated in the above
diagram, both height- and width-wise as they progress from the wider combustion
chamber into the narrower tailpipe, as well as length-wise. The basic dimensions
of each burner chamber, in terms of relative height, width and length, resembles
the shape of a "blade." By way of comparison, most pulse combustion products on
the market today utilize a long "tubular" design. For this reason our company
sometimes refers to our pulse combustion technology as "pulse `blade'
combustion" or "PBC" technology, principally to differentiate our configuration
from the "tubular" pulse combustion configuration conventionally used today.
It is important to note that so long as we maintain the basic geometries of our
"blade" design, whether in the linear or cylindrical configuration, we can
obtain additional heat output where required, by making one or both of the
following simple alterations to the basic design depending upon space and use
considerations:
. extending or "scaling-up" either (1) the length of the system (i.e., the
length of the existing pulse combustion burner chambers and intervening
water or air chambers), while maintaining the width
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and height of the burner chambers, or (2) the width or height of the burner
chambers, while maintaining basic blade design geometries; or
. adding or "stacking" one or more additional pulse combustion burner
chambers and intervening water or air chambers on a side-by-side basis or
"linear" basis.
The principal advantage of our linear configuration over our cylindrical
configuration is that it lends itself more readily to the joining together on a
side-by-side basis of separate operating "modules," each module containing one
or more combustion units. We can then regulate or adjust heat output by turning
one or more of these adjoining modules on or off. This on-off capacity, which we
refer to as "turn-down capability," allows our linear unit to operate at a
number of differing pre-selected higher or lower output levels while maintaining
optimum heat output and heat transfer efficiencies.
We have built and tested the following different linear units to date:
. an 8,000 to 10,000 BTU/hr natural gas-fueled boiler;
. several 100,000 BTU/hr natural gas-fueled water heaters;
. a 100,000 BTU/hr natural gas-fueled low-pressure boiler unit complete with
instrumentation and housing, which was built to be expanded to a three-
module 300,000 BTU/hr unit with a 3 to 1 turn-down capability; and
. a 250,000 to 400,000 BTU/hr natural gas-fueled furnace supported by grants
from the Science Council of British Columbia as a proof of concept model
with multiple burners operating side-by-side to demonstrate the scale-up
capability of our technology.
We developed our cylindrical configuration for use in applications where turn-
down capability is not a consideration. There are several benefits to the
cylindrical shape for these applications, including lower manufacturing costs,
innate structural integrity, and elimination of gases collecting in corners. We
have built and tested the following different cylindrical units to date:
. a 30,000 to 94,000 BTU/hr natural gas-fueled water heater, sponsored, in
part, by BC Gas Inc. This unit has been completed to the engineering
proto-type stage; and
. a 500,000 BTU/hr water heater sponsored in part by the Science Council of
British Columbia. This unit was built as a proof of concept model to
demonstrate scale-up capability in the cylindrical configuration.
Competing Pulse Combustion Products
Pulse combustion technology is not a new development. It has been in the public
domain since early in the century, and was used in World War II to power the
infamous V-1 "buzz bombs." Until recently, however, its use for commercial heat
transfer applications has been relatively limited.
Pulse combustion technology was first applied to the manufacture of boilers in
the late 1950's by Lucas Rotax in its "Pulsamatic" boiler. The introduction of
the technology was short-lived, though, due to lack of strong marketing and the
absence of incentive to buy high-efficiency boilers when gas prices were low.
The technology was reactivated in 1979 when Hydrotherm Corporation introduced
its high-efficiency residential "Hydropulse" series of residential water
boilers. Lennox International, Inc., also incorporated pulse combustion
technology into several of its products in 1976 through a collaborative working
agreement with the American Gas Association and the Gas Research Institute, and
introduced several models of an ultra-high efficiency pulse-forced-air furnace
into the marketplace in 1992.
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Even though the higher efficiencies afforded by pulse combustion over
conventional steady-state combustion is a well known fact in the heat transfer
industry, pulse combustion products still have not been introduced, and have had
limited penetration in the markets they have been introduced into. We believe
the principal reasons for this limited market penetration are higher
manufacturing and installation costs, which translate into higher sales prices,
as well as noise considerations. Indeed, to our knowledge the only significant
manufacturers and marketers of pulse combustion burner units within the United
States today are:
. Hydrotherm Corporation, which markets three natural gas-fueled pulse water
boiler systems rated at from 100,000 BTUs/hr to 300,000 BTUs/hr for
residential and commercial "hydronic" space heating purposes. In hydronic
space heating, hot water is circulated in an enclosed system through a
series of interconnected pipes located within a concrete slab in a
building. As the hot water circulates, the heat it emanates warms the air
spaces above and below the slab.
. Lennox International, Inc., which markets two natural gas-fueled forced-air
pulse combustion furnaces for space heating, ranging from 50,000 BTUs/hr to
100,000 BTUs/hr output.
. Fulton Boiler Works, Inc., which markets:
. two lines of natural gas or propane fueled boilers for commercial and
small business purposes, namely, a line of low pressure models rated
at between 500,000 to 750 BTUs/hr input, and a line of high pressure
models rated at between 500,000 to 700,000 BTUs/hr input; and
. two lines of pulse boilers used for hydronic heating purposes, rated
at between 300,000 to 1,400,000 BTUs/hr input.
Each of these competitors positioned their pulse combustion products as premium-
priced, "higher efficiency" alternatives to conventional steady-state combustion
product lines.
All of Lennox's, Fulton's and Hydrotherm's pulse combustion products utilize a
long "tubular" design. For example, in the case of the Lennox unit, the tube is
approximately eight feet long and is looped or coiled vertically for space
efficiency. The principal operational feature of the conventional tubular design
is the low number of repetitive combustion pulses or cycles at which it
operates, typically 60 to 70 cycles per second.
There are also numerous manufacturers and marketers of conventional steady-state
combustion products within the United States that compete with pulse combustion
products, including Cleaver Brooks, Raypack, Inc., AERCO International Inc. and
Weben-Jarco, as well as Lennox, Fulton and Hydrotherm.
Competitive Advantages Of Our Pulse Combustion Technology
Summary Of Competitive Advantages Over Conventional Steady-State Combustion And
Conventional Tubular Pulse Combustion Technologies
As discussed below in greater specificity, our pulse combustion technology
affords the following principal competitive advantages over conventional steady-
state combustion and conventional tubular pulse combustion technologies:
. Our pulse combustion technology enables burner units to operate with:
. significantly higher energy conversion efficiencies than conventional
steady-state combustion technology, leading to significantly higher
fuel savings than these technologies, and
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. slightly higher heat output and heat transfer conversion efficiencies
than conventional tubular pulse combustion technologies, leading to
slightly higher fuel savings than these technologies.
. Our pulse combustion technology enables burner units to emit:
. significantly lower emissions than conventional steady-state
combustion technology, and
. significantly lower emissions of oxides of nitrogen, commonly known as
"NOx," than conventional tubular pulse combustion technologies, and
comparable or slightly lower emission levels than these technologies
with respect to emissions other than NOx;
. Our pulse combustion technology results in significantly smaller and
lighter burner units and systems than allowed by both steady-state
combustion and conventional tubular pulse combustion technologies due to
our compact and simple linear design, and the elimination of the need for
an external primary heat exchanger. This advantage is compounded in multi-
burner scale-up configurations.
. Our pulse combustion technology allows burner units to be designed for
operation at optimum energy conversion efficiencies and low emission levels
at differing pre-selected output levels due to our integrated modular
design and resultant turn-down capability. While conventional steady-state
combustion and tubular pulse combustion units can also operate on a similar
modular basis, they can only do so when aligned in a bank of separate
burner systems, while our design allows us to incorporate numerous
combustion chambers within a single combustion system. This advantage
allows us to compound the size and weight advantage which the compact size
of our pulse burner technology already affords us on a unit-versus-unit
comparison basis.
. Our pulse combustion technology allows burner units to be manufactured and
installed at significantly lower costs than steady-state combustion and
conventional tubular pulse combustion technologies due to our simplicity of
design, compact size and lack of moving parts.
Better Energy Conversion Efficiencies
. Background: Among the principal considerations is evaluating a burner unit
----------
are its relative "energy conversion efficiencies," which refers to its
overall ability to convert the maximum amount of chemical energy contained
in the fuel into heat energy through the combustion process, and to then
apply or transfer this heat for the intended purpose. The ultimate economic
measure of energy conversion efficiencies is fuel savings. Essentially, a
burner unit which is more energy conversion efficient will use a lesser
amount of fuel to generate and transfer a required level of heat than a
less efficient combustion unit. The energy conversion efficiency of a
burner unit can be broken down into the following constituent elements:
. Heat Output Efficiency: As previously discussed in this prospectus, a
----------------------
burner unit uses the combustion process to convert the chemical energy
contained in various fuel sources, such as natural gas, propane,
gasoline, diesel fuel, oil, or coal, into heat energy measured in
BTUs. The term "heat output efficiency" simply refers to the ability
of the combustion process to effectively convert the maximum amount of
chemical energy contained in the selected fuel into heat energy. For
example, ten cubic feet of natural gas could potentially produce 1,000
BTUs of heat energy assuming its entire chemical energy was converted
into heat energy through the combustion process--although, as a
practical matter, perfect heat output efficiency never occurs due to a
number of variables. To the extent chemical energy is not converted
into heat energy, it is discharged as part of the exhaust stream in
the form of various post-burn chemical gases
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including NOx, carbon monoxide and sulfur dioxide--resulting in
unextracted or "wasted" of heat energy potential.
. Heat Transfer Efficiency: As previously discussed in this prospectus,
------------------------
the commercial application of a burner unit is to act as a "heat
transfer" device to heat water or air. The term "heat transfer
efficiency" simply refers to the ability of the heat transfer surfaces
of the combustion unit to effectively "transfer" the maximum amount of
heat generated by the combustion process to warm the water or air,
instead of allowing any of this heat to be discharged as part of the
exhaust stream--resulting in unapplied or "wasted" heat energy.
. Start-Up Efficiencies: All combustion units, including both
-----------------------
conventional steady-state and pulse combustion units, require a period
of time to "warm-up" before they attain optimum combustion
temperatures. Generally speaking, the bigger the combustion unit in
terms of BTU output capacity, the longer the warm-up period. The warm-
up time for a conventional steady-state 10 million BTU/hour boiler, for
instance, is approximately two hours.
. Energy Conversion Efficiency Advantages of Pulse Combustion Over
----------------------------------------------------------------
Conventional Steady-State Combustion: Energy conversion efficiencies
------------------------------------
associated with pulse combustion are significantly higher than those of
conventional steady-state combustion for the following reasons:
. Heat Output Efficiencies: Pulse combustion results in significantly
------------------------
higher heat output efficiencies than conventional steady-state
combustion since the more turbulent combustion environment and internal
combustion pressures resulting from the repetitive pulse combustion
cycles promote more thorough combustion. Consequently, a greater
proportion of chemical energy per unit of fuel is converted into heat
energy instead of being wasted or discharged as part of the exhaust
stream.
. Heat Transfer Efficiencies: In conventional steady-state combustion, a
--------------------------
zone of air called a "buffer layer" is created adjacent to the interior
surfaces of the combustion unit, including those being used for heat
transfer purposes. This layer acts as a barrier which essentially
channels the heat energy generated by the combustion process away from
the exterior surface areas and down the middle of the exhaust pathway,
allowing a significant portion of the heat energy created to be wasted
without application for heating purposes. This buffer layer affect does
not occur in pulse combustion, however, since the more turbulent
combustion environment and internal combustion pressures resulting from
the repetitive pulse combustion cycles forces a greater proportion of
the heat energy to circulate against the heat transfer surfaces,
resulting in less wasted heat energy than conventional steady-state
combustion. For example, most conventional steady-state combustion
units have a heat transfer efficiency rating in the 70% to 85% range,
meaning that a corresponding percentage of the heat created is actually
transferred to the targeted medium. By way of comparison, most
conventional "tubular" pulse combustion units on the market today have
a heat transfer efficiency rating in the range of 90% to 96%.
. Start-Up Efficiencies: As the result of its repetitive on-off cycling,
---------------------
pulse combustion can attain optimal combustion temperatures much more
quickly than conventional steady-state combustion, which translates
into both fuel savings and less operational downtime while the burner
unit warms-up. The warm-up time for a 10 million BTU/hour pulse
combustion boiler, for instance, would be approximately two minutes, as
compared to the two hour warm-up time noted above for a comparable
conventional steady-state boiler.
. Energy Conversion Efficiency Advantages of Our Pulse Combustion Technology
Over Conventional "Tubular" Pulse Combustion: As noted above, the various
energy conversion efficiencies afforded by pulse combustion result from the
more turbulent combustion environment and internal combustion pressures
resulting from the repetitive pulse combustion cycles. Our pulse combustion
design, as a consequence, can deliver greater energy conversion
efficiencies than
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conventional tubular pulse combustion designs as a result of the greater
number of burning cycles at which our design operates. Conventional tubular
pulse combustion units, for instance, generally operate at only 60 to 70
cycles per second. Our pulse combustion technology, on the other hand,
operates at anywhere from 350 to 650 cycles per second depending upon the
configuration and application, or 6 to 9 times the rate of conventional
tubular pulse combustion, leading to better heat output, heat transfer and
start-up efficiencies.
Lower Emissions
. Background: There has been increased worldwide awareness and concern over
----------
the past 25 years over the effect of atmospheric pollutants on the
environment and people's health, leading to ever-increasing levels of
regulatory emissions constraints, particularly in the developed countries
of the world. In order to address these concerns and satisfy current and
anticipated regulatory requirements, prospective purchasers are now
demanding burner units which emit significantly lower levels of post-burn
chemical gases, including NOx, carbon monoxide, sulfur dioxide and other
residual gases, while maintaining the energy conversion efficiencies
necessary to minimize fuel costs.
In designing and operating burner units with an eye toward reducing
emissions, manufacturers and operators must consider two inter-related
variables, the "completeness" of the burning process as evidenced by its
heat output efficiency, and the amount of so-called "excess air" required
to maintain stable combustion based upon the fuel to be burned.
Specifically:
. There is an inverse relationship between heat output efficiency and
emission levels. As previously discussed in this prospectus, heat
output efficiencies are a function of the completeness of the burning
process. The more compete the process, the greater amount of the
chemical components of the fuel will be converted into heat energy,
and the less amount of unconverted fuel, in the form of various post-
burn chemical gases, will be emitted as part of the exhaust stream.
. The amount of pollutants is also a function of the level of "excess
air" used in the combustion process, as measured as a percentage of
oxygen contained in the exhaust stream. Simply put, the combustion
process requires, at a minimum, two quantities of oxygen--the first
quantity representing that amount necessary to bond and chemically
react with the fuel as part of the combustion process in order to
convert its chemical energy into heat energy, and the second quantity
representing an additional amount necessary to maintain a "stable"
combustion environment. If there are insufficient quantities of this
latter amount of additional oxygen in the combustion environment,
referred to as "excess air," then the combustion process will sputter
or be "unstable," resulting in reduced energy conversion
efficiencies. By way of example, natural gas-fueled water heaters
typically operate with excess air rates of 30% to 40% of the exhaust
stream, which constitutes approximately 30% to 40% of the amount of
additional oxygen required to burn the natural gas and convert it
into heat energy.
. From an emission control standpoint, the greater amount of excess air the
better. Specifically, the excess air promotes the re-burning of the various
post-burn chemical gases from the primary combustion process, thereby
lowering emissions. Excess air is not beneficial, however, from a heat
transfer efficiency standpoint, since the excess air captures or "steals"
the heat generated by the primary combustion process, which makes it
unavailable for the intended heat transfer purposes. The more excess air--
the greater the loss in heat transfer efficiency. As a consequence of this
dynamic, operators of burner units are faced with the following "no-win"
choice: if their primary requirement is pollution control--they must
operate their burner unit at "richer" oxygen levels and bear the attendant
greater fuel costs due to the resulting loss of heat transfer efficiency;
and if their primary requirement is lower fuel costs--they must operate
their burner unit at increased emission levels.
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. Emission Control Advantages of Pulse Combustion Over Conventional Steady-
-------------------------------------------------------------------------
State Combustion: As previously discussed in this prospectus, pulse
----------------
combustion results in a more complete combustion process than conventional
steady-state combustion due to the more turbulent combustion environment
and internal combustion pressures resulting from the repetitive pulse
combustion cycles inherent in pulse combustion process, resulting in the
emission of less post-burn chemical gases as part of the exhaust stream.
Pulse combustion can, however, maintain stable combustion at significantly
lower excess air rates than conventional steady-state combustion as a
result of its combustion dynamics. As a result, higher heat transfer
efficiencies can be maintained with pulse combustion as compared to
conventional steady-state combustion, resulting in improved fuel savings,
while at the same time lowering emission levels.
. Emission Control Advantages of Our Pulse Combustion Technology Over The
-----------------------------------------------------------------------
Conventional "Tubular" Pulse Combustion: As noted above, the ability of the
---------------------------------------
pulse combustion unit to completely burn fuel results from the more
turbulent combustion environment and internal combustion pressures
resulting from the repetitive pulse combustion cycles. Our pulse combustion
design, as a consequence, offers significantly reduced NOx emissions than
conventional tubular pulse combustion designs, and comparable or slightly
lower levels of other emissions, such as sulfur and carbon monoxide, as a
result of greater number of burning cycles inherent in our design. Simply
put, the greater number of burning cycles, the more complete the burning
process, and the lower the level of emissions. As previously noted, pulse
burner units using the conventional tubular pulse combustion configuration
typically operate at 60 to 70 cycles per second. Our pulse combustion
technology, on the other hand, operates at anywhere from 350 to 650 cycles
per second depending upon the configuration and application, which
translates into significantly lower emissions.
The ability of our pulse combustion technology to reduce emissions is
illustrated by the following independent test results:
. In February, 1994, the Center for Emissions Research, and
Certification, Inc., an independent testing agency under the auspices
of the Southern California Air Quality Management District located
conducted a series of tests at their facilities in the City of
Industry, California, of a 30,000 to 94,000 BTU/hour natural gas-fueled
residential water heater demonstration unit using our cylindrical pulse
combustion design. These tests followed a test protocal developed by
the Southern California Air Quality Management District. The average
NOx emissions of these tests, based upon three test runs conducted and
monitored by the Center using their testing equipment, was 9.5
Ng/Joule.
. In May, 1994, the American Gas Association Laboratories, an independent
testing laboratory, conducted a series of tests at their facilities in
Cleveland, Ohio, on a 8,000 BTU/hour natural gas-fueled water heater
demonstration unit using our linear pulse combustion design. These
tests followed the same test protocal developed by the Southern
California Air Quality Management District and used by the Center for
Emissions Research, and Certification, Inc. in conducting its tests.
The average NOx emissions of these tests, based upon a series of test
runs conducted and monitored by the American Gas Association
Laboratories using their testing equipment, was 5.5 Ng/Joule.
. In February, 1997, the Canada Centre for Mineral and Energy Technology,
or "CANMET," conducted a series of tests at our research and
development facilities of (1) a 15,200 BTU/hour natural gas-fueled
industrial drying furnace unit using linear pulse combustion
configuration, and (2) a 10,700 BTU/hour combination natural gas and
coal powder-fueled industrial drying furnace unit. All tests were
conducted and monitored by CANMET using its own test protocols and
testing equipment. CANMET reported zero parts per million NOx and
sulfer dioxide emissions for all of
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these tests, with the exception of one anomalous NO reading on one test
arising from the addition of air through a coal feeding orifice.
We believe that our pulse combustion technology is so effective in reducing
the emissions of post-burn chemical gases that it can be utilized as a
relatively inexpensive pollution control device. In these cases our burner
units would re-burn the exhaust from a commercial or industrial process,
while at the same time generating heat energy which can be used for various
heat transfer applications, such as electricity co-generation, thereby
reducing operating costs. The cost to manufacture, install and operate our
burner units for these applications should be significantly cheaper than
current scrubber applications.
Compact Size
Our pulse combustion burner units are significantly smaller than conventional
steady-state and tubular pulse combustion units of equivalent output due to the
following considerations:
. Our burner units require a smaller combustion chamber to generate
equivalent heat output and heat transfer capabilities than conventional
steady-state and tubular pulse combustion units due to the geometric
configuration of our design as well as the higher number of pulse
cycles at which our unit operates; and
. Conventional steady-state and tubular pulse combustion units require
separate, large external heat exchangers to transfer heat energy,
regardless of application, while the walls of our burner design act as
primary heat exchange surfaces.
This size advantage is extremely important where limited floor or room space
considerations apply. For instance, a 100,000 BTU/hr low pressure boiler system
utilizing our linear configuration is approximately the size of a briefcase, and
weighs approximately 50 pounds, exclusive of the jacketing, muffler and a
secondary heat exchanger connected to the tailpipe. By way of comparison, a low
pressure boiler system utilizing a conventional tubular combustion unit contains
a combustion chamber which is approximately two feet in diameter and three feet
in height, and weighs in excess of 200 pounds. The size of conventional steady-
state combustion units, in turn, equal or exceed that of conventional tubular
combustion units of comparable output.
Integrated Modular Design
As previously discussed in this prospectus, one of the principal advantages of
our pulse design is that it lends itself readily to the joining together on a
side by side basis of separate but integrated operating "modules," each module
containing one or more combustion units that work in concert. This modular
design affords the following advantages over both conventional steady-state
combustion and tubular pulse combustion designs:
. Turn-down Capability: All conventional and pulse burners operate at an
optimum energy conversion efficiency and emission levels based upon
their design, measured in terms of BTU output. A 100,000 BTUs/hour
conventional steady-state furnace, for example, is designed to operate
most efficiently at a level of fuel-mixture, referred to as the "turn-
down ratio," which would generate 100,000 BTUs of heat energy per hour
after taking into consideration the inefficiencies inherent in that
particular design. If the unit is operated at levels above or below the
rated optimum output in order to regulate or adjust heat output by
either increasing or decreasing the amount of incoming air and fuel,
then the heat output and heat transfer efficiencies will decline and
emission levels increase.
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As previously discussed in this prospectus, one of the principal
advantages of our pulse combustion design over both conventional
steady-state combustion and tubular pulse combustion designs is that
our burner units can be designed to incorporate numerous combustion
chambers aligned on a side-by-side basis within a single combustion
unit. These combustion chambers can then be engineered to operate
together in separate "modules" consisting of one or more combustion
chambers. This modular configuration is important since it allows us
to regulate or adjust heat output while maintaining maximum heat
output and heat transfer efficiencies and lower emissions levels,
which we refer to as "turn-down capability," by simply turning one or
more modules contained in a combustion unit on or off. Moreover,
should an operator desire to increase the combustion units' overall
output ability, he need only attach a new module to the system.
While conventional steady-state combustion and tubular pulse
combustion units can also operate on a similar modular basis, they can
only do so when aligned in a bank of separate burner systems, while
our design allows us to incorporate numerous combustion chambers
within a single combustion system. This advantage allows us to
compound the size advantage which the compact size of our pulse burner
technology already affords us on a unit versus unit comparison basis.
. No Downtime For Maintenance and Repair: The modular design of our
--------------------------------------
pulse combustion technology also allows for easy assembly and
disassembly, enabling the operator to repair or replace sections of
the burner unit in most configurations while maintaining full energy
output from the remaining modules. This feature is particularly
important in commercial and industrial applications requiring
continuous operation.
No Moving Parts
Many conventional tubular pulse systems employ flapper valves on their intake
channels. Our pulse combustion technology, on the other hand, is a simple design
which requires no valves or other moving parts to operate, leading to increased
operating reliability and reduced maintenance and repair costs.
Ability to Operate on a Wide Range of Fuels
Our pulse combustion burner unit has the capability to use any carbon-based fuel
as its energy source. Although most of our testing to date has been done with
natural gas, we have also successfully burned gasoline, propane, powdered coal
and hydrogen, and believe it will be equally successful with diesel and oil.
Reduced Operating Noise
One of the principal drawbacks of conventional tubular pulse combustion is the
cost and effort required to dampen its operating noise to levels commensurate
with conventional steady-state combustion units. As previously discussed in this
prospectus, conventional tubular pulse combustion units operate at approximately
60 to 70 cycles per second due to their configuration. The oscillating pressure
waves from these cycles create a corresponding low frequency standing sound wave
of approximately 60 to 70 Hz, resulting in a very loud, continuous and deep
level of operating noise. Due to the relatively long length of this sound
wavelength, technically complicated and expensive dampening technology is
required in order to mute the operating noise to levels commensurate with
conventional steady-state combustion.
The noise generated by our pulse combustion technology, on the other hand,
operates at between 350 and 600 cycles per second depending upon the
configuration, and is "tuned" to create a standing sound wave of approximately
440 Hz. Although this continuous soundwave is equally loud, albeit at a higher
pitch, than that associated with conventional tubular pulse combustion, it
nevertheless lends itself to relatively simple and inexpensive dampening
technologies due to the short longitudinal length of its
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wavelength, which affords it significant competitive advantages over
conventional tubular pulse combustion technology.
Lower Manufacturing and Installation Costs
The cost to manufacture and install a conventional steady-state 100 million
BTU/hr boiler can exceed $10 million, and could take three years to design,
manufacture and install from the date the order is placed. A conventional
tubular pulse combustion boiler with comparable output would likely be equally
expensive.
Due to the simplicity and compact size of our design, including lack of moving
parts, we believe that we can design, manufacture and install a pulse combustion
boiler system with comparable output at a significantly lower cost, and a
significantly shorter design-through-installation period.
Markets For Burner Units
Burner units are used worldwide for numerous commercial, industrial, residential
and specialty heat transfer applications. The following list of heat transfer
markets applications is instructive:
. Water Heater and Boiler Market: In these applications, heat generated
by a burner unit is used to either simply heat water in an
unpressurized water heating system, or to heat water to create steam
or pressurized hot water in a pressurized boiler system. Hot water is
required in a variety of residential, commercial and industrial uses,
including homes, apartment buildings, schools, hospitals, hotels,
office buildings, restaurants, stores, laundries, car washes,
warehouses, industrial plants, boats/ships and recreational vehicles.
Steam or pressurized hot water is used for a variety of commercial or
industrial applications, including both direct applications such as
steam cleaning and indirect applications where steam is used to run a
turbine in order to generate electricity.
. Space Heating Market: In this application, heat generated by a burner
unit called a furnace is used to heat airspace in a variety of
residential, commercial and industrial settings, including those
mentioned above in the discussion relating to water heaters.
. Industrial Drying Market: In this application, heat generated by a
burner unit is used in industrial processes to dry or atomize a
variety of materials. Industries which employ industrial burners
include the food processing, plastic, polymer, rubber, chemical,
mineral, pulp and paper, and pharmaceutical industries.
. "One-Of-A-Kind" Industrial Project Market: In this application, a
burner unit is used for industrial applications best described as
"one-of-a-kind" which often require custom engineering or fabrication,
such as retrofitting of power generation plants, new power plants, and
large co-generation installations.
. Specialty Application Markets: In this application, a burner unit is
used for various specialty applications. A good example of a specialty
application is the need for "inert" process gases for industrial
operations, such as horizontal down-hole drilling and catalytic
oxidation systems. Inert process gases are exhaust gases which contain
low or zero levels of oxygen.
. Pollution Control Equipment Market: In this application, a burner unit
is used as a secondary pollution control device to "reburn" industrial
flue gases generated by a primary industrial or commercial processes
in order to remove the pollutants contained in these gases. Typical
industrial and commercial settings which require the use of pollution
control equipment are manufacturing facilities, power plants, chemical
plants, refineries and paper mills.
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Marketing Strategy
Both our pulse combustion technology and our diesel fuel combustion technology
have completed their respective research and development stages, and the next
step in exploiting these technologies is to introduce these technologies to the
various markets in order to build market penetration and share and product
knowledge and acceptance. Given the broad range of potential applications and
markets for our burner technologies, we anticipate that we will introduce our
technologies to these potential markets through a number of different strategies
and approaches, including the following types of arrangements:
. Royalty Agreements: We will seek royalty arrangements with equipment
manufacturers which will permit them to incorporate the use of
specific pulse combustion burner unit designs in their products, in
return for the payment of royalties based upon units sold, an initial
up-front fee, or a combination of these. These agreements will be
targeted toward volume producers that will use our pulse combustion
technology as an integral component of their functional product, such
as water heaters and low emission vehicles. This is a domain requiring
large capital expenditures which will not be recovered for several
years, since the end products, such as electric automobiles, will be
several years away from mass production.
. Licensing Agreements: We will seek licensing agreements with equipment
manufacturers that allow a broader scope in application of our burner
technologies than in royalty agreements. The end products of these
arrangements will likely be commercial systems, such as large boilers
and air conditioning equipment for apartment complexes, shopping
centers, and schools and hospitals. License agreements may be
consummated by payment of an initial fee, and an annual maintenance
payment.
. Engineered Projects: We will seek contracts for site specific, one-of-
a-kind projects of a large scale, such as thermal power-plants, co-
generation and various food processing applications. We believe these
will be particularly lucrative projects insofar as they will utilize
our technology at high-end outputs where the advantages of modular
scale up are most fully realized.
. Joint Ventures: We will seek joint venture arrangements for various
industrial projects that lend themselves to pulse combustion
technology in which we will act as prime contractor, subcontractor or
joint venture partner. Joint venture opportunities of greatest
interest to us are in the area of spin-off company formation for
development and sale of products with specific end use applications.
. Product Manufacturing: We would consider a product manufacturing
arrangement in situations where it may be advantageous for us to
manufacture, or have subcontractors manufacture, specific products or
components for end users.
Pending Proposals For Our Technology
As noted above, our burner designs have recently completed their primary
development stage and are now in a position to be introduced to the market. We
are currently working on a variety of production proto-types under proposal
requests from five different companies which would lead to the initial
introduction of the following burner units using our technologies. These
proposal requests are as follows:
. Pulse Combustion Burner to Create A Low Excess Air Reducing Gas For
Industrial Catalytic Absorption Pollution Control Systems: Goal Line
Environmental Technologies, LLC, a Tennessee-based designer and
manufacturer of industrial catalytic absorption pollution control
systems, has requested that we give quotes for eight different natural
gas-fueled pulse combustion burner unit proto-types, ranging from
30,000 BTU/hr to 69 million BTU/hr, to be used as a component for
their proprietary industrial catalytic absorption pollution control
systems. Goal Line, which is a joint venture of Sunlaw Energy
Corporation and Advanced Catalyst Systems, Inc., was
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initially formed to combine Sunlaw's experience in power plant
development and operation with Advanced Catalyst Systems' extensive
catalytic research and development expertise.
Goal Line's first project was to develop a catalytic absorption
pollution control system which would eliminate carbon monoxide and NOx
emissions for two 28 MW natural gas turbine powered industrial co-
generation plants operated by Sunlaw in the Los Angeles metropolitan
area. This system, which was successfully developed and installed by
Goal Line at Sunlaw's co-generation plants and now forms the basis of
Goal Line's technology, involves the following two processes:
. An oxidation/absorption process where emissions are passed
through an absorption chamber that (1) captures NOx in a
potassium carbonate absorber coating, and (2) converts carbon
monoxide into harmless carbon dioxide, which is then released
through a smokestack; and
. A nitrogen regeneration process where dilute hydrogen reducing
gas is passed across the surface of the catalyst and converts the
previously captured NOx into harmless nitrogen, which is then
released through a smokestack.
The Goal Line catalytic absorption pollution control system has been
found by the United States Environmental Protection Agency to result in
the "Lowest Achievable Emission Rate" for NOx emissions to date for gas
turbine power plants, and therefore, by law, to be the "Best Available
Control Technology" standard for new gas turbines. Regardless of these
findings, the primary competitive drawback of Goal Line's system has
been its inability to identify a technology which would allow it to
introduce an oxygen-free dilute hydrogen reducing gas into the catalytic
chamber for the nitrogen regeneration process. This is currently done by
redirecting steam from the power generation process, which reduces the
heat output efficiency of the overall system by approximately 10%. Goal
Line looked without success for several years for a technology which
would facilitate this requirement since this loss of heat output
efficiency is a significant cost item. We demonstrated to Goal Line in a
series of tests conducted in January and September 1999 that our pulse
combustion burner unit has the capability, due to its ability to
maintain "stable" combustion at lower excess air levels, to deliver a
100% oxygen-free hydrogen reducing gas to the catalytic chamber, thereby
allowing Goal Line to recapture the lost heat output efficiency.
As a result of the noted demonstrations, we have been authorized by Goal
Line to commence designing eight different proto-types for use with Goal
Line's catalytic absorption pollution control systems. We are currently
working on the first proto-type, a 365,000 BTU burner unit for use with
the catalytic absorption pollution control system installed at Sunlaw's
Los Angeles gas turbine co-generation plant. This unit will also serve
as a demonstration proto-type for the sale of the catalytic absorption
pollution control system to other industrial plants. The other proto-
types will be used with catalytic absorption pollution control system
used for other types of power system applications, including diesel
compressor sets and oil pipeline pumping stations.
. Pulse Combustion Burner to Create A Low Excess Air Reducing Gas For
External Combustion Engine Applications: We are currently working on a
proposal for STM Corporation, formerly Stirling Thermal Motors, to
develop a natural gas-fueled burner unit to provide an oxygen-free
reducing gas as a heat source for the operation of their external
combustion engine for industrial and automobile purposes. Specifically,
STM applies external heat to expand helium or hydrogen in a sealed
chamber and drive four double-acting pistons, therefore converting heat
energy into mechanical energy As the helium or hydrogen is heated, it
expands and pushes against the pistons in one direction, and as the gas
cools, it compresses and drives the pistons in the return direction. The
operating cycle is perpetual so long as there is an external source of
heat.
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The attractiveness of our burner unit to STM is its ability to
maintain "stable" combustion at lower excess air levels, thereby
producing a low-NOx oxygen-free reducing gas for use as the heat
source for STM's engine with resultant gains in heat output
efficiency. We anticipate that we will complete a demonstration unit
meeting STM's specifications within the next month, which should lead
to more definitive proto-type and development and contract
discussions. We believe that STM's external combustion engine, when
used with our pulse combustion technology, can be used as a low-cost
highly energy efficient, extremely low emission replacement for the
internal combustion engine. While the proto-type we are developing is
natural gas-fueled, we anticipate that it will be adopted to operate
on other fuels as well.
. Flare Gas-Fueled Pulse Combustion Burner to Operate Turbo-Generator:
We are currently working on a proposal for Allied Signal Power
Systems, Inc., to assess the application of our pulse combustion
technology to be used in conjunction with Allied Signal Power Systems'
flare-gas operated turbo-generator. Allied Signal Powers Systems is a
division of AlliedSignal, which recently merged with Honeywell, Inc.
to form Honeywell.
. Flare gas is residual natural gas emitted as a byproduct of producing
oil wells. Flare gas is ordinarily burned at the source, and the
resultant emissions released into the environment, since the amount of
residual natural gas is relatively small and the cost to collect and
market the gas is not commercially justified. Allied Signal Power
Systems uses the heat energy resulting from the combustion of flare
gas to power its turbo-generator, and create electricity than can then
be funneled into the electricity grid. The attractiveness of our
burner unit to Allied Signal Power Systems is its ability to provide
both higher energy efficiencies and lower-NOx exhaust gases than the
burner unit Allied Signal Powers Systems currently uses to fuel its
turbo-generator. We have successfully competed the first stage of this
project, which was to conduct flow tests establishing our ability to
meet Allied Signal Power Systems' unusual flow capacity requirements.
We anticipate that we will complete the second and third steps, which
will result in a demonstration proto-type, by early 2001.
. Instantaneous Pulse Combustion Water Heater: We have worked closely
over the past five years with State Industries, Inc., North America's
largest water heater manufacturer, to develop a natural gas-fueled
400,000 to 500,000 BTU/hr instantaneous water heater. State Industries
currently sells 30,000 to 40,000 of these units annually for small
business purposes, such as fast-food restaurants, at a price of
approximately $4,600 per unit. State Industries' research and
development facility in Tennessee has invested approximately $500,000
to date in designing and manufacturing a full-size engineered proto-
type unit, which is intended to be used to create a production model.
However, State Industries has recently eliminated its research and
development department for cost savings purposes, and has asked us to
complete development of the proto-type unit. When the proto-type unit
is completed, we will enter into negotiations with State Industries
relative to granting it a license to manufacture and sell certain
water heaters using our pulse combustion technology. State Industries
sells approximately 4.25 million water heaters per year, and we
anticipate that this will be the first of many different pulse
combustion water heater designs which will be created for State
Industries. We anticipate that we will commence the completion of this
project upon our completion of the projects for Goal Line
Environmental Systems, STM Corporation and Allied Signal Power Systems
discussed above.
. Adaptation Of Two Natural Gas Fueled Burner Units To Burn Diesel Fuel
Using Diesel Combustion Technology: Acotech Corporation of Marietta,
Georgia, has requested that we design two production proto-types of
our diesel fuel combustion technology which would allow two of
Acotech's natural gas-fueled burner design to burn diesel fuel.
Acotech is a 50/50 joint venture of
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The Bekaert Group, the largest independent steel wire manufacturer in
Europe, and The Royal Dutch Shell Group. We anticipate that we will
commence this project upon our completion of the projects for Goal
Line, STM Corporation and Allied Signal Power Systems discussed above.
Please note that completion of proto-types under the foregoing proposals are
still pending, and no orders will be placed until the proto-types are completed
and approved, and mutually acceptable contract terms have been negotiated. We
cannot give you any assurance that we will enter into any licensing, royalty,
joint venture or other agreement with any of the foregoing parties after we
complete the noted prototypes.
Additional Applications Of Our Technology We Intend To Target In The Near Future
Additional applications of our pulse combustion technology which we intend to
pursue in the near future include the following:
. Commercial Dryer for Industrial Waste, Wood Products and Wood Waste,
and the Agri-food Drying Industry: This is an application identified
by The Canadian Center For Mineral And Energy Technology, or CANMET,
following their testing and evaluation of our pulse combustion
technology that is of particular suitability to its design. The
acoustic wave associated with pulse combustion, when applied to drying
applications, provides a 22% mechanical advantage over conventional
drying technologies because of the acoustic signal's physical
manipulation of the drying environment. This 22% advantage, when added
to the 90%+ heat output efficiency of our pulse combustion technology,
can offer the highest levels of overall system efficiency. We believe
that this will translate into substantial fuel savings in large
industrial drying applications.
We have received a proposal from CANMET, a quasi-governmental "think
tank" which specializes in researching and marketing innovative
mineral and energies technologies, to work in consultation to our
company to design and manufacture a working proto-type industrial
dryer and to approach potential users in the industrial dry cleaning
market. Under this proposal, CANMET would lend the assistance of its
scientific and technical staff and industry contacts to assist us at
their cost of manpower. No potential users have been contacted to
date, and we do not anticipate that we will proceed in developing a
proto-type industrial drying unit for at least twelve months.
. 40 to 80 Million BTU/hr Flow-Through Water Heater: This unit is
intended for large industrial applications such as pulp mills. A
design feasibility study to apply our pulse combustion technology to
the requirements of a specific mill was requested by a large pulp and
paper manufacturer. The design work is currently being addressed.
. Electric Car Heater and Recharging System: It is currently proposed
that the batteries of the all-electric car mandated for California be
reserved for one purpose only, the movement of the car. This means
that all other energy requirements, such as heating, cooling,
headlights, radio and perhaps most importantly, a trickle charge back
into the battery, be loaded onto a different energy system. Pulse
combustion burner unit emissions are sufficiently low to qualify for
the so-called "zero emissions" standards being applied to electric
vehicles in California. We believe that this advantage, as well as the
compact size of our pulse combustion technology, perfectly suit it to
be the heat source for this application.
. Transit Bus Heater: We plan to design a 50,000 BTU/hr natural-gas-
fired heater for natural gas transit buses. This is a rapidly
expanding market area. Natural gas has been acclaimed "the fuel of
choice" for transit buses by most leading authorities in the United
States, including the American Gas Association.
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. 10 Million BTU/hr. Burner Head for Large Scale Power Plant Retrofit such
as Burrard Thermal in Vancouver: The Burrard Thermal Plant, which is
located in the greater Vancouver, British Columbia, area, is a major
local source of NOx emissions and the current remedy of installing after-
combustion-scrubbers is an expensive stop gap measure. We believe that
once its scale-up progress continues to ten million BTU, we would be in a
position to assess whether our technology can be engineered to retrofit
one of the large units, consisting of approximately one billion BTU
output, at the Burrard Thermal Plant. If so, we would have the unique
opportunity of providing a practical and inexpensive solution for high
output, high pollution industrial sites such as the Burrard Thermal
Plant.
Manufacturing Capacity and Suppliers
We currently fabricate our burner units at our facilities located in Burnaby,
British Columbia, although certain components are purchased to our
specifications from suppliers or subcontractors. Most of these components are
standard parts or fabrication projects available from multiple sources at
competitive prices. We believe that we would be able to secure alternate supply
sources or suppliers or subcontractors if any of these become unavailable. Given
the limitations of our internal manufacturing capability, we anticipate that we
will rely upon strategic partners or third party contract manufacturers or
suppliers to satisfy future production requirements as demand for our products
increase.
Research and Development
Our principal activities since our formation in March 1999 have been research
and development activities in adapting our proto-types into production models.
Our research and development team is currently comprised of two employees,
Messrs. Chato and DeFina. We have incurred over $182,000 in research and
development expenses since our inception through October 31, 1999.
License Agreements Governing Our Technologies
Pulse Combustion Technology License
On March 5, 1999, we entered into a Pulse Combustion Technology License with
818879 Alberta, Ltd. pursuant to which it granted us, in consideration of $10,
an exclusive license to design, engineer, manufacture, market, distribute, lease
and sell burner products using the pulse combustion technology within any
country in the world other than Finland or Sweden, and to sublicense and
otherwise commercially exploit the pulse combustion technology within the
permitted countries. Under the terms of the Pulse Combustion Technology License,
we have no obligation to pay any royalty or license fees to 818879 Alberta, Ltd.
The term of the Pulse Combustion Technology License expires upon the earlier of
March 5, 2019 or the lapse of the newest underlying patents for the pulse
combustion technology, including any patented improvements. The oldest pulse
combustion technology patent expires in July 2006, and the newest current pulse
combustion technology patent expires in July 2012. For further information
concerning the underlying patents for the pulse combustion technology, see the
section of this prospectus captioned "Business--Patents and Proprietary Rights."
We are generally prohibited under the Pulse Combustion Technology License from
sublicensing our rights to the pulse combustion technology, or otherwise
assigning our rights as licensee under the Pulse Combustion Technology License,
to any third party without 818879 Alberta, Ltd.'s prior consent. 818879 Alberta,
Ltd., in turn, is also generally prohibited from selling its rights to the pulse
combustion technology, or otherwise assigning its rights as licensor under the
Pulse Combustion Technology License, to any third party without our prior
consent.
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We are obligated under the Pulse Combustion Technology License to pay or to
reimburse 818879 Alberta, Ltd. for all costs its incurs to file and prosecute
new or additional patents for the pulse combustion technology in any country. We
are also obligated to pay or to reimburse 818879 Alberta, Ltd. for prosecuting
and defending patent infringement claims relating to the pulse combustion
technology, and to pay any damages arising from these claims.
We have the right under the Pulse Combustion Technology License to acquire full
ownership of the pulse combustion technology from 818879 Alberta, Ltd. on or
after March 4, 2002, based upon the occurrence of certain conditions revolving
around our success or failure in procuring a listing of our common stock on a
"National Market," which is defined under the Pulse Combustion Technology
License to constitute The New York Stock Exchange, The American Stock Exchange
or The Nasdaq Stock Market, including both the SmallCap and National Markets. We
refer to this purchase right as the "Pulse Combustion Technology Option."
Specifically:
. We have the right, commencing March 4, 2002, to elect to acquire full
ownership of the pulse combustion technology from 818879 Alberta, Ltd. for
the payment of Cdn. $1, so long as our common stock has been accepted for
listing or quotation on a National Market by the date we notify 818879
Alberta, Ltd. that we are exercising this option and we tender payment. We
have made no application to date to obtain any listing or quotation, and
we can give no you assurance that we will make any application.
. 818879 Alberta, Ltd., in turn, has the right to terminate the Pulse
Combustion Technology License anytime after March 4, 2002, if our common
stock is not actively trading on a National Market by the date it
exercises its termination right. In order to exercise this right, 818879
Alberta, Ltd. must give us 90-days notice accompanied by the payment of
Cdn. $1. Should 818879 Alberta, Ltd. exercise this termination right, and
should we fail to procure the listing or quotation of our common stock on
a National Market by the end of our 90-day cure period, or to exercise
certain other protective rights to acquire the pulse combustion technology
described below, we will lose all rights to market burner products using
the pulse combustion technology.
. Should 818879 Alberta, Ltd. exercise its termination right, and should we
fail to procure the listing or quotation of our common stock on a National
Market by the lapse of our 90-day cure period, we can nevertheless acquire
full title to the pulse combustion technology by paying 818879 Alberta,
Ltd. the sum of Cdn. $525,000 within ten business days of the end of our
90-day cure period, subject to downward adjustment, plus interest on the
amount which has accrued since January 1, 1999 at the rate of 13% per
annum. In order to be entitled to receive the full Cdn. $525,000, 818879
Alberta, Ltd. must remit to us concurrent with our payment all shares of
our series "A" preferred stock which are then outstanding as well as
593,750 shares of our common stock. If 818879 Alberta, Ltd. is unable to
tender all 593,750 shares of our common stock, the Cdn. $525,000 cash
consideration we must pay to 818879 Alberta, Ltd. will be reduced on a pro
rata basis based upon the number of shares of our common stock which
818879 Alberta, Ltd. actually remits to us.
. If our common stock is not actively trading on a National Market by March
4, 2002, and should 818879 Alberta, Ltd. not exercise its termination
right by that date, then we may pay 818879 Alberta, Ltd. the sum of Cdn.
$1 and demand that 818879 Alberta, Ltd. exercise its termination right
within 90 days of our demand, in which case we may, in turn, elect to
acquire full ownership of the PCB Technology on the terms described above.
If 818879 Alberta, Ltd. fails to make its election by the end of our 90
day demand period, full title to the pulse combustion technology will
automatically revert to us.
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. Should we acquire full title to our pulse combustion technology by reason
of any of the above purchase rights, 818879 Alberta, Ltd. will nevertheless
retain the right to reacquire our pulse combustion technology should we
later become bankrupt or insolvent, or be threatened with bankruptcy or
insolvency, or make an assignment in favor of our creditors.
For further information concerning the Pulse Combustion Technology License, see
that section of this prospectus captioned "Certain Relationships And Related
Transactions--Transactions With Management And Others--Pulse Combustion
Technology License Agreement." For further information concerning risks
associated with the termination of the Pulse Combustion Technology License, see
that section of this prospectus captioned "Risk Factors--Risks Relating To Clean
Energy And Its Business--We Could Lose Our Technology Licenses If We Fail To
List Our Common Stock on a National Market."
Diesel Fuel Combustion Technology License
On March 5, 1999, in consideration of the sum of $10 paid to Mr. John D. Chato,
we entered into a Diesel Fuel Combustion Technology License with Mr. Chato
pursuant to which he granted us an exclusive worldwide license to design,
engineer, manufacture, market, distribute, lease and sell burner products using
the diesel fuel combustion technology, and to sublicense and otherwise
commercially exploit the diesel fuel combustion technology. We are obligated
under the Diesel Fuel Combustion Technology License to pay Mr. Chato or his
assignees a 10% royalty based upon our net profits, after reasonable allowance
for bad debts and the allocation of administrative and other overhead items,
from the sale of products incorporating the diesel fuel combustion technology.
The term of the Diesel Fuel Combustion Technology License expires upon the
earlier of March 5, 2019, or the lapse of the newest underlying patents for the
diesel fuel combustion technology, including any patented improvements. An
application for a patent for the diesel fuel combustion technology was filed in
August 1998 and, if issued, will expire 17 years after the issue date. For
further information concerning the underlying patents for the diesel fuel
combustion technology, see that section of this prospectus captioned "Business--
Patents and Proprietary Rights."
We are generally prohibited under the Diesel Fuel Combustion Technology License
from sublicensing our rights to the diesel fuel combustion technology, or
otherwise assigning our rights as licensee under the Diesel Fuel Combustion
Technology License, to any third party without Mr. Chato's prior consent. Mr.
Chato, in turn, is also generally prohibited from selling his rights to the
diesel fuel combustion technology, or otherwise assigning his rights as licensor
under the Diesel Fuel Combustion Technology License, to any third party without
our prior consent.
We are obligated under the Diesel Fuel Combustion Technology License to pay or
to reimburse Mr. Chato for all costs he incurs to file and prosecute new or
additional patents for the diesel fuel combustion technology in any country. We
are also obligated to pay or to reimburse Mr. Chato for prosecuting and
defending patent infringement claims relating to the diesel fuel combustion
technology, and to pay any damages arising from these claims.
The Diesel Fuel Combustion Technology Agreement provides that we will
automatically obtain full ownership of the diesel fuel combustion technology,
without the payment of any additional consideration, as of the same date as we
acquire title to the pulse combustion technology. We refer to this acquisition
right as the "Diesel Fuel Combustion Technology Option." Should we acquire full
ownership of the diesel fuel combustion technology, we will nevertheless
continue to be obligated to pay the 10% royalty to Mr. Chato or his assigns.
Should the Pulse Combustion Technology License be terminated without our
acquiring full ownership of the pulse combustion technology, then the Diesel
Fuel Combustion Technology License will expire
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concurrently, and we will lose all rights to market burner products using the
diesel fuel combustion technology.
For further information concerning the Diesel Fuel Combustion Technology
License, see the section of this prospectus captioned "Certain Relationships And
Related Transactions--Transactions With Management And Others--Diesel Fuel
Combustion Technology License Agreement." For further information concerning
risks associated with the termination of the Diesel Fuel Combustion Technology
License, see the section of this prospectus captioned "Risk Factors--Risks
Relating To Clean Energy And Its Business--We Could Lose Our Technology Licenses
If We Fail To List Our Common Stock on a National Market."
Patents and Proprietary Rights
Our basic pulse combustion technology and certain design improvements to this
technology is protected by a number of United States patents in the name of Mr.
Chato, as inventor, the oldest of which expires in July, 2006, and the newest of
which expires in July 2012. The diesel fuel combustion technology is also
protected by a United States patent filed in 1998 which expires in August 2012.
We anticipate that we will make international patent applications in selected
foreign countries for our pulse combustion technology and our diesel fuel
combustion technology in the upcoming months.
We acquired our rights to our pulse combustion technology pursuant to a Pulse
Combustion Technology License we entered into with 818879 Alberta, Ltd. on March
5, 1999. 818879 Alberta, Ltd. acquired its rights to the pulse combustion
technology in December 1998 from a creditor of the BO Group and its related
companies. The transfer of rights excluded certain rights to early pulse
combustion patents relating to Finland and Sweden which the creditor had
purchased separately from the BO Group. As part of 818879 Alberta, Ltd.'s
acquisition of its rights to the pulse combustion technology, Mr. Chato agreed
to release all of his rights to the initial pulse blade combustion patents and
any improvements. Mr. Chato owns the diesel fuel combustion technology, which he
licensed to us on March 5, 1999. For more complete information concerning these
transactions, see the sections of this prospectus captioned "Business--Corporate
Structure" and "Business--License Agreements."
We intend to diligently defend any infringement of our pulse combustion
technology and diesel fuel combustion technology patents. We are not aware of
any potential challenges to these patents. We have not established a fund for
defense of these patents, but may do so if significant sales of its products are
achieved. We intend to have all employees and consultants execute trade secret
and confidentiality agreements.
We cannot give you any assurance that the existing patents granted to us or our
licensors will not be invalidated, that patents currently or prospectively
applied for by us or our licensors will be granted, or that any of these patents
will provide significant commercial benefits. Moreover, it is possible that
competing companies may circumvent patents we or our licensors have received or
applied for by developing products which closely emulate but do not infringe our
or our licensor's patents, and thereby market products that compete with our
products without obtaining a license from us. An adverse decision from a Court
of competent jurisdiction affecting the validity or enforceability of our
patents or proprietary rights owned by or licensed to us could have, depending
generally on the economic importance of the country or countries to which these
patents or proprietary rights relate, an adverse effect on our company and our
business prospects. Legal costs relating to prosecuting or defending patent
infringement litigation may be substantial. Costs of litigation related to
successful prosecution of patent litigation are capitalized and amortized over
the estimated useful life of the relevant patent. We cannot give you any
assurance that we will be able to successfully defend our patents and
proprietary rights. For further information concerning
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these risks, see "Risk Factors--Risks Relating To Clean Energy And Its
Business--Our Ability To Compete Is Dependent Upon Our Patents and Proprietary
Rights."
Employees
We currently have six full-time employees, with two in executive management and
four in research and development. We expect to add two additional full-time
employees in the next 12 months. None of our employees are represented by a
union. We believe that our relations with our employees are good.
Facilities
Our executive offices and principal research and development facilities,
consisting of approximately 4,300 square feet, are located at 7087 MacPherson
Avenue, Burnaby, British Columbia, Canada, V5J 4N4. This space is currently
leased for a two-year term, with a two-year option to renew, through our
subsidiary Clean Energy Canada, at an approximate rental rate of Cdn. $3,400 per
month. Our future space requirements will be determined by the type of royalty,
license or joint venture arrangements we may enter into in the future.
Government Regulation
Emission standards in the United States are imposed by the United States
Environmental Protection Agency and by other regulatory agencies such as the
California Air Resources Board and Southern California Air Quality Management
District. Although one of the principal benefits of our burner technologies are
their ability to satisfy lower pollution standards, we cannot give you any
assurance that emission standards will not be increased by any governmental
agency to a level that our technologies will either not satisfy, or which will
require significant expenditures in research and development costs in order to
satisfy. Any expenditures and or delays in additional technology development to
meet higher emission standards would have a material adverse effect on our
business, results of operations and financial condition.
The heat transfer industry is subject to numerous federal, state, provincial and
local government regulations. We are also subject to laws governing our
relationship with our employees, including minimum wage requirements, overtime,
working conditions and citizenship requirements.
Legal Proceedings
As of the date of this prospectus:
. There are no material pending legal or governmental proceedings relating to
our company or properties to which we are a party, or to our knowledge any
proceeding of this nature which are being contemplated or threatened; and
. There are, to our knowledge, no material proceedings to which any of our
directors, executive officers or affiliates are a party adverse to us or
which have a material interest adverse to us.
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Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
General
The following discussion of our consolidated financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and their explanatory notes, which can be found commencing on page F-
1 of this prospectus.
Overview
We are a development stage entity formed on March 1, 1999, for the specific
purpose of acquiring exclusive world-wide license rights entitling us to design,
engineer, manufacture, market, distribute, license and otherwise commercially
exploit two innovative patented "burner" technologies, our pulse blade
combustion technology and our diesel fuel combustion technology. Both of these
technologies have completed the primary development stage and are in a position
to be commercially exploited. Our objective is to enter into licensing, royalty,
joint venture or manufacturing agreements with established national and
international heat transfer industry manufacturers which will result in the
introduction of a variety of different burner units based upon our technology
into various selected market segments. We have no revenues to date, nor have we
entered into any revenue producing contracts to date, although we are currently
working on a number of proto-types under several proposal requests which could
lead to revenue producing contracts over the next four to six months.
Results Of Operations
We had no revenues for the eight-month period from March 1, 1999, the date of
our inception, through October 31, 1999.
We incurred total operating expenses of $508,048 for the eight-month period from
March 1, 1999, the date of our inception, through October 31, 1999. These
expenses included $108,888 in pre-incorporation operating expenses incurred from
January 1, 1999 through February 28, 1999, which we assumed upon our
incorporation. Our principal operating expenses for this interim period were:
. $182,256 in research and development costs for various project proposals,
including associated wages and benefits;
. $132,088 in administrative wages and benefits;
. $61,171 in marketing expenses; and
. $52,400 in legal expenses.
Liquidity And Capital Resources
Our cash flow requirements from our inception through October 31, 1999 were
funded from the following sources:
. $108,888 in short-term advances from one of our stockholders, BO Tech
Burner Systems Ltd.;
. a $500,000 private placement of series "B" preferred stock which closed on
April 6, 1999, and
. $115,544 in short-term advances by one of our directors, Mr. R. Dirk
Stinson.
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We repaid the $108,888 short term advance to BO Tech Burner Systems Ltd. in
June, 1999, together with interest of $3,437 accrued at the rate of 8.75%.
The $115,544 was advanced by Mr. Stinson pursuant to a promissory note in the
original amount of $50,000 dated August 8, 1999. This note requires our company
to repay the $50,000, plus any additional amounts Mr. Stinson agrees to advance
to our company ($65,544 as of October 31, 1999), plus interest accrued on these
amounts at the rate of prime plus 2% per annum, by August 10, 2000, or any
earlier time we raise Cdn. $750,000 in equity, debt or joint-venture financing
or product revenues. Mr. Stinson is also afforded the right under the note to
convert any portion of the outstanding indebtedness under the note into our
common stock at any time at the conversion rate of one share of common stock per
$2.00 of indebtedness.
Our cash position as of October 31, 1999 was $27,227. Our working capital as of
October 31, 1999 was a deficit of $62,779.
We had a net increase in our cash position of $27,227 for the eight-month period
ended October 31, 1999, which was composed of net proceeds of $577,635 from
financing activities, net of $487,437 in net cash used in operating activities
and $62,971 in cash used in investing activities.
Plan Of Operation And Prospective Capital Requirements
Our ability to continue as a going concern will be dependent upon our entering
into revenue producing contracts and raising additional working capital to fund
these contracts and fully implement our longer-term business plan and marketing
strategies, which we estimate would require at least $2 million in the longer
term. Based upon current operations, we estimate we will incur operating costs
of approximately $800,000 over the twelve-month period ended December 31, 2000.
These estimates will be subject to significant change based upon any contracts
we may enter into.
Our operating expenses are currently being funded through advances made by Mr.
Stinson pursuant to the terms of the promissory note previously described.
Although Mr. Stinson has indicated his willingness to continue funding
operations under these terms for the near future, he has stated that he will
expect us to raise additional working capital by August 10, 2000, in such
amounts as will enable us to repay his advances, with interest, and
independently support our operations afterwards without further contributions
from him. He has also stated that he will have no obligation to make any further
advances should he at any time deem it inadvisable to do so.
We have made no arrangements to obtain additional working capital as of the date
of this prospectus other than the advances described above which Mr. Stinson may
make. Our intent is to raise additional working capital in one or more
increments through contract advances, public or private sales of debt or equity
securities, debt financing or short-term loans, or a combination of the
foregoing. In view of our limited operating history and lack of revenues and
profits to date, we cannot give you any assurance that we will be able to secure
the additional capital we require at all, or on terms which will not be
objectionable to our company or our stockholders, including substantial dilution
or the sale or licensing of our technologies. Our failure or inability under
these circumstances to obtain additional capital on acceptable terms or at all
would have a material adverse effect on our company and our business, which
would result in our being forced to materially scale back or even suspend our
operations, or even force us to seek a merger with or to sell our business to a
third party. In view of these considerations, note number one of our financial
statements states that if we do not raise sufficient capital there is a
substantial doubt as to our ability to continue as a going concern.
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Other Matters
Foreign Exchange
Our business to date is principally conducted in the United States and Canada,
in transactions denominated in United States and Canadian dollars. We maintain
our cash and investments predominately in United States denominated funds, and
only convert these funds into Canadian dollars when necessary to pay our
Canadian expenses. While we do not believe that the fluctuation in the value of
the United States dollar in relation to the Canadian dollar has adversely
affected our operating results, we cannot give you any assurance that adverse
currency exchange rate fluctuations will not occur in the future. Any adverse
currency rate fluctuation could have a material adverse effect on our business,
results of operations and financial condition.
Effect Of Inflation
In our view, at no time during our corporate existence has inflation or changing
prices had a material impact on our business or financial statements.
Year 2000 Compliance
Because many computer and computer applications define date by the last two
digits of the year, "00" may not be properly identified as the year 2000. This
error could result in miscalculations or systems failure in computer systems,
network elements, software applications and other business systems that have
time sensitive programs.
We have reviewed our computer systems and software products for Year 2000
problems, and believe they are Year 2000 compliant and, indeed, have suffered no
Year 2000 problems since January 1, 2000. We only use recent versions of
certified Year 2000 compliant off-the-shelf commercial software applications
manufactured by well-known software manufacturers. We are not reliant upon third
parties, and have sufficient back-up documentation to recover any loss due to
the failure of a third party's computers as the result of Year 2000 problems. In
the event Year 2000 considerations do arise, we do not believe such
considerations will materially impact our internal operations or future
financial or operating results or future financial condition. We cannot give you
any assurance, however, that we will be unaffected by the Year 2000 issues
affecting our prospective customers or suppliers, although we do not believe the
Year 2000 readiness of our prospective customers or suppliers will have a
material impact on our business or financial statements.
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Management
Identity
The following table sets forth the names, municipalities of residence and ages
of our current executive officers and directors, their respective offices and
positions, and their respective dates of election or appointment:
<TABLE>
<CAPTION>
Date First Elected As
Director Or Appointed As
Position With Clean Energy Officer Of Clean Energy
Name Age And Its Subsidiaries And Its Subsidiaries
- --------------------------------- ------- ----------------------------- ----------------------------
<S> <C> <C> <C>
John D. Chato................. 59 Director (Chairman of the March 1, 1999
Burnaby, British Columbia Board) and Head of Research
and Development
John P. Thuot................. 50 President and Director March 1, 1999
Burnaby, British Columbia
Barry A. Sheahan.............. 48 Chief Financial Officer, March 1, 1999
Burnaby, British Columbia Secretary and Director
R. Dirk Stinson............... 46 Director January 20, 2000
Miami, Florida
James V. DeFina............... 58 Projects Director March 1, 1999
Burnaby, British Columbia
</TABLE>
There are no family relationships between any two or more of our directors or
executive officers. There are no arrangements or understandings between any two
or more of our directors or executive officers.
Business Experience
John D. Chato--Chairman of the Board and Head of Research and Development
Mr. Chato is the inventor and developer of the pulse blade combustion system. He
has over 40 years experience in engine rebuilding, engine design and general
combustion research. Mr. Chato has developed theories which apply ram scavenge
and carburetion principles to internal combustion engines, and holds many
patents including a design for electrical generation which combines pulse
combustion and the principles of magneto-hydrodynamics, or MHD. Ram scavenge
refers to the study of the inter-relationship of the momentum of moving gases in
an internal combustion engine and the precise timing of the opening and closing
of the valves to achieve maximum and minimum pressure in the cylinder.
Carburation refers to the study of the mixture of fuel and air in the combustion
process. Magneto-hydrodynamics refers to the study of the motion of an
electrically conducting fluid such as a plasma, or highly heated gas, and its
interactions with magnetic fields.
John P. Thuot--President and Director
Mr. Thuot, has been involved with the BO Group of Companies for over ten years.
Mr. Thuot has served as Secretary and Treasurer for BO Development Enterprises
Ltd., since 1988. In 1994, he assumed the position of Vice President and Chief
Operating Officer of BO Tech Burner Systems Ltd., where he is currently
responsible for overall operations and strategic planning of the company, with
particular emphasis on finance, shareholder and public relations, and
commercialization activities. In 1995, he also assumed the role of Vice
President and Chief Operating Officer of BO Gas Limited. Before his
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involvement with the BO Group, Mr. Thuot was Fire Material Coordinator for the
Cassiar Forest District, Government of British Columbia, from 1986 to 1988. From
1978 to 1986 he was part owner and Operations manager of J&J Placer Mining, a
placer gold operation in the Cassiar-Dease Lake area of northern British
Columbia. Mr. Thuot served as electrical foreman for Commercial-Federal Electric
from 1976 to 1978. Prior to that, Mr. Thuot was part owner and Electrical
Supervisor for L&H Construction in Grand Forks, British Columbia from 1974 to
1976, an account executive for GWG Limited of Edmonton, the largest clothing
manufacturing company in Canada, from 1970 to 1974, and an operator of the
world's largest rotary kiln of its day for Northwood Pulp in Prince George,
British Columbia, from 1968 to 1970. Mr. Thuot is a graduate of Regiopolis
College, Kingston, Ontario.
Barry A. Sheahan--Chief Financial Officer, Secretary and Director
Mr. Sheahan is a chartered accountant who earned his C.A. designation in 1982
after ten years in the financial services industry. He was immediately accepted
into partnership with a regional firm and, in 1984 started his own practice in
Vancouver, British Columbia. Over the next ten years he continued to provide
accounting and tax advisory services, developing a clientele of over 1,000, at
which time he sold his practice in order to enable him to focus on a few key
corporate clients, primarily technology companies. Since 1994 Mr. Sheahan has
acted as a financial consultant to several companies, including the BO Group of
Companies.
R. Dirk Stinson--Director
Mr. Stinson is a business management consultant and private investor with a
background in the heat transfer and oil and gas exploration industries. Most
recently, Mr. Stinson has served as a director since January 1996, and President
from January 1996 through April 1999, of Pinnacle Oil International, Inc., a
publicly traded wide-area oil and gas exploration reconnaissance technology
company. In September 1995 Mr. Stinson co-founded Pinnacle Oil International,
Inc.'s privately-held predecessor company, Pinnacle Oil Inc., of which he served
as President and a director through April 1999.
Prior to forming Pinnacle Oil Inc., Mr. Stinson worked for over 20 years as a
business management consultant and entrepreneur. From 1980 through 1989, Mr.
Stinson managed a number of businesses in Hawaii, including Commercial Energy
Systems, Inc., the Industrial and Commercial division of PRI Energy Systems, and
Pacific Marine. Following his return to Canada in 1990, Mr. Stinson worked in
the automobile industry primarily in the fleet and lease sales, and as fleet and
lease manager for a Nissan dealership. From 1992 to 1994, Mr. Stinson worked as
a sales executive for Premier Plastics Ltd. and Century Plastics Ltd. and, in
1995, became the President of EIC-Energy Interface Corporation in Vancouver,
British Columbia, Canada, a wholly-owned subsidiary of International Parkside
Products, Inc. Mr. Stinson studied Communication Arts at the Southern Alberta
Institute of Technology.
James V. DeFina--Projects Director
Mr. DeFina served as research assistant to John Chato during the early
development stages of the pulse blade combustion project, from 1985 to 1988.
Since that time to the present, he has served as manager of research activities
for BO Gas Limited and BO Tech Burner Systems Ltd. with responsibilities in
research and testing, design and fabrication, preparation of patents and the
submission and administration of research grants. Mr. DeFina received his
undergraduate education at Salem State College in Massachusetts, and his M.A.
degree at the University of British Columbia in 1983.
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Board of Directors
Number of Directors; Non-Series A Directors and Series A Directors; Appointment;
Removal
Our Certificate of Incorporation and Bylaws provide that our Board of Directors
may, by resolution, fix our authorized number of directors at any number between
two and twelve, inclusive, although our Board may not effect any reduction in
the size of our Board that shortens the term of any incumbent director. Our
Board currently consists of four members, three of whom are designated under our
Certificate of Incorporation as "Non-Series A Directors" appointed exclusively
by our common and series "B" preferred stockholders, voting as one class, and
the fourth of whom is designated under our Certificate of Incorporation and
Bylaws as our "Series A Director" appointed exclusively by our series "A"
preferred stockholders.
Our series "A" preferred stockholders are given the right to appoint a number of
"Series A Directors" which would, when aggregated with the number of our Non-
Series A Directors, equal one-fourth of the aggregate number of directors, or
----------
the minimum whole number in excess of one-fourth should the aggregate number of
directors not be a multiple of four. Certain provisions in our Certificate of
Incorporation and Bylaws govern and, to a certain degree circumscribe, the
rights of our stockholders to appoint or remove directors, and to call special
meetings or take actions by written consent. For further information concerning
these matters, see "Description Of Our Securities--Provisions In Our Certificate
Of Incorporation and Bylaws Governing Rights of Stockholders."
Term of Office of Directors
Our directors are elected at each annual meeting of our stockholders, and the
term of their office runs until the next annual meeting of our stockholders and
until their successors have been elected.
Compensation of Directors
We currently compensate our directors who are not executive officers for serving
on our Board of Directors through the grant of options tied to their continued
service on our Board. We do not currently compensate our directors who are also
executive officers for serving on our Board of Directors since they already
receive compensation in the form of salary and option grants tied to their
continued employment as executive officers. We reimburse all of our directors
for any reasonable out-of-pocket expenses they may incur in connection with
attendance at Board of Director and committee meetings.
On January 20, 2000, we agreed to grant non-qualified options under our 1999
Clean Energy Combustion Systems, Inc. Stock Plan to Mr. R. Dirk Stinson
entitling him to purchase 60,000 unregistered shares of our common stock as an
inducement for his serving on our Board of Directors. The exercise price for
these options is $2 per share, which was based upon the exercise price fixed for
options previously granted to our executive officers. Although we have no
valuation for our common stock, its value at the time of the issuance of these
options is significantly less than $2 per share. These options vest in equal
installments upon the conclusion of his first through third annual anniversary
of service on our Board of Directors, and lapse, if unexercised, five years
following the date of vesting. For further information concerning these options,
see "Description Of Our Securities--1999 Clean Energy Combustion Systems, Inc,
Stock Plan."
Committees
Our Board of Directors has not established any committees, including Audit or
Compensation committees, to date, and has no current intent to do so until are
successful in procuring the listing or quotation of our common stock on a
National Market.
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Employment Agreements and Executive Compensation
On March 5, 1999, we entered into employment agreements with Mr. Chato as our
Head of Research and Development, Mr. Thuot as our President, Mr. Sheahan as our
Chief Financial Officer, and Mr. DeFina as our Projects Director. The essential
terms of the employment agreements, which are virtually identical, are as
follows:
. Each agreement provides for a one-year initial term, subject to earlier
termination in certain events. After the initial term, each agreement will
renew automatically for successive one year terms, unless either party
elects by a written, 60-day notice not to renew or the agreement is
terminated earlier in accordance with its terms.
. Each officer is required to devote his full and undivided attention to our
affairs.
. Mr. Chato's salary under his employment agreement is Cdn. $120,000 per
year, while Messrs. Thuot's, Sheahan's and DeFina's salaries under their
respective employment agreements are Cdn. $110,000. Each of these officers
is also entitled to an annual performance bonus as determined by our Board
of Directors.
. Each agreement provides for early termination in the case of the following
events:
. the death or disability of the officer;
. the termination of the officer by us for "Cause," as that term is
defined in the agreement; or
. the termination by the officer for "Good Reason," as that term is
defined in the agreement.
In general, where a termination is for death, disability, "Cause" or by the
officer without "Good Reason," compensation allowances and benefits under
the agreement will accrue only through the effective date of the
termination. However, and again in general, where a termination is without
"Cause," or by the officer for "Good Reason," the agreement provides that
we will pay compensation and certain allowances and benefits to the officer
through the end of the then applicable term.
On March 5, 1999, we agreed to grant incentive options under our 1999 Clean
Energy Combustion Systems, Inc. Stock Plan to Messrs. Chato, Thuot, Sheahan and
DeFina entitling them to purchase 100,000, 80,000, 80,000 and 60,000
unregistered shares of our common stock, respectively, as an inducement for
their continued performance as employees. The exercise price for these options
is $2 per share, which was based upon a proposed offering price of our series
"B" preferred stock which would carry a $2 per share liquidation preference.
Although we have no valuation for our common stock, its value at the time of the
issuance of these options is significantly less than $2 per share. Each
officer's options vest in equal installments upon the conclusion of his first
through fifth annual anniversary of continuous employment, and lapse, if
unexercised, five years following the date of vesting. For further information
concerning these options, see "Description Of Our Securities--1999 Clean Energy
Combustion Systems, Inc, Stock Plan."
Indemnification of Directors, Executive Officers and Agents
Our Certificate of Incorporation provides that any person who was or is a party
or is threatened to be made a party to any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative, and whether or not by or in the right of our company, by reason
of the fact that:
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. he or she is or was a director, officer, incorporator, employee, or agent
of our company, or
. is or was serving at the request of our company as a director, officer,
incorporator, employee, partner, trustee, or agent of another corporation,
partnership, joint venture, trust or other enterprise, including an
employee benefit plan,
is entitled to indemnification to the full extent allowed by law against any
expenses (including counsel fees and disbursements), judgments, fines (including
excise taxes assessed with respect to an employee benefit plan), and settlement
amounts he or she may pay in connection with any action, suit, or proceeding.
This right of indemnification inures whether or not the claim asserted is based
on matters which antedate the adoption of this indemnification provision in our
Certificate of Incorporation, and continues with respect to any person who
ceases to be a director, officer, incorporator, employee, partner, trustee, or
agent, and inures to the benefit of his or her heirs and personal
representatives. Our Certificate of Incorporation provides that this right of
indemnification will not be deemed to be exclusive of any other rights which may
be provided now or in the future under any provision currently in effect or
hereafter adopted of our Bylaws, by any agreement, by vote of stockholders, by
resolution of disinterested directors, by provision of law, or otherwise.
Our Certificate of Incorporation provides that none of our directors shall be
personally liable to us for monetary damages for any breach of their fiduciary
duties in their capacity as a director, with the following exceptions to the
extent allowed under applicable law:
. for any breach of his or her duty of loyalty to our company or our
stockholders;
. for acts or omissions not in good faith or which involve his or her
intentional misconduct or knowing violation of law;
. under Section 174 of the Delaware General Corporation Law Delaware for
unlawful payments of dividends or unlawful stock purchases;
. for any transaction under which he or she derived an improper personal
benefit; or
. the payment of profits arising from his or her purchase and sale, or sale
and purchase, of our securities in violation of Section 16(b) of the
Exchange Act.
Our Certificate of Incorporation provides that the term "damages" will include,
to the extent permitted by law, any judgment, fine, amount paid in settlement,
penalty, punitive damages, excise or other tax assessed with respect to an
employee benefit plan, or expense of any nature, including counsel fees and
disbursements. None of the foregoing alters a director's liability under the
federal securities laws of the United States, or affects the availability of
equitable remedies under applicable laws, such as an injunction or rescission,
for breach of fiduciary duty.
Our Certificate of Incorporation authorizes us to purchase and maintain
insurance on behalf of any person who is or was a director or officer, employee
or agent of our company, or is serving at our request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise against any liability asserted against
him or her and incurred by him or her in any of those capacities, or arising out
of his or her status in any of those capacities, whether or not we would
otherwise have the power under applicable law to indemnify him or her against
these liabilities. Our Certificate of Incorporation also authorizes us to create
a trust fund, grant a security interest or use any other means, such as letters
of credit, surety bonds or other similar arrangements, or to enter into
contracts providing indemnification to the full extent authorized or permitted
by law, to ensure that amounts as may become necessary to effect indemnification
are paid.
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We believe that the above provisions are necessary to attract and retain
qualified persons as directors and executive officers. We have promised certain
of our executive officers and directors that we will enter into written
indemnification agreements with them, and also procure officers' and directors'
insurance coverage when we are in a financial position to do so. No pending
material litigation or proceeding involving our directors, executive officers,
employees or other agents as to which indemnification is being sought exists,
and we are not aware of any pending or threatened material litigation that may
result in claims for indemnification by any of our directors or executive
officers.
We have been advised that any indemnification for liabilities arising under the
Securities Act that may be permitted to our directors, officers and controlling
persons under our Certificate of Incorporation, Bylaws or other agreements
containing indemnity provisions are, in the opinion of the Securities and
Exchange Commission, against public policy as expressed in the Securities Act
and are, therefore, unenforceable.
Change of Control Arrangements
We have no knowledge of any arrangements which may result in a future change of
control of our company. Certain of our founding stockholders have agreed,
moreover, that they will not vote their shares in favor of certain changes of
control unless a majority of each class of shares held by all of the founding
stockholders affirmatively vote in favor of these transactions. For further
information concerning these agreements, see "Description Of Our Securities--
Founding Stockholders Agreement."
Principal Stockholders
The following table sets forth certain information, computed as of February 24,
2000, about the amount and nature of our securities beneficially owned by:
. each of our executive officers (the term "executive officer" is defined as
our President, Secretary, Chief Financial Officer or Treasurer, any vice-
president in charge of a principal business function, such as sales,
administration or finance, or any other person who performs similar policy
making functions for our company);
. each of our directors;
. each person who is a beneficial owner of more than 5% of any class of our
outstanding securities with voting rights; and
. the group comprised of our current directors and executive officers.
This information was given to us by our stockholders and the numbers used are
based on the definitions by the Securities and Exchange Commission found in
Rules 13d-3 and 13d-5 under the Exchange Act. Accordingly, the number of shares
listed in the table represent "beneficial ownership" only for purposes of the
reports required by the Securities and Exchange Commission. We believe that each
individual or entity named has sole investment and voting power with respect to
the securities indicated as beneficially owned by them, subject to community
property laws, where applicable, except where otherwise noted.
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<TABLE>
<CAPTION>
Series "A" Series "B"
-----------------------
Name (1) Common Stock (2) Preferred Stock (2) Preferred Stock (2)
- ------------------------------------ ---------------------------- -------------------- -----------------------
Amount % Amount % Amount %
---------------- --------- ----------- ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
John D. Chato (3)(4)(5)............. 6,860,739 (6)(7) 71.1% -- -- -- --
John P. Thuot (3)(4)................ 173,513 (8) 1.8% -- -- -- --
James V. DeFina (3)(4).............. 327,026 (9) 3.4% -- -- -- --
Barry A. Sheahan (3)(4)............. 204,276 (10) 2.1% -- -- -- --
R. Dirk Stinson (4)(5).............. 1,968,750 (11) 20.4% 1,000 (11) 100% 125,001 (11) 50.1%
BO Development Enterprises Ltd. (5). 6,840,739 (6) 70.9% -- -- -- --
BO Tech Burner Systems Ltd. (5)..... 6,840,739 (6) 70.9% -- -- -- --
BO Gas Limited (5).................. 6,840,739 (6) 70.9% -- -- -- --
Ravenscraig Properties Limited (5).. 1,968,750 (11) 20.4% 1,000 (11) 100% 125,001 (11) 50.1%
818879 Alberta, Ltd. (5)............ 1,968,750 (11) 20.4% 1,000 (11) 100% 125,001 (11) 50.1%
Executive officers
and directors as a group............ 9,538,304 98.9% 1,000 100% 125,001 50.1%
</TABLE>
- -----------------------------
* Less than one-tenth of one percent.
(1) The business addresses for the principal stockholders are: Messrs. Chato,
Thuot, DeFina and Sheahan, BO Tech Burner Systems Ltd., BO Development
Enterprises Ltd., and BO Gas Limited--7087 MacPherson Avenue, Burnaby,
British Columbia, Canada, V5J 4N4; Mr. R. Dirk Stinson--14455 Ocean Drive,
#1608, Miami Beach, Florida 33139; Ravenscraig Properties Limited--Box 71,
Alofi, Niue; and 818879 Alberta, Ltd.--4500 Bankers Hall West, 855-2nd
Street S.W., Calgary, Alberta, Canada T2P 4K6.
(2) Under Rule 13d-3(d) of the Exchange Act, we include in each person's share
count any shares under any options, warrants, rights or conversion
privileges which are or may become exercisable by that person within 60
days of the date of the registration statement containing this prospectus.
In computing each person's respective percentage ownership, the shares
attributable to his or her exercisable securities under the 60-day
inclusion rule are treated as being outstanding (i.e., are added to the
total outstanding shares of that class for computational purposes), while
exercisable securities attributable to the other executive officers,
directors or 5% stockholders under the 60-day inclusion rule are
disregarded. In computing the percentage ownership our company's officers
and directors as a group, all shares attributable to exercisable
securities held by the members of that group under the 60-day inclusion
rule are treated as being outstanding (i.e., are added to the total
outstanding shares of that class for computational purposes). The base
number of outstanding shares of common stock, series "A" preferred stock
and series "B" preferred stock as of the applicable date are 9,643,750,
1,000 and 250,001 shares, respectively.
(3) Executive officer.
(4) Director.
(5) 5% stockholder.
(6) Reflects the aggregate number of shares owned by Mr. Chato (315,026
shares), BO Development Enterprises Ltd. (2,599,084 shares), BO Tech
Burner Systems Ltd. (3,172,905 shares) and BO Gas Limited (753,724
shares). These shares are aggregated for purposes of determining the
beneficial ownership of each of these stockholders pursuant to Rules 13d-3
and 13d-5 above since Mr. Chato controls BO Development Enterprises Ltd.
which, in turn, controls BO Tech Burner Systems Ltd. which, in turn,
controls BO Gas Limited.
(7) Pursuant to Rule 13d-3(d) noted above, includes 20,000 shares of common
stock issuable upon exercise of options granted to Mr. Chato under the
1999 Clean Energy Combustion Systems, Inc. Stock Plan which vest on or
before April 24, 2000.
(8) Pursuant to Rule 13d-3(d) noted above, includes 16,000 shares of common
stock issuable upon exercise of options granted to Mr. Thuot under the
1999 Clean Energy Combustion Systems, Inc. Stock Plan which vest on or
before April 24, 2000.
(9) Pursuant to Rule 13d-3(d) noted above, includes 12,000 shares of common
stock issuable upon exercise of options granted to Mr. DeFina under the
1999 Clean Energy Combustion Systems, Inc. Stock Plan which vest on or
before April 24, 2000.
(10) Pursuant to Rule 13d-3(d) noted above, includes 16,000 shares of common
stock issuable upon exercise of options granted to Mr. Sheahan under the
1999 Clean Energy Combustion Systems, Inc. Stock Plan which vest on or
before April 24, 2000.
(11) Reflects the aggregate number of shares owned by Mr. R. Dirk Stinson (0
shares), Ravenscraig Properties Limited (2,043,750 common shares and
250,001 series "B" preferred shares)) and 818879 Alberta, Ltd. (1,000
series "A" preferred shares). These shares are aggregated for purposes of
determining the beneficial ownership of each of these stockholders
pursuant to Rules 13d-3 and 13d-5 above since Ravenscraig Properties
Limited and 818879 Alberta, Ltd. are owned and controlled by Mr. Stinson.
To our knowledge there are no existing arrangements the operation of which may,
at a later date, result in a change in control of our company.
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Certain Relationships and Related Transactions
Transactions with Management and Others
We have entered into the following transactions through the date of this
prospectus with our executive officers, directors and securities holders
identified in that section of this prospectus captioned "Security Ownership of
Certain Beneficial Owners and Management."
Pulse Combustion Technology License
On March 5, 1999, in consideration of the sum of $10 paid to 818879 Alberta,
Ltd., we entered into a Pulse Combustion Technology License with 818879 Alberta,
Ltd. pursuant to which it granted us an exclusive license to design, engineer,
manufacture, market, distribute, lease and sell burner products using the pulse
combustion technology within any country in the world other than Finland or
Sweden, and to sublicense and otherwise commercially exploit the pulse
combustion technology within the permitted countries. Under the terms of the
Pulse Combustion Technology License, we have no obligation to pay any royalty or
license fees to 818879 Alberta, Ltd. The $10 purchase price is reflected as an
asset under patents for accounting purposes since we have the obligation under
the Pulse Combustion Technology License to maintain the PBC technology patents
and these patents will ultimately revert to our Company. as been charged is
reflected inFor further information concerning these transactions and the terms
of the Pulse Combustion Technology License, see "Business--Corporate Structure"
and "Business--License Agreements--Pulse Combustion Technology License."
818879 Alberta, Ltd. is one of our founders and is the sole holder of our series
"A" preferred stock, and its affiliate, Ravenscraig Properties Limited, holds a
minority interest in our common stock. Both of 818879 Alberta, Ltd. and
Ravenscraig Properties Limited are owned and controlled by Mr. R. Dirk Stinson,
who became one of our directors in January 2000. 818879 Alberta, Ltd. acquired
the rights to the pulse combustion technology in December 1998 from TOBA
Developments Ltd., a creditor of the BO Group and its affiliates, for the sum of
Cdn. $525,000 paid to TOBA to satisfy a debenture under foreclosure.
The terms of 818879 Alberta, Ltd.'s acquisition of the pulse combustion
technology from TOBA and its later licensing of the pulse combustion technology
to our company pursuant to the Pulse Combustion Technology License were each
negotiated on an arms-length basis between the parties. We did not obtain any
independent valuation relative to the terms of the Pulse Combustion Technology
License or the value of the pulse combustion technology from any appraiser or
other expert in the valuation of technologies and businesses.
Diesel Fuel Combustion Technology License
On March 5, 1999, in consideration of the sum of $10 paid to Mr. John D. Chato,
we entered into a Diesel Fuel Combustion Technology License with Mr. Chato
pursuant to which he granted us an exclusive worldwide license to design,
engineer, manufacture, market, distribute, lease and sell burner products using
the diesel fuel combustion technology, and to sublicense and otherwise
commercially exploit the diesel fuel combustion technology. The $10 purchase
price is reflected as an asset under patents for accounting purposes since we
have the obligation under the Diesel Fuel Combustion Technology License to
maintain the diesel combustion technology patents and these patents will
ultimately revert to our Company. For further information concerning these
transactions and the terms of the Diesel Fuel Combustion Technology License, see
"Business--Corporate Structure" and "Business--License Agreements--Diesel Fuel
Combustion Technology License."
As previously discussed in this prospectus, Mr. Chato is one of our founders and
is also a holder, together with other members of the Bo Group, of a controlling
interest in our common stock. The terms of the
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Diesel Fuel Combustion Technology License were negotiated on an arms-length
basis between the parties. We did not obtain any independent valuation relative
to the terms of the Diesel Fuel Combustion Technology License or the value of
the diesel fuel combustion technology from any appraiser or other expert in the
valuation of technologies and businesses.
Founding Stockholders Agreement
On March 1, 1999, we entered into a Founding Stockholders Agreement with our
founding common stockholders relating to certain matters deemed necessary to
ensure the continuity of our management and ownership. For a detailed
description of the terms of the Founding Stockholders Agreement, see
"Description Of Our Securities--Founding Stockholders Agreement."
Indebtedness of Clean Energy to Management and Others
As of October 31, 1999, we owed the sum of $12,624 to one of our stockholders,
BO Tech Burner Systems Ltd. This indebtedness arose from the agreement of our
founders, when forming our company, that we would repay BO Tech Burner Systems
Ltd. and BO Gas Limited for funding our pre-incorporation operating expenses for
the period of January 1, 1999 through February 28, 1999, as well as any other
obligations they might later pay on our behalf. One of our stockholders, 818879
Alberta, Ltd., agreed in turn to advance monies to these companies to fund any
payments they might make on our behalf. In reliance upon this agreement, BO Tech
Burner Systems Ltd. and BO Gas Limited expended $12,624 on our behalf through
October 31, 1999. In June 1999 we paid the sum of $108,888, together with $3,437
in interest accrued at the rate of 8.75%, to 818879 Alberta, Ltd. in repayment
of BO Tech Burner Systems Ltd.'s and BO Gas Limited's payments on our behalf
through that date.
As of October 31, 1999, we also owed the sum of $115,544 to Mr. Dirk Stinson,
who owns and controls 818879 Alberta, Ltd. Mr. Stinson became one of our
directors in January 2000. This indebtedness arose in connection with a $50,000
advance to our company by Mr. Stinson in August 1999, and subsequent advances
through October 31, 1999 in the amount of $65,544. The underlying promissory
note for this transaction requires our company to repay the original $50,000
advance plus any subsequent advances, together with interest accrued on these
amounts at the rate of prime plus 2% per annum, by August 10, 2000, or any
earlier time we raise Cdn. $750,000 in equity, debt or joint-venture financing
or product revenues. Mr. Stinson is also afforded the right under the note to
convert any portion of the outstanding indebtedness under the note into our
common stock at any time at the conversion rate of one common share per $2.00 of
indebtedness.
Indebtedness of Management and Others to Clean Energy
As of October 31, 1999, one of our stockholders, BO Tech Burner Systems Ltd.,
owed our company the sum of $52,033. This indebtedness arose from our payment on
behalf of BO Tech Burner Systems Ltd. of $52,033 to Mr. R. Dirk Stinson in June
1999. Mr. Stinson had previously advanced this amount to BO Tech Burner Systems
Ltd. in December 1998 to cover its operating for that month and some of its
accrued liabilities, and BO Tech Burner Systems Ltd. was not in a position to
repay Mr. Stinson. This indebtedness is currently non-interest bearing, and has
no specific terms of repayment, although BO Tech Burner Systems Ltd. has
indicated that it will pay interest on this advance at a mutually agreeable
interest rate.
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Description of our Securities
General
Our Certificate of Incorporation authorizes us to issue the following classes of
capital stock:
. 15,000,000 shares of common stock; and
. 1,000,000 shares of preferred stock in one or more series, with each series
having such powers, preferences and rights as our Board of Directors may
confer. Three series of preferred stock have been designated to date, as
follows:
. 1,000 shares of series "A" preferred stock;
. 250,001 shares of series "B" preferred stock; and
. 500,000 shares of series "C" preferred stock;
We have issued the following number of shares of our authorized capital stock as
of February 24, 2000, all of which are currently outstanding and fully paid and
nonassessable:
. 9,643,750 shares of common stock;
. 1,000 shares of series "A" preferred stock; and
. 250,001 shares of series "B" preferred stock.
Common Stock
Each common stockholder is entitled to one vote for each share he or she may own
of record on any matter voted upon by our common stockholders.
Should we liquidate, dissolve or wind-up our company, our common stockholders
will share equally and ratably in any assets which remain after we:
. pay all of our debts and liabilities, and
. pay any liquidation preference due to any outstanding class of preferred
stock.
Our common stockholders are entitled to receive and share dividends on a pro
rata basis should our Board of Directors declare a dividend on our common stock.
Any dividend our Board may declare in favor of our common stockholders will be
subject to the following restrictions:
. any dividend and liquidation rights or preferences reserved to any
outstanding class of preferred stock;
. any dividend restrictions that may be contained in future credit
facilities; and
. any restrictions imposed under Delaware corporate law.
Delaware corporate law provides that no dividend or other distribution,
including redemptions or repurchases of shares of capital stock, may be made by
a corporation if, after giving effect to the distribution, the corporation would
not be able to pay its debts as they become due in the usual course of our
business, or its total assets would be less than the sum of its total
liabilities plus the amount that would
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be needed, if it were to be dissolved at the time of the distribution, to
satisfy the preferential rights of its preferred stockholders.
Our common stock has no preemptive or cumulative voting rights under our
Certificate of Incorporation, and is not subject to any redemption, sinking fund
or conversion provisions, with the exception of 818879 Alberta, Ltd.'s
obligation to surrender common stock upon the termination of the Pulse
Combustion Technology License. Specifically, we must pay up to Cdn. $525,000 to
818879 Alberta, Ltd., plus interest accrued thereon at the rate of 13% per annum
from January 1, 1999, in order to preserve our right to acquire full ownership
of the pulse combustion technology should 818879 Alberta, Ltd. exercise its
right to terminate the Pulse Combustion Technology License after March 4, 2002
if our common stock is not then actively trading on a National Market. 818879
Alberta, Ltd. must, in turn, surrender to our company any shares of series "A"
preferred stock which then remain outstanding, plus up to 593,750 shares of
common stock. For further information concerning these provisions, see
"Business--License Agreements."
Series "A" Preferred Stock
Our series "A" preferred stockholders are generally not entitled to vote, except
that they may elect to our Board of Directors a number of directors equal to
one-fourth of our total directors, or the minimum whole number in excess of one-
fourth of our total directors if the total number of our directors is not a
multiple of four.
We are also prohibited under our Certificate of Incorporation from taking the
following actions without the affirmative vote or consent of a majority of our
series "A" preferred stock holders:
. change, amend, or repeal any of the provisions of our Certificate of
Incorporation which would adversely affect the rights, preferences,
privileges, and restrictions of our series "A" preferred stock or authorize
our Board of Directors to do so;
. effect an exchange, reclassification, or cancellation of all or part of our
series "A" preferred stock or effect an exchange, or create a right of
exchange, of all or part of the shares of any other class into series "A"
preferred stock;
. increase or decrease: (1) the presently authorized number of shares of our
preferred stock, including our series "A" preferred stock; or (2) the
presently authorized number of shares of our common stock, except and then
only to the extent necessary to effectuate a forward stock-split with
respect to our common stock;
. fix or alter the designation, powers, preferences and rights of the shares
of any series of our preferred stock (other than our series "A" preferred
stock), and establish the number of shares contained in any series;
. issue any shares of our preferred stock (other than our series "A"
preferred stock), or any security convertible into shares of our preferred
stock;
. create any new class of shares, or any security convertible into that new
class, ranking on a parity with or having rights, preferences or
privileges, as to assets, senior to our series "A" preferred stock;
. declare or pay any dividend with respect to any shares of our common stock,
series "B" preferred stock or any other equity securities of our company
(other than our series "A" preferred stock), or permit or authorize any of
our subsidiaries to declare or pay any dividend with respect to any of
their equity securities (which we collectively refer to as "Series A Junior
Securities"), whether payable out
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of our legally available cash or property, unless and then only to the
extent the dividend relates to the issuance of shares of our common stock
in connection with a forward stock-split with respect to outstanding shares
of our common stock;
. redeem, purchase or otherwise acquire directly or indirectly, or permit or
authorize any of our subsidiaries to redeem, purchase or otherwise acquire
directly or indirectly, any shares of our common stock, series "B"
preferred stock or other of our Series A Junior Securities or any
securities convertible into our Series A Junior Securities, or set aside
any monies for the purchase or redemption, through a sinking fund or
otherwise, of any of those securities;
. sell or convey our principal assets or businesses, or the principal assets
or businesses or equity securities, or securities convertible into equity
securities, of any of our subsidiaries, except inter-company transactions
amongst our company and our wholly owned subsidiaries;
. merge or consolidate our company with or into another legal entity or
entities, with the exception of a short-form merger of a wholly-owned
subsidiary into our company which does not require the vote of our
stockholders;
. dissolve, liquidate or wind-up our company; or
. make an assignment for the benefit of our creditors, or file a petition
under any federal, state or provincial bankruptcy law or statute, which
petition is not vacated within ninety days.
Each holder of our series "A" preferred stock is entitled to one vote for each
share he or she may own of record on any matter voted upon by those
stockholders.
818879 Alberta, Ltd. has agreed, under the terms of the Founding Stockholders
Agreement, that it will not withhold its consent to the payment of certain
dividends pursuant to its right under our Certificate of Incorporation under
certain circumstances. For further information concerning this contractual
provision, see "Description Of Our Securities--Founding Stockholders Agreement."
Our series "A" preferred stock is not entitled to participate in dividends
declared by our Board.
Our Certificate of Incorporation provides that our series "A" preferred
stockholders will be entitled to receive $1 per share, or $1,000 in the
aggregate based upon the 1,000 shares of series "A" preferred stock currently
outstanding, should our company liquidate, dissolve or wind-up. The series "A"
preferred stock liquidation preference is payable from any assets which remain
available for distribution after provision for payment of our debts and the
liquidation preference held by our series "A" preferred stock, but before any
provision is made for our common stock. Our series "A" preferred stockholders
will have no right to participate in any assets that may remain for distribution
after satisfaction of their series "A" liquidation preference.
Our Certificate of Incorporation provides further that each share of our
preferred stock is convertible at the option of its holder into one share of our
common stock, subject to adjustment for stock dividends, combinations or splits.
In addition, if our common stock is accepted for listing or quotation on a
National Market and actively trades on that market for a two year continuous
period, all outstanding shares of series "A" preferred stock will automatically
convert into common stock in the same conversion ratio as if voluntarily
converted.
Our series "A" preferred stock has no preemptive or cumulative voting rights
under our Certificate of Incorporation, and is not subject to any redemption,
sinking fund or conversion provisions, with the exception of the following:
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. Our Certificate of Incorporation provides that each share of series "A"
preferred stock will be converted into one share of common stock, subject
to adjustment for stock dividends, combinations or splits:
. at the option of its holder; or
. if our common stock is accepted for listing or quotation on a National
Market and actively trades on that market for a two year continuous
period.
. Our Founding Stockholder's Agreement provides that each share of series "A"
preferred stock will be converted into one share of common stock, subject
to adjustment for stock dividends, combinations or splits, should:
. the aggregate holdings of Ravenscraig Properties Limited and its
affiliates in our common stock at any time become less than 5% of the
total number of shares of our common stock outstanding, unless the
decrease is attributable to a stock redemption; or
. 818879 Alberta, Ltd. sell or assign any of our series "A" preferred
stock to any third party other than any affiliate of 818879 Alberta,
Ltd. and Ravenscraig without our prior written consent. For further
information concerning this contractual provision, see "Description Of
Our Securities--Founding Stockholders Agreement."
Our Founding Stockholder's Agreement also requires 818879 Alberta, Ltd.'s to
surrender all outstanding shares of series "A" preferred stock upon the
termination of the Pulse Combustion Technology License. Specifically, we must
pay up to Cdn. $525,000 to 818879 Alberta, Ltd., plus interest accrued thereon
at the rate of 13% per annum from January 1, 1999, in order to preserve our
right to acquire full ownership of the pulse combustion technology should 818879
Alberta, Ltd. exercise its right to terminate the Pulse Combustion Technology
License after March 4, 2002 if our common stock is not then actively trading on
a National Market. 818879 Alberta, Ltd. must, in turn, surrender to our company
any shares of series "A" preferred stock which then remain outstanding, plus up
to 593,750 shares of common stock. For further information concerning this
contractual provision, see "Business--License Agreements."
Our series "A" preferred stockholders will be entitled to receive, in cash or
securities, the amount they would have received upon our voluntary or
involuntary liquidation, dissolution or winding-up upon the occurrence of any of
the following:
. any recapitalization or reclassification of our capital stock;
. our merger or consolidation with or into another corporation or
corporation;
. our corporate reorganization, including an exchange reorganization or a
sale-of-assets reorganization; or
. any transaction in which all or substantially all of our assets are sold;
with the exception, in any of the above cases, of
. any transaction whose principal purpose is to change the state in
which our company is incorporated, or to form a holding company, or to
effect a similar reorganization as to form of entity without change of
beneficial ownership, including a merger into a wholly-owned
subsidiary, or
. the merger of our company with or into a corporation that is
controlled by our company immediately after the transaction.
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Series "B" And Series "C" Preferred Stock
Each holder of our series "B" and series "C" preferred stock is entitled to vote
on all matters voted upon by our common stockholders, and will be deemed for
voting purposes to hold that number of whole shares of common stock into which
his or her respective shares of preferred stock could be converted.
We are also prohibited under our Certificate of Incorporation from taking any of
the following actions without obtaining the affirmative vote or consent of a
majority of the outstanding shares of each or both of our series "B" and series
"C" preferred stock (which we collectively refer to as the "applicable series of
preferred stock"), to the extent each or both of their respective series of
preferred stock are affected by such action:
. changing, amending, or repealing any of the provisions of our Certificate
of Incorporation which would adversely affect the rights, preferences,
privileges, and restrictions of the applicable series of preferred stock or
authorizing our Board of Directors to do so;
. effecting an exchange, reclassification, or cancellation of all or part of
the applicable series of preferred stock or effecting an exchange, or
creating a right of exchange, of all or part of the shares of any other
class into the applicable series of preferred stock;
. increasing the presently authorized number of shares of the applicable
series of preferred stock;
. creating any new class of shares, or any security convertible into the new
class, ranking on a parity with or having rights, preferences or
privileges, as to assets, senior to the applicable series of preferred
stock;
. creating any new class of shares, or any security convertible into the new
class, ranking on a parity with or having rights, preferences, or
privileges, as to assets, junior to the applicable series of preferred
stock but senior to our common stock;
. declaring, paying or making any distribution (other than a dividend payable
in cash or property pursuant to which the applicable series of preferred
stock is otherwise entitled to participate) with respect to any shares of
our capital stock or any other equity securities of our company ranking
junior to the applicable series of preferred stock upon liquidation or
distribution (except in shares of, or warrants or rights to subscribe for
or purchase shares of our company which are junior to the applicable series
of preferred stock as to assets), or permit or authorize any of our
subsidiaries to declare, pay or make any distribution with respect to any
of their equity securities (we refer to these securities as "junior
securities"), if after giving effect to that distribution there is accrued
but unpaid dividends or accrued but unpaid liquidation preferences with
respect to the applicable series of preferred stock;
. declaring, paying or making any dividend payable in cash or property, after
taking into consideration provision for liquidation preferences for the
applicable series of preferred stock, unless:
. the dividend relates to the issuance of shares of our common stock as
a dividend on outstanding shares of our common stock, or
. our Board of Directors declare that the holders of the applicable
series of preferred stock may participate in the dividend on the same
basis as if all of their shares of the applicable series of preferred
stock had been converted into common stock; and
. redeeming, purchasing or otherwise acquiring directly or indirectly, or
permitting or authorizing any of our subsidiaries to redeem, purchase or
otherwise acquire directly or indirectly, any applicable
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junior securities or any securities convertible into applicable junior
securities, or setting aside any monies for the purchase or redemption,
through a sinking fund or otherwise, of any of those junior securities if,
after giving effect to that redemption or purchase, any accrued but unpaid
dividends are payable to the applicable preferred stockholders or there is
an accrued but unpaid liquidation preference with respect to the applicable
series of preferred stock.
Our series "B" and series "C" preferred stock may only participate in dividends
if permitted to do so by our Board of Directors. If either series of preferred
stock is granted participation rights, they will share in the dividend on a pro
rata basis as if their shares of preferred stock were converted into common
stock.
Should we liquidate, dissolve or wind-up of our company, our Certificate of
Incorporation requires us to pay to each of our series "B" and series "C"
preferred stockholders an amount equal to the "stated value" of his or her
preferred shares, which is defined as the issuance cost for these securities.
The stated value of the 250,001 shares of series "B" preferred stock currently
outstanding is $2 per share, or $500,002 in the aggregate. No stated value has
been assigned to the series "C" preferred stock since no shares have been issued
to date.
The series "B" preferred stock liquidation preference is senior to the series
"C" preferred stock liquidation preference, and the series "B" and series "C"
liquidation preferences are senior to any liquidation preference for our series
"A" preferred stock or common stock. Accordingly, in the event of our
liquidation, dissolution or winding-up, any assets which remain available for
distribution after we have made provision for payment of our debts must be
applied first toward the payment of the series "B" liquidation preference, and
then toward he payment of the series "C" liquidation preference, before any
liquidation payments or distributions can be made with respect to any other
equity securities, including our series "A" preferred stock and our common
stock. Our series "B" and "C" preferred stockholders will have no right to
participate in any assets that may remain for distribution after satisfaction of
their respective liquidation preferences.
Our Certificate of Incorporation provides that each share of series "B" and
series "C" preferred stock will be converted into one share of common stock
(subject to adjustment for: (1) the issuance of our common stock under certain
circumstances for cash consideration of less than the Stated Value of the
applicable series of preferred stock; determined on a cumulative basis after
taking into consideration all previous issuances of common stock; or (2) stock
dividends, reclassifications, splits and other similar events stock dividends,
combinations or splits):
. at the option of its holder; or
. if our common stock is accepted for listing or quotation on a National
Market.
Our series "B" and series "C" preferred stock has no preemptive or cumulative
voting rights under our Certificate of Incorporation, and are not subject to any
redemption, sinking fund or conversion provisions other than the previously
noted conversion feature.
Our series "B" and series "C" preferred stockholders will be entitled to
receive, in cash or securities, the amount they would have received upon the
voluntary or involuntary liquidation, dissolution or winding-up of our company
upon the occurrence of any of the following events:
. any recapitalization or reclassification of our capital stock;
. our merger or consolidation with or into another corporation or
corporation;
. our corporate reorganization, including an exchange reorganization or a
sale-of-assets reorganization; or
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. any transaction in which all or substantially all of our assets are sold;
with the exception, in any of the above cases, of
. any transaction whose principal purpose is to change the state in which
our company is incorporated, or to form a holding company, or to effect
a similar reorganization as to form of entity without change of
beneficial ownership, including a merger into a wholly-owned
subsidiary, or
. the merger of our company with or into a corporation that is controlled
by our company immediately after the transaction.
Non-Designated Preferred Stock
Our Board of Directors is authorized under our Certificate of Incorporation to
designate additional series of our preferred stock from the balance of
authorized shares not previously designated as part of our series "A," series
"B" and series "C" preferred stock, and to fix the number of shares within each
series so designated and determine the designation, powers, preferences and
rights of that series, subject to the consent rights reserved to our series "A,"
series "B" and series "C" preferred stockholders.
Provisions In Our Certificate Of Incorporation and Bylaws Governing Rights of
Stockholders
Certain provisions in our Certificate of Incorporation and Bylaws described
below govern and, to a certain degree circumscribe, the rights of our
stockholders to appoint or remove directors, and to call special meetings or
take actions by written consent:
Number of Directors; Non-Series A Directors and Series A Directors; Appointment;
Removal
Our Certificate of Incorporation and Bylaws provide that the authorized number
of our directors will be not less than two nor more than twelve as fixed from
time-to-time by resolution of our Board of Directors, and that our Board will be
comprised of following two separate classes of directors:
. "Non-Series A Directors" appointed exclusively by our common and series
"B" and series "C" preferred stockholders voting as one class, with our
series "B" and series "C" preferred stockholders voting on the same basis
as if their shares had been converted into common stock; and
. "Series A Directors" appointed exclusively by our series "A" preferred
stockholders. These stockholders have the right to appoint a number of
Series A Directors which, when aggregated with the total number of our
Non-Series A Directors, would equal one-fourth of the total number of
----------
directors, or the minimum whole number in excess of one-fourth should the
total number of directors not be a multiple of four.
Our Board of Directors is presently fixed at four members, three of whom are
designated as "Non-Series A Directors," and the fourth of whom is designated as
a "Series A Director."
Our Certificate of Incorporation and Bylaws provide that each director will each
hold office until the annual meeting for the year in which his or her term
expires and until his or her successor is duly elected, unless the term has
previously expired due to his or her death, resignation, retirement,
disqualification or removal from office. Any vacancy in any Non-Series A
Director position, however resulting, or any newly created Non-Series A Director
position, may only be filled by a majority of our directors then in office, even
if less than a quorum, or by a sole remaining director and not by our
stockholders. Any vacancy in any Series A Director position, however resulting,
or any newly created Series A Director position, may only be filled by
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a majority of our outstanding series "A" preferred stock. Any director elected
to fill a vacancy will hold office for a term which coincides with the terms of
the class to which he or she was elected.
Our Non-Series A Directors may be removed from office at any time, for cause
only, by the affirmative vote of a majority of our outstanding common and series
"B" and series "C" preferred stock, voting as one class, with our series "B" and
series "C" preferred stockholders voting on the same basis as if their shares of
series "B" and series "C" preferred stock had been converted into common stock.
Our Series A Directors may be removed from office at any time, with or without
cause, by a majority of our outstanding series "A" preferred stock.
Special Meetings of Stockholders; Written Consents
Our Certificate of Incorporation and Bylaws provide that special meetings of our
common and series "B" and series "C" preferred stockholders may be called only
by our Board of Directors, the Chairman of our Board, our Chief Executive
Officer or our President. Moreover, any action required or permitted to be taken
at any annual or special meeting of our common and series "B" and series "C"
preferred stockholders:
. can only be taken upon the vote of the those stockholders at an annual or
special meeting duly noticed and called, as provided in our Certificate of
Incorporation and Bylaws; and
. may not be taken by written consent of our stockholders unless approved by
the affirmative vote of at least two-thirds of the combined voting power of
the outstanding shares of our stock of all classes and series entitled to
vote on the matter.
The only exceptions to the foregoing restrictions involve matters which
specifically require the affirmative consent of our series "A, series "B" or
series "C" preferred stockholders as a class under our Certificate of
Incorporation, which approval may be given by written consent of a majority of
shares held by those stockholders.
Our Certificate of Incorporation and Bylaws provide that our series "A"
preferred stockholders may call special meeting at any time for any purpose or
purposes, and can take any action by written consent.
Amendment or Revocation
Our Certificate of Incorporation and Bylaws provide that the foregoing
provisions can only be amended or repealed, or inconsistent provisions adopted,
by
. the affirmative vote of at least two-thirds of the combined voting power
of the outstanding shares of our stock of all classes and series entitled
to vote generally in the election of our directors, voting together as a
single class, e.g., our common and series "B" and series "C" preferred
stockholders voting as a class, and
. any class or series of our stock required by law or by our Certificate of
Incorporation or Bylaws, e.g., our series "A," series "B" or series "C"
preferred stockholders, voting separately, to the extent they are affected
by the action.
Founding Stockholders Agreement
On March 1, 1999, we entered into a Founding Stockholders Agreement with our
eight founders and initial common stockholders--Messrs. John D. Chato, John P.
Thuot, James V. DeFina, Barry A. Sheahan and Robert Alexander, and BO Tech
Burner Systems Ltd. and Ravenscraig Properties Limited, and our initial series
"A" preferred stockholder--818879 Alberta, Ltd., relating to certain matters
deemed necessary to
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ensure the continuity of our management and ownership. The Founding Stockholders
Agreement provides, among other things, for the following rights and obligations
amongst our company and these founding stockholders:
. 818879 Alberta, Ltd. agrees that its will note sell or assign our series
"A" preferred stock to any third party other than 818879 Alberta, Ltd.'s
and Ravenscraig Properties Limited's affiliates without our prior written
consent.
. 818879 Alberta, Ltd. granted us the right to convert any outstanding series
"A" preferred stock into common stock should:
. 818879 Alberta, Ltd. consummate any unpermitted sale or transfer of the
series "A" preferred stock; or
. the aggregate holdings of Ravenscraig Properties Limited and its
affiliates in our common stock become less than 5% of the total number
of shares of our common stock outstanding, excluding decreases
attributable to stock redemptions.
. 818879 Alberta, Ltd. agreed that any person its seeks to appoint as a
Series A Director to our Board of Directors must be reasonably acceptable
to our Board. We agreed that 818879 Alberta, Ltd. would have the right to
have an observer attend all meetings of our Board so long 818879 Alberta,
Ltd. or its affiliates hold our series "A" preferred stock.
. 818879 Alberta, Ltd. agrees that it will not withhold its consent to the
payment of certain dividends pursuant to its right as the holder of our
series "A" preferred stock under our Certificate of Incorporation should
we procure the quotation of our common stock on the Nasdaq National
Market.
. We agreed to grant pre-emptive rights to our seven initial common
stockholders entitling each of them to participate on a pro rata basis
with respect to certain offerings of our equity securities on or before
March 31, 2002. Specifically, should we issue any securities, other than
debt securities with no equity feature, in a private offering for cash on
or before March 31, 2002, we must offer each founding common stockholder
then holding our common stock a 30-day right entitling him or her to
purchase those securities at the same price and terms to be offered,
although this obligation is subject to certain conditions and exceptions.
If any founding common stockholder elects to purchase more securities than
offered, he or she will be entitled to purchase his or her pro rata
portion of the offered securities. This preemptive right does not apply,
among other events, to the following:
. securities we may issue or create as a result of any stock dividend,
subdivision, reclassification, recapitalization or similar event;
. securities we may issue under a firm commitment underwritten public
offering;
. securities we may issue to fulfill or comply with any of our
obligations to issue securities under any present or future stock
option plan, stock purchase, bonus, savings investment, or other
stock incentive programs for the benefit of our directors, officers,
employees or consultants;
. securities we may issue in isolated transactions in payment for
goods and services;
. securities we may issue by reason of the exercise of outstanding
options, warrants or other rights to acquire securities; or
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. securities we may issue in consideration of our acquisition, whether
by merger or otherwise, of the stock or assets of another entity.
These rights are personal, non-transferable rights limited to our founding
common stockholders subject to certain rights of transfer to family
members or affiliates or with our consent in our sole discretion, and may
only be exercised by any individual founding common stockholder or
permitted assignee if he or she then holds at least 5,000 shares of common
stock.
. Should our stockholders approve the sale, transfer, exchange or other
disposition of 50% or more of our capital stock in a single or series of
related transactions (which we refer to as an "Approved Stock Sale
Transaction"), Ravenscraig and its permitted successors retain the right
to sell, transfer, exchange or otherwise dispose of any common stock then
held by them as part of the Approved Stock Sale Transaction on a pro rata
basis with all other selling stockholders, even if they did not grant
their approval for the Approved Stock Sale Transaction or otherwise
consent to the sale, transfer, exchange or other disposition of their
common stock in accordance with the terms of the Approved Stock Sale
Transaction.
. We agree to use our best efforts to initially procure the quotation of our
common stock on the NASD OTC Bulletin Board, and to later procure the
quotation of our common stock on either tier of The Nasdaq Stock Market,
e.g., either The Nasdaq SmallCap Market or the Nasdaq National Market.
. Our founding common stockholders other than Ravenscraig Properties Limited
agreed to subject his or her shares of common stock to certain OTC
Bulletin Board Lock-Up restrictions. These restrictions are described
below in the section of this prospectus captioned "OTC Bulletin Board
Lock-Up."
. Our founding common stockholders each agreed they would not to vote in
favor of or otherwise approve any transaction or series of transactions
which would effectuate a "Change In Control" unless that transaction was
otherwise approved by a majority of our common stock then held by the
founding common stockholders and a majority of our outstanding series "A"
preferred stock. The term "Change In Control" is defined as any time an
"Acquiring Person" attains, by reason of and immediately after a
transaction or series of related transactions with certain enumerated
exceptions, "Beneficial Ownership" of 50% or more of the "Total Combined
Voting Power" of our then outstanding "Voting Securities," as those terms
are defined in the Founding Stockholders Agreement.
OTC Bulletin Board Lock-Up Restrictions
A portion of our currently outstanding common stock held by our founding common
stockholders, and all 500,000 shares of our common stock which may be derived by
conversion of shares of our currently outstanding series "B" preferred stock,
are subject to certain OTC Bulletin Board Lock-Up restrictions contained in our
Founding Stockholders Agreement. These restrictions were formulated to assist in
the creation of an orderly market for the sale of our common stock on the OTC
Bulletin Board by preventing too many shares from being offered for sale within
the first nine months of quotation on the OTC Bulletin Board.
Specifically, if our common stock is quoted on the OTC Bulletin Board before
December 31, 2000, these shares, whether held by our founding common
stockholders or their successors, cannot be sold on that market without our
prior consent until a certain specified date. Any waiver we may grant pursuant
to our discretionary authority must be exercised on a pro rata basis with
respect to all common stockholders who are subject to the OTC Bulletin Board
Lock-Up restrictions and whom desire to sell those shares on that market. Any
distributees of less than 3,000 shares of our common stock under this prospectus
will be
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entitled to sell those shares on the OTC Bulletin Board at any time free of the
OTC Bulletin Board Lock-Up restrictions. For further information concerning this
contractual provision, see "Description Of Our Securities--Founding Stockholders
Agreement."
The following table lists the total shares of our common stock which will be
subject to the OTC Bulletin Board Lock-Up restrictions after the consummation of
the sales or distributions contemplated by this prospectus, and their respective
release dates:
<TABLE>
<CAPTION>
OTC Bulletin Board
---------------------------------------------
Total Shares Of Common Stock Lock-Up Release Dates
--------------------------------------------- --------------------------------------------
Held By Founding Conversion Of Months After
Common Series "B" Quotation On OTC Fixed Date
Stockholders Preferred Stock Bulletin Board (If Earlier)
---------------------- -------------------- ----------------- ---------------------
<S> <C> <C> <C>
2,126,835 125,000 Three Months June 30, 2000
2,126,835 125,000 Six Months September 30, 2000
2,126,835 125,001 Nine Months December 31, 2000
--------- -------
6,380,166 375,001
========= =======
</TABLE>
1999 Clean Energy Stock Plan
Description of Plan
On March 5, 1999, our Board and stockholders approved our 1999 Clean Energy
Combustion Systems, Inc. Stock Plan, which we refer to as the "1999 Stock Plan."
The purpose of the 1999 Stock Plan is to provide our company with a vehicle to
attract, compensate and motivate selected directors, officers, employees and
consultants and advisors, and to appropriately compensate them for their
efforts, by creating a broad-based stock plan which will enable us, in our sole
discretion and from time to time, to offer to or provide incentives or
inducements to those persons in the form of stock awards, stock options or stock
appreciation rights, which we collectively refer to as "Awards" under the 1999
Stock Plan, in an aggregate amount which cannot exceed 1,000,000 shares of our
common stock, thereby affording those persons with an opportunity to share in
potential capital appreciation in our common stock. Consultants and advisors
will only be eligible to receive a grant under the 1999 Stock Plan if they are:
. natural persons; and
. provided bona fide consulting services to our company or its subsidiaries
under a contract, but excluding any services they may render in connection
with the offer and sale of our securities in a capital-raising
transaction, or which may directly or indirectly promote or maintain a
market for our securities.
The 1999 Stock Plan is administered by the "Plan Administrator," which is
defined under the 1999 Stock Plan to be our Board of Directors or, at our
Board's discretion, the Compensation Committee of our Board or any other
committee selected by our Board, or our President or his designee. The Plan
Administrator has the empower, subject to the terms and conditions of the 1999
Stock Plan, to determine the following matters:
. which persons are eligible to receive Awards under the 1999 Stock Plan;
. which eligible persons may be recipients of Awards;
. the type of Award, e.g., stock grant, option or stock appreciation right;
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. the time or times at which the Awards may be granted;
. the number of shares of our common stock subject to each Award;
. the time and manner in which any Award which is an option will be
exercisable, including the exercise price and option period;
. whether any Award will subject to vesting conditions; and
. any other terms and conditions of an Award.
The Plan Administrator has the power to interpret and administer the 1999 Stock
Plan in its sole discretion, and all of its decisions are final.
Stock grants under the 1999 Stock Plan will be awarded under the following
different circumstances:
. As a "bonus" or "reward" for services previously rendered and otherwise
compensated. This type of Award is comparable to a gift since our company
has no legal obligation to make the grant, and would ordinarily do so only
in our discretion to recognize extraordinary services.
. As "compensation" for the previous or future performance of services or
attainment of goals. This type of Award would commonly occur in a
situation in which the recipient enters into an agreement with our company
to be paid shares of common stock (in lieu of cash) for the provision of
past or future services.
. In "consideration" for the payment of a purchase price for our common
stock. This alternative would ordinarily apply where the recipient desires
to purchase our common stock, and our company is willing to sell our
common stock to the recipient.
Where payment is required to purchase our common stock under a stock grant, the
purchase price will be that price, including at a premium or discount to the
current fair market value of our common stock, as determined in the Plan
Administrator's sole discretion.
Options granted under the 1999 Stock Plan may:
. be either incentive stock options, which generally have more favorable
United States income tax considerations, or "non-qualified" stock options.
. cannot have an exercise price of less than 85% of the fair market value of
our common stock as of the date of grant in the case of non-qualified
options, and not less than 100% of fair market value in the case of
incentive stock options; and
. may not have a term which exceeds ten years from date of grant.
Certain additional restrictions apply in the case of grants of incentive stock
options to persons who are 10% stockholders of our company.
Stock appreciation rights may be granted under the 1999 Stock Plan in
conjunction with, or may be unrelated to, options granted under the 1999 Stock
Plan. A stock appreciation right entitles the recipient to receive a payment, in
cash or shares of our common stock or a combination thereof, in an amount equal
to the excess of the fair market value of our common stock at the time of
exercise over the fair market value as of the date of grant. Stock appreciation
rights may be exercised during a period of time fixed by the Plan Administrator
not to exceed ten years after the date of grant. If a stock appreciation right
is issued in tandem with an option granted under the 1999 Stock Plan, the stock
appreciation right will be
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canceled upon exercise of the option. A stock appreciation right may be issued
subject to vesting conditions on a similar basis as an option.
Awards granted under the 1999 Stock Plan are generally not transferable, and
will be subject to any vesting we may impose, all as governed by certain
applicable securities laws. A recipient of a grant must generally pay
consideration for the exercise of the option or purchase of our common stock in
cash; provided, however, we may permit the recipient to pay in shares of our
common stock or other property, including a promissory note.
The 1999 Stock Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time and from time to time by our Board of
Directors. Neither our Board of Directors nor the Plan Administrator may
materially impair any outstanding Awards without the express consent of the
recipient. The Plan Administrator may also modify the terms of outstanding
options or the vesting conditions placed upon any stock grants set forth in the
underlying Award Agreement. However, no modification can impair a recipient's
rights under the Award Agreement without his or her express consent.
Grants To Date Under The 1999 Stock Plan
As of the date of this prospectus, we have granted the following stock options
under the 1999 Stock Plan:
. Incentive options to four of our officers and key employees entitling
them to purchase an aggregate of 320,000 shares of our common stock at a
price of $2.00 per share; and
. Non-qualified options to a director entitling him to purchase of 60,000
shares of our common stock at a price of $2.00 per share.
The noted incentive options vest in equal installments upon the conclusion of
the first through fifth annual anniversaries of continuous employment, and the
non-qualified options vest in equal installments upon the conclusion of the
first through third annual anniversaries of engagement as a director. Both the
incentive and non-qualified options lapse five years from date of vesting. For
further information concerning these options, see "Management--Employment
Agreements And Executive Compensation" and "Management--Board of Directors--
Compensation of Directors."
Delaware Business Combination Act
As a Delaware corporation, we are subject to Section 203 of the Delaware General
Corporation Law (the "Business Combination Act") which generally restricts an
"interested stockholder," which is defined as a beneficial owner of 15% or more
of stock, from entering into a business combination with the target company for
a period of three years unless:
. the board of directors of the target company approves the combination
before the acquisition of the 15% interest;
. the interested stockholder acquires at least 85% of the stock of the
target company as part of the transaction in which the 15% will be
acquired, excluding stock owned by officers who are also directors and
certain voting stock held by employee benefit plans; or
. the board of directors approves a combination by a majority vote and two-
thirds of other stockholders approve at a duly called stockholders
meeting.
A business combination is defined as:
. a merger or consolidation requiring stockholder approval,
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. the sale, lease, pledge, or other disposition of assets, including by
dissolution, having at least 50% of the entire value of assets of the
company, or
. the proposed tender or exchange offer of 50% or more of the voting stock
of the target company.
Plan of Distribution
This prospectus relates to the offer and sale or distribution by some of our
stockholders of up to 6,595,822 shares of our common stock pursuant to the
following transactions:
. The sale of up to 1,158,019 common shares at a price of $0.001 per share
by five of our stockholders, Messrs. John D. Chato, John P. Thuot, James
V. DeFina, Barry A. Sheahan and Ravenscraig Properties Limited.
. The distribution of up to 6,329,822 common shares by three of our
corporate-stockholders to their respective stockholders as part of a
dividend by each of these corporate-stockholders; as follows:
. a distribution by BO Tech Burner Systems Ltd., a British Columbia
corporation which is one of our founding stockholders, of 2,084,995
shares of our common stock to 53 of its stockholders of record,
including 517,783 shares to be distributed to Messrs. Thuot, DeFina
and Sheahan;
. a distribution by BO Development Enterprises Ltd., a British Columbia
corporation which the parent of BO Tech Burner Systems Ltd., of
2,599,084 shares of our common stock to 134 of its stockholders of
record, including 2,165,562 shares to be distributed to Messrs.
Chato, Thuot, DeFina and Sheahan; and
. a distribution by BO Gas Limited, a British Columbia corporation
which is a subsidiary of BO Tech Burner Systems Ltd., of 753,724
shares of our common stock to 28 of its stockholders of record.
A summary of the names of our selling or distributing stockholders and their
current respective holdings in our company, the number of shares of our common
stock they will sell or distribute under this prospectus, and the number of
shares they will hold after the completion of these transactions, are set forth
in that section of this prospectus captioned "Selling or Distributing
Stockholders."
Our selling or distributing stockholders may be deemed to be underwriters within
the meaning of the Securities Act in connection with the sales and distributions
contemplated under this prospectus.
The foregoing sales or distributions by our selling or distributing stockholders
other than BO Gas Limited will be effectuated immediately after the date the
registration statement containing this prospectus clears the Securities and
Exchange Commission staff comment process and is declared effective. The
distribution by BO Gas Limited to its stockholders will be delayed beyond that
effective date pending the expiration of a cash rescission offer extended by BO
Gas Limited to certain of its stockholders under the securities laws of the
province of British Columbia.
No underwriters, dealers or finders are involved or expected to be involved in
the sales or distributions of our common stock under this prospectus, and no
payments of commissions, finders fees or any other compensation will be made to
any parties other than fees payable to our attorneys and accountants for
professional services rendered.
Clean Energy will not receive any payment of cash or other tangible property for
the common stock sold or distributed under this prospectus. We will pay all
expenses incurred in facilitating the sales or distributions under this
prospectus, including registration fees, and printing, legal and accounting
fees, estimated at $72,500, from our general funds.
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Assuming no transfers of our securities pending the sales or distributions
contemplated by this prospectus, we will have, immediately following the
consummation of the sales or distributions contemplated by this prospectus, up
to 223 holders of record for our common stock, one holder of record for our
series "A" convertible preferred stock, and 6 holders of record for our series
"B" convertible preferred stock.
Selling or Distributing Stockholders
The following table sets forth the following information:
. The name of each selling or distributing stockholder under this prospectus;
. The number of shares of our common stock held by each selling or
distributing stockholder and his percentage ownership of our common stock
immediately prior to the sales and distributions contemplated by this
prospectus;
. The number of shares of our common stock each selling or distributing
stockholder will receive as a result of the sales or distributions
contemplated by this prospectus;
. The number of shares of our common stock each selling or distributing
stockholder will sell or distribute pursuant to this prospectus; and
. The number of shares of our common each selling or distributing stockholder
will hold and his percentage ownership of our common stock immediately
after the completion of the sales and distributions contemplated by this
prospectus.
<TABLE>
<CAPTION>
Shares To Be Received
Or Sold
Aggregate Shares Owned As Part Of Aggregate Shares
Before Sales Or Sales Or Distributions Owned After Sales Or
Distributions Under This Prospectus Distributions
--------------------------- --------------------------- ---------------------------
Name Of Selling Or To Be To Be Sold Or
Distributing Stockholder Number % Received Distributed Number %
- -------------------------------- ----------------- --------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
John D. Chato.................... 315,026 3.3% 1,394,856 (1) 60,000 (5) 1,649,882 17.1%
John P. Thuot.................... 157,513 1.6% 730.358 (2) 82,513 (5) 805,358 8.4%
James V. DeFina.................. 315,026 3.3% 469,358 (3) 28,000 (5) 756,384 7.8%
Barry A. Sheahan................. 188,276 2.0% 88,773 (4) 33,100 (5) 243,949 2.5%
BO Development Enterprises Ltd... 2,599,084 27.0% -- 2,599,084 (7) 0 --
BO Tech Burner Systems Ltd....... 3,172,905 32.9% -- 2,084,995 (6) 1,087,910 11.3%
Ravenscraig Properties Limited... 1,968,750 20.4% -- 954,406 (5) 1,014,344 10.5%
BO Gas Limited................... 753,724 7.8% -- 753,724 (8) 0 --
</TABLE>
__________________________
(1) Shares to be received pursuant to dividend distribution from BO Development
Enterprises Ltd. under this prospectus.
(2) Includes 386,000 shares to be received pursuant to a dividend distribution
from BO Tech Burner Systems Ltd. under this prospectus, and 344,358 shares
to be received pursuant to a dividend distribution from BO Development
Enterprises Ltd. under this prospectus.
(3) Includes 125,000 shares to be received pursuant to a dividend distribution
from BO Tech Burner Systems Ltd. under this prospectus, and 344,358 shares
to be received pursuant to a dividend distribution from BO Development
Enterprises Ltd. under this prospectus.
(4) Includes 6,783 shares to be received pursuant to a dividend distribution
from BO Tech Burner Systems Ltd. under this prospectus, and 81,990 shares
to be received pursuant to a dividend distribution from BO Development
Enterprises Ltd. under this prospectus.
(5) Shares to be sold at their par value under this prospectus.
(6) Shares to be distributed as a dividend to BO Tech Burner Systems Limited's
stockholders under this prospectus.
(7) Shares to be distributed as a dividend distribution to BO Development
Enterprises Ltd.'s stockholders under this prospectus.
(8) Shares to be distributed as a dividend to BO Gas Limited's stockholders
under this prospectus.
Each selling or distributing stockholder is an executive officer, director or
affiliate of our company or an associate of an affiliate of our company. For
further information concerning selling or distributing
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stockholders who are executive officers, directors or affiliates of our company,
see "Management" and "Plan Of Distribution."
Please note that the beneficial ownership rules required to compute share
ownership for purposes of preparing the table contained section of this
prospectus captioned "Principal Stockholders" are not applicable for the
preparation of this table. Accordingly, the number of shares owned by each
selling stockholder in the table above may differ considerably than the number
shown in the table contained section of this prospectus captioned "Principal
Stockholders."
Market For Our Securities
General
As of September 21, 1999, we had seven holders of record for our common stock,
one holder of record for our series "A" convertible preferred stock, and six
holders of record for our series "B" convertible preferred stock. Assuming no
transfers of our securities pending the sales or distributions contemplated by
this prospectus, we anticipate we will have, up to 223 holders of record for our
common stock immediately following the consummation of these sales or
distributions.
There is no public market for our common stock or other securities, including
the common shares being sold or distributed under this prospectus, and we cannot
give you any assurance that any active or liquid public market for our common
stock or other securities will develop or be sustained at any time in the
future. Should a public market for our common stock develop, no prediction can
be made as to the effect, if any, that the sale of common shares or the
availability of common shares for sale will have on the market price prevailing
from time to time. Moreover, sales of substantial amounts of our common stock on
the public market, or the perception that substantial sales could occur, could
adversely affect prevailing market prices for these securities and also, to the
extent the prevailing market price for our common shares is decreased, adversely
impact our ability to raise additional capital in the equity markets.
Intent to Establish a Limited Public Market for Common Stock on the Nasd OTC
Electronic Bulletin Board
Since we will have a relatively large number of record holders for our common
stock immediately following the consummation of the foregoing sales or
distributions by our selling or distributing stockholders, we have promised
certain of our stockholders that we would use our best efforts to procure a
market maker to file a Form 15c2-11 application with the NASD in order to quote
our common stock on the OTC Bulletin Board. This will enable our common
stockholders to publicly offer and sell their shares freely and without
limitation under the federal and certain state securities laws, subject,
however, to the following restrictions as discussed in greater detail in this
section:
. the disclosure and investor suitability rules promulgated under the Penny
Stock Reform Act of 1990 and limitations mandated by Rule 15c-2-6
promulgated under the Exchange Act;
. the necessity of complying with any state "Blue Sky" or Canadian provincial
securities laws which may be applicable;
. certain contractual volume restrictions on sale imposed on certain holders
of blocks of more than 3,000 shares of our common stock, including the
common stock to be sold or distributed under this prospectus, upon whom we
have imposed lock-up restrictions as a condition to our cooperation in
establishing a public market for our common stock on the OTC Electronic
Bulletin Board; and
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. the amount of shares which may be freely traded under Rule 144 promulgated
under the Securities Act if applicable.
We have not made any inquiries of, or commenced any other efforts to procure,
any sponsoring market maker, and we cannot give you any assurance that we will
be able to procure a sponsoring market maker or that a public market for our
common stock will develop in the foreseeable future.
Compliance With Penny Stock Rules
Even if we procure the listing of our common stock on the OTC Electronic
Bulletin Board, our common stock will likely be subject to a number of "penny
stock" regulations which may affect the price of those shares and your ability
to sell those shares in the secondary market. These rules generally impose
additional sales practice requirements on broker-dealers that sell low-priced
securities to persons other than established customers and institutional
accredited investors. For transactions covered by these rules, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction. In addition,
because the penny stock rules probably will most likely apply to our common
stock if a public market develops on the OTC Electronic Bulletin Board,
investors who receive a sale or distribution of our common stock under this
prospectus probably will find it more difficult to sell those shares.
The Securities and Exchange Commission's regulations define a penny stock to be
any equity security that has a market price or exercise price of less than $5.00
per share, subject to some exceptions. The penny stock rules require a broker-
dealer to deliver a standardized risk disclosure document prepared by the
Securities and Exchange Commission, to provide the customer with additional
information including current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction,
monthly account statements showing the market value of each penny stock held in
the customer's account, and to make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These requirements probably
will reduce the level of trading activity in the secondary market for our common
stock and may severely and adversely affect the ability of broker-dealers to
sell our securities.
Restrictions On Transfer of Securities in the United States Without Compliance
With State "Blue Sky" Securities Laws
Even though the common stock to be sold or distributed under this prospectus
will be registered under the federal securities laws of the United States
pursuant to the filing of the registration statement containing this prospectus,
all of our securities, including the common stock to be sold or distributed
under this prospectus, will nevertheless remain subject to restrictions on sale,
transfer, assignment, hypothecation or other disposition imposed under the "Blue
Sky" or securities laws of the various states and territories of the United
States. Specifically, the public or private sale, transfer, assignment,
hypothecation or other disposition of our securities can only be effected by or
to a resident of any state or territory of the United States through the
registration or qualification of the transaction under the securities laws of
such state or territory, or reliance upon an available exemption from those
requirements. We have not filed, nor we do not intend to file, any registration
statement with any state or territorial securities administrator seeking
registration or qualification of any of our securities, including the common
stock to be sold or distributed under this prospectus, under the securities laws
of that state or territory, and we undertake no obligation to do so, although we
also reserve the right to do so where necessary to make a distribution.
You will be solely responsible for meeting the requirements of any resale
exemption which may be available, or for registering or qualifying our common
stock, including shares you receive under this prospectus, in any state or
territory should a resale exemption not otherwise be available, including the
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payment of any filing fees. It is very likely that you will not be able to
obtain the registration or qualification in a number of states or territories,
including as California, which impose "merit" criteria and requirements on the
issuer as a condition of registration or qualification.
Although we will not register or qualify our securities under the securities
laws of any state or territory of the United States, we have nevertheless
promised certain of our stockholders that we would use our best efforts to apply
for a Standard Manual Listing with either Standard and Poor's or Moodys.
Procuring a Standard Manual Listing would allow our securities holders to
qualify for an exemption for trading under the securities laws of over 35
States, including Arizona, Colorado, Massachusetts, New Hampshire, Nevada, Texas
and Washington. The other states, including California, do not have a Standard
Manual Exemption, or have a Standard Manual Exemption which imposes additional
criteria which we do not satisfy. We cannot give you any assurance that we will
be able to procure a Standard Manual Listing which will enable our common stock
to be traded in any of the states offering a Standard Manual Exemption.
All recipients of shares of our common stock sold or distributed under this
prospectus who are resident of the United States should consult with their own
legal advisers to determine the availability of resale exemptions or the
registration or qualification of our securities under the various state or
territorial securities laws which may be applicable in their individual
circumstances
Restrictions On Transfer of Securities in Canada Without Compliance With
Provincial Securities Laws
All of our securities are subject to restrictions on sale, transfer, assignment,
hypothecation or other disposition imposed under the securities laws of the
various provinces of Canada. Specifically, with the exception of the limited
exemptive relief noted below requested by three of our corporate-stockholders,
all of our securities, including the common stock you receive under this
prospectus, will be subject to an indefinite hold period in those provinces, and
their public or private sale, transfer, assignment, hypothecation or other
disposition can only be effected by a resident of those provinces if there is
available another exemption from the prospectus requirements of the applicable
provincial securities acts or a discretionary order of the applicable provincial
securities commissions is obtained. We have not applied for, nor do we intend to
make an application for, an exemptive order for the sale or other disposition of
any of our securities within any province of Canada, and we undertake no
obligation to do so. Our securities holders who are resident of Canada will be
solely responsible for obtaining any necessary exemptive order allowing them to
sell or otherwise dispose of our securities, including common stock you receive
under this prospectus, within any province of Canada, including the payment of
any filing fees. It is very unlikely that a further exemption will be available
or that a discretionary order will be granted by any Canadian provincial
securities regulator.
You should note that we are not a reporting issuer under the laws of British
Columbia or any other province or jurisdiction of Canada, and have no intention
in the foreseeable future of becoming a reporting issuer.
One of our stockholders, BO Tech Burner Systems Ltd., and two of its affiliates,
BO Gas Limited and BO Development Enterprises Ltd., will file a request for a
discretionary order from the provinces of British Columbia, Ontario, Alberta and
Manitoba allowing those persons who are resident of Canada who receive a sale or
distribution of our common stock from these companies under this prospectus to
resell those securities on the NASD OTC Bulletin Board or other public markets
within the United States.
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All recipients of shares of our common stock sold or distributed under this
prospectus who are resident of Canada should consult with their own legal
advisers to determine the extent of any applicable hold period and the
possibilities of utilizing any further statutory exemptions or the obtaining of
a discretionary order with respect to any provinces which may be applicable in
their individual circumstances.
OTC Bulletin Board Lock-up Restrictions
Following the completion of the sales and distributions contemplated under this
prospectus, approximately 6,380,166 shares of our common stock, plus an
additional 375,000 shares of our common stock reserved for issuance upon
conversion of shares of our currently outstanding series "B" preferred stock,
will be subject to certain OTC Bulletin Board Lock-Up restrictions which were
formulated to assist in the creation of an orderly market for the sale of our
common stock on the OTC Bulletin Board. For further information concerning this
contractual provision, see "Description Of Our Securities--OTC Bulletin Board
Lock-Up Restrictions."
Restrictions On Sale Imposed Under Rule 144
The following table identifies the number of shares of our common stock and
series "A" and "B" preferred stock which will be held by persons who are our
"affiliates" as that term is defined under Rule 144 promulgated under the
Securities Act, as well as those who are not so classified, immediately after
the sales or distributions contemplated by this prospectus, and assuming that no
transfers of our securities are made pending these sales or distributions:
<TABLE>
<CAPTION>
Common Series "A" Series "B"
----------- ------------ ------------
<S> <C> <C> <C>
Affiliates................ 5,557,827 1,000 125,001
Non-Affiliates............ 4,085,923 0 125,000
--------- ------ -------
Total............... 9,643,750 1,000 250,001
========= ====== =======
</TABLE>
None of our outstanding shares of common or preferred stock constitute
"restricted securities" under Rule 144. Our common stock will therefore be
freely tradable in any public market which may be established without further
registration under the Securities Act subject to the following rules:
. Common shares held by any stockholder who is an affiliate will be deemed
"control" securities within the meaning of Rule 144, and will only be
freely tradable in the public market established within certain volume,
manner of sale, notice and availability of current public information
requirements mandated by Rule 144, unless those securities are otherwise
registered under the Securities Act or sold in accordance with another
eligible exemption from registration. In general, under Rule 144 as
currently in effect, a person who is deemed to be our affiliate is entitled
to sell within any three-month period a number of common shares that does
not exceed the greater of the following:
. 1% of the then outstanding shares of common stock, and
. the average weekly reported trading volume of our common stock on the
public market during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Securities and
Exchange Commission, provided certain manner of sale and notice
requirements and requirements as to the availability of current public
information concerning our company are satisfied.
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. Common shares held by any stockholder who is not an affiliate may be freely
traded will be deemed "control" securities within the in the public market
established without restriction under Rule 144 or further registration
under the Securities Act so long as that person does not become an
affiliate.
As defined in Rule 144, an affiliate of an issuer is a person that directly or
indirectly through the use of one or more intermediaries, controls, or is
controlled by, or is under common control with, an issuer. Under Rule 144(k), a
person who has not been our affiliate for a period of three months preceding a
sale of securities would be entitled to sell the shares without regard to volume
limitations, manner of sale provisions, notification requirements or
requirements as to the availability of current public information concerning our
company.
We also have outstanding options and warrants entitling the holders to purchase
an aggregate of 416,000 shares of our common stock. Shares of common stock
issued upon exercise of these options or warrants may be subject to Rule 144.
Transfer Agent and Registrar
Our transfer agent and the registrar of our securities is Jersey Transfer and
Trust Co., located at 201 Bloomfield Avenue, Verona, New Jersey 07044.
Legal Matters
The validity of the original issuance of the common stock to be sold or
distributed by the selling or distributing stockholders under this prospectus
was passed upon for our company by John M. Woodbury, Esq.
Experts
Our financial statements commencing on page F-1 of this prospectus, as well as
the financial schedules included in the registration statement containing this
prospectus, have been included in reliance on the report of Deloitte & Touche
LLP, our independent auditors, appearing on page F-1 of this prospectus, and on
the authority of that firm as experts in accounting and auditing.
Where You Can Find More Information
This prospectus is part of a registration statement on Form SB-2 we have filed
with the Securities and Exchange Commission. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules filed therewith because certain parts are omitted from this
prospectus in accordance with the rules and regulations of the Securities and
Exchange Commission. You should refer to the registration statement and those
exhibits and schedules for further information regarding our company and the
shares of common stock to be sold or distributed under this prospectus. Please
also note that any statements or descriptions contained in this prospectus
relating to the contents of any contract or other document are not necessarily
complete, and those statements or descriptions are qualified in all respects to
the underlying contract or document in each instance where it is filed as an
exhibit to the registration statement.
You should rely only on the information or representations provided in this
prospectus. We have authorized no one to provide you with different information.
Neither the delivery of this prospectus nor any sale or distribution made under
this prospectus shall, under any circumstances, create any implication that
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information contained in this prospectus is correct as of any time subsequent to
the date of this prospectus.
You may request a copy of any document we file with the Securities and Exchange
Commission, at no cost, by writing us or telephoning us at the following address
and telephone number:
Clean Energy Combustion Systems, Inc.
7087 MacPherson Avenue
Burnaby, British Columbia V5J 4N4
(604) 435-9339
You may also read any document we file with the Securities and Exchange
Commission at its public reference rooms in Washington, D.C., New York, New York
and Chicago, Illinois. Please call the Securities and Exchange Commission at 1-
800-SEC-0330 for further information about the public reference rooms. Our
filings with the Securities and Exchange Commission also are available to the
public from the Securities and Exchange Commission's Web site at
http://www.sec.gov.
We are not currently subject to the information and periodic reporting
requirements of the Exchange Act, and accordingly are not obligated to file
reports, proxy statements, information statements and other information with the
Securities and Exchange Commission in accordance with the Exchange Act. Once the
registration statement containing this prospectus clears Securities and Exchange
Commission staff comment and is declared effective, we will become subject to
those information and periodic reporting requirements, and will commence filing
periodic reports, proxy statements, information statements and other information
required under the Exchange Act with the Securities and Exchange Commission.
These filed reports and statements may be inspected or copied at the Securities
and Exchange Commission's public reference rooms and through its Web site. While
we intend to mail our annual proxy materials and annual reports on Form 10-K to
our stockholders prior to our annual meeting of stockholders, we have no intent
at this time of mailing any other periodic reports and other information to our
stockholders other than in response to specific requests for these materials.
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Index to Financial Statements
<TABLE>
<S> <C>
Report of Independent Auditors (Deloitte & Touche)..................................... F-2
Consolidated Balance Sheets at October 31, 1999........................................ F-3
Consolidated Statements of Loss for the 92-day period ended October 31, 1999........... F-4
Consolidated Statements of Stockholders' Equity (deficit) from inception of operations
through October 31, 1999............................................................... F-5
Consolidated Statements of Cash Flows for the 92-day period ended October 31, 1999..... F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>
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Auditors' Report and Consolidated Financial Statements of:
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A Development Stage Enterprise)
October 31, 1999
F-1
<PAGE>
Auditors' Report
To the Board of Directors and Stockholders of
Clean Energy Combustion Systems, Inc.
We have audited the consolidated balance sheet of Clean Energy Combustion
Systems, Inc. as at October 31, 1999 and the consolidated statements of
operations, deficiency in assets and cash flows for the period from commencement
of operations on January 1, 1999 to October 31, 1999. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at October 31, 1999
and the results of its operations and cash flows for the period from
commencement of operations on January 1, 1999 to October 31, 1999 in accordance
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
November 17, 1999
Comments by Auditors for U.S. Readers on
Canada -U.S. Reporting Conflicts
To the Board of Directors and Stockholders of
Clean Energy Combustion Systems, Inc.
In the United States, reporting standards for auditors require an explanatory
paragraph (following the opinion paragraph) when the auditor concludes that
there is substantial doubt about the entity's ability to continue as a going
concern such as described in Note 1 of the financial statements. Our report
dated November 17, 1999 is expressed in accordance with Canadian reporting
standards, which do not permit a reference to such uncertainty in the auditors'
report when the uncertainty is adequately disclosed in the financial statements.
/s/ Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
November 17, 1999
F-2
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Consolidated Balance Sheet
October 31, 1999
(Expressed in U.S. Dollars)
===============================================================================
<TABLE>
<S> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 27,227
Accounts receivable and prepaid expenses 13,599
Advances to an affiliated company (Note 3) 52,033
- --------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 92,859
PATENTS 11,407
PROPERTY AND EQUIPMENT (Note 4) 44,824
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 149,090
==============================================================================================================
LIABILITIES
CURRENT
Accounts payable $ 15,522
Accrued liabilities 1,398
Current payroll taxes 10,550
Advances from related parties (Note 5) 128,168
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 155,638
- --------------------------------------------------------------------------------------------------------------
Going concern (Note 1)
Commitments and contingencies (Note 10)
DEFICIENCY IN ASSETS
Stockholders' Equity
Authorized
Preferred stock; $.0001 par value; 1,000,000 shares
Common stock; $.0001 par value; 15,000,000 shares
Issued
Series A preferred stock; $.0001 par value
Liquidation preference $1,000
1,000 shares issued and outstanding 1
Series B preferred stock; $.0001 par value
Liquidation preference $500,000
250,000 shares issued and outstanding 250
Common stock; $.0001 par value; 9,643,750 shares issued and outstanding 964
Additional paid-in capital 500,285
Accumulated deficit (508,048)
- --------------------------------------------------------------------------------------------------------------
TOTAL DEFICIENCY IN ASSETS (6,548)
==============================================================================================================
TOTAL LIABILITIES AND DEFICIENCY IN ASSETS $ 149,090
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC
(A development stage enterprise)
Consolidated Statement of Operations
From commencement of operations on January 1, 1999 to October 31, 1999
(Expressed in U.S. Dollars)
===============================================================================
<TABLE>
<CAPTION>
ADMINISTRATION EXPENSES
<S> <C>
Accounting $ 12,090
Administrative wages and benefits 132,088
Amortization 6,740
Communications 5,910
Foreign exchange loss 8,587
Interest 3,654
Legal 52,400
Marketing 61,171
Occupancy 25,880
Office and miscellaneous 13,062
Transfer agent fees 4,210
- --------------------------------------------------------------------------------
325,792
- --------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT EXPENSES
Wages and benefits 162,847
Development 19,409
- --------------------------------------------------------------------------------
182,256
- --------------------------------------------------------------------------------
TOTAL EXPENSES AND NET LOSS FOR THE PERIOD $ (508,048)
================================================================================
BASIC AND DILUTED LOSS PER SHARE $(0.08)
================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 6,473,202
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Consolidated Statement of Deficiency in Assets
From commencement of operations on January 1, 1999 to October 31, 1999
(Expressed in U.S. Dollars)
================================================================================
<TABLE>
<CAPTION>
Series A Series B Additional Total
Preferred Stock Preferred Stock Common Stock Paid-in Deficiency
--------------- ----------------- ------------------
Shares Amount Shares Amount Shares Amount Capital Deficit in Assets
------ ------ ------- -------- --------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issued on incorporation 1,000 $ 1 - $ - 9,643,750 $ 964 $ 535 $ - $ 1,500
Private placement - - 250,000 250 - - 499,750 - 500,000
Net loss - - - - - - - (508,048) (508,048)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1999 1,000 $ 1 250,000 $ 250 9,643,750 $ 964 $ 500,285 $(508,048) $ (6,548)
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Consolidated Statement of Cash Flows
From commencement of operations on January 1, 1999 to October 31, 1999
(Expressed in U.S. Dollars)
================================================================================
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C>
Total operating expenses for the period $(508,048)
Adjustments to reconcile total operating expenses to net cash
utilized in operating activities
Amortization 6,740
Change in operating assets and liabilities:
Accounts receivable (13,599)
Accounts payable 15,522
Accrued liabilities 1,398
Payroll taxes 10,550
- ------------------------------------------------------------------------------------------------------
Net cash used in operating activities (487,437)
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
======================================================================================================
Purchase of a patent (11,407)
Purchase of property and equipment (51,564)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (62,971)
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances to an affiliated companies (52,033)
Proceeds from advances from related parties 128,168
Proceeds from issue of common stock 1,000
Proceeds from issue of Series A convertible preferred stock 500
Proceeds from issue of Series B preferred stock 500,000
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 577,635
- ------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 27,227
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,227
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
October 31, 1999
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND GOING CONCERN
Clean Energy Combustion Systems Inc. ("Company") was incorporated in
Delaware, organized and commenced operations on March 1, 1999. These
financial statements also reflect certain preorganization transactions and
commitments incurred between January 1, 1999 and the date of incorporation
on March 1, 1999, which have been accepted by the Board of Directors as
obligations of the Company. The Company is a development stage company with
principal executive offices located in Vancouver, British Columbia, Canada.
The Company was formed for the specific purpose of acquiring exclusive
world-wide license rights entitling it to design, engineer, manufacture,
market, distribute, license and otherwise commercially exploit two
innovative, patented "burner" technologies, the Pulse Blade Combustion or
"PBC" Technology and the Diesel Technology. The Company acquired two
licenses in the amount of $10 each from founding shareholders of the
Company. These intangible assets are not reflected in the accompanying
financial statements. The Company has incurred losses from inception
totaling $508,048 and does not currently have the financial resources to
complete its business plan. The Company's ability to continue as a going
concern is dependent upon its ability to attain future profitable
operations and to obtain the necessary financing to meet its obligations
and repay its liabilities arising from normal business operations when they
come due. External financing, predominately by the issuance of common stock
to the public will be sought to finance development of the Company's
products; however, there can be no assurance that sufficient funds will be
raised. The Company's objective is to enter into licensing, royalty, joint
venture, or manufacturing agreements with established national and
international heat transfer industry manufacturers.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States and reflect the
following significant accounting policies.
(a) Basis of presentation
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Clean Energy Technologies
(Canada) Inc. All intercompany balances and transactions have been
eliminated on consolidation.
(b) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, funds on deposit
and short-term investments with an original maturity of 90 days or
less.
F-7
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
October 31, 1999
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Patents
Costs related to the acquisition of patents are capitalized in the
accounts and will be amortized on a straight-line basis over the
shorter of the estimated life of the technology and the life of the
patent commencing the first quarter following acquisition which is 20
years. The costs of servicing the Company's patents are expensed as
incurred. The Company assesses potential impairment of patents by
measuring the expected net recovery based on cash flows from products
based on these rights on an annual basis. These capitalized costs are
valued at the lower of amortized cost and net recoverable amount.
(d) Property and equipment
Property and equipment are stated at cost. Amortization is recorded on
a straight line basis over the estimated service lives of the
respective assets as follows:
Furniture and fixtures 20%
Communications equipment 30%
Computer equipment 30%
Computer software 50%
Lab equipment 20%
Leasehold improvements 20%
Management periodically reviews the carrying value of property and
equipment by reviewing the estimated cash flows attributable to
assets, replacement cost and the enduring benefit to the Company to
determine whether any permanent impairment in value is indicated.
Where a permanent impairment is identified a charge is recognized and
reflected in the results from operations.
(e) Impairment of long-lived assets and long-lived assets to be disposed
of
The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of such assets or intangibles may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(f) Foreign currency translation
The Company is a Delaware corporation and considers the United States
dollar to be the appropriate functional currency for the Company's
operations and these financial statements, notwithstanding that the
Company does business in Canada in transactions denominated in
Canadian dollars. It is anticipated that the majority of the Company's
business will be conducted in United States dollars and the
anticipated customer base is within the United States. For purposes of
preparing these financial statements, foreign currency monetary assets
and liabilities are translated into United States dollars at the
exchange rates in effect at the balance sheet date. Other balance
sheet items and revenues and expenses are translated at the rates
prevailing on the respective transaction dates. Translation gains and
losses are included in income.
F-8
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
October 31, 1999
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Estimates and assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(h) Earnings (loss) per common share
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of shares
outstanding for the period. In addition, diluted earnings per share
which includes the potential dilution that could occur if common stock
equivalents or other potentially dilutive securities were exercised or
converted into common stock. Common stock equivalent shares are
excluded from the computation if their effect is anti-dilutive. Common
equivalent shares consist of the common shares issuable upon the
conversion of the convertible loan notes and special warrants (using
the if-converted method) and incremental shares issuable upon the
exercise of stock options and share purchase warrants (using the
treasury stock method).
(i) Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic
value based method whereby compensation cost is recorded for the
excess, if any, of the quoted market price of the common share over
the exercise price at the date granted for all common stock options.
No compensation cost has been recorded for any period under this
method.
The following pro forma financial information presents the net loss
for the period and loss per common share had the Company adopted
Statement of Financial Accounting Standard No. 123 (SFAS 123)
Accounting for Stock-based Compensation.
1999
----------
NET INCOME (LOSS) FOR THE PERIOD $ (590,385)
=================================================================
DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.09)
=================================================================
Using the fair value method for stock-based compensation, additional
compensation costs of approximately $82,337 would have been recorded
for the period ended October 31, 1999. This amount is determined using
an option pricing model assuming no dividends are to be paid, an
average vesting period of five years, a weighted average annualized
volatility of the Company's share price of zero and a weighted average
annualized risk free interest rate at 5.25%.
F-9
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
October 31, 1999
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Comprehensive income
The Financial Accounting Standards Board issued Statement No. 130
(SFAS 130), Reporting Comprehensive Income, which is required to be
adopted for fiscal years beginning on or after December 15, 1997. SFAS
130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. There is no impact of SFAS 130 on the
Company's financial statements.
(k) Recent pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which standardizes the accounting
for derivative instruments. SFAS 133 is effective for all quarters of
all financial years beginning after June 15, 1999. The Company is
currently assessing the impact of SFAS 133 on the Company's financial
statements and has not yet determined what if any changes will be
necessary. Financial Accounting Standards Board have subsequently
delayed implementation of the standard for the financial years
beginning after June 15, 2000.
3. ADVANCES TO AN AFFILIATED COMPANY
During the period the Company advanced $52,033 (Cdn $76,556) to a Company
controlled by shareholders in common. These advances are non-interest
bearing, are repayable in Canadian dollars and have no specific terms of
repayment.
4. PROPERTY AND EQUIPMENT
Furniture and fixtures $ 1,743
Communications equipment 5,743
Computer equipment 13,101
Computer software 2,476
Lab equipment 24,005
Leasehold improvements 5,462
------------------------------------------------------------------
52,530
Less accumulated amortization 7,706
------------------------------------------------------------------
Net Property and equipment $ 44,824
------------------------------------------------------------------
F-10
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
October 31, 1999
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
5. ADVANCES FROM RELATED PARTIES
Advance from related company $ 12,624
Advance from shareholders 115,544
------------------------------------------------------------------
$ 128,168
------------------------------------------------------------------
(a) Advance from related company
During the period, the Company received advances of $12,624 (Cdn
$18,574) from a company controlled by shareholders in common. The
advances bear interest at the rate of 8.75% per annum are repayable in
Canadian dollars, and have no specific terms of repayment.
(b) Advance from shareholder
As at October 31, 1999, the Company had borrowed $115,544 (Cdn
$170,000) from a significant shareholder. The loan bears interest at a
prime plus 2% per annum and is repayable in Canadian dollars at such
time as the Company raises the sum of $517,241 (CDN$750,000) through
equity, debt, joint-venture financing or product revenues, or any
combination thereof, but no later than August 10, 2000.
The holder of the loan has the right to covert any portion of the
principal amount and all interest into common shares at the conversion
rate of $2.00 US per share.
6. SHARE CAPITAL AND STOCK OPTIONS
(a) Series A Preferred Stock
Series A preferred stock are non-voting and are convertible into one
share of common stock at the option of the holder at any time. The
Company requires the affirmative consent of a majority of the Series A
Preferred stockholders prior to liquidation, selling principle assets,
merging or consolidating the Company, declaring dividends, or making
changes in the authorized capital stock of the Company or issuing
additional preferred shares. If the common stock is accepted for
listing on The New York Stock Exchange, or The American Exchange or is
accepted for quotation on the Nasdaq, the Series A preferred stock
will automatically convert into common stock on a one for one basis
once the common stock has been actively traded on such exchange or
market for a two year continuous period. In the event of a
liquidation, dissolution, or winding up of the Company, Series A
preferred stockholders will be entitled to an amount equal to $1 per
share, but after payment has been made to Series B preferred
stockholders.
The Company designated and issued 1,000 Series A preferred stock on
incorporation.
F-11
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
October 31, 1999
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
6. SHARE CAPITAL AND STOCK OPTIONS (Continued)
(b) Series B Preferred Stock
Series B preferred stock are voting and are entitled to participate in
dividends with shares of common stock. The Company requires the
affirmative consent of a majority of the Series B Preferred
stockholders prior to changes in the authorized capital stock of the
Company or issuing any additional preferred shares, declaring
dividends and the redemption or purchase of any Series B Preferred
Stock. Series B preferred stock is convertible into common stock at
the option of the holder, at any time, into one share of common stock.
If the common stock is accepted for listing on The New York Stock
Exchange or The American Stock Exchange, or is accepted for quotation
on the Nasdaq, the Series B Preferred Stock will automatically convert
into common stock on a one for one basis. In the event of a voluntary
or involuntary liquidation, dissolution, or winding up of the Company,
the holders of Series B preferred stock will be entitled to receive an
amount equal to the $2.00 stated value, issuance cost, before any
payment will be made or any assets distributed to the holders of
Series A Preferred Stock, Common Stock, or any other junior equity
security.
During the period ended May 31, 1999, the Company designated 475,000
preferred shares as Series B preferred stock and issued, pursuant to a
private placement, 250,000 Series B preferred stock for gross proceeds
of $500,000. Each share of Series B preferred stock is convertible
into one share of common stock.
(c) Common Stock
The Company issued 9,643,750 shares of common stock on incorporation.
(d) Stock Options
The Company has granted to executive officers and key employees non-
qualified stock options to purchase an aggregate of 320,000 common
shares at an exercise price of $2.00. These options vest equally
annually over a five year period and each annual vesting portion
expires five years subsequent to the vesting date. No stock options
have been exercised as at October, 1999.
(e) Share purchase warrants
The Company has issued 36,000 share purchase warrants as additional
consideration pursuant to a public relations services agreement
pursuant to which the holder is given the right to purchase 36,000
common shares at $2.00 per share. The right to exercise these warrants
vests in equal monthly installments over a 24 month period, and each
installment lapses five years after date of vesting. As at October 31,
1999 15,000 shares have vested and none have been exercised.
F-12
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
October 31, 1999
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
7. INCOME TAXES
As at October 31, 1999, the Company had net operating loss carryforwards
available to reduce taxable income in future years of approximately
$500,000. At the statutory rate of 30% the net operating loss represents a
potential non-current income tax asset of $150,000. The Company has no
other significant temporary or permanent timing differences. The tax asset
relating to operating losses incurred through October 31, 1999, has been
fully offset by a valuation allowance.
8. RELATED PARTY TRANSACTIONS
Related party transactions and balances not disclosed elsewhere in these
financial statements are as follows:
(a) The Company has acquired exclusive world-wide license rights entitling
it to design, engineer, manufacture, market, distribute, license and
otherwise commercially exploit two patented "burner" technologies, the
Pulse Blade Combustion or "PBC" Technology and the Diesel Technology.
The former license was granted by a founding shareholder who
indirectly holds greater than 10% of the outstanding and issued share
capital, and the latter was granted by a founding shareholder who
indirectly holds greater than 10% of the outstanding and issued share
capital and who is the inventor of both technologies and a Director of
the Company.
(b) During the period from commencement of operations on January 1, 1999
to October 31, 1999, the Company paid $190,310 (CDN$283,333) in
salaries to three Executive Officers who are also Directors of the
Company.
9. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, advances from
affiliated companies and loan payable. The fair value of these financial
instruments approximates carrying values due to the short-term to maturity
of the financial instruments and similarity to current market rates.
The carrying value of advances to an affiliated company of $52,033 at
October 31, 1999 differs from its fair value of approximately $43,595. Fair
value amounts are intended to represent estimates of the amounts at which
the instruments could be exchanged in a current transaction between willing
parties. Therefore, this instrument has been valued on a going concern
basis, using the present value of the cash flows at maturity using a
discount rate of 9.25%. Interest rate sensitivity is the main causes of
changes in the above fair values.
It is management's opinion that the Company is not exposed to significant
interest, currency or credit risks arising from these financial
instruments.
F-13
<PAGE>
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(A development stage enterprise)
Notes to the Consolidated Financial Statements
October 31, 1999
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
10. COMMITMENTS
(a) The Company has entered into a lease for premises currently occupied
by the business. The lease requires monthly payments of $2,342
(CDN$3,396) for three years commencing January 1, 1999. The Company
has an option to renew the lease for a further three years.
(b) The licensors of the PBC Technology have the right to terminate the
license if the Company has not obtained a listing on The New York
Stock Exchange, The American Stock Exchange or the Nasdaq by March 4,
2002. The licensor of the PBC Technology also has the right to
reacquire the Technology if the Company is declared insolvent or
bankrupt. Should the licensor exercise its termination right, the
Company can purchase full title to the PBC technology by paying
Canadian $525,000 within ten business days of the 90 day termination
period, plus interest on such amount at the rate of 13% per annum,
accruing as of January 1, 1999. On the purchase, the Company is also
entitled to receive 593,750 common shares of the Company's stock as
well as all outstanding shares of Series A Preferred Stock. If the
licensor is unable to deliver the full number of shares, the cash
payment will be reduced pro-rata. Should the PBC technology license be
terminated without the Company acquiring full ownership of the
technology, then the Diesel Technology License shall concurrently
expire.
(c) The Company has entered into employment agreements with four senior
employees providing for total annual payment of $308,000 (Cdn
$450,000). Each agreement provides for a one year initial term,
renewed automatically for successive one year terms.
(d) The Company has entered into public relations services agreements
whereby the Company is obligated to pay a monthly fee of Cdn $6,000
for a period of 36 months. The agreement is terminable by either party
after one year.
11. SUBSEQUENT EVENTS
Subsequent to the period ended October 31, 1999, the Company:
(a) Issued 1 Series B preferred share for $2.
(b) Reduced the designated number of designated Series B preferred shares
from 475,000 to 250,001.
(c) Resolved to create a new class of preferred shares, Series C preferred
shares, which have the same rights as Series B preferred shares except
that they are subordinate to Series B on liquidation. The liquidation
preference will be based on the sales price. No Series C preferred
shares have been issued.
F-14
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have been advised that any indemnification for liabilities arising under the
Securities Act of 1933 that may be permitted to our directors, officers and
controlling persons under our Certificate of Incorporation, Bylaws or other
agreements containing indemnity provisions are, in the opinion of the Securities
and Exchange Commission, against public policy as expressed in the Securities
Act and are, therefore, unenforceable.
ITEM 25 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses which we expect
to incur with respect to the offering and sale or distribution of our common
stock under this registration statement. We have agreed to pay all of these
expenses.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............................. $ 3
Financial Printer Fees to EDGARize and Print Registration Statement............. 15,000
Transfer Agent Fees, including Printing and Engraving Stock Certificates........ 10,000
Legal Fees and Expenses......................................................... 37,500
Accounting Fees and Expenses.................................................... 7,500
Miscellaneous................................................................... 2,500
-------
Total......................................................................... $72,503
-------
</TABLE>
ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES
We have sold or issued the following securities not registered under the
Securities Act since our inception:
1. In connection with our organization on March 1, 1999, we issued:
A. 9,643,750 shares of our common stock to seven of our eight founding
stockholders--Messrs. John D. Chato, John P. Thuot, Barry A. Sheahan,
James V. DeFina, Robert Alexander and BO Tech Burner Systems Ltd. and
Ravenscraig Properties Limited--for a total cash price of $1,000, and
B. 1,000 shares of our series "A" preferred stock to our eighth founding
stockholder--818879 Alberta, Ltd.--for a total cash price of $500.
This transaction was exempt from the registration requirements of the
Securities Act under Section 4(2) of the Securities Act and Rule 504
because it was a sale that did not involve a public offering, but rather
involved the formation of the corporation by these founding stockholders.
There was no solicitation or advertising involved in this issuance.
2. On March 5, 1999, we granted options to five of our employees--Messrs. John
D. Chato, John P. Thuot, Barry A. Sheahan and James V. DeFina--to acquire a
total of 320,000 shares of our common stock at an exercise price of $2.00
per share under our 1999 Clean Energy Combustion Systems, Inc. Stock Plan.
These options vest in equal installments upon the conclusion of his first
through fifth
II-1
<PAGE>
annual anniversary of continuous employment, and lapse, if unexercised,
five years following the date of vesting. These transactions were exempt
from the registration requirements of the Securities Act under Section 4(2)
and Rule 701 because it was a compensatory issuance of options to
employees.
3. On April 1, 1999, we entered into a Investor Relations and Stock Marketing
Advisory Services Agreement with ABCE Enterprises, Inc. for the provision
of prospective public relations services. This agreement, which has a 36-
month term but is terminable by either party after one year, provides for
the payment of Cdn. $6,000 per month in consulting fees, and the grant of
warrants entitling the consultant to purchase 36,000 unregistered shares of
common stock at an exercise price of $2.00 per share, with the right to
exercise the warrants vesting monthly in equal installments over 24 months
of continued performance under this agreement. This transaction was exempt
from the registration requirements of the Securities Act under Section 4(2)
and Rule 504.
4. On April 6, 1999, we sold 250,000 shares of our series "B" preferred stock
at a price of $2 per share to six accredited investors with a pre-existing
relationship to our company in a private placement for a total cash price
of $500,000. These transactions were exempt from the registration
requirements of the Securities Act under Section 4(2) and Rule 504. There
was no solicitation or advertising involved in this issuance.
5. On November 11, 1999, we sold a single share of our series "B" preferred
stock at a price of $2 per share to one of our affiliates, Ravenscraig
Properties Limited. This transaction was exempt from the registration
requirements of the Securities Act under Section 4(2). There was no
solicitation or advertising involved in this issuance.
6. On January 20, 2000, we granted options to a new director appointed on that
date, Mr. R. Dirk Stinson, to acquire a total of 60,000 shares of our
common stock at an exercise price of $2.00 per share under our 1999 Clean
Energy Combustion Systems, Inc. Stock Plan. These options vest in equal
installments upon the conclusion of his first through third annual
anniversary of service on our Board of Directors, and lapse, if
unexercised, five years following the date of vesting. This transaction was
exempt from the registration requirements of the Securities Act under
Section 4(2) and Rule 701 because it was a compensatory issuance of options
to a director.
ITEM 27 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
3.1 Certificate of Incorporation filed in the Office of the Delaware Secretary
of State on March 1, 1999 *
3.2 Certificate of Amendment to Certificate of Incorporation filed in the
Office of the Delaware Secretary of State on May 20, 1999 *
3.3 Certificate of Amendment to Certificate of Incorporation filed in the
Office of the Delaware Secretary of State on November 12, 1999
3.4 Bylaws (as restated to reflect corporate name change) *
4.1 Specimen common stock certificate *
4.2 Specimen series "A" preferred stock certificate *
4.3 Specimen series "B" preferred stock certificate *
4.4 Founding Stockholders Agreement dated March 5, 1999 *
II-2
<PAGE>
4.5 1999 Clean Energy Technologies, Inc. Stock Plan adopted on March 5, 1999
(as restated to reflect corporate name change) *
4.6 Form of Option Certificate under 1999 Clean Energy Technologies, Inc. Stock
Plan relating to grants of options on March 5, 1999 to John D. Chato, John
P. Thuot, Barry A. Sheahan and James V. DeFina *
4.7 Series B Preferred Stock Purchase Agreement dated April 6, 1999 *
4.8 Investor Relations and Stock Marketing Advisory Services Agreement dated
April 1, 1999, with ABCE Enterprises, Inc. *
5. Opinion of legal counsel regarding legality of original issuance of
securities being registered
10.1 Pulse Combustion Technology License dated March 5, 1999, with 818879
Alberta, Ltd. *
10.2 Diesel Fuel Combustion Technology License dated March 5, 1999, with John D.
Chato *
10.3 Founding Stockholders Agreement dated March 5, 1999 (see exhibit 4.4) *
10.4 Employment Agreement dated March 5, 1999, with John D. Chato *
10.5 Employment Agreement dated March 5, 1999, with John P. Thuot *
10.6 Employment Agreement dated March 5, 1999, with Barry A. Sheahan *
10.7 Employment Agreement dated March 5, 1999, with James V. DeFina *
10.8 Promissory Note dated August 10, 1999 in the principal amount of $50,000
between Clean Energy Combustion Systems, Inc., as maker, and R. Dirk
Stinson, as holder
23.1 Consent of Independent Auditors
23.2 Consent of counsel (included in exhibit 5)
24 Power of attorney (included as part of signatures of this registration
statement)
27 Financial data schedule
* Filed as an Exhibit to Clean Energy Combustion Systems, Inc. Registration
Statement on Form SB-2 filed on September 30, 1999 (Commission File No.
333-88207)
ITEM 28 UNDERTAKINGS
We hereby undertake to:
1. File, during any period in which we offer or sell securities, a post-
effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospects
II-3
<PAGE>
filed with the Securities and Exchange Commission under Rule 424(b)
if, in the aggregate, the changes in the volume and price represent
no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table on the face page
of the effective registration statement.; or
(iii) Include any additional or changed material information on the plan of
distribution.
2. For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons under
the foregoing provisions or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. If a claim for indemnification against such liabilities
(other than our payment of expenses incurred or paid by any of our
directors, officers or controlling persons in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, we hereby
certify that we have reasonable grounds to believe that we meet all of the
requirements for filing this pre-effective amendment number 1 to registration
statement on Form SB-2 and authorized this pre-effective amendment to
registration statement to be signed on our behalf by the undersigned, thereunto
duly authorized, in the City of Burnaby, province of British Columbia, Canada,
on February 23, 2000.
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
By: /s/ John P. Thuot
-----------------------------
John P. Thuot, President
By: /s/ Barry A. Sheahan
-----------------------------
Barry A. Sheahan, Chief Financial Officer
(principal accounting officer)
II-4
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a Delaware corporation)
1. Clean Energy Combustion Systems, Inc. (the "Company"), a corporation
organized and existing under the laws of the State of Delaware (particularly
Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof and
supplemental thereto, and known, identified and referred to as the "General
Corporation Law of the State of Delaware"), does hereby certify that Articles
Fourth and Fifth of the Certificate of Incorporation of the Company are hereby
revised in their entirety to read as follows:
ARTICLE FOURTH
4.01 General. The Company is authorized to issue two classes of shares,
-------
designated, respectively, "Preferred Stock" and "Common Stock." Each class of
stock shall have a par value of one tenth of one mil ($0.0001) per share. The
number of shares of Preferred Stock authorized to be issued is two million
(2,000,000), and the number of shares of Common Stock authorized to be issued
(including the designated series described below in sections 4.02 and 4.03) is
------------- ----
fifteen million (15,000,000).
4.02 Currently Designated Preferred Stock. The Company hereby designates
------------------------------------
the following series of Preferred Stock, whose respective rights, preferences,
privileges, restrictions and conditions are specified below in Article Fifth:
-------------
A. One thousand (1,000) shares of "Series "A" Convertible Preferred
Stock;"
B. Two hundred fifty thousand and one (250,001) shares of "Series "B"
Convertible Preferred Stock;" and
C. Five hundred thousand (500,000) shares of "Series "C" Convertible
Preferred Stock."
4.03 Non-Designated Preferred Stock. The shares of Preferred Stock
------------------------------
authorized for issuance pursuant to section 4.01, but not specifically
------------
designated pursuant to section 4.02, may be prospectively issued at any time and
------------
from time-to-time in one or more series. Subject to section 5.01C(4) of Article
---------------- -------
Fifth, the Board of Directors of the Company is hereby authorized to fix or
- -----
alter at any time and from time-to-time the designation, powers, preferences and
rights of the shares of each such series including, without limitation, the
voting powers and the qualifications, limitations or restrictions of any wholly
unissued series of Preferred Stock, and to establish at any time and from time-
to-time the number of shares constituting any such series or any of them; and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be
decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
Page 1 of 16
<PAGE>
ARTICLE FIFTH
The rights, preferences and privileges granted to, and the restrictions and
conditions imposed upon, the Series "A" Convertible Preferred Stock, Series "B"
Convertible Preferred Stock and Series "C" Convertible Preferred Stock and the
holders thereof, are as follows:
5.01 Voting Rights.
-------------
A. General Voting Rights of Series "A" Convertible Preferred Stock.
---------------------------------------------------------------
Except for the voting rights exclusively granted to the holders of the Series
"A" Convertible Preferred Stock as provided below in section 5.01C and sections
------------- --------
5.01F through 5.01J or as otherwise provided by law, the holders of Series "A"
- ----- -----
Convertible Preferred Stock shall not be entitled to vote, it being understood
that the holders of Common Stock, Series "B" Convertible Preferred Stock and
Series "C" Convertible Preferred Stock shall have and possess exclusive voting
rights and powers.
B. General Voting Rights of Series "B" Convertible Preferred Stock
---------------------------------------------------------------
and Series "C" Convertible Preferred Stock. Except for and in addition to the
- -------------------------------------------
voting rights exclusively granted to the holders of the Series "B" Convertible
Preferred Stock and Series "C" Convertible Preferred Stock as provided below in
sections 5.01D and 5.01E, respectively, or as otherwise provided by law, the
- -------------- -----
holders of the Series "B" Convertible Preferred Stock and Series "C" Convertible
Preferred Stock then outstanding shall be entitled to vote on all matters
submitted to a vote of the holders of the Common Stock. Each holder of Series
"B" Convertible Preferred Stock and Series "C" Convertible Preferred Stock shall
be entitled to a number of votes equal to the number of whole shares of Common
Stock into which such holder's shares of Series "B" Convertible Preferred Stock
or Series "C" Convertible Preferred Stock (as the case may be) could be
converted pursuant to section 5.03B(2) on the record date for the determination
----------------
of stockholders entitled to vote on such matter or, if no record date is
established, on the date such vote is taken or any written consent of
stockholders is first executed. Except for the voting rights exclusively
granted to the holders of the Series "B" Convertible Preferred Stock and Series
"C" Convertible Preferred Stock as provided below in sections 5.01D and 5.01E,
-------------- -----
respectively, or as otherwise provided by law, the holders of Series "B"
Convertible Preferred Stock, Series "C" Convertible Preferred Stock and Common
Stock shall vote together as a single class on all matters (together with
holders of any other class of Preferred Stock who are also entitled to vote on
all matters submitted to a vote of the holders of the Common Stock).
C. Voting Rights Reserved for Series "A" Convertible Preferred Stock
-----------------------------------------------------------------
as a Class. Series "A" Convertible Preferred Stock are outstanding, the Company
- ----------
shall not, without first obtaining the consent, either expressed in writing or
by affirmative vote at a meeting called for that purpose, of at least a
majority, i.e., more than fifty percent (50%), of the total number of shares of
Series "A" Convertible Preferred Stock then outstanding, as a class, in addition
to the vote or written consent of the outstanding shares of Common Stock or any
other class of Preferred Stock as may be required under this Certificate of
Incorporation or under the General Corporation Law of the State of Delaware:
(1) Change, amend, or repeal any of the provisions of these
Certificate of Incorporation applicable to Series "A" Convertible Preferred
Stock which would adversely affect the rights, preferences, privileges, and
restrictions of Series "A" Convertible Preferred Stock or authorize the
Board of Directors to do so;
(2) Effect an exchange, reclassification, or cancellation of all
or part of Series "A" Convertible Preferred Stock or effect an exchange, or
create a right of exchange, of all or part of the shares of any other class
into Series "A" Convertible Preferred Stock;
(3) Increase or decrease: (i) the presently authorized number of
shares of Preferred Stock, including the Series "A" Convertible Preferred
Stock; or (ii) the presently authorized
Page 2 of 16
<PAGE>
number of shares of Common Stock (except and then only to the extent
necessary to effectuate a forward stock-split with respect to the Common
Stock);
(4) Fix or alter the designation, powers, preferences and rights
of the shares of any series of Preferred Stock (other than the Series "A"
Convertible Preferred Stock), and establish the number of shares
constituting any such series or any of them;
(5) Increase the presently authorized number of shares of Common
Stock (other than such amount as is necessary to effectuate a forward
stock-split with respect to the Common Stock);
(6) Issue any shares of Preferred Stock (including the Series "B"
Convertible Preferred Stock and Series "C" Convertible Preferred Stock but
excluding the Series "A" Convertible Preferred Stock), or any security
convertible into shares of Preferred Stock;
(7) Create any new class of shares (or any security convertible
into such shares) ranking on a parity with or having rights, preferences or
privileges, as to assets, senior to the Series "A" Convertible Preferred
Stock;
(8) Declare or pay any dividend with respect to any shares of
Common Stock, Preferred Stock (including the Series "B" Convertible
Preferred Stock and Series "C" Convertible Preferred Stock but excluding
the Series "A" Convertible Preferred Stock) or any other equity securities
of the Company, or permit or authorize any of the Company's subsidiaries to
declare or pay any dividend with respect to any of their equity securities
(such securities of the Company and its subsidiaries being collectively
referred to for purposes of this section 5.01C as "Series "A" Junior
-------------
Securities"), whether payable in cash or property out of legally available
cash or property therefor (unless and then only to the extent such dividend
relates to the issuance of shares of Common Stock in connection with a
forward stock-split with respect to outstanding shares of Common Stock);
(9) Redeem, purchase or otherwise acquire directly or indirectly,
or permit or authorize any of the Company's subsidiaries to redeem,
purchase or otherwise acquire directly or indirectly, any shares of Common
Stock, Preferred Stock (including the Series "B" Convertible Preferred
Stock and Series "C" Convertible Preferred Stock but excluding Series "A"
Convertible Preferred Stock) or other Series "A" Junior Securities or any
securities convertible into Series "A" Junior Securities, or set aside any
monies for the purchase or redemption (through a sinking fund or otherwise)
of any such securities;
(10) Sell or convey the principal asset(s) or business(es) of the
Company, or the principal asset(s) or business(es) or equity securities (or
securities convertible into equity securities) of any of the Company's
subsidiaries, except inter-company transactions amongst the Company and its
wholly owned subsidiaries;
(11) Merge or consolidate the Company (other than a short-form
merger of a wholly-owned subsidiary into the Company which does not require
the vote of the stockholders of the Company) with or into another legal
entity or entities;
(12) Dissolve, liquidate or wind-up the Company; or
(13) Make an assignment for the benefit of creditors, or file a
petition under any federal, state or provincial bankruptcy law or statute,
which petition is not vacated within ninety (90) days.
D. Voting Rights Reserved for Series "B" Convertible Preferred Stock
-----------------------------------------------------------------
as a Class. So long as any shares of Series "B" Convertible Preferred Stock are
- ----------
outstanding, the Company shall not, without first
Page 3 of 16
<PAGE>
obtaining the consent, either expressed in writing or by affirmative vote at a
meeting called for that purpose, of at least a majority, i.e., more than fifty
percent (50%), of the total number of shares of Series "B" Convertible Preferred
Stock then outstanding, as a class, in addition to the vote or written consent
of the outstanding shares of Common Stock or any other class of Preferred Stock
as may be required under this Certificate of Incorporation or the General
Corporation Law of the State of Delaware:
(1) Change, amend, or repeal any of the provisions of these
Certificate of Incorporation applicable to Series "B" Convertible Preferred
Stock which would adversely affect the rights, preferences, privileges, and
restrictions of Series "B" Convertible Preferred Stock or authorize the
Board of Directors to do so;
(2) Effect an exchange, reclassification, or cancellation of all
or part of Series "B" Convertible Preferred Stock or effect an exchange, or
create a right of exchange, of all or part of the shares of any other class
into Series "B" Convertible Preferred Stock;
(3) Increase the presently authorized number of shares of Series
"B" Convertible Preferred Stock, or decrease the number of authorized
shares of Series "B" Convertible Preferred Stock to a number less than the
number issued and outstanding;
(4) Create any new class of shares (or any security convertible
into such shares) ranking on a parity with or having rights, preferences or
privileges, as to assets, senior to the Series "B" Convertible Preferred
Stock;
(5) Declare pay or make a distribution (other than a dividend
payable in cash or property pursuant to section 5.02B) with respect to any
-------------
shares of the capital stock or any other equity securities of the Company
ranking junior to the Series "B" Convertible Preferred Stock upon
liquidation or distribution (except in shares of, or warrants or rights to
subscribe for or purchase shares of the Company which are junior to the
Series "B" Convertible Preferred Stock as to assets), or permit or
authorize any of the Company's subsidiaries to declare, pay or make such a
distribution with respect to any of their equity securities (such
securities of the Company and its subsidiaries being collectively referred
to for purposes of this section 5.01D as "Series "B" Junior Securities"),
-------------
if after giving effect to that distribution there is accrued but unpaid
dividends pursuant to section 5.02B below or accrued but unpaid Series "B"
-------------
Liquidation Preference pursuant to section 5.04A(1) below;
----------------
(6) Declare or pay any dividend payable in cash or property out
of legally available cash or property therefor (which shall be determined
after taking into consideration provision for the Series "B" Liquidation
Preference) pursuant to section 5.02B, unless (i) such dividend relates to
-------------
the issuance of shares of Common Stock as a dividend on outstanding shares
of Common Stock, or (ii) the holders of the Series "B" Convertible
Preferred Stock then outstanding are entitled to participate in such
dividend pursuant to section 5.02B; or
-------------
(7) Redeem, purchase or otherwise acquire directly or
indirectly, or permit or authorize any of the Company's subsidiaries to
redeem, purchase or otherwise acquire directly or indirectly, any Series
"B" Junior Securities or any securities convertible into Series "B" Junior
Securities, or set aside any monies for the purchase or redemption (through
a sinking fund or otherwise) of any such securities; if after giving effect
to that redemption or purchase, there is accrued but unpaid dividends
pursuant to section 5.02B below or accrued but unpaid Series "B"
-------------
Liquidation Preference pursuant to section 5.04A(1).
---------------
E. Voting Rights Reserved for Series "C" Convertible Preferred Stock
-----------------------------------------------------------------
as a Class. So long as any shares of Series "C" Convertible Preferred Stock are
- ----------
outstanding, the Company shall not, without first obtaining the consent, either
expressed in writing or by affirmative vote at a meeting called for that
purpose, of at least a majority, i.e., more than fifty percent (50%), of the
total number of shares of Series "C" Convertible
Page 4 of 16
<PAGE>
Preferred Stock then outstanding, as a class, in addition to the vote or written
consent of the outstanding shares of Common Stock or any other class of
Preferred Stock as may be required under this Certificate of Incorporation or
the General Corporation Law of the State of Delaware:
(1) Change, amend, or repeal any of the provisions of these
Certificate of Incorporation applicable to Series "C" Convertible Preferred
Stock which would adversely affect the rights, preferences, privileges, and
restrictions of Series "C" Convertible Preferred Stock or authorize the
Board of Directors to do so;
(2) Effect an exchange, reclassification, or cancellation of all
or part of Series "C" Convertible Preferred Stock or effect an exchange, or
create a right of exchange, of all or part of the shares of any other class
into Series "C" Convertible Preferred Stock;
(3) Increase the presently authorized number of shares of Series
"B" Convertible Preferred Stock, or decrease the number of authorized
shares of Series "B" Convertible Preferred Stock to a number less than the
number issued and outstanding;
(4) Create any new class of shares (or any security convertible
into such shares) ranking on a parity with or having rights, preferences or
privileges, as to assets, senior to the Series "C" Convertible Preferred
Stock;
(5) Declare pay or make a distribution (other than a dividend
payable in cash or property pursuant to section 5.02C) with respect to any
-------------
shares of the capital stock and/or any other equity securities of the
Company ranking junior to the Series "C" Convertible Preferred Stock upon
liquidation or distribution (except in shares of, or warrants or rights to
subscribe for or purchase shares of the Company which are junior to the
Series "C" Convertible Preferred Stock as to assets), or permit or
authorize any of the Company's subsidiaries to declare, pay or make such a
distribution with respect to any of their equity securities (such
securities of the Company and its subsidiaries being collectively referred
to for purposes of this section 5.01E(5) as "Series "C" Junior
----------------
Securities"), if after giving effect to that distribution there is accrued
but unpaid dividends pursuant to section 5.02C below or accrued but unpaid
-------------
Series "C" Liquidation Preference pursuant to section 5.04A(2) below;
----------------
(6) Declare or pay any dividend payable in cash or property out
of legally available cash or property therefor (which shall be determined
after taking into consideration provision for the Series "C" Liquidation
Preference) pursuant to section 5.02C, unless (i) such dividend relates to
-------------
the issuance of shares of Common Stock as a dividend on outstanding shares
of Common Stock, or (ii) the holders of the Series "C" Convertible
Preferred Stock then outstanding are entitled to participate in such
dividend pursuant to section 5.02C; or
-------------
(7) Redeem, purchase or otherwise acquire directly or
indirectly, or permit or authorize any of the Company's subsidiaries to
redeem, purchase or otherwise acquire directly or indirectly, any Series
"C" Junior Securities or any securities convertible into Series "C" Junior
Securities, or set aside any monies for the purchase or redemption (through
a sinking fund or otherwise) of any such securities; if after giving effect
to that redemption or purchase, there is accrued but unpaid dividends
pursuant to section 5.02C below or accrued but unpaid Series "C"
-------------
Liquidation Preference pursuant to section 5.04A(2).
----------------
F. Right of Series "A" Convertible Preferred Stock to Nominate and
---------------------------------------------------------------
Elect Series "A" Directors. The holders of the Series "A" Convertible Preferred
- --------------------------
Stock shall have the sole and exclusive right to nominate and elect to the Board
of Directors of the Company, by affirmative vote of holders of a majority of the
then outstanding shares of the Series "A" Convertible Preferred Stock, such
number of directors (the "Series "A" Directors") which will, when aggregated
with the number of directors elected by the holders of the Company's securities
other than the Series "A" Convertible Preferred Stock (the "Non-Series "A"
Page 5 of 16
<PAGE>
Directors"), equal one-fourth (1/4/th/) of such aggregated number of directors
----------
(or such minimum whole number in excess of one-fourth (1/4/th/) in the event
such number of aggregated directors is not a multiple of four). The Series "A"
Directors elected to the Board of Directors pursuant to this section 5.01F shall
-------------
be in addition to the Non-Series "A" Directors.
G. Reservation of Right to Series "A" Convertible Preferred Stock to
-----------------------------------------------------------------
Remove Series "A" Directors. Notwithstanding anything in this Certificate of
- ---------------------------
Incorporation or the Bylaws of the Company to the contrary, the holders of the
Series "A" Convertible Preferred Stock shall have the sole and exclusive right,
by affirmative vote of holders of a majority of the then outstanding shares of
the Series "A" Convertible Preferred Stock, to remove any Series "A" Director at
any time with or without cause.
H. Reservation of Right of Series "A" Convertible Preferred Stock to
-----------------------------------------------------------------
Fill Vacancies for Series "A" Directors. Notwithstanding anything in this
- ---------------------------------------
Certificate of Incorporation or the Bylaws of the Company to the contrary, the
holders of the Series "A" Convertible Preferred Stock shall the sole and
exclusive right, by affirmative vote of holders of a majority of the then
outstanding shares of the Series "A" Convertible Preferred Stock, to fill any
vacancy for any Series "A" Director.
I. Special Meetings of Series "A" Convertible Preferred Stock
----------------------------------------------------------
Stockholders. Notwithstanding anything in this Certificate of Incorporation or
- ------------
the Bylaws of the Company to the contrary, any Series "A" Director and any
holder of the Series "A" Convertible Preferred Stock shall have the right, at
any time upon the provision of ten (10) days written notice (unless such notice
is waived by the holders of a majority of the then outstanding shares of the
Series "A" Convertible Preferred Stock), to call a special meeting of the
holders of the Series "A" Convertible Preferred Stock, to be held at such place
and at such date and time as indicated in such written notice, to take any
action described in section 5.01F, section 5.01G, and/or section 5.01H;
------------- ------------- -------------
provided, however, holders of a majority of the then outstanding shares of the
Series "A" Convertible Preferred Stock may change such place and at such date
and time to the extent they determine it to be more convenient. No election of
Series "A" Directors need be by written ballot.
J. Actions of Series "A" Convertible Preferred Stockholders Taken
--------------------------------------------------------------
Without A Meeting. Notwithstanding anything in this Certificate of Incorporation
- -----------------
or the Bylaws of the Company to the contrary, (i) any action required or
permitted to be taken at any special meeting of the holders of the Series "A"
Convertible Preferred Stock may be taken without a meeting; and (ii) any action
required or permitted to be taken at any special meeting of the holders of the
Series "B" Convertible Preferred Stock or Series "C" Convertible Preferred Stock
to address any matter for which their affirmative consent is expressly required
pursuant to sections 5.01D or 5.01E, respectively, may be taken without a
-------------- -----
meeting, provided; however, that in either case above the holders of a majority
of the then outstanding shares of such Preferred Stock consent thereto in
writing, and such writing or writings are filed with the minutes of proceedings
of the stockholders of the Company.
5.02 Dividends.
---------
A. Series "A" Convertible Preferred Stock. The holders of the Series
--------------------------------------
"A" Convertible Preferred Stock shall have no right to participate in, and no
dividends shall be paid with respect to, the Series "A" Convertible Preferred
Stock.
B. Series "B" Convertible Preferred Stock. Whenever the Company
--------------------------------------
shall declare any dividends in cash and/or property out of legally available
cash or property therefor (which shall be determined after taking into
consideration provision for the Series "B" Liquidation Preference and Series "C"
Liquidation Preference) on any shares of its Common Stock or any other Series
"B" Junior Securities, the Board of Directors may, in its sole discretion and
without any obligation to do so, entitle the holders of the Series "B"
Convertible Preferred Stock then outstanding to participate in such dividend,
with each holder of Series "B" Convertible Preferred Stock to receive an amount
of cash or property paid with respect to such declared dividend as such holder
of Series "B" Convertible Preferred Stock would have received if such holder had
converted all of his, her or its shares of Series "B" Convertible Preferred
Stock into Common Stock in
Page 6 of 16
<PAGE>
accordance with section 5.03B(2) (or, if applicable, other Series "B" Junior
----------------
Securities), immediately prior to the date and time of declaration. Except as
provided in the preceding sentence, the holders of the Series "B" Convertible
Preferred Stock shall have no right to participate in, and no dividends shall be
paid with respect to, the Series "B" Convertible Preferred Stock. No interest
shall accrue on any unpaid dividend to which the holders of Series "B"
Convertible Preferred Stock may be entitled pursuant to this section 5.02B.
-------------
C. Series "C" Convertible Preferred Stock. Whenever the Company
--------------------------------------
shall declare any dividends in cash and/or property out of legally available
cash or property therefor (which shall be determined after taking into
consideration provision for the Series "B" Liquidation Preference and Series "C"
Liquidation Preference) on any shares of its Common Stock or any other Series
"C" Junior Securities, the Board of Directors may, in its sole discretion and
without any obligation to do so, entitle the holders of the Series "C"
Convertible Preferred Stock then outstanding to participate in such dividend,
with each holder of Series "C" Convertible Preferred Stock to receive an amount
of cash or property paid with respect to such declared dividend as such holder
of Series "C" Convertible Preferred Stock would have received if such holder had
converted all of his, her or its shares of Series "C" Convertible Preferred
Stock into Common Stock in accordance with section 5.03B(3) (or, if applicable,
----------------
other Series "C" Junior Securities), immediately prior to the date and time of
declaration. Except as provided in the preceding sentence, the holders of the
Series "c" Convertible Preferred Stock shall have no right to participate in,
and no dividends shall be paid with respect to, the Series "C" Convertible
Preferred Stock. No interest shall accrue on any unpaid dividend to which the
holders of Series "C" Convertible Preferred Stock may be entitled pursuant to
this section 5.02C.
-------------
5.03 Conversion.
----------
A. Voluntary Conversion by Holders of Preferred Stock. Each share of
--------------------------------------------------
the Series "A" Convertible Preferred Stock, Series "B" Convertible Preferred
Stock and Series "C" Convertible Preferred Stock shall be convertible, at the
option of the respective holder of such share, at any time, into the following
number of fully paid and nonassessable shares of Common Stock:
(1) In the case of the conversion of the Series "A" Convertible
Preferred Stock, each share of Series "A" Convertible Preferred Stock shall
be converted into one (1) share of Common Stock (subject to adjustment for
stock dividends, combinations or splits with respect to such shares);
(2) In the case of the conversion of the Series "B" Convertible
Preferred Stock, each share of Series "B" Convertible Preferred Stock shall
be converted into such number of shares of Common Stock (subject to
adjustment for stock dividends, combinations or splits with respect to such
shares) as would be determined by multiplying the number "1" (representing
such share) by a fraction, the numerator of which shall be the "Series "B"
Stated Value" of such share (as such term is defined below in section
-------
5.03D), and the denominator of which shall be the "Series "B" Conversion
------
Price" for such share (as such term is defined below in section 5.03D) in
-------------
effect at the date of surrender of such share for conversion (as such date
is hereinbelow more particularly described); and
(3) In the case of the conversion of the Series "C" Convertible
Preferred Stock, each share of Series "C" Convertible Preferred Stock shall
be converted into such number of shares of Common Stock (subject to
adjustment for stock dividends, combinations or splits with respect to such
shares) as would be determined by multiplying the number "1" (representing
such share) by a fraction, the numerator of which shall be the "Series "C"
Stated Value" of such share (as such term is defined below in section
-------
5.03E), and the denominator of which shall be the "Series "C" Conversion
------
Price" for such share (as such term is defined below in section 5.03E) in
-------------
effect at the date of surrender of such share for conversion (as such date
is hereinbelow more particularly described).
Any conversion of Series "A" Convertible Preferred Stock
under this section 5.02A must be for all shares of Series "A" Convertible
-------------
Preferred Stock then outstanding. Any conversion of Series "B" Convertible
Preferred Stock or Series "C" Convertible Preferred Stock under this section
-------
5.02A shall be
- -----
Page 7 of 16
<PAGE>
of a minimum amount of at least one hundred (100) shares of Preferred Stock,
unless the holder of Series "B" Convertible Preferred Stock or Series "C"
Convertible Preferred Stock (as the case may be) holds less than one hundred
(100) shares, in which case such conversion must be for all shares of Series "B"
Convertible Preferred Stock or Series "C" Convertible Preferred Stock (as the
case may be) then held by such holder.
B. Mandatory Conversion. In the event the Common Stock shall have
--------------------
been accepted for listing on The New York Stock Exchange(R) or The American
Stock Exchange(R) or accepted for quotation on either tier of The Nasdaq Stock
Market(SM) (each an "Exchange" for purposes of this section 5.03B), then each
-------------
share of the Series "A" Convertible Preferred Stock, Series "B" Convertible
Preferred Stock and Series "C" Convertible Preferred Stock (as the case may be)
shall be convertible into fully paid and nonassessable shares of Common Stock as
follows:
(1) In the case of the Series "A" Convertible Preferred Stock,
each share of Series "A" Convertible Preferred Stock then outstanding shall
be automatically converted into one (1) share of Common Stock at such time
as the Common Stock shall have been actively traded on such Exchange for a
continuous two (2) year period (subject to adjustment for stock dividends,
combinations or splits with respect to such shares);
(2) In the case of the Series "B" Convertible Preferred Stock,
the Company shall have the option, commencing upon such listing or
quotation on such Exchange, to convert all (but not less than all) of the
shares of the Series "B" Convertible Preferred Stock then outstanding into
Common Stock. In such case each share of Series "A" Convertible Preferred
Stock then outstanding shall be converted into such number of shares of
Common Stock (subject to adjustment for stock dividends, combinations or
splits with respect to such shares) as would be determined by multiplying
the number "1" (representing such share) by a fraction, the numerator of
which shall be the "Series "B" Stated Value" of such share (as such term is
defined below in section 5.03D), and the denominator of which shall be the
-------------
"Series "B" Conversion Price" or of such share (as such term is defined
below in section 5.03D) in effect at the date of surrender of such share
-------------
(as such date is hereinbelow more particularly described); and
(3) In the case of the Series "C" Convertible Preferred Stock,
the Company shall have the option, commencing upon such listing or
quotation on such Exchange, to convert all (but not less than all) of the
shares of the Series "C" Convertible Preferred Stock then outstanding into
Common Stock. In such case each share of Series "C" Convertible Preferred
Stock then outstanding shall be converted into such number of shares of
Common Stock (subject to adjustment for stock dividends, combinations or
splits with respect to such shares) as would be determined by multiplying
the number "1" (representing such share) by a fraction, the numerator of
which shall be the "Series "C" Stated Value" of such share (as such term is
defined below in section 5.03E), and the denominator of which shall be the
-------------
"Series "C" Conversion Price" or of such share (as such term is defined
below in section 5.03E) in effect at the date of surrender of such share
-------------
(as such date is hereinbelow more particularly described).
C. Mechanics of Conversion.
-----------------------
(1) In order for any holder of Series "A" Convertible Preferred
Stock, Series "B" Convertible Preferred Stock or Series "C" Convertible
Preferred Stock to exercise his, her or its respective option to convert
their respective shares of Preferred Stock into Common Stock pursuant to
section 5.03A, such holder must surrender the certificate or certificates
-------------
for those shares, duly endorsed in blank or accompanied by proper
instruments of transfer, at the office of the Company or of any transfer
agent for such shares of Preferred Stock. The holder must also give written
notice (the "Holder Conversion Notice") to the Company at such office that
the holder elects to convert a specified number or all of the shares
represented by the surrendered certificate(s); but in any event not
Page 8 of 16
<PAGE>
less than the minimum number of shares which must be converted pursuant to
section 5.03A. The Holder Conversion Notice shall also specify the name or
-------------
names in which the holder wishes the certificate or certificates for Common
Stock to be issued. If a name specified is not that of the holder, the
Holder Conversion Notice shall also state the address of the new holder and
any other information required by law. The Company shall, as soon as
practicable thereafter, issue and deliver to the holder of the shares of
the Preferred Stock being converted, or that holder's nominee or nominees:
(i) certificates for the number of full shares of Common Stock to which the
holder shall be entitled to receive, together (in the case of Series "B"
Convertible Preferred Stock or Series "C" Convertible Preferred Stock being
converted) with scrip certificate or cash in lieu of any fraction of a
share as provided below in section 5.03K; and (ii) if the holder is
-------------
converting less than all shares of Preferred Stock represented by the
certificate or certificates tendered by the holder, a certificate for such
number of shares of Preferred Stock as have not been converted.. Such
conversion shall be deemed to have been made immediately prior to the close
of business on the date of surrender of the shares of Preferred Stock to be
converted, and person or persons entitled to receive shares of Common Stock
issuable upon conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on that date.
(2) To facilitate the exercise of the Company's right to convert
shares of Series "A" Convertible Preferred Stock, Series "B" Convertible
Preferred Stock or Series "C" Convertible Preferred Stock into Common Stock
pursuant to section 5.03B, the Company shall provide notification (the
-------------
"Company Conversion Notice") to each record holder for such shares at such
holder's address of record, which notice shall inform such holder of the
number of shares of Common Stock such holder is entitled to receive upon
conversion, and shall provide instructions for the return of the
certificate representing the Preferred Stock being converted. The Company
shall, as soon as practicable after its receipt from each holder of the
certificate representing the Preferred Stock being converted, issue and
deliver to such holder, or such holder's nominee or nominees, certificates
for the number of full shares of Common Stock to which such holder shall be
entitled to receive, together (in the case of the conversion of Series "B"
Convertible Preferred Stock or Series "C" Convertible Preferred Stock) with
a scrip certificate or cash in lieu of any fraction of a share as provided
below in section 5.03K. Such conversion shall be deemed to have been made
-------------
immediately prior to the close of business on the date of surrender of the
shares of Preferred Stock to be converted, and the person or persons
entitled to receive shares of Common Stock issuable upon conversion shall
be treated for all purposes as the record holder or holders of such shares
of Common Stock on that date.
D. Series "B" Stated Value and Series "B" Conversion Price. The
-------------------------------------------------------
"Series "B" Stated Value" per each share of Series "B" Convertible Preferred
Stock shall be equal to the consideration initially paid to the Company to
purchase such share from the Company. The "Series "B" Conversion Price" shall
equal the Series "B" Stated Value, as such amount may be adjusted from time-to-
time in certain instances as provided below in section 5.03F.
-------------
E. Series "C" Stated Value and Series "C" Conversion Price. The
-------------------------------------------------------
"Series "C" Stated Value" per each share of Series "C" Convertible Preferred
Stock shall be equal to the consideration initially paid to the Company to
purchase such share from the Company. The "Series "C" Conversion Price" shall
equal the Series "C" Stated Value, as such amount may be adjusted from time-to-
time in certain instances as provided below in section 5.03G.
-------------
F. Adjustments to Series "B" Conversion Price. If the Company shall
------------------------------------------
after the first date of issuance of the Series "B" Convertible Preferred Stock
(the "Series "B" Issue Date") issue any shares of Common Stock, and if the
Series "B" Conversion Price in effect immediately prior to the close of business
on such date of issuance subsequent to the Series "B" Issue Date (the "Series
"B" Adjustment Date") exceeds the amount determined as of the close of business
on the Series "B" Adjustment Date (the "Series "B" Adjustment
Page 9 of 16
<PAGE>
Amount") by dividing (x) a sum equal to the aggregate of the amount of all
consideration received by the Company upon all issues of shares of Common Stock
on or after the Series "B" Issue Date by (y) the total number of all such shares
of Common Stock issued on or after the Series "B" Issue Date, then the Series
"B" Conversion Price shall be reduced effective at the close of business on the
Series "B" Adjustment Date by an amount equal to the sum by which the then
effective Series "B" Conversion Price exceeds the Series "B" Adjustment Amount,
with any fractions of one cent (1(cent)) being rounded down.
G. Adjustments to Series "C" Conversion Price. If the Company shall
------------------------------------------
after the first date of issuance of the Series "C" Convertible Preferred Stock
(the "Series "C" Issue Date") issue any shares of Common Stock, and if the
Series "C" Conversion Price in effect immediately prior to the close of business
on such date of issuance subsequent to the Series "C" Issue Date (the "Series
"C" Adjustment Date") exceeds the amount determined as of the close of business
on the Series "C" Adjustment Date (the "Series "C" Adjustment Amount") by
dividing (x) a sum equal to the aggregate of the amount of all consideration
received by the Company upon all issues of shares of Common Stock on or after
the Series "C" Issue Date by (y) the total number of all such shares of Common
Stock issued on or after the Series "C" Issue Date, then the Series "C"
Conversion Price shall be reduced effective at the close of business on the
Series "C" Adjustment Date by an amount equal to the sum by which the then
effective Series "C" Conversion Price exceeds the Series "C" Adjustment Amount,
with any fractions of one cent (1(cent)) being rounded down.
H. Factors to be Considered in Making Adjustments to Series "B" and
----------------------------------------------------------------
Series "C" Conversion Prices. For purposes of sections 5.03F and 5.03G, the
- ---------------------------- -------------- -----
following provisions shall be applicable:
(1) Any shares of Common Stock directly or indirectly pursuant
to: (i) options or warrants granted before the Series "B" Issue Date or
Series "C" Issue Date, as the case may be (the "Applicable Issue Date"),
(ii) options or warrants or shares of Common Stock granted pursuant to
rights to receive such securities granted before the Applicable Issue Date,
or (iii) options, warrants or grants awarded after the Applicable Issue
Date but pursuant to a stock plan approved before the Applicable Issue
Date, shall be disregarded.
(2) If the Company shall issue or sell for cash shares of Common
Stock, or any shares or obligations convertible into or exchangeable for
shares of Common Stock, the consideration received by the Company shall be
deemed to be the amount of cash received, before deducting therefrom any
commissions or expenses paid by the Company for any underwriting of, or
otherwise in connection with, the issue or sale.
(3) If the Company shall issue or sell shares of Common Stock to
an underwriter without payment of any commission, the consideration
received by the Company shall be deemed to be the full amount at which
those securities are initially offered by the underwriter to the public.
(4) If the Company shall issue (otherwise than upon conversion
or exchange of obligations or shares of stock of the Company) additional
shares of Common Stock for a consideration wholly or partly other than
cash, the amount of the consideration other than cash received by the
Company for those shares shall be deemed to be (i) the closing sales price
for the Common Stock as of the close of the last trading day for the Common
Stock in the event there is a public trading market for such shares, and
(ii) the current fair market value of such issued shares of Common Stock as
determined by the Board of Directors in its reasonable discretion in the
event a public trading market for such shares does not exist.
(5) If the Company shall issue or sell for cash shares of Common
Stock to its officers, employees, directors, consultants, or agents for a
consideration per share (whether cash, other than cash, or partly other
than cash) less than the Series "B" Conversion Price or Series "C"
Conversion Price, as the case may be (the "Applicable Conversion Price") in
effect immediately prior to the issuance thereof, and such additional
shares of Common Stock are issued pursuant as compensation for services
Page 10 of 16
<PAGE>
rendered or to be rendered by such directors, officers, employees,
consultants or agents other than pursuant to a stock plan described in
section 5.03H(1), the consideration per share received by the Company for
----------------
each such share shall be deemed to be (i) the closing sales price for the
Common Stock as of the close of the last trading day for the Common Stock
in the event there is a public trading market for such shares, and (ii) the
current fair market value of such issued shares of Common Stock as
determined by the Board of Directors in its reasonable discretion in the
event a public trading market for such shares does not exist.
(6) If the Company shall issue in any manner any rights to
subscribe for or to purchase Common Stock or any options for the purchase
of Common Stock (other than the issuance referred to in section 5.03H(4)),
-----------------
at a consideration per share (as computed below in section 5.03H(8)) less
-----------------
than the Applicable Conversion Price in effect immediately prior to the
date of the offering of such rights or the granting of such options (as the
case may be), all shares of Common Stock that the holders of those rights
or options shall be entitled to subscribe for or purchase pursuant to those
rights or options shall be deemed to be issued or sold as of the date of
the offering of those rights or the granting of those options (as the case
may be), and the minimum aggregate consideration named in those rights or
options for the shares of Common Stock covered thereby, plus the
consideration, if any, received by the Company for those rights or options,
shall be deemed to be the consideration actually received by the Company
(as of the date, as the case may be, of the offering of those rights or the
granting of those options), for the issuance of those shares.
(7) If the Company shall issue in any manner any obligations or
any shares of the Company (other than shares of the Series "B" Convertible
Preferred Stock or Series "C" Convertible Preferred Stock, as the case may
be), that shall be convertible into or exchangeable for shares of Common
Stock, at a consideration per share (as computed below in section 5.03H(8))
-----------------
less the Applicable Conversion Price in effect immediately prior to the
date such obligations or shares are issued, all shares of Common Stock
issuable upon such conversion or exchange of those obligations or shares
shall be deemed to be issued as of the date those obligations or shares are
issued, and the amount of the consideration received by the Company for
those additional shares of Common Stock shall be deemed to be the total of
(x) the amount of consideration received by the Company upon the issuance
of those shares or obligations, as the case may be, plus (y) the minimum
aggregate consideration, if any, other than those obligations or shares,
received by the Company upon such conversion or exchange, except in
adjustment of interest and dividends.
(8) The amount of the consideration received by the Company upon
the issuance of any rights or options referred to in section 5.03H(6))
----------------
above, or upon the issuance of any obligations or shares that are
convertible or exchangeable as described in section 5.03H(7) above, and the
----------------
amount of the consideration, if any, other than such obligations or shares
so convertible or exchangeable, receivable by the Company upon the exercise
conversion or exchange thereof shall be determined in the same manner as
provided in section 5.03H(1) and section 5.03H(4) above with respect to the
---------------- ----------------
consideration received by the Company in case of the issuance of additional
shares of Common Stock; provided, however, that if the obligations or
shares of stock so convertible or exchangeable are issued in payment or
satisfaction of any dividend upon any stock of the Company other than
Common Stock, the amount of the consideration received by the Company upon
the original issuance of the obligations or the value of those obligations
or shares, as of the date of the adoption of the resolutions declaring the
dividend, shall be determined by the Board of Directors at or as of that
date. Upon the expiration of any rights or options referred to in section
-------
5.03H(6), or the termination of any right of conversion or exchange
--------
referred to in section 5.03H(7), the Applicable Conversion Price then in
----------------
effect shall be readjusted to the Applicable Conversion Price that would
have applied had the adjustments made upon the issuance of the option,
right, or convertible or exchangeable securities been made upon the basis
of the delivery of only the number of shares of Common Stock actually
delivered upon the exercise of those rights or options, or upon the
conversion or exchange of those securities.
Page 11 of 16
<PAGE>
(9) The number of shares of Common Stock at any time outstanding
shall be deemed to include any outstanding shares of Common Stock then
owned or held by or for the account of the Company.
(10) The number of shares of Common Stock at any time outstanding
shall be deemed to include the number of shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock.
(11) Each share of Common Stock issued upon conversion of the
Series "B" Convertible Preferred Stock or Series "C" Convertible Preferred
Stock, as the case may be, shall be deemed to have been issued for a
consideration equal to the Applicable Conversion Price in effect at the
time of issuance.
(12) Anything in this section 5.03H to the contrary
-------------
notwithstanding, if the Company shall issue additional shares of Common
Stock as a dividend, then: (i) the aggregate number of shares of Common
Stock issued in payment of the dividend for purposes of prospective
calculations under this section 5.03H shall be deemed to have been issued
-------------
and to be outstanding on the day next succeeding the record date for the
determination of stockholders entitled to the dividend and shall be deemed
to have been issued without consideration; and (ii) the Applicable
Conversion Price shall be adjusted pursuant to the terms of section 5.03I
-------------
in lieu of this section 5.03H.
-------------
I. Subdivision, Stock Dividend, Combination. Should the Company at
----------------------------------------
any time subdivide the outstanding shares of Common Stock, or issue shares of
Common Stock as a dividend on the outstanding shares of Common Stock, the
Applicable Conversion Price in effect immediately prior to that subdivision or
the issuance of such dividend shall be proportionately decreased. On the other
hand, should the Company at any time combine the outstanding shares of Common
Stock, the Applicable Conversion Price in effect immediately prior to that
combination shall be proportionately increased, effective at the close of
business on the date of the subdivision, division, or combination. For the
purposes of this section 5.03I, the date of issuance of any such dividend shall
-------------
be determined in accordance with section 5.03H(12).
-----------------
J. Notice of Change in Applicable Adjustment Amount. Whenever an
------------------------------------------------
event occurs resulting in the creating or change in the Series "B" Adjustment
Amount or Series "C" Adjustment Amount (as the case may be) pursuant to sections
--------
5.03F, 5.03G, 5.03H, or 5.03I, the Company shall promptly mail a notice (the
- ----- ----- ----- -----
"Adjustment Notice") to each holder of the Series "B" Convertible Preferred
Stock or Series "C" Convertible Preferred Stock so affected setting forth the
new conversion ratio for such holders' shares of Series "B" Convertible
Preferred Stock or Series "C" Convertible Preferred Stock (as the case may be),
as well as a brief statement of the facts causing such change.
K. Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon the conversion of Series "A" Convertible Preferred Stock. If any
fractional shares of Common Stock would, except for the provisions of this
section 5.03K, be deliverable upon the conversion of any shares of Series "B"
- -------------
Convertible Preferred Stock or Series "C" Convertible Preferred Stock (as the
case may be), the Company shall, in lieu of delivering the fractional share
therefor, at its option either: (i) adjust the fractional interest by payment
to the holder of the converted Series "B" Convertible Preferred Stock or Series
"C" Convertible Preferred Stock (as the case may be), of an amount in cash equal
(computed to the nearest cent) to the current market value of the fractional
interest as determined by the Board of Directors in its reasonable discretion,
unless the current market value of such fractional interest does not exceed ten
dollars ($10), in which case the fractional interest may be adjusted by rounding
off such shares of Common Stock to be issued upon the conversion to the nearest
whole share; or (ii) issue non-dividend bearing and non-voting scrip
certificates for fractions of a share which would otherwise be issuable, in form
and containing terms and conditions as determined by the Board of Directors, and
exchangeable, within the period following the date of issue as the Board of
Directors shall fix, together with other unexpired scrip certificates of like
tenor aggregating one or more full shares, for share certificates representing a
full share or shares.
Page 12 of 16
<PAGE>
L. Recapitalization or Reclassification; Merger or Consolidation;
--------------------------------------------------------------
Reorganization; Sale of Assets. If there shall occur any recapitalization or
- ------------------------------
any reclassification of the capital stock of the Company, or the merger or
consolidation of the Company with or into another entity or entities, or the
reorganization of the Company (including an exchange reorganization or a sale-
of-assets reorganization), or any transaction in which all or substantially all
of the assets of the Company are sold or transferred (with the exception, in all
of the above cases, of: (i) any transaction whose principal purpose is to
change the State in which the Company is incorporated, or to form a holding
company, or to effect a similar reorganization as to form of entity without
change of beneficial ownership, including a merger into a wholly-owned
subsidiary; or (ii) a merger with or into a corporation that is controlled by
the Company immediately after the transaction), the holders of the Series "A"
Convertible Preferred Stock, Series "B" Convertible Preferred Stock and Series
"C" Convertible Preferred Stock shall each be entitled to receive such amount of
securities or other property they would have otherwise received upon the
voluntary or involuntary liquidation, dissolution, or winding up of the Company
pursuant to section 5.04 hereof. The terms of any such reclassification, merger
------------
or consolidation, reorganization, or sale or transfer shall include such terms
so as to continue to give to the holders of the Series "A" Convertible Preferred
Stock, Series "B" Convertible Preferred Stock and Series "C" Convertible
Preferred Stock the right to receive the securities or property set forth in
this section 5.03L upon any conversion following such reclassification, merger
-------------
or consolidation, reorganization, or sale or transfer. This provision shall
similarly apply to successive reclassifications, mergers or consolidations,
reorganizations, or sales or transfers.
M. Notice of Certain Events Pertinent to Exercise of Conversion
------------------------------------------------------------
Rights. In the event of the occurrence of any of the following action:" (i) the
- ------
Company shall set a record date for the purpose of entitling the holders of its
Common Stock to receive a dividend, or any other distribution of property or
securities of the Company; (ii) the Company shall set a record date for the
purpose of entitling the holders of its Common Stock, as a class, to subscribe
for or purchase any shares of any class or securities convertible into or
exchangeable for shares of any class, or any option, right or warrant, to
subscribe therefor; (iii) the merger or consolidation of the Company (other than
a short-form merger which does not require the vote of the stockholders of the
Company) with or into another entity or entities; (iv) any reorganization of the
Company (including any exchange reorganization or sale-of-assets
reorganization), any recapitalization or reclassification of the capital stock
of the Company; or (v) the voluntary or involuntary dissolution, liquidation, or
winding up of the Company; then, and in any such case, the Company shall cause
to be mailed to the holders of record of the outstanding shares of Series "A"
Convertible Preferred Stock, Series "B" Convertible Preferred Stock and Series
"C" Convertible Preferred Stock, at least thirty (30) days prior to the date
hereinafter specified, a notice stating the date (x) that has been set as the
record date for the purpose of the dividend, distribution, or rights
subscription as hereinabove described in clause (i) and clause (ii) of this
---------- -----------
section 5.03M, or (y) on which the merger or consolidation, reorganization,
- -------------
liquidation, dissolution or winding up described in clause (iii) through clause
------------ ------
(v) of this section 5.03M is to take place; provided, however, if the notice
- --- -------------
referred to herein will contain material non-public information if distributed
at the time period specified herein, then the notice shall be distributed to
such holders of Preferred Stock on the later to occur of (a) thirty (30)
calendar days prior to the applicable record or effective date specified herein;
or (b) the date that such information is made publicly available; or (c) at such
time as such information otherwise ceases to be material non-public information;
provided further that the notice requirement to be distributed pursuant to this
section 5.03M shall be distributed at least five (5) calendar days prior to the
- -------------
applicable record or effective date.
N. Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued Common Stock,
solely for the purpose of effecting conversion of its Series "A" Convertible
Preferred Stock, Series "B" Convertible Preferred Stock and Series "C"
Convertible Preferred Stock then outstanding pursuant to the terms of this
section 5.03, such number of full shares of Common Stock as shall be sufficient
- ------------
from time-to-time to effect the conversion of all said shares of Preferred Stock
In the event the number of authorized but unissued shares of Common Stock shall
not at any time be sufficient to effect the conversion of all then outstanding
shares of Series "A" Convertible Preferred Stock, Series "B" Convertible
Preferred Stock and Series "C" Convertible Preferred Stock, the Company shall
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose including, without limitation, extending its best
Page 13 of 16
<PAGE>
efforts to obtain the requisite stockholder approval of any necessary amendment
to this Certificate of Incorporation.
O. Costs; Taxes. The Company shall pay any and all issue and other
------------
taxes that may be payable in respect of any issued or delivered shares of Common
Stock upon conversion of Series "A" Convertible Preferred Stock, Series "B"
Convertible Preferred Stock and Series "C" Convertible Preferred Stock pursuant
hereto. The Company shall not, however, be required to pay any tax payable in
respect of any transfer involved in the issue and delivery of Common Stock in a
name other than that in which Series "A" Convertible Preferred Stock, Series "B"
Convertible Preferred Stock and Series "C" Convertible Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting that issue has paid to the Company the amount of
any such tax, or has established to the satisfaction of the Company that the tax
has been paid.
P. No Reissuance. Shares of Series "A" Convertible Preferred Stock,
-------------
Series "B" Convertible Preferred Stock and Series "C" Convertible Preferred
Stock which are reacquired by the Company for any reason, including by reason of
conversion or redemption, shall be appropriately cancelled on the books of the
Company and retired to treasury, and may not be reissued. The Company may from
time-to-time take such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of such Preferred Stock.
5.04 Liquidation, Dissolution, or Winding Up.
---------------------------------------
A. General. In the event of the liquidation, dissolution, or winding
-------
up of the Company, whether voluntary or involuntary, the assets and surplus
funds of the Company legally available for distribution, if any, after payment
or provision for the debts and liabilities of the Company ("Distributable
Assets"), shall be distributed to the stockholders as follows:
(1) Each holder of Series "B" Convertible Preferred Stock then
outstanding shall be entitled to receive, for each share of Series "B"
Convertible Preferred Stock held by such person, an amount equal to the
Series "B" Liquidation Preference (as such term is defined below). All of
the preferential amounts to be paid to the holders of the Series "B"
Convertible Preferred Stock under this section 5.04A(1) shall be paid or
----------------
set apart for payment before the payment or setting apart for payment of
any amount for, or the distribution of any assets of the Company to, the
holders of Series "A" Convertible Preferred Stock, Series "C" Convertible
Preferred Stock, Common Stock, or any other Series "B" Junior Securities in
connection with any such liquidation, dissolution or winding up. If
Distributable Assets available for distribution to the holders of Series
"B" Convertible Preferred Stock shall be insufficient to permit the payment
of the full Series "B" Liquidation Preference to each such holder, then
such assets shall be distributed ratably among such holders in proportion
to the full preferential amount each such holder would otherwise be
entitled to receive.
(2) To the extent there remain Distributable Assets after the
distributions prescribed above in section 5.04A(1), each holder of Series
----------------
"C" Convertible Preferred Stock then outstanding shall be entitled to
receive, for each share of Series "C" Convertible Preferred Stock held by
such person, an amount equal to the Series "C" Liquidation Preference (as
such term is defined below). All of the preferential amounts to be paid to
the holders of the Series "C" Convertible Preferred Stock under this
section 5.04A(2) shall be paid or set apart for payment before the payment
----------------
or setting apart for payment of any amount for, or the distribution of any
assets of the Company to, the holders of Series "A" Convertible Preferred
Stock, Common Stock, or any other Series "C" Junior Securities in
connection with any such liquidation, dissolution or winding up. If
Distributable Assets available for distribution to the holders of Series
"C" Convertible Preferred Stock shall be insufficient to permit the payment
of the full Series "C" Liquidation Preference to each such holder, then
such assets shall be distributed ratably among such holders in proportion
to the full preferential amount each such holder would otherwise be
entitled to receive.
Page 14 of 16
<PAGE>
(3) To the extent there remain Distributable Assets after the
distributions prescribed above in sections 5.04A(1) and 5.04A(2), each
----------------- --------
holder of Series "A" Convertible Preferred Stock then outstanding shall be
entitled to receive out of such assets, for each share of Series "A"
Convertible Preferred Stock held by such person, an amount equal to the
Series "A" Liquidation Preference (as such term is defined below). All of
the preferential amounts to be paid to the holders of the Series "A"
Convertible Preferred Stock under this section 5.04A(3) shall be paid or
----------------
set apart for payment before the payment or setting apart for payment of
any amount for, or the distribution of any assets of the Company to, the
holders of Common Stock or any other Series "A" Junior Securities in
connection with any such liquidation, dissolution or winding up. If
Distributable Assets available for distribution to the holders of Series
"A" Convertible Preferred Stock shall be insufficient to permit the payment
of the full Series "A" Liquidation Preference to each such holder, then
such assets shall be distributed ratably among such holders in proportion
to the full preferential amount each such holder would otherwise be
entitled to receive.
(4) To the extent there remain Distributable Assets after the
distributions prescribed above in sections 5.04A(1) through 5.04A(3), the
----------------- --------
holders of Common Stock then outstanding shall be entitled to receive their
ratable share of such assets in proportion to the number of shares of
Common Stock held by each such holder.
B. Series "A" Liquidation Preference. The Series "A" Liquidation
---------------------------------
Preference per share of Series "A" Convertible Preferred Stock shall equal one
dollar ($1.00) (as such amount may be adjusted for any stock dividends,
combinations or splits with respect to such shares).
C. Series "B" Liquidation Preference. The Series "B" Liquidation
---------------------------------
Preference per share of Series "B" Convertible Preferred Stock shall equal the
sum of (i) the Series "B" Stated Value (as such term is defined above in section
-------
5.03D) and (ii) the amount of any accrued but unpaid dividends, whether declared
- ------
or not, but without interest (as either of such amounts may be adjusted for any
stock dividends, combinations or splits with respect to such shares).
D. Series "C" Liquidation Preference. The Series "C" Liquidation
---------------------------------
Preference per share of Series "C" Convertible Preferred Stock shall equal the
sum of (i) the Series "C" Stated Value (as such term is defined above in section
-------
5.03E) and (ii) the amount of any accrued but unpaid dividends, whether declared
- ------
or not, but without interest (as either of such amounts may be adjusted for any
stock dividends, combinations or splits with respect to such shares).
E. Scope of Liquidation, Dissolution or Winding Up. Neither the
-----------------------------------------------
recapitalization or reclassification of the capital stock of the Company, or the
merger or consolidation of the Company with or into any other entity or
entities, or the reorganization of the Company (including an exchange
reorganization or a sale-of-assets reorganization), or the sale or conveyance of
all or substantially all of the assets of the Company, shall be deemed a
liquidation, dissolution, or winding up of the Company within the meaning of
this section 5.04.
------------
5.05 No Redemption. Neither the Company or the holders of the Series "A"
-------------
Convertible Preferred Stock, Series "B" Convertible Preferred Stock or Series
"C" Convertible Preferred Stock shall have any rights of redemption under this
Certificate of Incorporation with respect to such shares of Preferred Stock.
5.06 No Assessments Permitted; Partial Payment Allowed. Series "A"
-------------------------------------------------
Convertible Preferred Stock, Series "B" Convertible Preferred Stock and Series
"C Convertible Preferred Stock shall not be assessable. Series "A" Convertible
Preferred Stock, Series "B" Convertible Preferred Stock and Series "C"
Convertible Preferred Stock may, at the discretion of the Board of Directors, be
issued partially paid, so long as the par value of such Preferred Stock is paid.
5.07 Definition of "Dividend." The term "dividend," as used in this Article
----------------------- -------
Fifth, shall mean a dividend or other distribution upon shares of the Company;
- -----
and, in the event of a declaration of a dividend by the
Page 15 of 16
<PAGE>
Company without the fixing of a record date for the determination of
shareholders entitled thereto, the date fixed by applicable law for the
determination of the shareholders entitled thereto shall be deemed to be the
record date.
5.08 Definition of "Common Stock." Whenever reference is made in this
---------------------------
Article Fifth to the issue or sale of shares of Common Stock, the term "Common
- -------------
Stock" shall include any stock of any class of the Company with a fixed limit on
dividends and a fixed amount payable in the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Company.
2. The above amendment to the Certificate of Incorporation of the Company
was authorized at a special meeting of the Board of Directors of the Company by
a majority of the directors, followed by written consent of a majority of each
class of outstanding stock entitled to vote thereon, in accordance with the
applicable provisions of Sections 141, 228 and 242 of the General Corporation
Law of the State of Delaware, with written notice of the written consent
promptly given to those stockholders who had not consented in writing.
IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment to
be signed by John P. Thuot, its President, and Barry A. Sheahan, its Secretary,
who affirm the truth of the statements herein set forth under penalty of perjury
this 3rd day of November, 1999.
Clean Energy Combustion Systems, Inc.
By: /s/ John P. Thuot
--------------------------------
John P. Thuot, President
ATTEST:
By: /s/ Barry A. Sheahan
-------------------------------
Barry A. Sheahan, Secretary
Page 16 of 16
<PAGE>
EXHIBIT 5
JOHN M. WOODBURY, JR.
840 7/TH/ Avenue S.W., Suite 750
Calgary, Alberta, Canada
T2P 3G2
February 25, 2000
Clean Energy Combustion Systems, Inc.
7087 McPherson Avenue
Burnaby, British Columbia, Canada
V5J 4N4
Ladies and Gentlemen:
On February 25, 2000, Clean Energy Combustions Systems, Inc., a Delaware
corporation (the "Company"), filed with the Securities and Exchange Commission
(the "Commission") a Pre-Effective Amendment Number 1 to Registration Statement
on Form SB-2 (the "Registration Statement"), under the Securities Act of 1933,
as amended (the "Act"), relating to the offer and sale or distribution by
stockholders of the Company of an aggregate of 6,595,822 shares of common stock,
$0.0001 par value per share (the "Shares"). I have acted as counsel to the
Company in connection with the preparation and filing of the Registration
Statement.
In connection therewith, I have examined and relied upon the original or copies,
certified to my satisfaction, of (i) the Articles of Incorporation and the
Bylaws of the Company, in each case as amended to date, (ii) copies of
resolutions of the Board of Directors of the Company authorizing the original
offering and the issuance of the shares to be offered and sold or distributed by
the stockholders of the Company pursuant to the Registration Statement and
related matters, (iii) the Registration Statement, and all exhibits thereto, and
(iv) such other documents and instruments as I have deemed necessary for the
expression of opinions herein contained. In making the foregoing examinations,
I have assumed the genuineness of all signatures and the authenticity of all
documents submitted to me as originals, and the conformity to original documents
of all documents submitted to me as certified or photostatic copies. As to
various questions of fact material to this opinion, I have relied, to the extent
I deem reasonably appropriate, upon representations or certificates of officers
or directors of the Company and upon documents, records and instruments
furnished to me by the Company, without independent check or verification of
their accuracy.
Based upon the foregoing examination, I am of the opinion that the Shares to be
offered and sold or distributed by the stockholders of the Company pursuant to
the Registration Statement were duly and validly authorized when originally
issued by the Company, and are legally issued, fully paid and nonassessable.
/s/ John M. Woodbury, Jr.
--------------------------------
John M. Woodbury, Jr., Esq.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of my name under the caption "Legal Matters" in the
Prospectus forming a part of the Registration Statement. In giving such
consent, I do not admit that I come within the category of persons whose consent
is required by Section 7 of the Act or the rules and regulations of the
Commission thereunder.
Respectfully submitted,
/s/ John M. Woodbury, Jr.
--------------------------------
John M. Woodbury, Jr., Esq.
<PAGE>
Exhibit 10.8
PROMISSORY NOTE
Cdn. $50,000 August 10, 1999
Burnaby, British Columbia, Canada
FOR VALUE RECEIVED, the receipt and sufficiency of which is hereby acknowledged,
Clean Energy Combustion Systems, Inc. and Clean Energy Technologies (Canada)
Inc. (collectively, the "Maker"), hereby jointly and severally promise to pay to
R. Dirk Stinson, or order (the "Holder"), at such address as the Holder may from
time-to-time designate by written notice to the Maker, the principal sum
hereinbelow described (the "Principal Amount"), together with interest thereon,
in the manner and at the times herebelow provided and subject to the terms and
conditions herebelow described.
1. PRINCIPAL AMOUNT
The Principal Amount means the sum of fifty thousand Canadian dollars (Cdn.
$50,000), which has been advanced by the Holder to the Maker
contemporaneously with or prior to the date of this Note, plus any such
additional amounts as the Holder may in the future advance from time-to-
time to the Maker.
2. INTEREST
Interest on the Principal Amount from time-to-time remaining unpaid shall
accrue from the date of any advances to the Maker under this Note at the
rate of Royal Bank Prime Rate plus 2% per annum. Interest shall be computed
on the basis of a three hundred sixty (360) day year and a thirty (30) day
month.
3. PAYMENT ON PRINCIPAL AND INTEREST
Subject to paragraphs 3 and 5, the Principal Amount and all interest and
other indebtedness under this Note shall be due and payable at such time as
the Maker raises the sum of seven hundred fifty thousand Canadian dollars
(Cdn. $750,000) through equity, debt or joint-venture financing or product
revenues, or any combination thereof, but in any event by August 10, 2000.
Payments of any amount required hereunder shall be made solely in lawful
money of Canada, and shall be credited first against other indebtedness
under this Note, if any, next against accrued but unpaid interest, if any,
and with the balance of such payment applied against the unpaid balance of
the Principal Amount.
The Maker reserves the right to prepay any portion of the Principal Amount
in whole or in part (in either case with any accrued and unpaid interest
through the date of prepayment plus any other amounts due under this Note)
without prepayment penalty or premium or discount.
Whenever any payment required under the terms of this Note shall be stated
to be due on a day other than a business day, such payment shall be made on
the next succeeding business day, and such extension of time shall in such
case be included in the computation of payment of interest.
4. ACCELERATION UPON DEFAULT
At the option of the Holder, all or any part of the indebtedness of the
Maker hereunder shall immediately become due and payable, irrespective of
any agreed maturity, upon the happening of any of the following events of
default:
(a) If the Maker shall make an assignment for the benefit of creditors;
1
<PAGE>
(b) If a custodian, trustee, receiver, or agent is appointed or takes
possession of substantially all of the property of the Maker;
(c) If the Maker becomes insolvent;
(d) If the Maker shall file a petition of bankruptcy, or apply to any
tribunal for appointment of a custodian, trustee, receiver, or agent
of the Maker, or commence any proceeding related to the Maker under
any bankruptcy or reorganization statute, or under any arrangement,
insolvency, readjustment of debt, dissolution, or liquidation law of
any jurisdiction, whether now or hereafter in effect;
(e) If any petition is filed against the Maker under any bankruptcy or
reorganization statute and either (1) the relief is ordered by the
applicable jurisdiction against the Maker under the applicable
bankruptcy or reorganization statute, or (2) such petition is not
dismissed by the applicable jurisdiction within thirty (30) days of
the date of filing; or
(f) If any attachment, execution, or other writ is levied on substantially
all of the assets of the Maker and remains in effect for more than
fifteen (15) days.
5. CONVERSION OF NOTE INTO COMMON STOCK
The Holder shall reserve the right at any time, in his sole discretion, to
convert any portion of the Principal Amount and all interest and other
indebtedness under this Note remaining unpaid into Clean Energy Combustion
Systems, Inc. common stock at the conversion rate of two United States
dollars (U.S. $2.00) per one (1) share of common stock. The Maker shall
afford the Holder five (5) business days' prior written notice relative to
the Maker's intent to pay or prepay the Principal Amount or any portion
thereof in order to allow the Holder to make the aforesaid election.
6. PURCHASE OF PBC TECNOLOGY
The Maker agrees that it shall not have the right to exercise its right to
purchase the PBC Technology from 818879 Alberta Limited pursuant to the
terms of that certain PBC Technology License dated March 5, 1999 unless and
until all indebtedness under this Note shall be paid or converted into
common stock pursuant to the terms of this Note.
7. COLLECTION COSTS AND ATTORNEYS' FEES
The Maker agrees to pay the Holder all costs and expenses, including
reasonable attorneys' fees, actually paid or incurred by the Holder in
connection with the collection or enforcement of this Note. In the event
any party institutes or should the parties otherwise become a party to any
action or proceeding in connection with the enforcement or interpretation
or collection of this Note, or for damages by reason of any alleged breach
of this Note or any provision hereof and/or any alleged breach, of any
instrument securing payment of this Note or any provision thereof, or for a
declaration of rights in connection with this Note and/or any instrument
securing payment of this Note, or for any other relief, including equitable
relief, in connection with this Note, the prevailing party in any such
action or proceeding shall be entitled to receive from the non-prevailing
party all costs and expenses including, without limitation, reasonable
attorneys' and other fees actually incurred by the prevailing party in
connection with such action or proceeding, and shall also be entitled to
collect as damages those costs and expenses hereinabove described in the
first sentenced of this section.
8. NOTICE
Any notice to the Maker provided for in this Note shall be given by
personal delivery or by express mail, Federal Express, DHL or similar
airborne/overnight delivery service, or by mailing
2
<PAGE>
such notice by first class or certified mail, return receipt requested,
addressed to the Maker at his or her address presently on the books of the
Maker, or to such other address as the Maker may designate by written
notice to the Holder. Any notice to the Holder shall be given by personal
delivery or by express mail, Federal Express, DHL or similar
airborne/overnight delivery service, or by mailing such notice by first
class or certified mail, return receipt requested, addressed to the Holder
at its present executive offices, or to such other address as may have been
designated by written notice to the Maker. Mailed notices shall be deemed
delivered and received three (3) days after deposit in accordance with this
provision in the Canadian or, if applicable, United States mail.
9. USURY COMPLIANCE
All agreements between the Maker and the Holder are expressly limited, so
that in no event or contingency whatsoever, whether by reason of the
consideration given with respect to this Note, the acceleration of maturity
of the unpaid Principal Amount and interest thereon, or otherwise, shall
the amount paid or agreed to be paid to the Holder for the use,
forbearance, or detention of the indebtedness which is the subject of this
Note exceed the highest lawful rate permissible under the applicable usury
laws. If, under any circumstances whatsoever, fulfillment of any provision
of this Note after timely performance of such provision is due, shall
involve transcending the limit of validity prescribed by law which a court
of competent jurisdiction deems applicable, then ipso facto, the
obligations to be fulfilled shall be reduced to the limit of such validity,
and if, under any circumstances whatsoever, the Holder shall ever receive
as interest an amount that exceeds the highest lawful rate, the amount that
would be excessive interest shall be applied to the reduction of the unpaid
Principal Amount and/or late charges under this Note and not to the payment
of interest, or, if such excessive interest exceeds the unpaid balance of
the Principal Amount and/or late charges under this Note, such excess shall
be refunded to the Maker. This provision shall control every other
provision of all agreements between the Maker and the Holder.
10. GENERAL
(A) No Waiver of Holder's Rights. No delay or failure or act of commission
or omission on the part of the Holder in exercising any rights under
this including, without limitation, the Holder's right to accelerate,
nor reinstatement of this Note by the Holder after such exercise,
shall operate as a waiver of the Maker's right to exercise such right
or of any other right under this Note or as a release of Maker, for
the same default or any other default, except to the extent such
waiver is in writing and signed by the Holder and then only to the
extent specifically set forth in writing.
(b) Successors and Assigns. This Note and all of the covenants, promises
and agreements contained in it shall be binding on and inure to the
benefit of the respective legal and personal representatives, devises,
heirs, successors, and assigns of the Maker and the Holder.
(c) Integration. This writing is intended by the parties to be an
integrated and final expression of this Note and also is intended to
be a complete and exclusive statement of the terms of that agreement.
No course of prior dealing between the parties, no usage of trade, and
no parole or extrinsic evidence of any nature shall be used to
supplement, modify or vary any of the terms hereof. There are no
conditions to the full effectiveness of this Note except as
specifically provided herein.
(d) Invalidity. If any provision of this Note, or the application of it to
any party or circumstance, is held to be invalid, the remainder of
this Note, and the application of such provision to other parties or
circumstances, shall not be affected thereby, the provisions of this
Note being severable in any such instance.
3
<PAGE>
(e) Interpretation. This Note shall be governed by, interpreted under and
construed and enforced in accordance with the laws of the Province of
British Columbia, Canada applicable to contracts entered into in the
Province of British Columbia, Canada, by residents of the Province of
British Columbia, Canada, and intended to be performed entirely within
the Province of British Columbia, Canada.
IN WITNESS WHEREOF, the Maker, intending to be legally bound hereby, has duly
executed this Note the day and year first above written.
MAKER:
Clean Energy Combustion Systems, Inc. Clean Energy Technologies (Canada)
Inc.
By: /s/ J.P. Thuot By: /s/ B.A. Sheahan
--------------------------------- -----------------------------
4
<PAGE>
EXHIBIT 23.1
____________________________
[LOGO] Deloitte & Touche LLP
Suite 2100
1055 Dunsmuir Street
P.O. Box 49279
Four Bentall Centre
Vancouver, British Columbia
V7X 1P4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report relating to the Clean Energy Combustion Systems, Inc. dated
November 17, 1999 on the consolidated financial statements for the period ended
October 31, 1999, in the Registration Statement on Form SB-2, Amendment No. 1,
of Clean Energy Combustion Systems, Inc.
/s/ Deloitte & Touche LLP.
CHARTERED ACCOUNTANTS
Vancouver, British Columbia, Canada
February 25, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS TABLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CLEAN ENERGY
COMBUSTION SYSTEM, INC.'S CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1999, AND
CLEAN ENERGY COMBUSTION SYSTEM, INC.'S CONSOLIDATED STATEMENT OF LOSS FOR THE
EIGHT-MONTH INTERIM PERIOD ENDED OCTOBER 31, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> MAR-1-1999
<PERIOD-END> OCT-31-1999
<CASH> 27,227
<SECURITIES> 0
<RECEIVABLES> 65,632
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 92,859
<PP&E> 52,530
<DEPRECIATION> 7,706
<TOTAL-ASSETS> 149,090
<CURRENT-LIABILITIES> 155,638
<BONDS> 0
0
251
<COMMON> 964
<OTHER-SE> (8,048)
<TOTAL-LIABILITY-AND-EQUITY> 149,090
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 508,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (508,048)
<INCOME-TAX> 0
<INCOME-CONTINUING> (508,048)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (508,048)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
