<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-27432
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CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1393453
- - ------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
Clean Diesel Technologies, Inc.
300 Atlantic Street - Suite 702
Stamford, CT 06901-3522
(Address of principal executive offices) (Zip Code)
(203) 327-7050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes __X__ No _____
As of November 13, 1998, there were outstanding 2,516,666 shares of Common
Shares, par value $0.05 per share, of the registrant.
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CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
Form 10-Q for the Quarter Ended September 30, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of September 30, 1998,
and December 31, 1997 1
Statements of Operations for the Three- and Nine-Month
Periods Ended September 30, 1998, and 1997,
and for the Period from January 1, 1992,
through September 30, 1998 2
Condensed Statements of Cash Flows for the Nine-Month
Periods Ended September 30, 1998, and 1997,
and for the Period from January 1, 1992,
through September 30, 1998 3
Note to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults on Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 457 $ 1,239
Inventories 214 205
Other current assets 187 238
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Total current assets 858 1,682
Other assets 51 68
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Total assets $ 909 $ 1,750
======= ========
Liabilities and shareholders' (deficiency) equity
Current liabilities:
Accounts payable and accrued expenses $ 755 $ 794
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Total current liabilities 755 794
Long-term debt:
Term loan payable to Fuel Tech 495 495
Bridge loan payable to Fuel Tech 500 --
Bridge loan payable to other lenders 900 --
------- --------
Total long-term debt 1,895 495
Series A Convertible Preferred Stock (Redeemable),
par value $.05 per share, Liquidation preference
$500 per share, authorized 10,000 and no shares,
no shares issued and outstanding -- --
Shareholders' (deficiency) equity:
Convertible Preferred Stock, par value $.05 per share,
authorized 90,000 and 100,000 shares, no shares
issued and outstanding -- --
Common Shares, par value $.05 per share, authorized
15,000,000 and 5,000,000 shares, issued and
outstanding 2,516,666 shares 126 126
Additional paid-in capital 11,188 11,188
Deficit accumulated during development stage (13,055) (10,853)
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Total shareholders' (deficiency) equity (1,741) 461
------- --------
Total liabilities and shareholders'
(deficiency) equity $ 909 $ 1,750
======= ========
</TABLE>
See note to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
Statements of Operations
(Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Period from
Three Months Ended Nine Months Ended January 1, 1992,
September 30 September 30 through
1998 1997 1998 1997 September 30, 1998
-------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Sales $ 30 $ 80 $ 39 $ 160 $ 238
Costs and expenses:
Cost of sales 19 45 24 91 156
General and administrative 366 350 1,121 1,309 6,163
Research and development 269 551 684 1,713 6,001
Patent filing and maintenance 39 43 119 158 1,057
------ ------ ------ ------- --------
Loss from operations 663 909 1,909 3,111 13,139
Interest income (9) (34) (30) (144) (611)
Interest expense 44 10 76 34 280
Cost of withdrawn Rights Offering 247 -- 247 -- 247
------ ------ --------- ------- --------
Net loss during development
stage $ 945 $ 885 $2,202 $ 3,001 $ 13,055
====== ====== ========= ======= ========
Basic and diluted loss per
Common Share $ 0.38 $ 0.35 $ 0.87 $ 1.19 N/A
====== ====== ========= ======= ========
Average number of Common
Shares outstanding 2,517 2,517 2,517 2,515 N/A
====== ====== ========= ======= ========
</TABLE>
See note to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Period from
Nine Months Ended January 1, 1992,
September 30, through
1998 1997 September 30, 1998
-------- -------- --------------------
<S> <C> <C> <C>
Operating activities
Net cash used in operating activities $(2,180) $(3,064) $(12,670)
Financing activities
Proceeds from 1995 Rights Offering, net of
$630 of brokerage commissions -- -- 11,156
Expenses of 1995 Rights Offering -- -- (425)
Repayment of expenses of 1995 Rights Offering
paid by Fuel Tech -- -- (200)
Issuance of Common Shares to parent -- -- 250
Net parent company investment -- -- 469
Proceeds of loan from Fuel Tech -- -- 2,874
Repayment of loan to Fuel Tech -- (250) (2,313)
Proceeds from exercise of stock options -- 3 4
Proceeds of Bridge Loan from Fuel Tech 500 -- 500
Proceeds of Bridge Loan from other lenders 900 -- 900
------- ------- --------
Net cash provided from (used in) financing
activities 1,400 (247) 13,215
Investing activities
Sale (purchase) of short-term investments -- 2,000 --
Purchase of fixed assets (2) (7) (88)
------- ------- --------
Net cash (used in) provided from investing
activities (2) 1,993 (88)
------- ------- --------
Net (decrease) increase in cash and
cash equivalents (782) (1,318) 457
Cash and cash equivalents at beginning
of period 1,239 3,270 --
------- ------- --------
Cash and cash equivalents at
end of period $ 457 $ 1,952 $ 457
======= ======= ========
</TABLE>
See note to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
Note to Financial Statements
September 30, 1998
(Unaudited)
Basis of Presentation
The accompanying unaudited, condensed, consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included. All
such adjustments are of a normal recurring nature. Operating results for the
three- and nine-month periods ended September 30, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the consolidated Financial Statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Clean Diesel Technologies, Inc. (the "Company") is a development-stage
company, and its efforts from January 1, 1992, through September 30, 1998, have
been devoted to the research, development, and commercialization of Platinum
Fuel Catalysts ("PFCs"), some of which are licensed to the Company by Fuel-Tech
N.V. ("Fuel Tech"), and nitrogen oxide ("NOx") reduction technologies for 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 were focused on other
applications of the PFCs that were unrelated to the Company's present or
contemplated business and were not material to the overall development of the
Company's products. Therefore, such costs have been excluded from the
determination of the Company's development costs.
In the first quarter of 1997, the Company began selling its PFCs on a
commercial basis to the consumer car care market for use in the aftertreatment
of fuel. In order to sell the PFCs in other markets, however, additional
development and field testing may be required. In the third quarter of 1998, the
Company recorded the first sales of its commercial prototype of the ARIS(TM)
2000 diesel NOx reduction system for testing and evaluation purposes. The
Company's NOx control technologies will require additional field testing to
determine their commercial viability. As more fully described elsewhere herein,
during 1998, the Company received net proceeds of $1.4 million and commitments
for an additional $1.85 million from private placements, which will assist in
the pursuit of the Company's commercialization efforts.
In the first half of 1998, the Company received $1.4 million in bridge
loan notes (the "Bridge Loan"). According to the terms of the Bridge Loan, if
the Company raises a minimum of an additional $1.75 million, net of expenses,
the Bridge Loan is automatically convertible into shares of the Company's Series
A Convertible Preferred Stock (the "Series A Preferred Stock"). In November
1998, the Company received commitments of approximately $1.85 million, net of
expenses, for shares of its Series A Preferred Stock, which when received would
trigger the above-mentioned Bridge Loan conversion. Additionally, in November
1998, Fuel Tech elected to exchange its $495,000 term loan note (the "Term
Note") (along with the accrued interest) with the Company for shares of the
Company's Series A Preferred Stock upon receipt by the Company of the proceeds
of $1.85 million mentioned above. With the $3.25 million net proceeds derived
from these issues and the conversion of the Company's outstanding debt, the
Company's management believes that it will be able to fund its operations
through the third quarter of 1999. These funds, together with expected revenues,
may be sufficient to fund the Company's operations until it generates a positive
cash flow, although no assurance can be given that the Company will not be
required to seek additional debt or equity financing in the future. See "Related
Party Transactions," "Subsequent Events," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Sources of Capital" elsewhere herein for additional information.
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Going Concern
The financial statements have been prepared assuming that the Company
will continue as a going concern and do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
and the amount and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.
As a result of the Company's recurring operating losses, the Company
has been unable to generate a positive cash flow. In addition to the $3.25
million funding mentioned above, the Company may require additional capital in
the future in order to fund its operations. Although the Company believes that
it will be successful in its capital-raising efforts, should they be necessary,
there is no guarantee that it will be able to raise such capital on terms
satisfactory to the Company. Accordingly, at September 30, 1998, there continues
to be substantial doubt as to the Company's ability to continue as a going
concern. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Sources of Capital" elsewhere herein for
additional information.
Inventories
Inventories are stated at the lower of cost or market and consist of
finished product. Cost is determined using the first-in, first-out (FIFO)
method.
Basic and Diluted Loss Per Common Share
In 1997, SFAS No. 128, Earnings per Share, was issued. SFAS No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share, respectively. Unlike the previously
reported primary earnings per share, basic earnings per share excludes the
dilutive effects of stock options. Diluted earnings per share is similar to the
previously reported fully diluted earnings per share. Earnings per share amounts
for all periods presented have been calculated in accordance with and, where
appropriate, restated to conform to the requirements of SFAS No. 128.
Warrant to Purchase Common Shares
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 Shares for $10.00 per share, a 142% premium over the market price on the
date of issue. The warrant expires on March 17, 2004. Included in the Company's
Statement of Operations for the nine-month period ended September 30, 1997, is
$30,000 of expense related to the grant of this warrant, which represented the
fair value of services received, as determined by the utilization of the
Black-Scholes option pricing model.
Related Party Transactions
On July 1, 1995, the Company entered into a $745,000 promissory demand
note (the "Demand Note") with Fuel Tech bearing an interest rate of eight
percent per annum. Pursuant to the Company's agreement with Fuel Tech, Fuel Tech
did not demand repayment during 1995 or 1996. In the first quarter of 1997, the
Company repaid $250,000 of this note. Throughout the life of the note, the
Company had made monthly interest payments on the unpaid balance. On November 5,
1997, the Company entered into a $495,000 promissory term note (the "Term Note")
with Platinum Plus, Inc. (a wholly owned subsidiary of Fuel Tech) representing
the unpaid balance of the Demand Note on that date. The principal amount is
payable in three annual installments of $100,000 each on July 1 of each of the
years 1998 through 2000 with a final installment of $195,000 on July 1, 2001. On
July 1, 1998, Platinum Plus elected to defer the repayment of the $100,000 of
principal which was payable on that date. Interest at a rate of eight percent
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per annum is payable on the unpaid balance on each principal payment date. The
interest accrued on the note as of July 1, 1998 was paid by the Company.
On February 17, 1998, Fuel Tech agreed to provide the Company with up
to $500,000 in order to fund its cash requirements until such time as the
Company obtained the long-term financing it was seeking. The $500,000
commitment, along with a $900,000 commitment from other lenders, was
subsequently converted into the Bridge Loan which, pursuant to its conversion
features, will automatically convert into shares of the Company's Series A
Preferred Stock in November 1998 upon receipt by the Company of the proceeds
from the $1.85 million private placement noted above. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Sources of Capital" elsewhere herein for additional information.
On November 11, 1998, Fuel Tech elected to exchange the $495,000 Term
Note (along with the interest which had accrued since July 1, 1998) for shares
of the Company's Series A Preferred Stock. As a result of the aforementioned
anticipated exchanges by Fuel Tech and assuming full conversion of the Series
A Preferred Stock into the Company's Common Shares, Fuel Tech's ownership
interest in the Company will remain unchanged. See "Subsequent Events" below for
further information.
Subsequent Events
On November 5, 1998, the Company notified the Securities and Exchange
Commission that it had canceled its pending Rights Offering for $2 million of
shares of the Company's Series B Preferred Stock. The Statements of Operations
for the three- and nine-month periods ended September 30, 1998, include
approximately $247,000 of previously deferred costs associated with this Rights
Offering.
Effective November 11, 1998, the Company received commitments from
European investors through a private placement for approximately $1.85 million,
subject to exchange rate adjustments which are not deemed to be significant,
against the issue and sale of approximately 3,710 shares of the Company's Series
A Convertible Preferred Stock, par value $500 per share. Simultaneously and in
accordance with the terms of the $1.4 million Bridge Loan, such Bridge Loan will
be converted into 2,800 shares of Series A Preferred Stock. Additionally, the
$495,000 Term Note from Fuel Tech, as well as the accrued interest, will be
exchanged for approximately 1000 shares of Series A Preferred Stock. As a result
of these transactions, approximately 7,500 shares of Series A Preferred Stock
will be outstanding.
The shares of the Company's Series A Preferred Stock shall be
redeemable at the option of a holder of the Series A Preferred Stock, in whole
or in part, from time to time out of funds legally available for such purpose,
at any time, on or after the fourth anniversary of the date of execution of the
Certificate of Designation at the redemption price of $500 per share (which
conversion price will be deemed to have been paid in full, at no extra cost to
the holder thereof, with the tendering of the Series A Preferred Stock in
connection with the conversion thereof), plus, in each case, an amount equal to
all dividends accrued and unpaid on the shares of Series A Preferred Stock up to
the date fixed for the redemption as set forth in the Certificate of
Designation.
The shares of the Company's Series A Preferred Stock are convertible
into the Company's Common Shares at a rate of 333.33 Common Shares per share of
Series A Preferred Stock, which is equivalent to $1.50 per Common Share.
Assuming full conversion of the Series A Preferred Stock, the Company would have
approximately five million Common Shares outstanding.
The Company can force the holder to convert his shares of Series A
Preferred Stock, in whole or in part, into Common Shares at any time on or after
the date that the average Closing Price (as defined in the Certificate of
Designation) of the Common Shares equals or exceeds $4.50 for 20 consecutive
trading days. Such conversion may, at the election of the holders of 60% of the
issued and outstanding shares of the Company's Series A Preferred Stock, be
scheduled to occur on a pro-rata basis quarterly over 18 months.
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Subject to the provision for adjustment set forth in the Certificate of
Designation, each share of the Company's Series A Preferred Stock shall be
automatically converted into a number of Common Shares at the conversion price
set forth in the Certificate of Designation in the event that the Company
consummates the sale of Common Shares in a bona fide, firm commitment,
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, resulting in at least $10 million
of gross proceeds at a price per share of at least 200% of the Conversion Price
being received by the Company (a "Qualified IPO"). In the event of such
mandatory conversion, accrued and unpaid dividends will also convert into Common
Shares, on the same terms as the underlying shares of Series A Preferred Stock.
Holders of the Company's Series A Preferred Stock are entitled to
receive when, as, and if declared by the Board of Directors of the Company out
of funds of the Company legally available therefor, cash dividends at the annual
rate of nine percent of the $500 stated value and liquidation preference of the
Series A Preferred Stock price per share, provided, however, that in lieu of
making dividends in cash, the Company may elect, by giving written notice to
each holder of shares of the Series A Preferred Stock, to pay dividends in kind
at the annual rate of eleven percent of the liquidation preference (cash
dividends and dividends in kind are each deemed "Preferred Dividends").
Dividends payable to the holders of the Series A Preferred Stock are payable
quarterly in arrears, on the first business day of January, April, July, and
October of each year (each such date being hereinafter referred to as a
"Dividend Payment Date"), commencing January 1, 1999. Preferred Dividends on
shares of Series A Preferred Stock shall be cumulative and shall accrue from the
date of original issuance. It is presently anticipated that the Company will pay
dividends on these shares in additional shares of the Company's Series A
Preferred Stock, and any earnings which the Company may realize in the
foreseeable future will be retained to finance the development and expansion of
the Company.
By vote of the Company's Board of Directors effective November 11,
1998, and at the request of certain of the Bridge Loan and Loan Note lenders,
Mr. Derek R. Gray was appointed to the Company's Board of Directors, which
increased the number of directors from six to seven. Mr. Gray is the Managing
Director of S G Associates Limited, a London-based international fiscal advisory
firm.
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CLEAN DIESEL TECHNOLOGIES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
Statements in this Form 10-Q 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 "Risk Factors of the Business" in Item 1, "Business," and also
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Company's Form 10-K for the year ended December 31, 1997.
Results of Operations
Sales for the third quarter and first nine months of 1998 decreased to
$30,000 and $39,000, respectively, from $80,000 and $160,000 during the
respective comparable periods in 1997. The 1998 sales related primarily to sales
of the Company's commercial prototype of the ARIS(TM) 2000 diesel NOx reduction
system. The units were sold for testing and evaluation purposes. The 1997 sales
related to Platinum Fuel Catalyst (PFC) products purchased by Holt Lloyd
International Ltd. ("Holts"), pursuant to a September 1996 supply agreement. In
early 1997, Holts launched the Company's PFC products for use with Holts' fuel
additives in the aftertreatment of fuel for both gasoline and diesel engines in
several European countries. The results were disappointing due to consumers'
lack of understanding of the products' benefits and the lack of a defined
market. Additionally, in December 1997, Holts was acquired by Prestone Products,
Inc., a division of AlliedSignal. There were no sales of the PFCs in the first
nine months of 1998. The Company is currently in discussions with potential
partners for commercialization of three product groups for diesel engines. These
technologies are the ARIS 2000 diesel NOx reduction technology, platinum and
cerium fuel catalysts for particulate filters, and Platinum Plus(R) fuel
catalysts for premium diesel fuel.
Cost of sales decreased to $19,000 and $24,000 in the third quarter and
first nine months of 1998, respectively, from $45,000 and $91,000 during the
respective comparable periods in 1997. Cost of sales related primarily to the
sale of the ARIS 2000 prototypes in 1998 and PFC products to Holts in 1997, as
more fully described above.
General and administrative ("G&A") expenses were $366,000 and
$1,121,000 in the third quarter and first nine months of 1998, respectively, as
compared with $350,000 and $1,309,000 during the respective comparable periods
in 1997. The increase in the three months ended September 30, 1998, versus the
comparable year-earlier period is primarily due to a larger portion of
management's time being spent on (and allocated to) the commercialization of the
Company's products versus research and development. As a result of the shift in
emphasis towards commercialization in 1998, marketing expense also increased in
1998 versus 1997. Additionally, in 1997 the Company was reimbursed by Fuel-Tech
N.V. ("Fuel Tech") for time spent by an executive of the Company working on the
behalf of Fuel Tech. G&A expense for the first nine months of 1998 decreased
from the comparable period in 1997 due to the implementation of measures taken
by the Company to conserve cash. Such measures included reducing the
administrative staff from four to two, closing the Company's London office, and
reducing management fees charged to the Company by Fuel Tech.
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Research and development ("R&D") expenses for the third quarter and
first nine months of 1998 decreased to $269,000 and $684,000, respectively, from
$551,000 and $1,713,000 during the respective comparable periods in 1997. The
Company significantly reduced costs in 1998 due in part to a shift in emphasis
towards commercialization versus R&D. Other factors include the completion of a
number of fundamental programs in 1997, the deferral of certain field trials
until additional funding was obtained, and the Company's expanded participation
in collaborative and consortium-based programs with potential customers and
industrial partners for which it is responsible for only a portion of the
program costs. In addition to the reallocation of some of management's time to
G&A, a technical employee, whose salary and related benefits had been included
in the R&D costs for the first nine months of 1997, resigned from the Company in
September 1997.
Patent filing and maintenance expenses decreased to $39,000 and
$119,000 for the third quarter and first nine months of 1998, respectively, from
$43,000 and $158,000 during the respective comparable periods in 1997. The
decrease was due in part to the shift in emphasis towards commercialization
mentioned above. Additionally, the expenses were higher in 1997 due to the costs
associated with new patent filings for the Company's NOx reduction technology.
Interest income for the third quarter and first nine months of 1998
deceased to $9,000 and $30,000, respectively, from $34,000 and $144,000 during
the respective comparable periods in 1997. The decrease is the result of the
Company's diminishing cash position. Interest expense increased to $44,000 and
$76,000 in the third quarter and first nine months of 1998, respectively, from
$10,000 and $34,000, respectively, in the comparable periods in 1997 due to
interest expenses associated with the $1.4 million bridge loan notes (the
"Bridge Loan"). See "Liquidity and Sources of Capital" below for further
information.
During the period May 1998 through September 1998, the Company incurred
approximately $247,000 in expenses associated with an effort to secure
additional funding in the form of a Rights Offering. The Company submitted a
Registration Statement (Form S-1) to the Securities and Exchange Commission in
August 1998. The Registration Statement was subsequently withdrawn on November
5, 1998, upon obtaining a commitment for approximately $1.85 million through a
private placement. See "Liquidity and Sources of Capital" below for further
information.
Liquidity and Sources of Capital
The Company is a development-stage enterprise and has incurred losses
since inception (January 1, 1992) aggregating $13,055,000 and $10,853,000 at
September 30, 1998, and December 31, 1997, respectively. The Company expects to
incur losses through the foreseeable future as it further pursues its research,
development, and commercialization efforts. Although the Company started selling
product in 1997, sales have been minimal and the Company continues to be
dependent upon sources other than operations to finance its working capital
requirements.
In December 1995, the Company raised approximately $10.5 million, net
of offering expenses and broker-dealer commissions of approximately $1.3
million, through the 1995 Rights Offering of its shares by Fuel Tech. The
Company then repaid Fuel Tech approximately $2.3 million in intercompany loans.
On February 17, 1998, Fuel Tech agreed to provide the Company with up
to $500,000 in order to fund its cash requirements until such time as the
Company obtained the long-term financing it was seeking. On May 20, 1998, the
$500,000 commitment was converted into a Bridge Loan, which constitutes senior
secured debt, bearing interest at the rate of ten percent per annum and maturing
April 15, 2001. The Bridge Loan stipulates an automatic conversion into shares
of the Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock") upon the conclusion of a public or private financing that contributes a
minimum of $1.75 million of additional net proceeds to the Company. The Bridge
Loan is secured by all of the Company's intellectual property. During mid-1998,
the Company also received an additional $900,000 of financing under the same
Bridge Loan (having the same terms and conditions including maturity date) from
outside investors. As of July 1998, the Company received $1.4 million,
representing all of the proceeds of the Bridge Loan. See below for further
information concerning the anticipated conversion of the Bridge Loan into shares
of Series A Preferred Stock.
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For the period from January 1, 1992, through September 30, 1998, the
Company used cash of $12,670,000 in operating activities. In 1997, the Company
repaid $250,000 of a $745,000 promissory demand note with Fuel Tech and
restructured the remaining amount into a $495,000 promissory term loan note (the
"Term Note") with Platinum Plus, Inc. ("Platinum Plus"), a wholly owned
subsidiary of Fuel Tech. The principal amount of the Term Note is payable in
three annual installments of $100,000 each on July 1 of each of the years 1998
through 2000 with a final installment of $195,000 on July 1, 2001. On July 1,
1998, Platinum Plus elected to defer the repayment of the $100,000 of principal
which was payable on that date. Interest at a rate of eight percent per annum is
payable on the unpaid balance on each principal payment date. The interest
accrued on the note as of July 1, 1998, was paid by the Company. See below for
further information concerning the anticipated exchange of the Term Note for
shares of the Company's Series A Preferred Stock.
In November 1998, the Company obtained a commitment from investors for
approximately $1.85 million in net proceeds against the issuance of shares of
the Company's Series A Preferred Stock. As the Company received commitments for
net proceeds in excess of $1.75 million, and in accordance with the Bridge Loan
agreement, the $1.4 million Bridge Loan, mentioned above, will convert into
shares of the Company's Series A Preferred Stock upon receipt of all of the
proceeds. Additionally, in an effort to retain its approximate 27% interest in
the Company (assuming conversion of the Series A Preferred Stock into the
Company's Common Shares), Fuel Tech elected to exchange its $495,000 Term Note
and the associated accrued interest (see above) for shares of the Company's
Series A Preferred Stock upon receipt by the Company of the $1.85 million net
proceeds.
As a result of the anticipated foregoing transactions, the Company will
have approximately 7,500 shares of Series A Preferred Stock outstanding, which
will be convertible into approximately 2.5 million shares of the Company's
Common Shares, $0.05 par. Pursuant to a Registration Rights Agreement and
Consent, these Common Shares will be entitled to registrations under the
Securities Act of 1933, as amended, (a) three on demand, if not less than
$500,000 in value and not more often than once in every twelve months and (b) an
unlimited number, if incidental or "piggy-back."
Holders of shares of the Company's Series A Preferred Stock are
entitled to receive, when, as and if declared by the Board of Directors of the
Company out of funds of the Company legally available therefor, cash dividends
at the annual rate of nine percent of the $500 stated value and liquidation
preference of the Series A Preferred Stock price per share, provided, however,
that in lieu of making dividends in cash, the Company may elect, by giving
written notice to each holder of the Series A Preferred Stock, to pay dividends
in kind at the annual rate of eleven percent of the Liquidation Preference (cash
dividends and dividends in kind are each deemed "Preferred Dividends").
Dividends payable to the holders of the Series A Preferred Stock are payable
quarterly in arrears, on the first business day of January, April, July, and
October of each year (each such date being hereinafter referred to as a
"Dividend Payment Date"), commencing January 1, 1999. Preferred Dividends on
shares of Series A Preferred Stock shall be cumulative and shall accrue from the
date of original issuance. It is presently anticipated that the Company will pay
dividends on these shares in additional shares of Series A Preferred Stock, and
any earnings which the Company may realize in the foreseeable future will be
retained to finance the development and expansion of the Company. See "Note to
Financial Statements -- Subsequent Events" for further information on the
redemption and conversion features of the Series A Preferred Stock.
At September 30, 1998, and December 31, 1997, the Company had cash and
cash equivalents of $457,000 and $1,239,000, respectively. Working capital at
those dates was $103,000 and $888,000, respectively. The decrease in cash, cash
equivalents, and working capital was the result of resources used to fund the
Company's operations in the first nine months of 1998. As more fully described
above, in November 1998, the Company's outstanding debt, which included the $1.4
million Bridge Loan and the $495,000 Term Note, will be exchanged for shares of
the Company's Series A Convertible Preferred Stock upon the Company's receipt of
the $1.85 million net proceeds mentioned above. However, the Company still
anticipates incurring additional losses through the foreseeable future as it
further pursues its research,
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<PAGE>
development, and commercialization efforts. In light of this, the Company is
taking steps to minimize expenditures until such time as it is able to generate
a positive cash flow.
Effective as of October 28, 1994, Fuel Tech granted two licenses to the
Company for all patents and rights associated with its PFC technology. Effective
November 24, 1997, the licenses were canceled, and Fuel Tech assigned to the
Company all such patents and rights on terms substantially similar to the
licenses. In exchange for the assignment, the Company agreed to pay Fuel Tech a
royalty of 2.5% of its annual gross revenue from sales of the PFCs, commencing
in 1998. The royalty obligation expires in 2008. The Company may at any time
terminate the royalty obligation by payment to Fuel Tech in any year from 1998
through 2008 of amounts, depending on the year, declining from $12 million in
1998 to $1.1 million in 2008. The Company as assignee and owner will maintain
the technology at its own expense. To date, no royalties have been paid to Fuel
Tech.
In September 1996, the Company entered into a supply agreement with
Holt Lloyd International Ltd. to sell the Company's PFCs under the Platinum Plus
trademark for use with Holts' 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 North, Central, and South America.
This agreement has a ten-year term with extension options. The exclusivity of
the agreement is determined by the attainment (or reasonable effort towards the
attainment) of predetermined minimum performance levels for each territory on a
calendar-year basis. The agreement also provides for the marketing of a
platinum-based gasoline fuel additive by Holts on similar terms and in similar
territories, if developed by the Company. The Company's PFCs were test-marketed
by Holts in Europe in the fourth quarter of 1996, with commercial sales
commencing in the first quarter of 1997. Based on jointly funded testing by
Holts and the Company, such a gasoline product was developed by the Company and
launched by Holts in September 1997 under the Cat Guard name, with disappointing
results. The exclusivity granted to Holts was revoked by the Company in the
second quarter of 1998 due to lower-than-expected performance levels, and the
Company may terminate this agreement at its option after March 1999.
As previously stated, the Company anticipates incurring additional
losses through the foreseeable future as it further pursues its research,
development, and commercialization efforts. With the net proceeds of the 1998
fund-raising efforts (both the $1.4 million Bridge Loan and the anticipated
$1.85 million private placement), the Company's management believes that it will
be able to fund its operations through the third quarter of 1999. These funds,
together with expected revenues, may be sufficient to fund the Company's
operations until it generates a positive cash flow, although no assurance can be
given that the Company will not be required to seek additional debt or equity
financing in the future. Accordingly, at September 30, 1998, there continues to
be substantial doubt as to the Company's ability to continue as a going concern.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including a temporary inability to process
transactions in the normal course of business activities.
Based upon recent inquiry of the Company's software and hardware
providers, management has determined that the Company's existing software and
hardware are Year 2000 compliant. However, the Company has yet to commence
testing such software and hardware. The Company continues to be a
development-stage company and, accordingly, the Company does not have any
significant operating equipment with software or embedded chips that will
require remediation in order to become Year 2000 compliant.
-11-
<PAGE>
As the Company further pursues the commercialization and development of
its technologies, management contemplates that the Company may market such
technologies through strategic alliances and/or joint development agreements.
The Company recognizes that the status of such third parties' Year 2000
initiatives could impact the Company's ability to successfully commercialize its
products. As the Company enters into such arrangements, it intends to develop
processes to assess the state of Year 2000 readiness of such third parties.
Foreign Currency Risk
To date, a significant amount of the Company's PFC sales, marketing,
and testing has taken place in Europe. While the Company has not experienced any
significant foreign currency exposure with respect to such activities, there can
be no assurance that exposure to currency fluctuation will not have a material
effect on the Company's operations in the future. The Company intends to manage
the risk of such exposure, if any, by entering into foreign currency futures and
option contracts.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
a. Effective November 11, 1998, pursuant to a Loan Note Agreement
of November 11, 1998, (the "Agreement") attached to this Report
as Exhibit 4.1, Clean Diesel Technologies, Inc. (the
"Registrant") will issue and sell to European investors for $1.85
million for 3,710 shares of Series A Convertible Preferred Stock,
par value $0.05 per share, Liquidation Preference $500 per share
(the "Series A Stock"), in an offshore private placement pursuant
to Regulation S under the Securities Act of 1933, as amended.
Series A Stock rather than Loan Notes shall be issued following
closing due to the conversion terms of the Agreement effecting
conversion of the obligation to issue notes, if the net proceeds
of the issue should be at least $1.75 million. Each share of
Series A Stock is convertible into Common Shares of the Company
at a ratio of 333.33 Common Shares per one share of Series A
Stock. The terms and conditions of the Series A Stock are set
forth in the certificate of designation therefor, previously
filed as Exhibit B to the Registrant's Form 8-K of May 26, 1998,
and are incorporated by reference herein.
Also, simultaneously with the foregoing sale of the Series A
Stock, the outstanding secured Bridge Loan Notes of the Registrant
in the amount of $1.4 million shall be converted, pursuant to the
conversion terms of the Bridge Loan Agreement of May 8, 1998,
between the Company and certain Lenders (the "Bridge Loan
Agreement"), into 2,800 shares of Series A Stock. The terms and
conditions of the Bridge Loan Agreement, previously filed as
Exhibit A to the Registrant's Report on Form 8-K of May 26, 1998,
are incorporated by reference herein.
Effective November 4, 1998, Fuel-Tech N.V., owner of 27.4% of the
Registrant's outstanding Common Shares, separately agreed to
exchange the Registrant's $495,000 term note due July 1, 2001, for
approximately 1000 shares of the Registrant's Series A Stock upon
the Registrant's receipt of the proceeds of $1.85 million.
As a result of the foregoing transactions the Company will have
7,500 shares of Series A Stock outstanding, which will be
convertible into 2,499,997 shares of the Registrant's Common
Shares, $0.05 par. Pursuant to a Registration Rights Agreement and
Consent attached as Schedule F to Exhibit 4.1 to this Report,
these Common Shares will be entitled to registrations under the
Securities Act of 1933, as amended, (a) three on demand, if not
less than $500,000 in value and not more often than once in every
twelve months and (b) an unlimited number, if incidental or
"piggy-back."
On a fully diluted basis and after accounting for the foregoing
transactions, Fuel-Tech N.V. will own approximately 27% of the
equity of the Registrant.
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<PAGE>
b. By vote of the Registrant's Board of Directors and effective
November 11, 1998, the number of directors of the Registrant was
increased from six to seven, and Mr. Derek R. Gray, Managing
Director of S G Associates Limited, a London based fiscal
advisory firm, was elected a director of the Registrant at the
request of certain of the Bridge Loan and Loan Note lenders.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
4.1 Loan Note Agreement dated as of November 11, 1998, among
the Registrant and the several Lenders therein.
b. Reports on Form 8-K
None
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<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC.
Date: November 13, 1998 By: /s/Jeremy D. Peter-Hoblyn
-------------------------------------------
Jeremy D. Peter-Hoblyn
President and Chief Executive Officer
Date: November 13, 1998 By: /s/Scott M. Schecter
------------------------------------------
Scott M. Schecter
Vice President and Chief Financial Officer
<PAGE>
LOAN NOTE AGREEMENT
Loan Note Agreement dated as of November 11, 1998 between Clean Diesel
Technologies, Inc., a Delaware corporation (the "Company") and the several
lenders set forth on Schedule A hereto and such other lenders as may from time
to time acquire Notes authorized hereunder (the "Lenders").
Whereas, the Company has heretofore issued Bridge Loan Notes in the
amount of $1.4 million under a Bridge Loan Agreement of May 8, 1998, as
supplemented, which Notes are convertible under certain circumstances into
shares of the Company's Series A Convertible Preferred Stock, par value $0.05
per share (the "Series A Stock"), and which Series A Stock is further
convertible under certain circumstances into shares of the Company's common
stock, par value $0.05 per share (the "Common Stock"); and
Whereas, under this Agreement the Company proposes to issue up to $2
million of Notes also convertible under certain circumstances into Series A
Stock; and
Whereas, the Bridge Loan Notes shall be converted into Series A Stock
upon the receipt by the Company of net proceeds of at least $1.75 million from a
financing of equity securities or securities convertible into equity securities
of the Company; and
Whereas, as more particularly provided herein, the Notes hereunder
shall be converted into and the Lenders shall receive, in lieu of Notes, shares
of Series A Stock, if the Company shall at the closing or completion of the
issue of the Notes derive or be reasonably anticipated to derive net proceeds of
at least $1.75 million from such issue;
Now therefore, the parties agree, as follows:
Article 1.0
The Loan
1.1 The Loan; Purpose. The Lenders agree on the terms of this Agreement,
severally to make a loan to the Company in an aggregate principal amount not
exceeding Two Million Dollars (U.S. $2,000,000.00) (the "Loan"). The obligation
of each Lender to make the loan in the principal amount set out on Schedule A is
hereafter referred to as its "Commitment." The Lenders shall advance their
Commitments to the Company upon the Closing. The Loan is for the general
corporate purposes of the Company.
1.2 The Notes; Maturities and Rate of Interest. The Loan shall be evidenced by
and repayable with interest in accordance with the terms of notes of the Company
each in the form as set forth on Schedule B hereto (the "Notes") dated the date
of the Closing, with appropriate insertions as to the names of the respective
Lenders and their Commitments and payable in lawful money of the United
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<PAGE>
States of America in immediately available funds at the offices of the Lenders
or their designees, as set forth on Schedule A. The principal amount of the
Notes shall be payable on April 15, 2001 and each of the Notes shall bear
interest payable quarterly in arrears at the rate of ten percent (10%) per annum
calculated on the basis of actual days elapsed over a year of 360 days and
twelve 30 day months and the actual number of days elapsed in any period of less
than one month.
1.3 Prepayment at Company's Option. The Notes shall be subject to prepayment at
the option of the Company on and after April 1, 1999 in whole at any time or in
part from time to time (in aggregate principal amounts of $100,000 or any
multiple thereof), at 100% of the principal amount prepaid plus a premium equal
to the following applicable percentages of the principal amounts prepaid during
the quarterly periods commencing as indicated:
Quarterly Period
Commencing Percentage
April 1, 1999 10%
July 1, 1999 8 1/2%
October 1, 1999 7%
January 1, 2000 5 1/2%
April 1, 2000 4%
July 1, 2000 2 1/2%
October 1, 2000 1%
January 1, 2001 1/2%
1.4 Closing. The Closing of the Loan shall take place on November 11, 1998, at
10:00 a.m. local time at the offices of S G Associates, Ltd., 45 Queen Anne
Street, London W1FM 9FA, U.K., or at such other time and place as the Lenders
shall agree.
Article 2.0
Security Agreement
2.1 Security Agreement. The parties shall at the Closing execute and deliver a
Security Agreement substantially in the form of Schedule C attached hereto.
Article 3.0
Conversion of Loan
Series A Stock
3.1 Conversion. Each of the Lenders may from time to time by the surrender to
the Company in aggregate principal amounts outstanding of the Notes of not less
than $100,000 convert the Notes into not more than 4,000 shares of the Company's
Series A Convertible Preferred Stock, par value $0.05 per share (the "Series A
Stock"), at the ratio of one share of Series A Stock per each $500.00 of
outstanding principal amount of Notes, such Series A Stock to have the rights
and preferences and to be on the terms and conditions
2
<PAGE>
more particularly set out in the form of Certificate of Designation set out as
Schedule D hereto, including the right to convert the Series A Stock into shares
of common stock, par value $0.05 per share, of the Company (the "Common Stock"),
and to be evidenced by a stock certificate or certificates substantially in the
form of Schedule E hereto and registered in the name of the Lender or its
nominee or designee. Accrued interest on a Note which is converted shall be
calculated up to but not including the date of conversion and shall be payable
on the next interest payment date following conversion. No fractional shares of
Series A Stock shall be issued on conversion but such fractional amounts shall
be paid ratably to the converting Lender or Lenders in cash.
3.2 Mandatory Conversion. Conversion of all of the outstanding principal amount
of the Loan, however, shall be mandatory upon and shall be effected by the
Company without notice or demand or any action by any Lender (excepting
surrender of the Notes) in the event that (a) 60% in outstanding principal
amount of the Loan shall have been converted in whole at any time or in part
from time to time into Series A Stock voluntarily by the Lenders, or (b) upon
the completion or closing of a private or public sale of (1) equity securities,
(2) securities convertible into equity securities (including the issue of the
Notes provided for hereunder on the Closing thereof or at any time thereafter),
or (3) rights to acquire equity securities or of the Company, pursuant to which
the Company shall receive or be entitled to receive, net of the expenses and
fees, discounts and commissions of lenders or investors, underwriters, placement
agents and brokers or finders, proceeds of at least $1.75 million.
3.3 Registration Rights. The parties shall at the Closing execute and deliver a
Registration Rights Agreement, substantially in the form of Schedule F hereto.
Article 4.0
Conditions of Lending
4.1 Conditions of Lending. The obligation of the several Lenders to make the
Loan to be made by them hereunder is subject to the following conditions
precedent:
(a) The Company shall be in good standing in the jurisdiction of its
incorporation.
(b) The Loan, this Agreement, the Security Agreement and the Series A
Stock shall have been duly authorized by the Company and the Company shall have
reserved (1) sufficient shares of the Series A Stock into which all of the Loan
may be converted according to the terms of this Agreement and (2) sufficient
shares of the Common Stock for conversion of the Series A Stock which may be
acquired by the Lenders.
3
<PAGE>
(c) This Agreement, the Notes and the Security Agreement shall have
been duly executed and delivered and shall be legal, valid and binding
obligations of the Company. All legal matters relating to this Agreement, the
Notes, the Series A Stock and the Security Agreement shall be satisfactory to
the Lenders and their respective counsel.
(d) No event of default specified herein (and no event specified herein
which, with the lapse of time or the notice and lapse of time specified herein,
would be a default) shall have occurred and be continuing. The representations
of the Company herein shall be true on and as of the date of the Closing with
the same force and effect as if made on and as of such date and the Company
shall so certify to the Lenders.
(e) The consent of the Lenders under that certain Bridge Loan Agreement
of May 8, 1998, as supplemented (the "Bridge Loan Lenders") to (1) the
withdrawal of the Financing Statement perfecting the security interest under the
Bridge Loan Agreement and to the granting by the Company of a security interest
in the collateral described in the Security Agreement hereunder parri passu to
the Lenders and to the Bridge Loan Lenders, (2) to the amendment of the Bridge
Loan Agreement, as supplemented, so that the percentage of consent of 60%
provided in Sections 6.1 and 7.1 thereof shall be 60% in principal amount of the
Bridge Loan Noteholders and the Noteholders hereunder in the aggregate, (3) the
rescission of the registration rights provisions in Sections 3.2 through 3.4 of
the Bridge Loan Agreement and the execution and delivery by them of the
Registration Rights Agreement hereunder, and (4) that the Notes hereunder are
"equity securities" within the meaning of Section 3.1 of the Bridge Loan
Agreement.
(f) The Lenders or their representatives shall have received certified
copies of all corporate action taken by the Company to authorize the
transactions contemplated by this Agreement and such other documents as they may
reasonably require.
Article 5.0
Representations
5.1 Representations of the Company. The Company hereby represents to the Lenders
that:
(a) The Company is duly organized and in good standing under the laws
of Delaware and has the corporate power and authority to make this Agreement, to
borrow hereunder, to execute and deliver the Notes, the Security Agreement and
the Registration Rights Agreement and to provide for the conversion of the Loan
into the Series A Stock and the conversion of the Series A Stock into Common
Stock.
(b) The making and performance by the Company of this Agreement, the
Notes, the Security Agreement and the Registration Rights Agreement and the
authorization of and reservation for issuance of the Series A Stock and the
Common Stock have been duly authorized by all necessary corporate action and
will not violate
4
<PAGE>
any provision of law or of its Charter or by-laws, or, except as contemplated
herein, result in the breach of or constitute a default or require any consent
under or result in the creation of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to any agreement, instrument or
indenture to which the Company is a party or by which the Company or its
property may be bound or affected.
(c) The balance sheet of the Company as at December 31, 1997 and the
statement of results of operations and of changes in stockholders equity
(deficiency) of the Company for the fiscal year ended on that date and the notes
thereto, certified by Ernst & Young LLP, fairly present the financial position
of the Company as at the date of said balance sheet and the results of its
operations for the period ending on such date. The Company has no contingent
obligations, liabilities for taxes, long-term leases or unusual forward or
long-term commitments not disclosed by, or reserved against, in said balance
sheet or the notes thereto; and at the present time there are no material
unrealized or anticipated losses from any unfavorable commitments of the
Company. Said financial statements were prepared in accordance with generally
accepted accounting principles consistently maintained throughout the periods
involved. Since December 31, 1997 there have been no material adverse changes in
the financial condition of the Company from that set forth in said balance sheet
as at that date; provided, however, that the cash position of the Company as at
September 30, 1998 was $456,500.
(d) There are no suits or proceedings pending, or to the knowledge of
the Company, threatened against or affecting the Company and there are no
proceedings by or before any governmental agency pending or to the knowledge of
the Company, threatened against the Company which, if adversely determined,
would have a material adverse effect on the financial condition or business of
the Company.
5.2 Representations of the Lenders. The Lenders severally represent to the
Company that:
(a) They have received a copy of the Company's Annual Report on Form
10-K for the year ending December 31, 1997 and Quarterly Report on Form 10-Q for
the period ending June 30, 1998 each as filed with the United States Securities
and Exchange Commission
(b) They are and will be acquiring the Notes, the Series A Stock and
the Common Stock for investment with no present intention to resell or
distribute them and that they acknowledge, subject to their rights to
registration under the Registration Rights Agreement with respect to the Common
Stock, that they may not sell or otherwise dispose of the Notes, the Series A
Stock or the Common Stock except pursuant to the securities laws of the United
States and the several states thereof or an applicable exemption therefrom and
that the certificates evidencing the Notes, the Series A Stock and the Common
Stock shall bear a legend to such effect, and that the holders of the Notes
shall be more particularly subject to the one year holding restrictions of
Regulation S under the Securities Act of 1933, as
5
<PAGE>
amended applicable to the Notes, the Series A Stock or the Common Stock whenever
held on conversion with the holding period of each counted as the holding period
of any of such securities.
(c) There is no law, rule or regulation known to them which prohibits
their participation in the transactions contemplated by this Agreement.
Article 6.0
Covenants
6.1 Covenants of the Company. The Company covenants with the several Lenders so
long as the Loan shall be outstanding, unless the Holders of 60% of the
outstanding principal amount of the Bridge Loan Notes and the Notes issued
hereunder shall consent in writing, that:
(a) Financial Statements; Information. The Company shall furnish the
Lenders (1) within 90 days after the end of each fiscal year of the Company a
balance sheet as at the close of such fiscal year and statements of operations
and changes in stockholders equity (deficiency) of the Company for the fiscal
year ending on that date, certified by independent public accountants acceptable
to the Lenders and prepared on a consolidated basis, if appropriate; (2) within
45 days after the end of each quarter of each fiscal year of the Company, a
statement of operations of the Company for the period from the beginning of the
fiscal year to the end of such quarter, certified by an authorized financial or
accounting officer of the Company and prepared on a consolidated basis, if
appropriate; (3) promptly after the filing thereof, all reports and other
documents (except with respect to employee benefit plans) filed with the United
States Securities and Exchange Commission; and (4) from time to time, such
further information regarding the business, affairs and financial condition of
the Company as the Lenders may reasonably request.
(b) Senior Debt. So long as the Loan shall be outstanding and shall not
have been converted into the Series A Stock as provided in this Agreement, the
outstanding principal amount of the Loan shall constitute Senior Debt of the
Company, shall not be subordinate to any other indebtedness of the Company and
the Company may not issue (1) securities senior to the Loan or (2) securities
entitled upon the liquidation of the Company to a more preferential distribution
of assets of the Company than to the Holders of the Notes.
Article 7.0
Defaults
7.1 Defaults. If any of the following events of default shall occur and shall
not have been remedied:
(a) Any representation made by the Company herein or in any certificate
delivered to the Lenders at the Closing shall prove to have been incorrect in
any material respect; or
(b) The Company shall default in the payment of principal on
6
<PAGE>
maturity or by acceleration or otherwise and interest on the Notes when due and
such default in payment of interest on the Notes shall continue for a period of
5 days; or
(c) The Company shall default in the performance of any other agreement
or covenant herein for 30 days after such default shall have become known to the
Company; or
(d) The Company shall (1) apply for or consent to the appointment of a
receiver, trustee or liquidator of itself or all or a substantial part of its
assets, (2) be unable, or admit in writing its inability, to pay its debts as
they mature, (3) make a general assignment for the benefit of creditors, (4) be
adjudicated a bankrupt or insolvent, or (5) file a voluntary petition in
bankruptcy or a petition or an answer seeking reorganization or an arrangement
with creditors or to take advantage of any insolvency law or admitting the
material allegations of a petition filed against it in any bankruptcy,
reorganization or insolvency proceeding, or corporate action shall be taken by
it for the purpose of effecting any of the foregoing; or
(e) An order, judgement or decree shall be entered, without the
application, approval or consent of the Company, by any court of competent
jurisdiction, approving a petition seeking reorganization of the Company or
appointing a receiver, trustee, or liquidator of the Company or of all or a
substantial portion of its assets, and such order, judgment or decree shall
continue unstayed and in effect for any period of 60 consecutive days; or
(f) Any default or event of default shall occur in respect of any
indebtedness of the Company on any obligation (other than the Notes) for
borrowed money or under a lease of property or any other arrangement for the use
or possession of property where the Company has the obligation to make payments
for the same in any and all events (hereafter, "Indebtedness"), the effect of
which shall be to cause or permit the holders of such Indebtedness to cause the
acceleration or maturity thereof (whether or not such holders shall do so), or
any other Indebtedness shall become due by its terms and shall not be paid
within 15 days thereafter, provided, however, that if any such default or
failure to pay shall be remedied or cured by the Company or waived by the holder
of the Indebtedness, then the event of default under this Agreement shall be
deemed likewise to have been thereupon remedied, cured or waived, without
further action by the Lenders or the Company;
thereupon, Lenders hereunder and under the Bridge Loan Agreement may, by written
notice to the Company of 60% of the Holders of the outstanding principal amount
of the Notes hereunder and the Bridge Loan Notes in the aggregate, declare the
principal of and interest accrued on the Loan to be forthwith due and payable,
whereupon the same shall become so, and may immediately exercise any and all
rights hereunder or under the Security Agreement or as otherwise provided by
law; excepting, however, in the case of voluntary or involuntary bankruptcy or
insolvency as more particularly described in clauses (d) and (e) above of this
Section 7.1, whereupon the principal and interest on
7
<PAGE>
the Notes shall be automatically due and payable without notice or demand or any
action by the Holders of the Notes.
Article 8.0
Miscellaneous
8.1 Notices. All notices, requests, and demands hereunder shall be given to or
made to the respective parties at their respective addresses and to the
attention of the person specified on Schedule A hereto or at such other address
as may be specified by a Noteholder by notice hereunder. Any such notice shall
be effective when made, if made by facsimile transmission or by hand and
acknowledged; and, if given by mail, on the fourth day following deposit of the
same in the mail postage prepaid, first class or priority airmail; and, if sent
by courier service, when received and acknowledged.
8.2 No Waivers. Neither failure nor delay on the part of the Lenders to exercise
any right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right power or privilege.
8.3 Governing Law. This Agreement and the Notes shall be governed by the
internal substantive laws of the state of Connecticut without regard to its
rules regarding conflicts of laws and the Company and the Lenders hereby submit
to the non-exclusive jurisdiction of the Superior Courts of Connecticut or the
United States Federal District Court for the District of Connecticut as to all
matters arising under this Agreement or the Notes.
8.4 Costs. If default is made in the payment of the Notes, the Company agrees to
pay all costs of collection borne by the Lenders, including reasonable counsel
fees and disbursements and court costs.
8.5 Integration; Amendments. This Agreement constitutes the entire Agreement of
the parties and all matters relating to the transactions contemplated by this
Agreement are incorporated herein. This Agreement may only be amended in a
writing stating that it is an amendment of this Agreement and signed by the
party to be charged.
8.6 Counterparts. This Agreement may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their representatives thereunto duly authorized, all as of the date
first above written.
CLEAN DIESEL TECHNOLOGIES, INC.
By: /s/ J. D. Peter-Hoblyn
- - -------------------------------------
Jeremy D. Peter-Hoblyn
President
S G ASSOCIATES LIMITED
As Agent for the Lenders
By: /s/ D. R. Gray
- - -------------------------------------
Derek R. Gray
Managing Director
<PAGE>
SCHEDULE A
THE LENDERS
Name Commitment U.S. $
---- -----------------
Bystead Limited 165,000
L G Gilliand 82,500
Samantha and Gary Newman 16,500
Alan John Philp 74,000
Lawrence Adam Philp 16,500
Nicholas Austins Philp 16,500
Sebastian A Philp 16,500
Raymond Spalding 8,000
Waltham Forest Friendly Society 330,000
SGA Nominees Limited 1,000
Positive Securities Limited 900,000
-------
Subtotal US$ 1,626,500*
Cadogan Settled Estates
Shareholding Company Limited 250,000
Total $ 1,876,500
* Attn: D. R. Gray
S G Associates
45 Queen Anne Street
London W1FM 9FA U.K.
<PAGE>
Schedule E to Loan Note Agreement of November 11, 1998
Form of Certificate for
Clean Diesel Technologies, Inc. Series A Convertible Preferred Stock
<PAGE>
N0.______ Series A Convertible Preferred Stock ______ Shares
CLEAN DIESEL TECHNOLOGIES, INC.
Incorporated under the laws of the State of Delaware
THIS CERTIFIES THAT
is the owner of fully-paid and non-assessable shares of the Series A Convertible
Preferred Stock of Clean Diesel Technologies, Inc. (hereinafter called the
"Corporation"), transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed.
This certificate and the shares represented hereby are issued and shall be
held subject to all of the provisions of the Certificate of Incorporation of the
Corporation and of any amendments thereto, including without limitation the
Certificate of Designation relating to the Series A Convertible Preferred Stock
which was filed with the Secretary of State of the State of Delaware on May
8, 1998 (copies of which are on file with the Secretary of the Corporation), to
all of which the holder by the acceptance hereof assents.
Witness the seal of the Corporation and the signatures of its duly authorized
officers this ____ day of _______ 199_.
DATED: [SEAL]
_____________________ ____________________________
(Secretary) (Vice) President
A full statement of the designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights will be furnished by the
Corporation without charge to any stockholder who so requests upon application
to the office of the Secretary of the Corporation.
No Holder of shares of this Series A Convertible Preferred Stock shall
directly or indirectly, sell, distribute, transfer, assign, pledge, hypothecate
or otherwise dispose of or encumber any of such shares or any shares of Common
Stock issuable upon the conversion of such shares, unless such transfer is made
pursuant to either (i) an effective registration statement under the Securities
Act of 1933, as amended, and any applicable state securities laws, or (ii) an
available exemption from the registration requirements of the Securities Act of
1933 and applicable state securities laws. This security has been issued in an
offshore transaction in compliance with Regulation S under the Securities Act of
1933 and may not, within the one year time period in Rule 903(b)(3)(iii) under
the Securities Act of 1933 as in effect with respect to a transfer, resell or
otherwise transfer this security and/or the Common Stock issuable on conversion
of such shares, collectively, except in conformity with such Regulation S.
<PAGE>
Clean Diesel Technologies, Inc
For value received_________________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________
| |
|________________________________________|
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND
ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint _______________________________________________________________Attorney
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated:__________________
(Notice: The signature to this assignment must correspond with the name as
written upon the face of the certificate in every particular with alteration or
enlargement or any change whatever)
Conversion Notice for Series A Convertible Preferred Stock
To: Clean Diesel Technologies, Inc.
Attention: Secretary
The undersigned, as Holder of shares of Series A Convertible Preferred
Stock (the "Series A Preferred Stock") of the Corporation hereby irrevocably
elects to convert ______ shares of the Series A Preferred Stock into Common
Shares, par value $0.05 per share (the "Common Shares"), of the Corporation
according to the conditions of the Certificate of Designation for the Series A
Preferred Stock. The undersigned requests that the share certificates for the
Common Shares to be issued to the undersigned pursuant to this notice of
conversion be issued in the name of, and delivered to, the undersigned or its
designee as indicated below. If shares are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto. No fee will be charged to the Holder for any conversion,
except for the above mentioned transfer taxes, if any.
Conversion information:
Name of Holder:_____________________ Date of Most Recent Conversion
by Holder of Shares of Series A
By:_________________________________ Preferred Stock:____________________
Name: Number of Shares of Series A
Title: Preferred Stock Held by Holder
After Conversion Pursuant to This
Address of Holder:__________________ Conversion Notice:__________________
____________________________________
Issue Common Shares to:_____________
____________________________________
at:_________________________________
<PAGE>
Schedule F to Loan Note Agreement of November 11, 1998
Registration Rights Agreement and Consent
<PAGE>
Schedule F
REGISTRATION RIGHTS AGREEMENT AND CONSENT
Registration Rights Agreement and Consent dated as of November 11, 1998 among
Clean Diesel Technologies, Inc. (the "Company") and the several lenders
designated under the Loan Note Agreement of such date (the "Loan Note
Agreement") among the Company and such lenders and also the lenders under that
Bridge Loan Agreement of May 8, 1998 among the company and the several lenders
therein (collectively, the "Lenders"), each of such lenders and its interest
being set forth on Schedule A hereto.
Whereas, the Lenders have under the Bridge Loan and Loan Note Agreements
acquired Notes of the Company (the "Notes") or have acquired, or may in the
future acquire, the Company's Series A Convertible Preferred Stock (the "Series
A Stock"), upon conversion of the Notes; and
Whereas, the holders of the Series A Stock may convert such stock to common
stock of the Company, par value $0.05 per share (the "Common Stock") on the
terms and conditions set forth in the Certificate of Designation for such Series
A Stock; and
Whereas, the holders of the Notes or the Series A Stock, as the case may be,
desire to be able to freely sell such Common Stock issuable upon conversion of
the Series A Stock;
Now Therefore, the parties agree as follows:
Article 1.0
Registration Rights
1. Registration Rights. In connection with any proposed sale by the Lenders (or
for purposes of these registration rights, their assigns) of the Common Stock
which they shall acquire on conversion of Series A Stock acquired by conversion
of the Notes, the Lenders shall have the following registration rights:
1. Three registrations on demand; and
2. An unlimited number of incidental or "piggy-back"
registrations.
Demand registrations shall be in the minimum aggregate amount in value of the
Common Stock of $500,000. and may not occur more often than once in any
successive 12 month period. 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 selling stockholders may legally sell or offer to sell the
quantities of the Common Stock owned by them which they desire to sell or offer
to sell for at least a period of six months from the commencement of the
effectiveness of the registration statement. An
<PAGE>
incidental or "piggy-back" registration shall mean a registration of securities
to be sold or offered for sale by the Company on its own behalf or on behalf of
sellers other than the Lenders or their assigns (other than for employee benefit
plans stock options or the like) in which the Lenders or their assigns shall
participate as a selling stockholder.
2. Costs of Registration. In the event of any registration pursuant to these
rights, the Company shall pay all costs involved in such registration including
legal, accounting, investment banking advice and the printing of reasonable
requirements for prospectuses. The Lenders or their assigns, however, shall pay
or absorb costs involved in any such registration which (a) may be voluntarily
assumed, such as legal fees for their own counsel or, (b) are associated with
the task of furnishing information concerning selling stockholders required to
be included in the registration statement or (c) relate to the fees,
commissions or discounts of underwriters ratably to the shares of the selling
stockholders.
3. Underwriting; Deferral; Participation. In any registration hereunder the
Company shall be entitled, subject to the approval of the Lenders or their
assigns who shall have exercised registration rights, to select the managing
underwriter and the Lenders or their assigns as selling stockholders shall (I)
indemnify and defend the Company for misstatements or omissions of fact
concerning themselves furnished or omitted by them 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. The Company may
defer the effectiveness of any demand registration in order to obtain the
benefit in registration of audited annual financial statements of the Company to
be furnished to stockholders. In the event of a demand registration the Company
may itself participate and offer securities on its own behalf with the Lenders
or their assigns acting as a selling stockholders so long, however, as there
shall be reasonable assurance that such arrangement will not interfere with the
intended sale of the Common Stock for which registration was demanded.
4. Rescission. The Company and the several Lenders under the Bridge Loan
Agreement agree to rescind and revoke Sections 3.2 through 3.4 of that Agreement
relating to registration rights.
5. Consents. The Company and the several Lenders under the Bridge Loan Agreement
agree and consent to (1) the rescission of the Security Agreement of May 8, 1998
among them and to the withdrawal of the Financing Statement authorized by that
agreement to perfect the security interests in the collateral described in that
agreement; (2) the amendment of the Bridge Loan Agreement, as supplemented, so
that the percentage of consent of 60% provided in Sections 6.1 and 7.1 thereof
shall be 60% in principal amount of both the
2
<PAGE>
Bridge Loan Noteholders and the Noteholders in the Loan Note Agreement in the
aggregate; and that the Notes under the Loan Note Agreement are "equity
securities" within the meaning of Section 3.1 of the Bridge Loan Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this registration Rights
Agreement to be duly executed by their duly authorized representatives, all as
of the date first above written.
CLEAN DIESEL TECHNOLOGIES, INC.
By: /s/ J. D. Peter-Hoblyn
- - -------------------------------------------
Jeremy D. Peter-Hoblyn
President
PLATINUM PLUS, INC.
By: /s/ C. W. Grinnell
- - -------------------------------------------
Charles W. Grinnell
Vice President
S G ASSOCIATES LTD
as Agent for the several Lenders
under the Bridge Loan and
Loan Note Agreements
By: /s/ D. R. Gray
- - -------------------------------------------
D. R. Gray
Managing Director
<PAGE>
SCHEDULE A REGISTRATION RIGHTS AGREEMENT AND CONSENT
Lenders Commitment
------- ----------
Bridge Loan Noteholders
- - -----------------------
Platinum Plus, Inc. $500,000
Addis International Limited 250,000
Professor J A Kanis 100,000
Ram Limited 50,000
SG Associates Limited Retirement Benefits Scheme 50,000
The Shimpling Trust Limited 250,000
S G Associates Limited as nominee 50,000
Positive Securities Limited 150,000
Loan Note Lenders
- - -----------------
Bystead Limited 165,000
L G Gilliland 82,500
Samantha and Gary Newman 16,500
Alan John Philp 74,000
Lawrence Adam Philp 16,500
Nicholas Austine Philp 16,500
Sebastian A Philp 16,500
Raymond Spalding 8,000
Waltham Forest Friendly Society 330,000
SGA Nominees Limited 1,000
Positive Securities Limited 900,000
Cadogan Settled Estates Shareholding Company Limited 250,000
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 457,000 457,000
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 214,000 214,000
<CURRENT-ASSETS> 858,000 858,000
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 909,000 909,000
<CURRENT-LIABILITIES> 755,000 755,000
<BONDS> 0 0
0 0
0 0
<COMMON> 126,000 126,000
<OTHER-SE> (1,867,000) (1,867,000)
<TOTAL-LIABILITY-AND-EQUITY> 909,000 909,000
<SALES> 30,000 39,000
<TOTAL-REVENUES> 30,000 39,000
<CGS> 19,000 24,000
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 921,000 2,171,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 35,000 46,000
<INCOME-PRETAX> (945,000) (2,202,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (945,000) (2,202,000)
<EPS-PRIMARY> (0.38) (0.87)
<EPS-DILUTED> 0 0
</TABLE>
