<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to ____________________
Commission File No. 0-27432
CLEAN DIESEL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 06-1393453
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(State or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification Number)
</TABLE>
Suite 702, 300 Atlantic Street
Stamford, CT 06901
(203) 327-7050
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(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $0.05 par value per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the average bid and asked prices of March 18, 1997:
$10,695,830.
Indicate number of shares outstanding of each of the registered classes of
common stock at March 18, 1997: 2,516,666 shares Common Stock, $0.05 par value.
Documents incorporated by reference:
Certain portions of the registrant's 1996 Annual Report to stockholders and of
the registrant's Proxy Statement for the annual meeting of stockholders to be
held in 1997 described in Parts II, III, and IV hereof are incorporated by
reference in this report.
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PART I
Forward-Looking Statements
Statements in this Form 10-K which are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See Item 1 "Risk Factors of the Business" and also Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 1. Business
General
The Company, a Delaware corporation with a principal place of business at
300 Atlantic Street, Stamford, Connecticut 06901, was formed in January 1994 as
a wholly-owned subsidiary of Fuel-Tech N.V. ("Fuel Tech") to further develop and
commercialize platinum fuel catalysts ("PFCs"). Fuel Tech saw market
opportunities develop after the passage of the Clean Air Act Amendments of 1990
("CAAA") and in 1992 Fuel Tech focused its research and development efforts on
the PFCs as an integral part of a diesel engine emission control program. The
rights to the PFCs were transferred by license agreements to the Company by Fuel
Tech and Platinum Plus, Inc. (an affiliate of Fuel Tech), effective October 28,
1994 (together, "the License Agreements"). In December 1995, Fuel Tech caused
1,810,853 (72.0%) of the Company's 2,516,666 outstanding shares of Common Stock,
$0.05 par value (the "Common Stock") to be publicly sold in a rights offering to
Fuel Tech stockholders. Fuel Tech retains the balance of the Common Stock.
Further information required by this item is set forth (a) on the inside
front cover of the Company's Annual Report to Stockholders for the year ended
December 31, 1996, exhibit 19 to this Report on Form 10-K (the "Annual Report"),
under the captions "Platinum Fuel Catalyst (PFC)" and "NOx Control Products,"
and (b) on page 1 and 2 of the Annual Report under the caption "Chairman's
Letter" and is incorporated by reference herein.
Regulations
Both federal and state environmental regulations in recent years have
demanded reduced emission levels from engines. Smog is a problem in a number of
industrialized areas and is caused by pollutants from engines, principally NOx
and volatile organic compounds. Particulate emissions have consistently been
linked to respiratory ailments. To address these pollution concerns, CAAA
require states to reduce NOx emissions in these areas from both stationary
sources, such as compressor engines and turbines, and mobile sources, such as
automobiles, buses and trucks. Specific regulations under Title II of the
CAAA-Provisions Relating to Mobile Sources pertain to the control of NOx and
particulates from diesel engines. These regulations also limit the sulfur
content of diesel fuel and establish new registration requirements for fuels and
fuel additives. Existing urban buses in major metropolitan areas were required
to reduce particulate emissions as of January 1995, and beginning in 1998 there
will be new NOx level standards in place for urban buses and new diesel engines.
In July 1995, the Environmental Protection Agency (the "EPA"), California Air
Resources Board and major diesel engine manufacturers signed a Statement of
Principles directed towards the development of new low NOx engines by 2004.
Under the CAAA there are so far only retrofit regulations for particulate
emissions from urban buses. EPA has, however, recently proposed further
tightening of ambient levels of ozone and particulates.
Products and Markets
Information required by this item (a) for the Company's PFC products is
set forth in the text from page 3 through page 4 of the Annual Report under the
caption "Platinum Fuel Catalysts" and the subcaptions "Platinum Plus - Europe
and Asia," "Platinum Plus - The Americas," "PFCs for Particulate Traps and
Catalytic Oxidizers," "Premium Diesel," "Total Market for PFCs," and "Health
Effects and the Use of Metallic Additives," and (b) for the Company's NOx
control products in the text from page 4 through page 5 of the Annual Report
under the caption "NOx Reduction Systems and Additives" and the subcaptions "NOx
Reduction for Heavy-Duty Diesel Engines," "Retrofit NOx Reduction for Heavy-Duty
Diesel-Engines" and "Market for NOx Reduction Systems and Additives," and (c)
with respect to marketing strategy generally, in the text of the second
paragraph under the caption "Business Structure" on page 5 of the Annual Report,
all of which information is incorporated by reference herein.
1
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Sources of Supply
Information required by this item is set forth in the first paragraph of
text in the Annual Report on page 5 under the caption "Business Structure" and
is incorporated by reference herein.
Research and Development
The Company employs six individuals, including three executive officers,
in engineering and product development as of the date of this report. During the
years ended December 31, 1996, 1995, and 1994, the Company's research and
development expenses exclusive of patent costs totaled approximately $1,747,000,
$796,000, and $441,000 respectively. The Company expenses all development costs
as incurred.
Protection of Proprietary Information
Under the license agreement with Fuel Tech, the Company holds the rights
to a number of patents and patent applications pending. There can be no
assurance that pending patent applications will be approved or that the issued
patents or pending applications will not be challenged or circumvented by
competitors. Certain critical technology incorporated in the Company's products
is protected by trademark and trade secret laws and confidentiality and
licensing agreements. There can be no assurance that such protection will prove
adequate or that the Company will have adequate remedies for disclosure of its
trade secrets or violations of its intellectual property rights.
Insurance
The Company maintains coverage for the customary risks inherent in its
operations. Although the Company believes its insurance policies to be adequate
in the amount and coverage for its current operations, no assurance can be given
that this coverage will, in fact, be or will continue to be available in
adequate amounts or at a reasonable cost or that such insurance will be adequate
to cover any future claims against the Company.
Employees
The Company has nine full-time employees. In addition, two executive
officers of Fuel Tech provide management, administrative, financial, and legal
services for the Company pursuant to a Management and Services Agreement between
Fuel Tech and the Company on an as-needed basis. The Company also retains three
outside technical consultants on specific projects related to platinum, engines,
and NOx reduction.
Risk Factors of the Business
Investors in the Company should be mindful of the following risk factors
relative to the Company's business.
Competition
Competition in the diesel fuel additive market will come from other large
additive suppliers. The Company is not currently in competition with other fuel
additive manufactures. When active marketing of the Company's PFCs is in
progress, the Company anticipates competing on the basis of price, proprietary
technology, effectiveness and ease of use of the PFCs and in efficiency of
distribution. To the Company's knowledge, it does not compete against any major
gasoline companies in the PFC market. While the company intends to seek
collaborative arrangements with additive suppliers and oil companies, there are
no assurances that these arrangements can be negotiated. Competition may also
come from alternative fuels including methanol and natural gas as well as from
mechanized adjustments to engines, new injector designs and engine rebuilds.
While the Company believes its patent position produces a strong competitive
barrier to entry, other platinum-based compounds could be developed outside the
Company's issued patents. To this end the Company is seeking collaborative
arrangement with specific platinum manufacturers.
Competition in the NOx control market will come from other suppliers of
reagent-based post-combustion NOx control systems including large,
well-established catalyst and engine manufacturing companies. The Company has
formed certain alliances to support its efforts to commercialize NOx control
products but there are no assurances that these alliances will be sufficient or
be maintained.
2
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Lack of a Viable Product; Need for Additional Research and Development
The Company was incorporated in January 1994 and, to date, has engaged
solely in research and development related to its PFC process and NOx reduction
technologies. The Company's PFC process will require substantial additional
research, development and testing in order to determine its commercial
viability. The Company has not proven its PFC technology other than in a limited
number of trials and demonstrations. If the Company successfully field tests its
PFC technology, the commercialization of the technology will require significant
additional time and expenditures. The commercialization of the technology will
depend on the Company's success in achieving cost effective production of the
PFCs, maintaining registration status with the EPA and other regulatory bodies,
and on forming strategic alliances for marketing and distribution of PFCs. The
accomplishment of some or all of these objectives may be delayed or may never
occur. If the accomplishment of any of these objectives is delayed, the Company
may require additional capital to continue the development and commercialization
of the PFC technology, and there can be no assurance that such capital will be
available.
No Revenues to Date; Continuing Operating Losses
The Company has had no revenues through December 31, 1996. The Company
expects to continue to incur operating losses through at least 1997. There can
be no assurance that the Company will achieve or sustain significant revenues or
profitability in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
No Assurances of Additional Funding
The Company may in the future seek additional funding in the form of a
public or private offering of additional shares of the Company's Common Shares.
Any offering of the Company's Common Shares may result in immediate and
significant dilution to the stockholders of the Company. The ability of the
Company to consummate a public offering or to obtain other financing will depend
on the status of the Company's research and development and marketing programs
and clinical trials, as well as conditions then prevailing in the relevant
capital markets. There can be no assurance that such funding will be available
when needed or on terms acceptable to the Company. In the event that the Company
is unable to raise additional funds, the Company may be required to delay, scale
back or severely curtail its development efforts or otherwise impede its ongoing
clinical trials, which could have a material adverse effect on the Company's
business, operating results, financial condition and long-term prospects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Limited Marketing Experience
The Company intends to enter into strategic alliances with marketing
partners. In addition to its supply agreement with Holt Lloyd International
Ltd., it is currently engaged in cooperative development and test programs with
potential marketing partners and is in discussion with others with a view
towards conducting similar programs. The Company is targeting to have one or
more additional strategic alliance agreements for marketing purposes concluded
within 1997; however, there can be no assurance that the Company will
successfully implement its sales and marketing plan.
Possible Volatility of Stock Price
There has been significant volatility in the market prices of
publicly-traded shares of emerging growth technology companies. Factors such as
announcements of technical developments, establishment of strategic alliances,
changes in governmental regulation, and developments in patent or proprietary
rights may have a significant effect on the market price of the Company's Common
Shares.
Relationship with Fuel Tech; Conflicts of Interest
Directors and officers of Fuel Tech and its subsidiaries who are also
directors and officers of the Company, and Fuel Tech as the Company's largest
stockholder, are in positions involving the possibility of conflicts of interest
with respect to transactions concerning the Company. The Company currently has
only one independent director, but may seek some in the future. See Item 13,
"Certain Relationships and Related Transactions".
3
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Lack of Diversification
The Company is engaged in only one principal business, involving the
development and commercialization of technology to control emissions from
internal combustion engines through the manufacturing and marketing of its PFCs
and by other products, such as emulsions and urea SCR systems. The Company does
not expect to have any material sources of revenues from other than the PFCs in
the foreseeable future. An adverse development in the Company's business as a
result of competition, technological change, government regulation, or any other
factor could have a significantly greater impact than if the Company maintained
diverse operations.
Expansion into New Markets
The Company's strategy is to expand beyond PFCs to other types of
emission control products for combustion engines, particularly for NOx control.
There can be no assurance that the Company will be successful in manufacturing
its PFCs cost-effectively or meet the future demand for emission-reducing fuel
additives or NOx control products. Failure to gain market acceptance (either in
the engineering or regulatory communities or in the general public) would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business --- Markets."
Dependence upon Third Party Technology
While the PFCs may be used alone for moderate levels of emission control,
it is expected that the product will be integrated into other systems using
third party technology to achieve higher levels of control. The adoption of the
use of PFCs in such systems will depend on the effectiveness of third party
technology, the ability of third parties to market their products, and the
compatibility of the PFCs and NOx control products with their systems. Failure
of these third party systems to gain market acceptance or failure of the PFCs
and NOx control products to prove compatible and effective with third party
systems could have an adverse effect on the Company's business, operating
results, and financial condition. See "Business --- Markets."
Uncertainty of Market Acceptance
The commercial success of the Company's products will depend upon
acceptance by the fuel additive, oil and engine industries, and acceptance by
governmental regulatory bodies. This market acceptance will in turn depend upon
competitive developments and the Company's ability to demonstrate the efficacy,
cost-effectiveness, safety and ease of use of PFCs and NOx control products of
the Company. The failure by the Company to receive market acceptance for PFCs
and NOx control products would have an adverse effect on the Company's business,
operating results and financial condition. See "Business --- Markets."
No Assurance of Necessary Regulatory Approvals
The Company's products and manufacturing activities are subject to
governmental regulation, principally by the EPA and corresponding foreign and
state agencies. The EPA administers the CAAA. The Company is subject to the
standards and procedures contained in such act and the regulations promulgated
thereunder, as well as similar standards, procedures, and regulations of
international regulatory authorities, and is subject to inspection by the EPA
and other regulatory bodies for compliance with such standards, procedures, and
regulations. Failure to receive appropriate approvals or to comply with EPA and
similar foreign regulations could result in civil monetary or criminal
sanctions, restrictions on or injunction against marketing of the Company's
products as well as seizure or recall of the Company's products, or other
regulatory actions. PFCs received registration from the EPA to be used as an
aftermarket treatment of individual vehicles and in bulk fuel supplies for
diesel. CDT has recently received registration status under EPA fuel additive
regulations for three additional PFCs with the original PFCs. CDT currently has
until May 1997 to submit information regarding the potential health impacts of
additive emissions under Federal regulations issued in May 1994 pertaining to
all fuel and fuel additives. The Company has received assurance from the U.K.
Government that the PFCs are not allergenic and emissions would be below levels
causing human toxicity. See "Business --- General."
No Assurance of Protection of Patents and Proprietary Rights
The Company holds licenses to a number of patents and has patent
applications pending. There can be no assurance that pending patent applications
will be approved or that the issued patents or pending applications will not be
challenged or circumvented by competitors. Certain critical technology
incorporated in the Company's products is protected by trademark and trade
secret laws and confidentiality and licensing agreements. There can be no
assurance that such protection will prove adequate or that the Company will have
adequate remedies for disclosure of its trade secrets or violations of its
intellectual property rights. See "Business --- Patents; Protection of
Proprietary Information."
4
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Platinum Price Volatility
The cost of platinum will have a direct impact on the future pricing and
profitability of PFCs. Although the Company intends to minimize this risk
through various purchasing and hedging strategies, there can be no assurance
that the Company will be able to do so. A significant increase in the price of
platinum could have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on Attracting and Retaining Personnel
The success of the Company will depend, in large part, on the Company's
ability (i) to retain current key personnel, (ii) to attract and retain
additional qualified management, scientific and manufacturing personnel, and
(iii) to develop and maintain relationships with research institutions and other
outside consultants and luminaries. The loss of key personnel or the inability
of the Company to hire or retain qualified personnel, or the failure to
assimilate effectively such personnel could have a material adverse effect on
the Company's business, operating results and financial condition. See "Business
- --- Employees."
No Dividends
The Company has to date not paid dividends on its Common Stock and does
not intend to pay any dividends to its stockholders in the foreseeable future.
The Company currently intends to reinvest earnings, if any, in the development
and expansion of its business. See Item 5, "Market for Registrant's Common
Equity and Related Stockholder Matters."
Item 2. Properties
Facilities
The Company has leased for administrative purposes 2,900 square feet of
office space at 300 Atlantic Street, Stamford, Connecticut effective February 1,
1996 through February 28, 1999. Annual base rent under this lease is $65,250.
Patents and Licenses
The Company's technology is comprised of patents, patent applications,
trade or service marks, data and know-how. This technology is held under two
license agreements effective as of October 28, 1994 from Fuel Tech, for use
outside the U.S., and from Platinum Plus, Inc., a subsidiary of Fuel Tech, Inc.,
which is a direct subsidiary of Fuel Tech, for use in the U.S. These agreements,
which expire in 2008, each provide the Company with an exclusive license,
including the right to sublicense the technology. They provide for running
royalties commencing in 1998 of 2.5% of gross revenues derived from the PFCs.
The Company may at any time purchase legal title to the technology and terminate
the agreements by payment of the aggregate amount of $12,000,000 to the
licensors. The agreements require the Company to maintain the technology at its
expense. Neither party to either agreement may promote or sell within the
defined territory of each agreement any other metallic fuel additive competitive
with the defined technology. Either party to either agreement may terminate such
agreement upon a material breach of the other party which remains uncured for 45
days after notice. A material breach of the Company would include failure to
render payments when due or the bankruptcy or insolvency of the Company.
The Company has, under its exclusive license from Fuel Tech, nine U.S.
and sixteen foreign patents for PFCs. Fourteen patent applications are also
pending in the U.S. and sixty foreign applications are pending, including five
applications filed under the patent cooperation treaty. The key aspect of these
patents, which were filed for diesel and gasoline applications and have claims
concerning platinum group metals compositions, manufacturing methods and
applications, is the protection of the platinum group metal compounds which are
soluble and stable in the fuel and actively catalyze the combustion of the fuel.
Item 3. Legal Proceedings
The Company is not involved in legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1996, no matters were submitted to a vote of
the Company's security holders.
5
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information required by this Item is set forth under the caption
"Stockholder Information" on the inside back cover of the Annual Report and is
incorporated by reference herein. The Company's Common Stock became first
publicly traded on December 26, 1995.
Item 6. Selected Financial Data
Information required by this Item is set forth under the caption
"Selected Financial Data" on page 8 of the Annual Report and is incorporated by
reference herein.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information required by this Item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 6 of the Annual Report and is incorporated by reference
herein.
Item 8. Financial Statements
Information required by this Item is set forth on pages 9 through 18 of
the Annual Report and is incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of the Company
will be set forth under the captions "Election of Directors," and "Directors and
Executive Officers of the Company" in the Company's proxy statement related to
the 1997 annual meeting of stockholders (the "Proxy Statement") and is
incorporated by reference herein.
Item 11. Executive Compensation
Information required by this item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and is incorporated by reference
herein excluding, however, the information under the captions "Report of the
Board of Directors on Executive Compensation" and "Performance Graph" which is
not incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item will be set forth under the caption
"Principal Stockholders and Stock Ownership of Management" in the Proxy
Statement and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
Information required by this item will be set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated by reference herein.
6
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Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a). (1) Financial Statements
The Financial Statements required by Part II, Item 8 of Form 10-K are
included in the Annual Report, pages 9 through 18 and are incorporated by
reference herein.
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of the conditions
under which they are required or because the required information where
material is shown in the Financial Statements or the notes thereto.
(3) Exhibits
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EXHIBIT NO. TITLE Page No.
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*3(i) Certificate of Incorporation, as amended.
*3(ii) By-Laws.
*4a Specimen Stock Certificate.
*10b License Agreement between Fuel Tech and the
Company, effective October 28, 1994.
*10c License Agreement between the Company and Platinum
Plus, Inc., effective October 28, 1994.
**10d The Company's 1994 Incentive Plan, as amended
through August 8, 1996.
****10e Management Services Agreement between the Company,
Fuel Tech, Inc. and Fuel Tech, dated as of June 1, 1996.
*10f Memorandum of Understanding between the Company and
Anglo American Platinum Corporation Ltd., dated August 15, 1995.
*10g Promissory Note of the Company to Fuel Tech, dated July 1, 1995.
***10h Office Premises Lease of January 26, 1996.
**10i Registration Rights Agreement between the Company and Fuel Tech
of March 17, 1997.
*14 Material Foreign Patents (filed with Exhibit 10b).
**19 Annual Report of the Company to Stockholders for the year 1996.
**23.1 Consent of Auditors, Ernst & Young LLP, dated March 28, 1997.
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* Previously filed as Exhibit to Registration Statement on Form S-1 of
August 16, 1995, No. 33-95840 and incorporated by reference herein.
** Filed herewith.
*** Previously filed as an Exhibit to Form 10-K for the year ended December
31, 1995, and incorporated by reference herein.
**** Previously filed as an Exhibit to Form 10-Q for the quarter ended
September 30, 1996, and incorporated by reference herein.
(b). Reports on Form 8-K
No reports on Form 8-K were filed by the Company for the fourth quarter
of 1996.
7
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Clean Diesel Technologies, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC.
March 28, 1997 By: /s/ Jeremy D. Peter-Hoblyn
------------------ --------------------------
Date Jeremy D. Peter-Hoblyn
Chief Executive Officer,
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of Clean
Diesel Technologies, Inc. and in the capacities and on the dates indicated.
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<S> <C> <C>
/s/ Ralph E. Bailey Director and Chairman of the Board of Directors March 28, 1997
-------------------------
Ralph E. Bailey
/s/ Jeremy D. Peter-Hoblyn Chief Executive Officer, President and Director March 28, 1997
------------------------- (principal executive officer)
Jeremy D. Peter-Hoblyn
/s/ Scott M. Schecter Chief Financial Officer, Vice President and March 28, 1997
------------------------- Treasurer (principal financial and accounting
Scott M. Schecter officer)
/s/ James M. Valentine Director, Chief Operating Officer, and March 28, 1997
------------------------- Executive Vice President
James M. Valentine
/s/ Kent D. S. Durr Director March 28, 1997
-------------------------
Kent D. S. Durr
/s/ John A. de Havilland Director March 28, 1997
-------------------------
John A. de Havilland
/s/ Charles W. Grinnell Director, Vice President and Corporate Secretary March 28, 1997
-------------------------
Charles W. Grinnell
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<PAGE>
EXHIBIT 10d
CLEAN DIESEL TECHNOLOGIES, INC.
1994 INCENTIVE PLAN
As amended through August 8, 1996
1. Purpose and Effective Date
The purpose of this 1994 Incentive Plan of Clean Diesel Technologies,
Inc., a Delaware corporation ("the Corporation") is to further the interests of
the Corporation and its shareholders by providing incentives in the form of
awards to such directors, officers, employees, consultants or advisors to the
Corporation as the directors shall determine are key to the continued success
and profitability of the Corporation. The Plan is intended to retain
Participants with significant training, experience and ability; to attract new
Participants whose services are considered valuable; and to encourage such
Participants to acquire a proprietary interest in the Corporation. So that the
maximum incentive can be provided each Participant in the Plan by granting to
such participant an Award best suited to the circumstances, the Plan provides
for granting, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted
Shares, Performance Awards, Bonuses, Other Awards, or any combination of the
foregoing.
This Plan shall become effective upon its adoption by the Board,
subject to approval within one (1) year of such adoption by the Corporation's
shareholders, and shall remain effective until terminated by resolution of the
Board.
2. Definitions
As used in this Plan:
(1) "Award" means the grant hereunder, and by consent of the
Participant, awards or options granted previously by the Corporation of any form
of Option, Stock Appreciation Right, Restricted Share, Performance Award, Other
Award, Bonus, or any other form of Share based or non-Share based Award.
(2) "Award Agreement" means a written agreement between the Corporation
and a Participant that sets forth the terms, conditions and limitations
applicable to an Award.
(3) "Beneficiary" means, where a Participant is with respect to any
Award not forfeitable by its terms on the death of the Participant entitled to
any unpaid portion thereof, such person or persons entitled thereto under the
Participant's will or under the laws of descent and distribution.
<PAGE>
(4) "Board" means the Board of Directors of the Corporation.
(5) "Bonus" means any payment under ss. 6.5.
(6) "Change in Control" has the meaning set forth in ss. 8.
(7) "Code" means the United States Internal Revenue Code of 1986, as
amended and in effect from time to time, or any successor statute.
(8) "Committee" means the Committee of the Board or any successor
committee as described in Section 3.1, or, if there shall be no such Committee,
the Board.
(9) "Corporation" means Clean Diesel Technologies, Inc., a Delaware
corporation, or any successor corporation, and its subsidiaries and affiliates,
incorporated or otherwise, in which the Corporation shall own directly or
indirectly at least fifty percent (50%) of the interests.
(10) "Employee" means any individual who is a salaried employee on the
payroll of the Corporation.
(11) "Exchange Act" means the Securities Exchange Act of 1934, as
amended and in effect from time to time, or any successor statute.
(12) "Fair Market Value Per Share" in reference to the common stock of
the Corporation means such value as shall be determined by the Board or a
Committee thereof, as the case may be, responsible from time to time for the
administration of the Plan.
(13) "Non-Qualified Stock Option" shall mean a stock option which is
not an Incentive Stock Option within the meaning of S. 422 of the Code.
(14) "Option" means an Award to purchase Shares granted pursuant to ss.
6.1.
(15) "Participant" means any director, officer, employee, consultant or
advisor who is granted an Award under this Plan. Except that consultants and
advisors shall not include those rendering services in connection with the offer
or sale of the Corporation's securities in a capital raising transaction.
(16) "Performance Award" has the meaning described in ss. 6.4.
(17) "Plan" means this 1994 Incentive Plan of Clean Diesel
technologies, Inc., as amended from time to time.
(18) "Restricted Shares" means Shares which have certain restrictions
attached to the ownership thereof, which may be issued under ss. 6.3.
(19) "Retirement" means termination of a Participant's
\
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employment with the Corporation by retirement under the normal, mandatory, early
and applicable age plus service or other provision of the applicable retirement
plan of the Corporation or a subsidiary or affiliate of the Corporation, or, if
there shall be no such plan or plans, then under such procedures as the Company
or its subsidiaries and affiliates may from time to time establish.
(20) "Rule 16b-3" means such rule as promulgated by the Securities and
Exchange Commission under the Exchange Act as now in force or as such regulation
or successor regulation shall be hereafter amended.
(21) "Shares" mean shares of common stock of the Corporation.
(22) "Share Unit" means the right to receive a payment equivalent in
value to one Share on the date of payment.
(23) "Stock Appreciation Right" means a right which may be issued under
ss. 6.2, the value of which is determined relative to the appreciation in value
of Shares.
(24) "Totally Disabled" means a condition of a Participant found by a
qualified physician selected by the Corporation to be that as described in ss.
22(e)(3) of the Code or as such Section or successor section shall be hereafter
amended.
(25) "Non-Employee Director" means a director as defined in
Rule 16b-3.
3. Administration
3.1 Committee
(a) This Plan shall be administered by the Board. The Board
may, however, appoint a Committee to administer the Plan which shall
consist of not less than a sufficient number of Non-Employee Directors
so as to qualify the Committee to administer this Plan as contemplated
by Rule 16b-3 and to that end the Board may limit the participation of
Committee members in the Plan to formula based or other awards. The
Board may remove members from or add members to the Committee.
Vacancies on the Committee shall be filled by the Board.
(b) To the extent permitted by ss. 13.3, the Board or
Committee is authorized to (i) determine the persons who shall be
Participants in the Plan and which Awards shall be granted to
Participants, (ii) establish, amend and rescind rules, regulations and
guidelines relating to the Plan as it deems appropriate, (iii)
interpret and administer the Plan, Awards and Award Agreements, (iv)
establish, modify and terminate terms and conditions of Award
Agreements, (v) grant waivers and accelerations of Plan, Award and
Award Agreement restrictions and (vi) take any other action necessary
for the
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proper administration and operation of the Plan.
(c) The Board or Committee may designate persons and
entities other than its members, including but not limited to, any
successor committee, the Chief Executive officer, and the Corporate
Secretary, to carry out any of its responsibilities under and described
in this Plan, under such conditions or limitations as the Board or
Committee may establish, other than its authority with regard to
participants, if any, who are subject to ss. 16 of the Exchange Act.
3.2 Effect of Determinations
Determinations of the Board or Committee and its designees shall be
final, binding and conclusive on the Corporation, its stockholders, Employees
and Participants. No member of the Board or Committee or any of its designees
shall be personally liable for any action or determination made in good faith
with respect to this Plan, any award, or any Award Agreement.
4. Eligibility
Persons eligible for Awards under this Plan shall consist of key
managerial and other directors, officers, employees, consultants or agents who
possess valuable experience and skills and have contributed, or can be expected
to contribute, materially to the success and profitability of the Corporation.
The Board or Committee shall determine which persons shall be Participants, the
types of Awards to be made to Participants and the terms, conditions and
limitations applicable to the Awards.
5. Shares Subject to This Plan
5.1 Maximum Number of Shares
The maximum number of Shares available for Awards under this Plan in
each calendar year during any part of which this Plan shall be in effect shall
be such fixed amount of shares as the Board shall from time to time determine
but not more than twelve and one half percent (12.5%) of the issued and
outstanding shares of the Corporation. Treasury stock shall not be deemed to be
issued and outstanding. Any and all such Shares may be issued in respect of any
of the types of Awards.
5.2 Share Accounting
Shares related to Awards that are forfeited, terminate, expire
unexercised, exchanged, settled in cash in lieu of Shares or settled in such
other manner so that a portion or all of the Shares included in an Award are not
issued to a Participant shall be available for other Awards. Any Shares not so
used shall be available for further Awards; provided, however, that in any
calendar year no more than the amount determined under ss. 5.1 above,
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shall be available for Awards. Shares issued under this Plan shall be authorized
and unissued Shares or Shares reacquired by the Corporation, as determined by
the Committee. No fractional Shares shall be issued under this Plan.
6. Awards
(a) Awards may include, but are not limited to, those described in this
ss. 6. Awards may be granted singly, in combination, or in tandem with other
Awards. Subject to the other provisions of this Plan, Awards may also be made in
combination or in tandem with, in replacement of, or as alternatives to, grants
or rights under this Plan and any other plan of the Corporation, including any
plan of any acquired entity and for the benefit of any present or former
director, officer, consultant or agent of such acquired entity. Subject to the
terms of the Awards described in this ss. 6 and the related Award Agreement, the
form of payment for Awards may be in cash, in Shares, in Share Units, or such
other form as determined by the Board or the Committee, and may be made partly
in one form and partly in one or more other forms, all as determined by the
Committee. Except as otherwise provided in this Plan, Awards shall be evidenced
by Award Agreements, the terms of which may be amended or accelerated by the
Board or Committee following the grant of any Award and need not be uniform
among Participants. Except as otherwise provided in this Plan, Awards shall be
granted for such minimum consideration as is required by applicable law, rules
and regulations, including without limitation, the then applicable Rule 16b-3,
and such additional consideration, if any, as may be determined by the
Committee.
(b) Notwithstanding anything contained in this Plan, if required by the
then applicable Rule 16b-3 or any successor provision, any "equity security"
awarded pursuant to this Plan to any participant who is subject to Section 16 of
the Exchange Act must be held by the Participant for at least six (6) months
after the award thereof. In addition, if required by the then applicable Rule
16b-3 or any successor provision, with respect to any Participant who is subject
to Section 16 of the Exchange Act, at least six (6) months must elapse from the
date of acquisition of a "derivative security" hereunder to the date of
disposition of such security. The terms "equity security" and "derivative
security" shall have the meanings described in the then applicable Rule 16b-3.
6.1 Options
Options may be granted under this Plan from time to time. If Options
are granted they shall be upon the following terms and conditions with such
additional terms and conditions, not inconsistent with the provisions of this
Plan, as the Board or Committee in its discretion shall deem desirable:
(a) Options shall be Non-Qualified Stock Options.
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(b) The option price per Share for all Options shall be not
less than one hundred per cent (100%) of the Fair Market Value Per
Share on the date the Option is granted.
(c) Award Agreements for Options shall conform to the
requirements of this Plan, and may contain such other provisions as the
Committee shall deem advisable.
(d) Award Agreements for Options shall specify when an Option
may be exercisable. An option may be exercised, in whole or in part, by
giving written notice of exercise to the Corporation specifying the
number of Shares to be purchased. Shares purchased upon exercise of an
Option shall be paid for in full at the time the Option is exercised in
cash or, with the consent of the Board or Committee, in Shares. Payment
may also be made in any other manner or form approved by the Board or
Committee, consistent with applicable law, regulations and rules.
(e) A holder of an Option shall have no rights as a
stockholder with respect to any Shares covered by such Option unless
and until the date of the issuance of the stock certificate for such
Shares.
(f) (i) If, after completion of any required period of
continuous employment or affiliation in order to exercise an Option as
provided in an Award Agreement, a Participant dies while employed by
the Corporation, such Option shall be exercisable by the Beneficiary
thereof, but after the date of death of the Participant only within the
period specified in the Award Agreement which shall not be later than
the expiration date of the Option.
(ii) Following the death of a Participant, the Board
or Committee may at its discretion, upon the request of such
Participant's Beneficiary who holds an exercisable Option and in
consideration of the surrender of such Option, pay the amount by which
the Fair Market Value per Share on the date of such request shall
exceed the Option price per Share multiplied by the number of Shares as
to which the request was made.
(g) If, after completion of any required period of continuous
employment in order to exercise an Option as provided in an Award
Agreement, a Participant is Totally Disabled or retires, such Option
shall be exercisable by the Participant, but only within the period
specified in the Award Agreement.
6.2 Stock Appreciation Rights
Stock Appreciation Rights may be granted under this Plan from
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time to time. If Stock Appreciation Rights are granted they shall be upon the
following terms and conditions, and such additional terms and conditions, not
inconsistent with the provisions of this Plan, as the Board or Committee in its
discretion shall deem desirable:
(a) A Stock Appreciation Right may be granted in tandem with
part or all of, in addition to, or completely independent of, an Option
or any other Award under this Plan. A Stock Appreciation Right issued
in tandem with an Option may be granted at the time of grant of the
related Option or at any time thereafter during the term of the Option.
(b) Award Agreements for Stock Appreciation Rights shall
conform to the requirements of this Plan and may contain such other
provisions (including but not limited to, the permitted form of payment
for the exercise of the Stock Appreciation Right, the requirement of
employment for designated periods of time prior to exercise and the
ability of the Board or Committee to revoke Stock Appreciation Rights
which are issued in tandem with options without compensation to the
Participant) as the Board or Committee shall deem advisable.
(c) Stock Appreciation Rights issued in tandem with Options
shall be subject to the following:
(i) Stock Appreciation Rights shall be exercisable at
such time or times and to the extent, but only to the extent, that the
Option to which they relate shall be exercisable.
(ii) Upon exercise of Stock Appreciation Rights the
holder thereof shall be entitled to receive a number of Shares equal in
aggregate value to the amount by which the Fair Market Value Per Share
on the date of such exercise shall exceed the option price per Share of
the related Option, multiplied by the number of Shares in respect of
which the Stock Appreciation Rights shall have been exercised.
(iii) All or any part of the obligation arising out
of an exercise of Stock Appreciation Rights may, at the discretion of
the Board or Committee, be settled by the payment of cash equal to the
aggregate value of the Shares (or a fraction of a Share) that would
otherwise be delivered under ss. 6.2(c)(ii).
(iv) Upon exercise of Stock Appreciation Rights the
unexercised tandem options of the Participant shall automatically
terminate upon the exercise of such Stock Appreciation Rights.
(v) Stock Appreciation Rights issued in tandem with
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Options shall automatically terminate upon the exercise of such
Options.
6.3 Restricted Shares
Awards of Restricted Shares may be granted under this Plan from time to
time. If Awards of Restricted Shares are granted they shall be upon the
following terms and conditions and such additional terms and conditions, not
inconsistent with the express provisions of this Plan, as the Committee in its
discretion shall deem desirable:
(a) Restricted Shares are Shares which are subject to such
terms, conditions and restrictions as the Board or Committee deems
appropriate, which may include restrictions upon the sale, assignment,
transfer or other disposition of the Restricted Shares and the
requirement of forfeiture of the Restricted Shares upon termination of
employment under certain specified conditions. The Board or Committee
may condition the lapsing of restrictions on part or all of an Award of
Restricted Shares upon the attainment of specific performance goals or
such other factors as the Board or Committee may determine. Awards of
Restricted Shares may be granted for no cash consideration or for such
minimum consideration as may be required by applicable law.
(b) Award Agreements for Restricted Shares shall conform to
the requirements of this Plan, and may contain such other terms and
conditions (including but not limited to, a description of a period
during which the Participant may not transfer the Restricted Shares and
limits on encumbering the Restricted Shares during such period) as the
Board or Committee shall deem desirable. To the extent permitted by ss.
13.3 hereof, the Board or Committee may provide for the lapse of any
such term or condition in installments and may accelerate or waive any
such term or condition in whole or in part, based on service,
performance and/or such other factors or criteria as the Board or
Committee may determine.
(c) Award Agreements for Restricted Shares shall provide that
the stock certificates representing Restricted Shares shall be
legended, that such certificates be held by a custodian or the
Corporation, or that there be other mechanisms for maintaining control
by the Corporation of the Restricted Shares until the restrictions
thereon are no longer in effect. After the lapse, waiver or release of
the restrictions imposed pursuant to the Award Agreement on any
Restricted Shares, the Corporation shall cause to be issued in the
Participant's name a stock certificate evidencing the Restricted Shares
with respect to which the restrictions have lapsed or been waived or
released, free of any legend, and
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shall cause such stock certificate to be delivered to the
Participant.
(d) Except as otherwise provided in this Plan or in the Award
Agreement, the participant shall have, with respect to Awards of
Restricted Shares, all of the rights of a shareholder of the
Corporation, including the right to vote the Restricted Shares and the
right to receive any cash or stock dividends on such Restricted Shares.
The Board or Committee may provide that the payment of cash dividends
shall or may be deferred. Any reinvestment of deferred cash dividends
shall be as determined by the Board or Committee. Stock dividends
issued with respect to restricted Shares shall be Restricted Shares and
shall be subject to the same terms, conditions and restrictions that
apply to the Restricted Shares with respect to which such dividends are
issued. Any additional Shares issued with respect to cash or stock
dividends shall not be counted against the maximum number of Shares for
which Awards may be granted under this Plan as set forth in Section 5.
(e) If the employment of a Participant is terminated prior to
the lapse of restrictions on Restricted Shares because the Participant
dies, becomes Totally Disabled or retires involuntarily the
restrictions on all Restricted Shares awarded to a participant shall
lapse on the date of such termination.
6.4 Performance Awards
Performance Awards may be granted under this Plan from time to time. If
Performance Awards are granted they shall be upon the following terms and
conditions and such additional terms and conditions, not inconsistent with the
express provisions of this Plan, as the Board or Committee in its discretion
shall deem advisable:
(a) Performance Awards are Awards which are based upon the
long-term performance of all or a portion of the Corporation or which
are based upon the long-term individual performance of a Participant.
Performance Awards may be in the form of performance units, performance
shares and such other forms of Performance Awards which the Board or
Committee shall determine to be desirable. Performance Awards are
Awards which are granted to participants contingent upon (i) the future
performance of all or a portion of the Corporation which may include,
without limitation, performance relative to a group of companies in the
same or related industries, achievement of specific business
objectives, attainment of certain growth rates, profitability goals and
such other measurements as the Board or Committee determines to be
appropriate, (ii) the future performance of a Participant,
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which may include, without limitation, attainment of specified goals
and objectives and such other measurements as the Board or Committee
determines to be appropriate, (iii) the future performance of a
combination of all or a portion of the Corporation and a participant,
or (iv) such other measurements and criteria as may be considered
appropriate by the Board or Committee. Performance Awards may contain
multiple performance measurements.
(b) Award Agreements for Performance Awards shall conform to
the requirements of this Plan and may contain such other terms and
conditions as the Board or Committee shall deem desirable, including
but not limited to, applicable performance measurements, a description
of whether performance measurements are to be used singly or in
combination, a description of whether different performance
measurements may be used for different performance periods, the length
of performance periods, the ability of the Board or Committee to amend
and adjust measurements, payouts and performance periods of performance
Awards and any requirements of employment during performance periods.
(c) Award Agreements for Performance Awards shall provide for
a required minimum period of continuous employment during a performance
period of a Performance Award. If such minimum period of continuous
employment shall have elapsed, the Award Agreement may provide, or the
Board or Committee may determine, the portion of the payment of the
Performance Award which participant or the Participant's beneficiary,
as applicable, is to receive at the end of the performance period.
6.5 Bonuses
Bonuses may be granted under this Plan from time to time on an annual
or one-time basis. The amount of Bonuses which may be awarded shall be as
determined by the Board or Committee. The Board or Committee may establish a
basis upon which aggregate Bonus expenditures for any year shall be determined,
which may include measurements of financial performance of the Corporation or of
a unit or department thereof, relative performance of the Corporation or of a
department thereof within the same or related industries, competitive
compensation considerations and other measurements and criteria.
(a) Each Bonus may be made at the discretion of the Board or
Committee either in cash, in Shares, in Share Units, or in another form
as determined by the Board or Committee and may be made partly in one
form and partly in one or more other forms. In the case of an Award of
a Bonus in Shares or Share Units, the number shall be determined by
using the Fair Market Value Per Share on the date of the Award of the
Bonus.
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(b) The payment of any Bonus shall be subject to such
obligations or conditions as the Board or Committee may specify in making or
recommending the Award of the Bonus, but Bonuses need not be evidenced by Award
Agreements.
(c) When payment of all or part of a Bonus is deferred in the
form of Shares or Share Units, the account of the Participant to whom
the Bonus was made will be credited with an amount per Share equal to
the dividends payable on each issued and outstanding Share ("dividend
equivalents"). Amounts thus credited shall, in the discretion of the
Board or Committee, either:
(i) be paid in cash as and when each such credit
shall be made, or
(ii) be credited in Shares or Share Units, with the
number determined by using the Fair Market Value Per Share on the date
of the dividend payment and delivered in such form and at such time or
times as may be determined by the Committee.
(d) When payment of all or part of a bonus is deferred in
cash, the Committee may provide that the account of the Participant to
whom the Bonus was made shall be credited with amounts equivalent to
interest ("interest equivalents"). Amounts thus credited shall be at
the rate determined by the Committee.
(e) Any Bonus payable in Shares may, in the discretion of the
Board or Committee, be paid in cash, on each date on which payment in
Shares would otherwise have been made, in an amount equal to the Fair
Market Value Per Share on each such date, multiplied by the number of
Shares which would otherwise have been paid on such date.
(f) Bonuses may be awarded in Share Units in accordance with
the following terms and conditions and such other terms and conditions
as the Board or Committee may impose:
(i) The number of Share Units awarded with respect to
any Bonus shall be the number determined by using the Fair Market Value
Per Share on the date of the Award of the Bonus.
(ii) Any Bonus made in Share Units may, in the
discretion or on the recommendation of the Board or Committee, be paid
in Shares on each date on which payment in cash would otherwise be
made.
(g) In lieu of the foregoing forms of payment of Bonuses, the
Board or Committee may specify or recommend any other form of payment
which it determines to be of
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substantially equivalent economic value to the cash value of the Bonus
including, without limitation, forms involving payments to a trust or
trusts for the benefit of one or more Participants.
(h) Each payment of a Bonus that is to be made in cash shall
be from the general funds of the Corporation or its respective
subsidiary or affiliate, as the case may be.
(i) In the event of the death of a Participant to whom a Bonus
is to be or shall have been made, the Bonus or any portion thereof
remaining unpaid shall be paid to such Participant's Beneficiary under
the Participant's will or pursuant to the relevant laws of descent and
distribution.
6.6 Other Awards
(a) The Board or Committee may grant other Share based Awards under
this Plan, including without limitation, those Awards pursuant to which Shares
are or may in the future be acquired, Awards denominated in Share Units,
securities convertible into Shares and dividend equivalents. The Board or
Committee shall determine the terms and conditions of such other Share based
Awards. Shares issued in connection with such other Share based Awards shall be
issued for such minimum consideration as shall be required by applicable law,
rules and regulations, including the then applicable Rule 16b-3, and such
additional consideration, if any, as may be determined by the Board or
Committee.
(b) The Board or Committee may also grant other non-Share based Awards
under this Plan and shall determine the terms and conditions of such other
non-Share based Awards in tandem or combination with other Awards or each other,
in exchange of other Awards, or in tandem or combination with, or as
alternatives to grants or rights under any other employee plan of the
Corporation, including any plan of any acquired entity. The Board or Committee
shall have the authority to determine the Participants for such Awards and all
other terms and conditions of such other Awards. No amendment of this Plan is
required for the creation of another type of Award.
7. Adjustments Upon Changes in Capitalization
(a) Subject to any required action by the Corporation's stockholders,
in the event of a reorganization, recapitalization, stock split, stock dividend,
exchange of Shares, combination of Shares, merger, consolidation or any other
change in corporate structure of the Corporation affecting the Shares, or in the
event of a sale by the Corporation of all or a significant part of its assets,
or any distribution to its shareholders other than a normal cash dividend, the
Board or Committee may make appropriate adjustment in the number, kind, price
and value of Shares
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authorized by this Plan and any adjustments to outstanding Awards as it
determines appropriate so as to prevent dilution or enlargement of rights.
(b) The existence of an Award under this Plan shall not affect in any
way the right or power of the Company or its shareholders to make or authorize
any or all adjustments, recapitalizations, reorganizations or other changes in
the Company's capital structure or its business, or any merger or consolidation
of the Company, or any issue of bonds, debentures, preferred or prior preference
stocks, ahead of or affecting the Stock or rights thereunder or convertible
thereto, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business or any other corporate act
or proceeding, whether of a similar character or otherwise.
(c) Awards granted hereunder prior to June 30, 1995 with respect to
Shares shall be adjusted as to the number thereof, in the event of the issuance
or reacquisition of Shares for any reason by the Corporation, so as to maintain
the ratio of the number of Shares with respect to such Awards outstanding on
June 30, 1995 to the number of the Corporations's issued and outstanding Shares
on such date; provided, however, that (i) where the Corporation shall issue
securities convertible into Shares or options or warrants for purchase of
Shares, no such adjustment shall be required until the conversion of securities
into or the purchase of Shares and (ii) upon any such adjustment the exercise
price of additional Shares upon a Participant's Award shall be the purchase
price (or fair market value of consideration therefor) of Shares issued which
initiated the adjustment and the Shares originally granted by the Award shall
carry the original exercise price therof. This Section 7 (c) shall expire and be
of no further force and effect after the first public offering of common stock
of the Corporation. The adjustments contemplated by this Section, however, shall
be effected with respect to shares issued in such public offering. A "Public
Offering" shall mean shares issued only pursuant to an effective registration
statement filed with the Securities and Exchange Commission.
8. Change in Control
8.1 Definition of Change in Control
A "Change in Control" shall be deemed to have occurred if any one or
more of the events described in paragraphs (a), (b) or (c) below occurs.
(a) Any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (including any group of persons with which
any person or its affiliates or associates, as such terms are defined
in Rule 12b-2 under the Exchange Act has any agreement, arrangement or
understanding, oral or written,
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regarding the acquiring, holding, voting or disposing of any of the
Corporation's securities, but excluding a trustee or other fiduciary
holding securities under an employee benefit plan of the Corporation)
(i) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing fifty one percent (51%) or more of the combined voting
power of the Corporation's then outstanding securities (hereinafter
referred to as an "Acquiring Person"); or
(b) In any two year period persons being a majority of the
Board shall cease to be so unless the nomination of the new directors
during such period was approved by at least a majority of the directors
then still in office who were directors at the beginning of the period;
or
(c) A consolidation or merger or "Business Combination," as
that term is defined as of the effective date of this Plan in Section
203(c)(3) of The General Corporation Law of Delaware, of the
Corporation shall occur (with the term "interested shareholder" as used
in that Section being deemed to refer to an Acquiring Person) in which
the Corporation is not the surviving Corporation and pursuant to which
the Corporation's shares are converted to cash, securities or other
property, but not a business combination where shareholders of the
Corporation prior to the business combination have substantially the
same proportionate ownership in a business entity after the merger; or
(d) The Shareholders of the Corporation shall approve any plan for
liquidation or dissolution of the Corporation not otherwise involving a
transaction where shareholders of the Corporation prior to the
transaction have substantially the same proportionate ownership of a
business entity after the transaction.
(e) In no event, however, shall a Change in Control be deemed to
have occurred with respect to a Participant, if that Participant is
part of an Acquiring Person which consummates the Change in Control
transaction. A Participant shall be deemed "part of an Acquiring
Person" for purposes of the preceding sentence if the Participant is an
equity participant or has agreed to become an equity participant in the
Acquiring Person (except for (i) passive ownership of less than three
percent of the securities of the Acquiring Person; or (ii) ownership of
equity participation in the Acquiring Person which is otherwise not
deemed to be significant, as determined prior to the Change in Control
by a majority of the disinterested Continuing Directors).
8.2 Effect of Change in Control
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Upon the occurrence of an event of Change in Control, unless otherwise
with respect to any Award specifically prohibited by the terms of the second
paragraph of Section 6:
(a) Any and all Options and Stock Appreciation Rights
shall become immediately exercisable.
(b) Any restriction periods and restrictions imposed on
Restricted Shares (except such as may be required by relevant
securities laws) shall lapse, and within ten (10) business days after
the occurrence of a Change in Control, the stock certificates
representing Restricted Shares, without any restrictions or legend
thereon (except a legend as may be required by relevant securities
laws), shall be delivered to the applicable Participants;
(c) The goal, objective, target value or the like, attainable
under all performance Awards shall be deemed to have been fully earned
for the entire performance period as of the effective date of the
Change in Control, except that all performance Awards which shall have
been outstanding less than six (6) months on the effective date of the
Change in Control shall not be deemed to have earned the goal,
objective, target value, or the like; and
(d) Subject to ss. 14.3 hereof, all such other actions and
modifications to the Awards as determined by the Board or Committee to
be appropriate before the Change in Control of the Corporation shall
become effective.
9. Relationship of the Plan to Benefit Plans
The amount of Bonuses to any Participant under this Plan shall be
eligible for inclusion in the Participant's earnings base for the purpose of
determining the benefits to which the Participant is entitled under retirement,
pension, excess benefit, thrift, savings, profit-sharing, insurance, long-term
disability and other benefit plans, if any, of the Corporation as determined by
the Board or Committee. No other income of a Participant attributable to this
Plan shall be included in the Participant's earnings for purposes of any benefit
plan in which the Participant may be eligible to participate.
10. Effect of the Plan On Right to Continued Employment and
Interest in Particular Property
(a) None of the existence of this Plan, any Awards granted pursuant
hereto or any Award Agreement shall create any right to continued employment of
any Participant by the Corporation. No Participant shall have, under any
circumstances, any interest whatsoever, vested or contingent, in any particular
property or asset of the Corporation or in any particular Share or Shares of
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the Corporation that may be held by the Corporation (other than Restricted
Shares held by a custodian) by virtue of any Award. A Participant may be granted
additional Awards under this Plan under such circumstances and at such times as
the Board or Committee may determine; provided, however, that no Participant
shall be entitled to any Award in the absence of a specific grant by the Board
or Committee of an Award, notwithstanding the prior grant of an Award to such
Participant.
(b) This Plan shall not be deemed a substitute for, and shall not
preclude the establishment or continuation of any other plan, practice or
arrangement that may now or hereafter be provided for the payment of
compensation, special awards or benefits to directors, officer, employees,
consultants and agents of the Corporation and its subsidiaries generally, or to
any class or group of employees, including without limitation, any retirement,
pension, excess benefit, thrift, savings, profit-sharing, insurance, long-term
disability, health care plans or other employee benefit plans. Any such
arrangements may be authorized by the Corporation and payment thereunder made
independently of this Plan.
11. Withholding Taxes and Deferrals
11.1 Cash Withholding
The Corporation and its participating subsidiaries shall have the right
to deduct from any cash payment made under Awards under this Plan any federal,
state, provincial or local income, or other taxes required by law to be withheld
with respect to such payment or to take such other action as may be necessary in
the opinion of the Corporation to satisfy all obligations for the payment of
such taxes.
11.2 Share Withholding
Any Share based Award may provide by the grant thereof that the
recipient of such Award may elect, in accordance with any applicable laws, rules
and regulations, to pay a portion or all of the amount of such minimum required
withholding taxes in Shares. In such event, the Participant shall authorize the
Corporation to withhold, or shall agree to deliver to the Corporation, Shares
owned by such Participant or a portion of the Shares that otherwise would be
distributed to such Participant, having a Fair Market Value equal to the amount
of withholding tax liability.
11.3 Deferrals
The Board or Committee may require or permit a Participant to defer
such Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise, the
satisfaction of any requirements or
- 16 -
<PAGE>
goals or lapse or waiver of restrictions of an Award made under this Plan. If
any such deferment election is required or permitted, the Board or Committee
shall establish rules and procedures for such payment deferrals.
12. Compliance With Applicable Legal Requirements
No certificate for Shares distributable pursuant to this Plan shall be
issued and delivered unless the issuance of such certificate complies with all
applicable legal requirements including, without limitation, compliance with the
provisions of applicable state securities laws, the Securities Act of 1933, as
amended from time to time or any successor statute, the Exchange Act and the
requirements of the exchanges on which Shares may, at the time, be listed, and
the provisions of any foreign securities laws or the rules of foreign securities
exchanges, where applicable.
13. Amendments
13.1 Plan Amendments
The Board may, insofar as permitted by law, from time to time, with
respect to any Shares at the time not subject to Awards, suspend or discontinue
this Plan or revise or amend it in any respect whatsoever, provided, however,
unless the Committee or the Board, as appropriate, specifically otherwise
provides, any revision or amendment that would cause this Plan to fail to comply
with any requirement of applicable law, regulation or rule if such amendment
were not approved by the stockholders of the Corporation shall not be effective
unless and until the approval of the stockholders of the Corporation is
obtained.
13.2 Award Amendments
Subject to the terms and conditions and within the limitations of this
Plan, the Board or Committee may amend, cancel, modify, or extend outstanding
Awards granted under this Plan.
13.3 Rights of Participants
No amendment, suspension or termination of this Plan nor any amendment,
cancellation or modification of any outstanding Award or Award Agreement that
would adversely affect the right of any Participant with respect to an Award
previously granted under this Plan will be effective without the written consent
of the affected participant. Such written consent may be obtained simultaneously
with the grant of any Award.
13.4 Rule 16b-3
This Plan is intended to comply with Rule 16b-3 with respect to
Participants, if any, who are subject to ss. 16 of the Exchange
- 17 -
<PAGE>
Act and in the event that the Corporation shall become subject to said ss. 16.
Should the requirements of Rule 16b-3 change, the Board or the Committee, as
appropriate, may amend the Plan to comply with the requirements of the amended
Rule 16b-3 or its successor provision or provisions.
14. Miscellaneous Provisions
14.1 Awards in Various Countries
The Board or Committee shall have the authority to adopt such
modifications, procedures and subplans as may be necessary or desirable to
comply with provisions of the laws of various countries in which the Corporation
or its subsidiaries may operate to assure the viability of the benefits of
Awards made to participants employed in such countries and to meet the
objectives of this Plan.
14.2 Transferability
(a) Awards may not be pledged or assigned and may otherwise be
transferred only to the extent provided herein or in an Award Agreement not
inconsistent herewith, provided, however, that an Option or Stock Appreciation
Right or any other benefit or Award hereunder deemed to be a derivative security
shall not be transferable other than by will or the laws of descent and
distribution and shall be exercisable during a Participant's lifetime only by
him or by his guardian or legal representative or pursuant to a "qualified
domestic relations order" as defined by the Code, or such order under the laws
of other jurisdictions as shall be similar in effect to a qualified domestic
relations order.
(b) Notwithstanding the foregoing, however, a Participant may, with the
consent of the Board or Committee and subject to such terms and conditions as
they may impose, assign or transfer an Award to or among immediate family
members, their issue or spouses or to a trust or family partnership of which
such immediate family members, their issue or spouses, are beneficiaries or
partners, as the case may be.
14.3 Cancellation of Awards
Except as otherwise provided in this Plan or in applicable Award
Agreements, the terms of which need not be uniform among Participants, if a
participant to whom an Award is granted ceases to be employed by the Corporation
all of such Participant's unexercised Awards and Awards on which there are
restrictions shall be immediately canceled.
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<PAGE>
14.4 Arbitration; Governing Law
(a) The Shares are registered in the United States under the Exchange Act
and are listed for trading on the United States stock exchange known as The
NASDAQ Stock Market, Inc. Any and all disputes whatsoever between a Participant
and the Corporation concerning the administration of this Plan, the
interpretation and effect of an Award Agreement or of this Plan or the rights of
a Participant under an Award Agreement shall be finally determined before one
neutral arbitrator in the City of Stamford, Connecticut, U.S.A. under the rules
of commercial arbitration of the American Arbitration Association then in effect
and judgment upon any award by such arbitrator may be entered in any Court
having jurisdiction or application may be made to such court for a judicial
acceptance of the award and an order of enforcement, as the case may be. The
arbitrator hereunder shall have no power or authority to award consequential,
punitive or statutory damages.
(b) This Plan, its administration and all Awards granted hereunder, the
terms and provisions of any related Award Agreements and the rights of all
Participants shall be governed and interpreted in accordance with the laws of
Connecticut U.S.A.
- 19 -
<PAGE>
EXHIBIT 10i
March 24, 1997
Fuel-Tech N.V.
Castorweg 22-24
Curacao, Netherlands Antilles
Attn: Mr. Kent D.S. Durr, Chairman and
Managing Director
Re: Stock Registration Rights
Dear Mr. Durr:
The following sets forth our proposal for registration rights to be
granted Fuel-Tech N.V. ("FT") over Clean Diesel Technologies, Inc.
("CDT") securities which it may own. If you are in accord with the
following, please sign below where indicated.
In connection with any proposed sale by FT of quantities of CDT securities which
FT may own and for which FT shall be required to deliver a statutory prospectus
covered by an effective registration statement, FT shall have the following
registration rights:
1. One registration on demand; and
2. An unlimited number of "piggy-back"
registrations.
In the event of any registration hereunder each selling shareholder, whether CDT
or FT, shall pay all costs involved in such registration including legal,
accounting, investment banking advice and the printing of reasonable
requirements for prospectuses pro-rata to the shares being sold by such selling
shareholders.
Notwithstanding the foregoing, however, FT shall pay or absorb costs involved in
any such registration which (i) it voluntarily assumes to protect its interests,
such as legal fees for its own counsel and (ii) are associated with the task of
furnishing financial statements, if any, and other information concerning FT
required to be included in the registration statement.
A "registration" shall mean an effective registration statement, with
post-effective amendments as required) under the United States securities laws
and such other proceedings as may be required under the securities or "blue sky"
laws of the various states of the United States so that FT may legally sell or
offer to sell the quantities of the CDT securities owned by it which it desires
to sell or offer to sell for at least a period of six months from the
commencement of the effectiveness of the registration statement.
<PAGE>
A "piggy-back" registration shall mean a registration of securities to be sold
or offered for sale by CDT on its own behalf or on behalf of sellers other than
FT (other than for employee benefit plans stock options or the like) in which FT
shall participate as a selling securities holder.
In any registration hereunder CDT shall be entitled, after consultation with FT,
to select the managing underwriter and FT shall (i) indemnify and defend CDT for
misstatements or omissions of fact concerning FT furnished by FT and required to
be included in a registration statement and (ii) shall be guided as to the
timing and quantities of securities to be sold or offered for sale by the
independent advice of the managing underwriter of the proposed offering.
In the event of a demand registration CDT may itself participate and offer
securities on its own behalf with FT acting as a selling securities holder so
long, however, as FT shall have reasonable assurance that such arrangement will
not interfere with FT's intended sale of securities.
Clean Diesel Technologies, Inc.
By: /s/ J.D. Peter-Hoblyn
--------------------------
Jeremy D. Peter-Hoblyn
President
Agreed to and Accepted
as of the 24th day of March, 1997
Fuel-Tech N.V.
By: /s/K.D.S. Durr
---------------------------
Kent D.S. Durr
Chairman and Managing Director
<PAGE>
EXHIBIT 19
Clean Diesel Technologies, Inc.
1996 Annual Report
LOGO
<PAGE>
LOGO
Clean Diesel Technologies(TM) (NASDAQ: CDTI)
The Company is developing and commercializing proprietary technologies, products
and systems to improve efficiency and to reduce emissions from diesel and
gasoline engines.
The Company is focused on two areas:
PLATINUM FUEL CATALYST (PFC)
The Company's PFCs are marketed under the Platinum Plus(R) trademark. They are
organo-metallic compounds of platinum group metals. Using the PFC, minute
amounts of platinum catalyst are continually deposited in the engine, thereby
improving combustion within the engine. They then travel through to the exhaust
where they increase the catalytic activity of the exhaust treatment system.
The PFCs enhance the performance of diesel catalytic oxidizers and particulate
traps as well as gasoline catalytic converters.
Sales of the Platinum Plus products have started in 1997 through a cooperative
marketing agreement with Holt Lloyd International Ltd., U.K.
The Company has several joint programs under way with engine companies, additive
companies, oil companies and emission control companies.
NOx CONTROL PRODUCTS
In cooperation with others, the Company is developing the Selective Catalytic
Reduction (SCR) system for diesel engines using urea as the reagent. The system
reduces NOx by 65%-90% and allows the engine manufacturer to make significant
improvements in fuel economy.
Sales of these products are expected to start in 1998.
The Company has announced a cooperative partnership with the Engelhard
Corporation to develop and commercialize the urea SCR system for stationary
diesels. It may be expanded to mobile applications.
<PAGE>
Chairman's Letter
1996 was an excellent year for the Company. It continued development of its
technologies and was successful in building alliances with several of the
leading companies in its industry.
At the start of 1996 the Company had $8.9 million in cash and
receivables from the Rights Offering and $0.7 million in debt. Expenses and
costs of technical and market development for the year at $3.8 million were
within budget, and as of January 1997 CDT had $5.3 million in cash and
short-term investments and $0.7 million in debt.
The Company began selling its Platinum Fuel Catalysts for diesel
products under the Platinum Plus trademark early in 1997. Last year it also
developed a Platinum Plus gasoline product, which maintains or rejuvenates
catalytic activity of automotive catalytic converters -- a product unique in its
field. The Company expects its gasoline product to be launched in the near
future. The initial focus for both the diesel and gasoline products is the
after-market, for which the Company has entered into a marketing agreement with
Holt Lloyd International Ltd. for Europe and Asia. Further marketing agreements
for North, Central and South America are under discussion with interested
parties. The Company is also exploring opportunities for selling its fuel
additives to the premium fuels market through arrangements with fuel refineries
and additive companies.
The Platinum Fuel Catalysts are proving to be synergistic with
"after-engine" emission control systems by enhancing performance and extending
durability of these systems. This applies to the catalytic oxidizers and
particulate traps for diesel engines, and to three-way catalytic converters
(autocat) for gasoline engines.
In recent years diesel engine manufacturers have focused on reducing
emissions by changes in engine design. Great improvements have been achieved,
yet much more has to be done to meet the levels engine manufacturers have agreed
to meet in the future for reduction of nitrogen oxides (NOx). Engine design
changes which reduce NOx increase fuel consumption and output of particulates
(PM) and hydrocarbons (HC), so activity is shifting to after-engine NOx
reduction systems, allowing the engine to be tuned for fuel consumption
improvements. The Company is developing technology for after-engine NOx
reduction, and has formed
1
<PAGE>
Chairman's Letter (continued)
a cooperative program with Engelhard and Nalco Fuel Tech to develop and
commercialize NOx reduction systems for stationary diesel engines. Joint engine
tests have shown the ability to reduce NOx by 65%-90%.
Sales of these NOx systems may start in 1998 and will take time to
build up. The world production of diesel engines is now some 8 million units per
year, so the potential market is very significant, and there are also
substantial opportunities in the retrofit market to control emissions from
existing engines.
We have been able to build up our staff by attracting some key
individuals from the industry. In addition, the Company continues to strengthen
its patent and intellectual property portfolio, a key asset for a technology
company. To all the staff (three of whom have been associated with the
technologies for several years) I offer my thanks as well as to the shareholders
who have supported the Company since its founding.
/s/ Ralph E. Bailey
- ---------------------------
Ralph E. Bailey, Chairman
2
<PAGE>
Operations Review
After completing the Rights Issue and spin-off from Fuel-Tech N.V. in December
1995, and repaying $2.1 million of debt, Clean Diesel Technologies, Inc. (CDT)
started last year with net cash and receivables from the Rights Offering of
about $8.9 million, to be primarily applied to research and development, field
trials, marketing, and patent prosecution and maintenance. During 1996 the
Company began exploring potential collaborations with engine manufacturers,
additive companies, catalyst companies and oil companies, and focused on
combining its technology with new engine designs. Efforts were also focused on
developing sales for the Platinum Fuel Catalyst (PFC) and on expanding the
technology into the control of nitrogen oxides (NOx) for diesel engines.
The Company made great progress in 1996 both in marketing its PFC and in proving
and extending its technologies. Marketing outlets were established for the PFC
under the Platinum Plus label for diesel fuels. The Company also developed a
Platinum Plus product for gasoline. Both Platinum Plus products are being
launched in Europe in the near term.
The Company made significant progress in establishing a second business line in
NOx reduction during 1996. The first focus is on NOx reduction for large
stationary engines for power generation. CDT formed a collaborative development
and marketing agreement with Engelhard and Nalco Fuel Tech to commercialize the
NOxOUT(R) SCR technology for stationary diesels. Diesel engine generators in the
1 to 10 Megawatt range that can be installed quickly are now a very
cost-effective means of generating power, so their use is expected to increase
substantially in the next few years. The Company is also exploring potential
collaborations to commercialize NOx control technologies in the heavy-duty
transport sector.
PLATINUM FUEL CATALYSTS
These are fuel additives comprised of platinum, rhodium or palladium which are
used in minute concentrations in fuel (costing a few cents per gallon of fuel
treated) to improve combustion, reduce emissions and improve the performance and
reliability of emission control equipment.
PLATINUM PLUS - EUROPE AND ASIA
In September 1996 CDT entered into an agreement with Holt Lloyd International
Ltd., the world's largest car care company, to market the PFC under the Platinum
Plus trademark for diesel fuel in Europe and Asia. The product is now on sale in
the first market, France, as a packaged product sold to consumers through major
retail outlets and service stations. Rollout in additional markets is planned
through 1997/1998.
The Holt Lloyd agreement provided for joint funding of the development of a
gasoline product. The consequent testing proved that PFCs significantly improve
the performance of catalytic converters in gasoline engines, especially when
they are aged. There are no similar products addressing this market. Holt Lloyd
now anticipates launching a gasoline product containing the Company's PFC in the
next few months. The Company considers the after-market to be a most valuable
market in which to create consumer awareness while generating near-term cash
flow.
PLATINUM PLUS - THE AMERICAS
This market is not covered by the agreement with Holt Lloyd. Discussions are in
progress with several potential partners for the distribution and marketing of
Platinum Plus in the Americas.
PFCS FOR PARTICULATE TRAPS AND CATALYTIC OXIDIZERS
The most effective method of reducing diesel particulate (smoke) is by
particulate trap or catalytic oxidizer. There are limitations when these devices
are used alone which the PFC has been proven to ameliorate. In December CDT
announced the results of two separate tests on typical London bus engines, one
on a Gardner engine and one on a Cummins engine. The combination of PFC and
catalytic oxidizer established new levels of performance in both
3
<PAGE>
cases. This work was conducted in conjunction with Lubrizol's Engine Control
Systems subsidiary, a leading supplier of oxidizers and traps. Joint marketing
efforts to fleets are expected to commence in 1997. The company also reached
agreement in principle with Cummins Engine's Advanced Technology Group to
develop the application of the PFC with oxidizers and traps for a new generation
of low-emission engines. Work commences in 1997.
In recent years there has been growing focus on the application of particulate
traps to control emissions from diesel engines. Indeed, the U.K. Government
announced in the November 1996 budget a substantial rebate in excise duty for
vehicles using particulate traps beginning January 1998. The PFC significantly
improves the performance of particulate traps. Cooperative programs are under
way with several suppliers of trap systems.
PREMIUM DIESEL
The use of PFC in both gasoline and diesel engines is showing a consistent
pattern of increasing the activity of catalytic surfaces and thus increasing
their lives and reducing emissions overall. Discussions are under way in the
U.S., Europe and the Pacific Rim with oil companies interested in the PFC for
application across a range of engines, fuels and markets. Significant fleet
testing commenced in July 1996 and will continue in 1997 to support Premium
Diesel marketing efforts with oil companies. The effectiveness of the PFC in
engines not fitted with catalysts or traps is proving to be variable in fleet
tests, but many new vehicles are fitted with either oxidizers, converters or
traps where PFCs perform consistently. Engine manufacturers are increasingly
inclined to adopt one of these systems.
TOTAL MARKET FOR PFCS
The total worldwide usage of diesel and gasoline fuels is in the order of 350
billion gallons per annum of which approximately 150 billion gallons are diesel
and 200 billion gallons are gasoline. At a projected treatment cost of 2 cents
(U.S.)/gallon of fuel, each 1% of the market represents a $70 million revenue
opportunity.
HEALTH EFFECTS AND THE USE OF METALLIC ADDITIVES
Certain metallic additives have come under scrutiny for their possible effects
on health. While PFCs are already registered in the U.S. and did not strictly
need to be registered in Europe, where there are no rules for testing such
additives, the Company considered it prudent to take a much more proactive view.
Therefore, in 1996 the Company began discussions with the Ministry of Transport
and the Ministry of Health, regulatory authorities in the United Kingdom, asking
for specific consent to the use of platinum metal additives in diesel fuel. In
December 1996 the following response was received from the United Kingdom
Ministry of Health's Committee on Toxicity: "The Committee is satisfied that the
platinum emissions from vehicles would not be in an allergenic form and that the
concentrations were well below those known to cause human toxicity." In the U.S.
the Company is planning for additional engine testing to maintain its EPA
registration as required of all fuel and fuel additive manufacturers. Engine
test results show that the amount of platinum emitted from use of the Company's
PFC is roughly equivalent to platinum attrition from automotive catalytic
converters.
NOx REDUCTION SYSTEMS AND ADDITIVES
NOx emissions from diesel engines represent as much as half of the emissions
from the transport sector in some parts of the U.S. and Europe. Diesel engines
emit much more NOx than gasoline vehicles. The catalytic converter systems used
in gasoline engines to reduce NOx do not work in diesel engines. This presents a
great opportunity since, while much can be done by engine design changes, this
is not enough for many applications. CDT is working on two programs to
commercialize NOx reduction systems:
4
<PAGE>
NOx REDUCTION FOR HEAVY-DUTY DIESEL ENGINES
In December CDT reached an agreement with Engelhard and Nalco Fuel Tech to
commercialize a system of Selective Catalytic Reduction (SCR) for a manufacturer
of power-generation diesels. The technology for this system comprises a reagent
metering and gasification unit (CDT/Nalco Fuel Tech) followed by a catalyst
(Engelhard) and system reagent supply (CDT/Nalco Fuel Tech). Development
programs are in progress, and performance and durability tests are scheduled for
1997. This system has demonstrated up to 90% NOx reduction in joint engine test
programs. It is synergistic in that it will have the economic benefit of
allowing manufacturers to optimize fuel economy while also minimizing NOx and
particulate emissions. Furthermore, this system does not require very low-sulfur
fuel. Based on interest in the U.S. and Europe, the partners are exploring
expanding the agreement to the automotive sector.
RETROFIT NOx REDUCTION FOR HEAVY-DUTY DIESEL ENGINES
CDT conducted a cooperative program with the U.S. EPA and the Department of the
Navy in 1996 to demonstrate the application of LOE-NOx(TM) diesel fuel and
water emulsion technology as a retrofit technology for harbor vessels. The types
of engines used in these vessels are of similar size and type to heavy-duty
transport engines. The parties are exploring a move to shipboard evaluation in
1997. LOE-NOx technology involves the supply of blending equipment and specialty
chemicals to dispense water-in-oil and maintain lubricity. In addition, the
Company is working with another major U.S. engine manufacturer for application
of the LOE-NOx technology to stationary diesels used for power generation.
MARKET FOR NOx REDUCTION SYSTEMS AND ADDITIVES
CDT finds the NOx control market attractive; there are more than 8 million
diesel engines of all types manufactured annually. These new engines represent a
very large market initially for power generation, starting in 1998, and then for
off-road vehicles and heavy-duty transport vehicles after the year 2000. Since
the average life of a diesel engine is between 10 and 30 years, there are also
substantial markets for retrofit applications because older engines are high NOx
producers and regulations are tightening for existing vehicles as well.
TECHNOLOGY
During 1996 CDT filed an additional five patent applications and now has a total
of 24 patents granted and 21 patent applications. These patents and patent
applications cover means of controlling the four principal emissions from diesel
engines (NOx, particulates, CO and HC). CDT's focus is on integrating its
technologies with other emission control systems to work with the engine
manufacturers and emissions control companies in optimizing specific systems for
each engine type. This broad patent position supports and protects CDT in its
cooperative efforts with the major players in the market. Fundamental patents
were issued in 1996 covering the use of the PFC with oxidizers. Four new
applications were filed on advanced urea SCR technology for NOx reduction.
BUSINESS STRUCTURE
The Company has outsourcing arrangements with two companies in the precious
metal refining industry and may make arrangements with others. The Company has
made the product itself in the past, but considers outsourcing to a precious
metal refinery to be more cost effective.
The Company's strategy is to market its technologies indirectly through additive
companies, emission control (catalyst) companies, engine manufacturers and oil
companies by integrating its technologies into the new low-emission engine and
after-engine systems now being developed. If this strategy proves successful,
the Company will not likely need to make significant increases in its marketing
staff.
5
<PAGE>
Clean Diesel Technologies, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company was incorporated on January 19, 1994, as a wholly owned subsidiary
of Fuel-Tech N.V. ("Fuel Tech"). Predecessor financial information included
below for the period January 1, 1992, through January 18, 1994, reflects the
Company's operations prior to incorporation, at which time it was accounted for
as part of Fuel Tech. Effective December 12, 1995, Fuel Tech completed a Rights
Offering of the Company's common shares, with Fuel Tech retaining a 27.6%
ownership interest in the Company. Net proceeds of the Rights Offering of $10.5
million were contributed to the Company by Fuel Tech. The Company is a
development stage enterprise and its efforts from January 1, 1992 (date of
inception), to the present time have been devoted to the research and
development of a Platinum Fuel Catalyst ("PFC") and nitrogen oxide ("NOx")
reduction technologies to reduce emissions from diesel engines. There were no
material activities related to the Company's business in 1990 or 1991. Prior to
1990, the activities of Fuel Tech (the Company's parent) were focused on other
applications of Platinum Fuel Catalysts that are unrelated to the Company's
present or contemplated business and were not material to the overall
development of the Company's product. Therefore, such costs have been excluded
from the determination of the Company's development costs.
RESULTS OF OPERATIONS
1996 VERSUS 1995
General and administrative expenses increased to $1,842,000 in 1996 from
$963,000 in 1995. The increase was due to expenses associated with the Company
establishing its offices, the recruitment and hiring of additional staff and
increased management and administrative costs provided by Fuel Tech pursuant to
a management and services agreement. In the first six months of 1996, a greater
portion of Fuel Tech management's time was spent on the Company's business
activities, which included research programs, establishing relationships with
potential marketing partners and hiring staff. The Company established its own
payroll and hired some of these executives full time in August 1996. The Company
anticipates a modest increase in general and administrative expenses in 1997,
primarily attributable to employees hired during 1996 being employed for the
full year in 1997, as well as a small increase in headcount required to support
an anticipated increase in commercial activities in 1997.
Research and development expenses were $1,747,000 in 1996 versus $796,000 in
1995. The increase is primarily due to significant testing on light-duty and
heavy-duty engines using the Company's PFC alone and with a catalytic oxidizer.
These test programs were conducted in conjunction with potential marketing
partners. The Company also hired three senior technical employees during the
year, and its senior officers, who were Fuel Tech employees in 1995, spent a
greater percentage of their time developing and managing research projects in
1996 than in 1995. The Company anticipates an increase in research and
development expenses in 1997, primarily due to testing required by government
regulators on the health effects of the Company's PFC, as well as the
compensation of senior technical personnel, hired in 1996, who will be
developing and managing research programs for the full year in 1997.
Patent filing and maintenance expenses were $223,000 in 1996 versus $199,000 in
1995. The increase was primarily attributable to the preparation and filing of
new patent applications.
1995 VERSUS 1994
General and administrative expenses increased to $963,000 in 1995 from $507,000
in 1994. The increase was due to an increase in expenses for management and
administrative costs provided by Fuel Tech. In 1995 a greater portion of Fuel
Tech management's time was spent on the Company's business activities, which
included research programs, the development of sources of supply of the
Company's PFC in both the United States and South Africa, establishing
relationships and joint research programs with potential marketing partners,
raising funds through a public offering and patent filings.
Research and development expenses were $796,000 in 1995, compared with $441,000
in 1994. The increase was primarily due to charges related to the completion of
test programs that commenced in 1994 and significant testing of the Company's
PFC on light-duty diesel vehicles. Additionally, more of Fuel Tech management's
time was devoted to the planning, supervision and evaluation of these research
programs.
Patent filing and maintenance increased to $199,000 in 1995 from $158,000 in
1994. The increase was primarily due to the preparation and filing of new patent
applications.
6
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
The Company is a development stage company and has incurred losses since
inception aggregating $7,089,000 at December 31, 1996. The Company expects to
incur losses through the foreseeable future as it further pursues its research,
development and commercialization efforts. In December 1995 the Company raised
approximately $10.5 million, net of offering expenses and broker-dealer
commissions of approximately $1.3 million, through a Rights Offering of its
shares by Fuel Tech.
For the years ended December 31, 1994, 1995 and 1996, and for the period from
January 1, 1992, through December 31, 1996, the Company used cash of $916,000,
$1,810,000, $3,520,000 and $6,715,000, respectively, in operating activities.
During 1996 the Company expended $76,000 for the purchase of furniture, fixtures
and computer equipment. In 1997 the Company expects such expenses to be less
than 1996. In 1997 the Company expects to hire additional technical and
marketing personnel. Additionally, the Company has budgeted increased spending
in 1997 and 1998 on research and development programs over 1996. Some of these
programs will be jointly funded by other companies. The Company believes that it
has sufficient cash balances to fund its requirements through March 31, 1998.
The Company does have the ability to control much of its research and
development costs to conserve cash, either by delaying or canceling certain
research programs. At December 31, 1996, the Company was committed to fund
$89,000 for research and development which will be completed in the first half
of 1997. The Company will, however, require additional financing in the future.
In order to meet such needs, management anticipates pursuing raising funds in
1997 through a private placement or a secondary offering of its shares. The
amount management seeks to raise will depend on the Company's stock price,
market conditions and the status of the development and commercialization of the
Company's technologies. However, there is no guarantee that the Company will be
able to raise such capital on terms satisfactory to the Company.
At December 31, 1995 and 1996, the Company had cash, cash equivalents and
short-term investments of $6,848,000 and $5,270,000, respectively. Working
capital at those dates was $8,395,000 and $4,109,000, respectively. In December
1995 the Company repaid Fuel Tech approximately $2.3 million in loans and
advances. At December 31, 1996, the Company owed Fuel Tech $745,000 under a
demand note, bearing interest at 8% per annum. Subsequent to December 31, 1996,
$250,000 of such amount was repaid.
Effective as of October 28, 1994, Fuel Tech licensed to the Company all patents
and rights associated with its Platinum Fuel Catalyst technology. In exchange
for the technology license, the Company will pay Fuel Tech a royalty of 2.5% of
its annual gross revenue from sales of the Platinum Fuel Catalyst, commencing in
1998. The license agreement expires in 2008, at which time the Company will have
the right to have Fuel Tech assign it the underlying technology. The Company may
purchase the technology subject to the license agreement at any time prior to
2008 for $12 million. The license agreement requires the Company to maintain the
technology at its own expense.
In September 1996 the Company entered into a supply agreement with Holt Lloyd
International Ltd. ("Holt") of the United Kingdom to sell the Company's PFC
under the Platinum Plus(R) trademark for use with Holt's fuel additives in the
consumer car care market for aftertreatment of fuel for both new and used diesel
engines in vehicles. The agreement covers territories worldwide except for
North, Central and South America. This agreement has a 10-year term with
extension options. The exclusivity of the agreement is determined by the
attainment (or reasonable effort toward the attainment) of predetermined minimum
performance levels for each territory on a calendar-year basis. The Company's
PFC was test-marketed by Holt in Europe in the fourth quarter of 1996, with
commercial sales to commence in the first quarter of 1997.
FORWARD-LOOKING INFORMATION
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Annual Report) may contain statements which
are not historical facts, so-called "forward-looking statements." These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, risk of dependence on significant customers, third party
suppliers and intellectual property rights, risks in product and technology
development and other risk factors detailed in this Annual Report and in the
Company's other Securities and Exchange Commission filings.
7
<PAGE>
Selected Financial Data (in thousands except per share data)
The Company was incorporated on January 19, 1994, as a wholly owned subsidiary
of Fuel Tech. Predecessor financial information included below for the period
January 1, 1992, through January 18, 1994, reflects the Company's operations
prior to incorporation, at which time it was accounted for as part of Fuel Tech.
Effective December 12, 1995, Fuel Tech completed a Rights Offering of the
Company's common shares, with Fuel Tech retaining a 27.6% ownership interest in
the Company. The Company is a development stage enterprise and its efforts from
January 1, 1992, to the present time have been devoted to the research and
development of a Platinum Fuel Catalyst and nitrogen oxide reduction
technologies to reduce emissions from diesel engines. There were no material
activities related to the Company's business in 1991. Prior to 1990, the
activities of Fuel Tech were focused on other applications of Platinum Fuel
Catalysts that are unrelated to the Company's present or contemplated business
and were not material to the overall development of the Company's product.
Therefore, such costs have been excluded from the determination of the Company's
development costs and from the selected financial data set forth below.
<TABLE>
<CAPTION>
Period from
January 1, 1992
For the years ended December 31 through
---------------------------------------------------------- December 31,
1996 1995 1994 1993 1992 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Costs and expenses:
General and administrative........... $1,842 $ 963 $ 507 $ -- $ -- $3,312
Research and development............. 1,747 796 441 86 262 3,332
Patent filing and maintenance........ 223 199 158 45 76 701
----- ------ ------ ---- ---- ------
Loss from operations................. 3,812 1,958 1,106 131 338 7,345
Interest (income) expense, net....... (323) 66 1 -- -- (256)
----- ------ ------ ---- ---- ------
Net loss during development stage.... $3,489 $2,024 $1,107 $131 $338 $7,089
===== ====== ====== ==== ==== ======
Net loss per common share............ $ 1.40 $ .79 $ .43 N/A N/A N/A
Weighted average shares outstanding.. 2,500 2,563 2,566 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets....................... $5,595 $8,882 $ 513 $ -- $ --
Total assets......................... 5,677 8,882 513 -- --
Current liabilities.................. 1,486 487 1,370 -- --
Long-term liabilities................ -- 745 -- -- --
Working capital (deficit)............ 4,109 8,395 (857) -- --
Stockholders' equity (deficiency).... 4,191 7,650 (857) -- --
</TABLE>
No dividends have been paid on the Company's common stock, and the Company does
not intend to pay dividends in the foreseeable future. The Company had
approximately 650 beneficial stockholders at December 31, 1996.
8
<PAGE>
Clean Diesel Technologies, Inc. (A Development Stage Company)
Balance Sheets (in thousands except share data)
<TABLE>
<CAPTION>
December 31
----------------------
1996 1995
------ ------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $3,270 $6,848
Short-term investments.............................................................. 2,000 --
Inventories......................................................................... 103 15
Stock subscription receivable....................................................... -- 2,018
Other current assets................................................................ 222 1
------ ------
Total current assets................................................................ 5,595 8,882
Other assets........................................................................ 82 --
------ ------
Total assets........................................................................ $5,677 $8,882
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................................... $ 741 $ 421
Due to Fuel-Tech N.V................................................................ -- 66
Loan payable to Fuel-Tech N.V....................................................... 745 --
------ ------
Total current liabilities........................................................... 1,486 487
Loan payable to Fuel-Tech N.V....................................................... -- 745
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.05 per share, authorized 100,000 shares,
no shares issued and outstanding............................................ -- --
Common stock, par value $.05 per share, authorized 5 million
shares, issued and outstanding 2,500,000 shares............................. 125 125
Additional paid-in capital.......................................................... 11,155 11,125
Deficit accumulated during development stage........................................ (7,089) (3,600)
------ ------
Total stockholders' equity.......................................................... 4,191 7,650
------ ------
Total liabilities and stockholders' equity.......................................... $5,677 $8,882
====== ======
</TABLE>
See accompanying notes.
9
<PAGE>
Clean Diesel Technologies, Inc. (A Development Stage Company)
Statements of Operations (in thousands except per share data)
<TABLE>
<CAPTION>
Period from
January 1, 1992
For the years ended December 31 through
------------------------------------------- December 31,
1996 1995 1994 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Costs and expenses:
General and administrative ...................... $ 1,842 $ 963 $ 507 $ 3,312
Research and development ........................ 1,747 796 441 3,332
Patent filing and maintenance ................... 223 199 158 701
------- ------- ------- -------
Loss from operations ............................ 3,812 1,958 1,106 7,345
Interest income ................................. (383) (33) -- (416)
Interest expense to Fuel-Tech N.V ............... 60 99 1 160
------- ------- ------- -------
Net loss during development stage ............... $ 3,489 $ 2,024 $ 1,107 $ 7,089
======= ======= ======= =======
Net loss per common share ....................... $ 1.40 $ .79 $ .43 N/A
======= ======= ======= =======
Average number of common shares outstanding...... 2,500 2,563 2,566 N/A
======= ======= ======= =======
</TABLE>
See accompanying notes.
10
<PAGE>
Clean Diesel Technologies, Inc. (A Development Stage Company)
Statements of Changes in (in thousands except per share data)
Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock Additional During Net Parent Stockholders'
-------------------- Paid-In Development Company Equity
Shares Amount Capital Stage Investment (Deficiency)
------ ------ ------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 -- $ -- $ -- $ (469) $ 469 $ --
Issuance of 2,500 common shares at
$.10 per share to Fuel-Tech N.V. 2,500 125 125 -- -- 250
Fuel-Tech N.V. capital contribution -- -- 469 -- (469) --
Net loss for year -- -- -- (1,107) -- (1,107)
----- ---- ------- ------- ---- ------
Balance at December 31, 1994 2,500 125 594 (1,576) -- (857)
Net loss for year -- -- -- (2,024) -- (2,024)
Fuel-Tech N.V. capital contribution -- -- 10,531 -- -- 10,531
----- ---- ------- ------- ---- ------
Balance at December 31, 1995 2,500 125 11,125 (3,600) -- 7,650
Net loss for year -- -- -- (3,489) -- (3,489)
Issuance of stock purchase warrants -- -- 30 -- -- 30
----- ---- ------- ------- ---- ------
Balance at December 31, 1996 2,500 $125 $11,155 $(7,089) $ -- $4,191
===== ==== ======= ======= ==== ======
</TABLE>
See accompanying notes.
11
<PAGE>
Clean Diesel Technologies, Inc. (A Development Stage Company)
Statements of Cash Flows (in thousands)
<TABLE>
<CAPTION>
Period from
January 1, 1992
For the years ended December 31 through
-------------------------------------- December 31,
1996 1995 1994 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ......................................... $ (3,489) $ (2,024) $ (1,107) $ (7,089)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation ................................. 12 -- -- 12
Issuance of stock purchase warrants .......... 30 -- -- 30
Changes in operating assets and liabilities:
Inventories ................................ (88) (15) -- (103)
Other current assets ....................... (221) (1) -- (222)
Accounts payable and accrued expenses ...... 320 230 191 741
Other assets ............................... (18) -- -- (18)
Due to Fuel-Tech N.V ....................... (66) -- -- (66)
-------- -------- -------- --------
Net cash used in operating activities ............ (3,520) (1,810) (916) (6,715)
-------- -------- -------- --------
FINANCING ACTIVITIES
Proceeds from Rights Offering net of $630
of brokerage commissions in 1995 ............. 2,018 9,138 -- 11,156
Expenses of Rights Offering ...................... -- (425) -- (425)
Repayment of expenses of
Rights Offering paid by Fuel-Tech N.V ........ -- (200) -- (200)
Issuance of common stock to parent ............... -- -- 250 250
Net parent company investment .................... -- -- -- 469
Proceeds of loan from Fuel-Tech N.V .............. -- 1,695 1,179 2,874
Repayment of loan to Fuel-Tech N.V ............... -- (2,063) -- (2,063)
-------- -------- -------- --------
Net cash provided from financing activities ...... 2,018 8,145 1,429 $ 12,061
-------- -------- -------- --------
INVESTING ACTIVITIES
Purchase of short-term investments ............... (2,000) -- -- (2,000)
Purchase of fixed assets ......................... (76) -- -- (76)
-------- -------- -------- --------
Net cash used in investing activities ............ (2,076) -- -- (2,076)
-------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents ......................... (3,578) 6,335 513 3,270
Cash and cash equivalents at beginning of period . 6,848 513 -- --
-------- -------- -------- --------
Cash and cash equivalents at end of period ....... $ 3,270 $ 6,848 $ 513 $ 3,270
======== ======== ======== ========
Cash payments for interest to Fuel-Tech N.V ...... $ 63 $ -- $ -- $ 63
NON-CASH ACTIVITIES
Contribution of net parent company
investment to capital of the Company ......... $ -- $ -- $ 469 $ 469
Stock subscription receivable .................... $ -- $ 2,018 $ -- $ 2,018
Issuance of stock purchase warrants .............. $ 30 $ -- $ -- $ 30
</TABLE>
See accompanying notes.
12
<PAGE>
Notes to Financial Statements
1. BASIS OF PRESENTATION
Clean Diesel Technologies, Inc. (the "Company") was incorporated in the State of
Delaware on January 19, 1994, as a wholly owned subsidiary of Fuel-Tech N.V.
("Fuel Tech"). Predecessor financial information included in the accompanying
financial statements for the period January 1, 1992, through January 18, 1994,
reflects the Company's operations prior to incorporation, at which time it was
accounted for as part of Fuel Tech. As more fully discussed in Note 4, effective
December 12, 1995, Fuel Tech completed a Rights Offering of the Company's common
shares. Accordingly, at December 12, 1995, Fuel Tech held a 27.6% interest in
the Company's common shares.
The Company is a development stage enterprise and its efforts from January 1,
1992, through December 31, 1996, have been devoted to the research and
development of Platinum Fuel Catalysts ("PFCs"), some of which were licensed to
the Company by Fuel Tech, and nitrogen oxide ("NOx") reduction technologies for
diesel engines (see Note 6). There were no material activities related to the
Company's business in 1990 or 1991. Prior to 1990, the activities of Fuel Tech
were focused on other applications of Platinum Fuel Catalysts that are unrelated
to the Company's present or contemplated business and were not material to the
overall development of the Company's product. Therefore, such costs have been
excluded from the determination of the Company's development costs.
The Company expects to begin selling its PFCs on a commercial basis in the first
half of 1997, for use in the aftertreatment of fuel (see Note 8). In order to
sell the PFCs in other markets, however, additional research and development
testing will be required. The Company's NOx control technologies will also
require additional research and development testing to determine their
commercial viability. The commercialization of these technologies will depend
upon the success of field tests, cost-effective production of PFCs and
governmental regulations principally by the Environmental Protection Agency, and
corresponding foreign and state agencies. If the accomplishment of some or all
of these objectives is delayed, the Company may require additional capital to
continue the development of its technologies, and there can be no assurance that
such capital will be available. The Company's management believes that the
Company has adequate capital to fund its operations through the first quarter of
1998. The Company does have the ability to control much of its research and
development costs to conserve cash, either by delaying or canceling certain
research programs. The Company will, however, require additional financing in
the future. In order to meet such needs, management anticipates pursuing raising
funds in 1997 through a private placement or a secondary offering of its shares.
The amount management seeks to raise will depend on the Company's stock price,
market conditions and the status of the development and commercialization of the
Company's technologies. However, there is no guarantee that the Company will be
able to raise such capital on terms satisfactory to the Company.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At December 31, 1996,
substantially all of the Company's cash and cash equivalents consisted of a $1.5
million Eurodollar deposit with a banking institution and $1.4 million in U.S.
Government obligations. At December 31, 1995, substantially all of the Company's
cash and cash equivalents were on deposit with one banking institution.
All financial instruments are reflected in the accompanying balance sheets at
amounts which approximate fair value.
13
<PAGE>
Notes to Financial Statements (continued)
Short-term investments consist of United States government-backed mortgages
which mature in June 1997. The Company has classified such investments as held
to maturity and, accordingly, they are carried at amortized cost in the
accompanying balance sheet.
INVENTORIES
Inventories are stated at lower of cost or market and consist of finished
product.
RESEARCH AND DEVELOPMENT COSTS
Costs relating to the research, design and testing of products are charged to
operations as they are incurred. These costs include test programs, salaries and
related costs, consultancy fees, materials and certain testing equipment. The
cost of patent filings and maintenance are also charged to operations as they
are incurred.
STOCK-BASED COMPENSATION
The Company accounts for stock option grants in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Under the Company's current plans, options may be granted at not less than the
fair market value on the date of grant and therefore no compensation expense is
recognized for the stock options granted. In 1996 the Company adopted the
disclosure provisions of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the average number of shares of common
stock outstanding during each year. Common equivalent shares are not included in
the per share calculations where the effect of their inclusion would be
antidilutive, except that, in accordance with Securities and Exchange Commission
requirements, common and common equivalent shares issued during the 12-month
period prior to the registration of the Company's common stock on December 12,
1995 (effective date of the Rights Offering), have been included in the
calculation as if they were outstanding for all periods, using the treasury
stock method and the initial public offering price of $6.50 per share.
3. TAXATION
The Company accounts for income taxes in accordance with the "liability method"
and, effective December 12, 1995, the company files its own federal income tax
returns. Prior to such date, the Company's operations were included in the
consolidated income tax return of Fuel Tech, Inc.
At December 31, 1996, the Company had tax losses available for offset against
future years' earnings of approximately $6.4 million and temporary differences
were insignificant as of such date. Approximately $0.9 million, $2.0 million and
$3.5 million of the tax loss carryforward expire in 2009, 2010 and 2011,
respectively. The Company has not recognized any benefit for the aforementioned
tax loss carryforward.
Under the provisions of the United States Tax Reform Act of 1986, utilization of
the Company's federal tax loss carryforward (for the period prior to December
12, 1995) may be limited as a result of the ownership change in excess of 50%
related to the Fuel Tech Rights Offering (see Note 4).
14
<PAGE>
4. STOCKHOLDERS' EQUITY
The Company was incorporated in January 1994 and was capitalized by Fuel Tech's
subscription to all of the Company's common stock in exchange for $250,000 in
cash. Furthermore, in 1994 Fuel Tech made a $469,000 capital contribution to the
Company, which amount was equivalent to the Company's operating losses from
January 1, 1992, through December 31, 1993.
On December 12, 1995, Fuel Tech completed a Rights Offering to its existing
shareholders of 72.4% of the Company's common shares, retaining 27.6% of the
common shares outstanding. Under the terms of the offering, each Fuel Tech
shareholder and holder of Fuel Tech's Nil Coupon Non-redeemable Convertible
Unsecured Loan Notes ("Note Holders") received a right to purchase one common
share of the Company for every 7.65 Fuel Tech shares (or notes convertible into
7.65 Fuel Tech shares) held for $6.50 per Company share. Holders of Fuel Tech
options were also allowed to participate, if requested, under the same terms.
Two million of the 2.5 million Company shares held by Fuel Tech were offered in
the Rights Offering.
Approximately 1.8 million Company shares were purchased in the offering, which
raised net proceeds, after expenses and broker-dealer commissions aggregating
$1.3 million, of approximately $10.5 million, all of which was contributed by
Fuel Tech to the Company. In December 1995, after the offering was completed,
the Company paid Fuel Tech approximately $2.3 million, which represented the
repayment of certain loans made to the Company ($2.1 million), as well as
certain expenses of the Rights Offering paid by Fuel Tech ($200,000).
As a result of the Rights Offering, and Fuel Tech's capital contribution of the
net offering proceeds, the Company's additional paid-in capital increased by
approximately $10.5 million.
On December 26, 1995, the Company's common stock commenced trading on the
National Association of Securities Dealers Quotation System (NASDAQ) under the
symbol "CDTI."
5. STOCK OPTIONS AND WARRANTS
The Company maintains a stock award plan, the 1994 Incentive Plan (the "Plan").
Under the Plan awards may be granted to participants in the form of
Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock,
Performance Awards, Bonuses or other forms of share-based or non-share-based
awards or combinations thereof. Participants in the Plan may be such of the
Company's directors, officers, employees, consultants and advisors (except
consultants or advisors in capital-raising transactions) as the directors
determine are key to the success of the Company's business. The Company includes
50%-owned subsidiaries or affiliates. In 1996 stockholders amended the Plan to
increase from 10% to 12 1/2% the percentage of outstanding shares of the
Company used to determine the maximum number of awards to participants. The
policy of the Board has been to grant stock options vesting in three equal
portions on the first through third anniversaries of the grant date.
15
<PAGE>
Notes to Financial Statements (continued)
If compensation expense for the Company's plan had been determined based on the
fair value at the grant dates for awards under its plans, consistent with the
method described in SFAS No. 123, the Company's net loss and loss per share
would have been increased to the pro forma amounts indicated below:
1996 1995
-----------------------------
Net loss:
As reported $3,489 $2,024
Pro forma 3,600 2,031
Loss per share:
As reported $1.40 $.79
Pro forma 1.44 .79
In accordance with the provisions of SFAS No. 123, the pro forma disclosures
include only the effect of stock options granted in 1995 and 1996. The
application of the pro forma disclosures presented above are not representative
of the effects SFAS No. 123 may have on operating results and earnings (loss)
per share in future years due to the timing of stock option grants and
considering that options vest over a period of three years.
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its stock options.
The fair value of each option grant, for pro forma disclosure purposes, was
estimated on the date of grant using the modified Black-Scholes option pricing
model with the following weighted-average assumptions:
1996 1995
---------------
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 6.8% 6.4%
Expected volatility 54.3% 65.4%
Expected life of option 4 years 4 years
16
<PAGE>
The following table presents a summary of the Company's stock option activity
and related information for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding, beginning of year 222 $2.86 125 $1.10 -- $ --
Granted 65 4.59 97 5.13 125 1.10
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
------------------------------------------------------------------------
Outstanding, end of year 287 $3.25 222 $2.86 125 $1.10
========================================================================
Exercisable, end of year 189 $3.11 63 $1.40 21 $2.00
Weighted-average fair value of options
granted during the year $2.25 $2.79 $ --
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Prices Options Contractual Life Price Options Price
- ----------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ .20 - $2.00 125,000 5.5 years $1.10 104,164 $1.28
2.50 - 4.50 97,500 7.6 3.65 29,166 2.50
5.63 - 6.82 64,450 8.8 6.70 56,116 6.82
- ----------------------------------------------------------------------------------------------------------------------------
$ .20 - $6.82 286,950 6.9 $3.25 189,446 $3.11
</TABLE>
Pursuant to a financial consulting agreement, an investment bank has the right
to purchase warrants covering 50,000 of the Company's common shares, with an
exercise price of $6.50 per share (an 18% premium over market price on the date
of issue). The warrants expire on March 1, 2001. Included in the Company's
Financial Statements is $30,000 of expense in 1996 related to the issuance of
these stock purchase warrants, which represented the fair value of services
received.
6. COMMITMENTS
The Company is obligated under a sublease agreement for its principal office.
Future minimum lease payments at December 31, 1996, are as follows: 1997 --
$65,000; 1998 -- $65,000; and 1999 -- $11,000. For the year ended December 31,
1996, rental expense approximated $90,000. Prior to 1996, the Company did not
incur any rent expense as such expenses were included in management fees and
allocations from Fuel Tech (see Note 7).
As of October 28, 1994, Fuel Tech licensed to the Company all patents and rights
associated with its Platinum Fuel Catalyst and other internal combustion
emissions control technology. In exchange for the technology license, the
Company will pay Fuel Tech a royalty of 2.5% of its annual gross revenue from
sales of such Platinum Fuel Catalyst commencing in the year 1998. Under the
terms of such license agreement the Company, at its option, can purchase the
aforementioned technology for $12 million from Fuel Tech. The license agreement
expires in 2008, at which time the Company has the right to have Fuel Tech
assign it the technology.
17
<PAGE>
Notes to Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS
On July 1, 1995, the Company entered into a $745,000 promissory demand note with
Fuel Tech bearing an interest rate of 8% per annum (the "Demand Note"). Pursuant
to the Company's agreement with Fuel Tech, Fuel Tech did not demand repayment
during 1996 and the Company made monthly interest payments on the unpaid
balance. Subsequent to December 31, 1996, the Company repaid $250,000 of this
note, and the balance is due upon demand.
Average trade balances due to Fuel Tech for the years ended December 31,1995 and
1996, approximated $152,000 and $183,000, respectively.
On August 3, 1995, the company signed a Management and Services Agreement with
Fuel Tech. According to the agreement, the Company reimburses Fuel Tech for
management, services and administrative expenses incurred on behalf of the
Company. Additionally, Fuel Tech charged the Company a fee equivalent to an
additional 10% of such costs. In June 1996 the Company renegotiated this
agreement. Under the new agreement, the Company agreed to pay Fuel Tech a fee
equal to an additional 3% or 10% of the costs paid on the Company's behalf,
dependent upon the nature of the costs incurred. Prior to the August 1995
agreement, the Company paid Fuel Tech a management fee of $150,000 per quarter,
which included the direct costs and associated fees. The Company shares
facilities and certain other resources with Fuel Tech and costs are allocated
between the companies based on usage. Certain of Fuel Tech's officers and
directors serve as officers and directors of the Company and the Company
received management and administrative support from Fuel Tech's staff. The
financial statements include allocations from Fuel Tech of certain management
and administrative costs, which approximate $600,000, $904,000 and $1,232,000
for the years ended December 31, 1994, 1995 and 1996, respectively, and
$2,801,000 for the period from January 1, 1992, through December 31, 1996. Cost
allocations for such periods were based on the amount of management time devoted
to the Company. In the opinion of the Company's management, such cost
allocations are fair and reasonable.
8. MARKETING AND JOINT DEVELOPMENT AGREEMENTS
In September 1996 the Company entered into a supply agreement with
Holt Lloyd International Ltd. ("Holt") of the United Kingdom to sell the
Company's PFC for use with Holt's fuel additives in the aftertreatment of fuel
for both new and used diesel engines in the consumer car care market. The
agreement covers territories worldwide except for North, Central and South
America. The term of this agreement is 10 years with the possibility of a term
extension. The exclusivity of the agreement is determined by the attainment (or
reasonable effort toward the attainment) of predetermined minimum performance
levels for each territory on a calendar-year basis. The Company's PFC was
test-marketed by Holt in Europe in the fourth quarter of 1996, with commercial
sales expected to commence in the first quarter of 1997. This agreement also
provides for collaborative testing of the Company's PFC product for
gasoline-fueled vehicles, and will be marketed under similar terms by Holt.
On November 11, 1996, the Company entered into a joint development agreement
with Engelhard Corporation and Nalco Fuel Tech. The parties agreed to
collaborate on the commercialization of various diesel engine NOx control
technologies, both in the U.S. and abroad. The companies will demonstrate and
market technologies utilizing urea-based NOx catalyst systems.
9. SUBSEQUENT EVENTS
In March 1997, in consideration of his undertaking to assist the Company in
obtaining sources of permanent financing, the Company granted a director of the
Company a warrant to purchase 25,000 shares of the Company's common stock for
$10.00 per share. The warrant expires on March 17, 2004.
18
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders / Clean Diesel Technologies, Inc.
We have audited the accompanying balance sheets of Clean Diesel Technologies,
Inc. (a development stage company) as of December 31, 1996 and 1995, and the
related statements of operations, stockholders' equity (deficiency), and cash
flows for each of the three years in the period ended December 31, 1996 and for
the period from January 1, 1992 through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clean Diesel Technologies, Inc.
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 and for
the period from January 1, 1992 through December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 20, 1997
19
<PAGE>
Corporate Information
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
Ralph E. Bailey, Chairman, CDT, and Chairman, American Bailey Corporation
Jeremy D. Peter-Hoblyn, Director, President and Chief Executive Officer
John A. de Havilland, Director and Retired Director, J. Henry Schroder Wagg &
Co.
Charles W. Grinnell, Director, Vice President, General Counsel and Corporate
Secretary
James M. Valentine, Director, Executive Vice President and Chief Operating
Officer
Scott M. Schecter, Vice President, Chief Financial Officer and Treasurer
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Clean Diesel Technologies, Inc.
300 Atlantic Street, Suite 702
Stamford, Connecticut 06901-3522
203-327-7050
Fax 203-323-0461
ANNUAL STOCKHOLDERS MEETING
- --------------------------------------------------------------------------------
Wednesday, June 11, 1997, 10:00 A.M.
Stamford Sheraton
First Stamford Place
Stamford, CT 06901
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Ernst &Young LLP
Stamford, Connecticut
TRANSFER AGENT AND REGISTRAR
- --------------------------------------------------------------------------------
Chase Mellon Shareholder Services
85 Challenger Road, Overpeck Centre
Ridgefield Park, New Jersey 07660
1-800-288-9541
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
Stockholder inquiries should be directed to:
Clean Diesel Technologies, Inc.
203-327-7050
A copy of the company's Annual Report on Form 10K will be provided free of
charge upon written request directed to the Corporate Secretary at the
offices of Clean Diesel Technologies, Inc.
The company's shares are listed on the NASDAQ Stock Market, Inc. (Symbol
CDTI).
Stock price data:
HIGH LOW
---- ---
4th Quarter 1995, from December 26,..................... 7 1/4 6 3/8
1st Quarter 1996........................................ 7 3/8 5
2nd Quarter 1996........................................ 6 1/8 4 3/8
3rd Quarter 1996........................................ 6 3 7/8
4th Quarter 1996........................................ 4 1/4 2
20
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
Clean Diesel Technologies, Inc. of our report dated March 20, 1997, included in
the 1996 Annual Report to Shareholders of Clean Diesel Technologies, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-16939) pertaining to the 1994 Incentive Plan of Clean Diesel
Technologies, Inc. of our report dated March 20, 1997 with respect to the
financial statements of Clean Diesel Technologies, Inc. incorporated by
reference in the Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 28, 1997
