-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W0x9SgXvzjtFbalrKSx3o4TlxemqJRdxkwf/BLGMYufjJlHY/SmhoHoA2IOq4QOO hJVsyEfUpA1NUaxtLJ5kCA== 0000895345-98-000430.txt : 19980810 0000895345-98-000430.hdr.sgml : 19980810 ACCESSION NUMBER: 0000895345-98-000430 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19980807 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLEAN DIESEL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000949428 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-CHEMICALS & ALLIED PRODUCTS [5160] IRS NUMBER: 061393453 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-60955 FILM NUMBER: 98679662 BUSINESS ADDRESS: STREET 1: 300 ATLANTIC ST STREET 2: STE 702 CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2033277050 MAIL ADDRESS: STREET 1: 300 ATLANTIC ST STREET 2: STE 702 CITY: STAMFORD STATE: CT ZIP: 06901 S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998 REGISTRATION NO. 333- =========================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------- CLEAN DIESEL TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 5169 06-1393453 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code organization) Number) 300 ATLANTIC STREET, SUITE 702 STAMFORD, CT 06901-3522 (203) 327-7050 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) CHARLES W. GRINNELL, ESQ. HUTH & GRINNELL, LLC 1055 WASHINGTON BLVD. STAMFORD, CT 06901 (Name, address, including zip code, and telephone number, including area code, of registrant's agent for service) PLEASE SEND COPIES OF ALL COMMUNICATIONS TO: KENNETH ROSH, ESQ. FRIED, FRANK, HARRIS, SHRIVER & JACOBSON ONE NEW YORK PLAZA NEW YORK, NY 10004 (212) 859-8000 Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement. -------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_| --------------------
CALCULATION OF REGISTRATION FEE ========================================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE (FN1) OFFERING PRICE (FN1) REGISTRATION FEE - --------------------------------------------- ---------------- ------------------- ------------------- ------------------- Rights to purchase shares of Series B Convertible Preferred Stock, par value $0.05 per share.............................. 50,000 -- -- -- (FN2) - --------------------------------------------- ---------------- ------------------- ------------------- ------------------- Series B Convertible Preferred Stock, par value $0.05 per share........................ 50,000 $74.25 $3,712,500 $1,095.19 - --------------------------------------------- ---------------- ------------------- ------------------- ------------------- Common Shares, par value $0.05 per share..... 1,650,000 -- -- -- (FN3) ========================================================================================================================== (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. (2) Pursuant to Rule 457(g), no registration fee is payable with respect to the Rights since the Rights are being registered in the same registration statement as the securities to be offered pursuant thereto. (3) Pursuant to Rule 457(i), no registration fee is payable with respect to the Common Shares since the Common Shares are being registered in the same registration statement as the securities which are convertible, for no additional consideration, into the Common Shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. =========================================================================== SUBJECT TO COMPLETION, DATED ______________, 1998 PROSPECTUS CLEAN DIESEL TECHNOLOGIES, INC. 50,000 RIGHTS TO ACQUIRE SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK 50,000 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK 1,650,000 SHARES OF COMMON STOCK -------------------- Clean Diesel Technologies, Inc., a Delaware corporation (the "Company"), is distributing to holders (the "Holders") of the Company's outstanding common shares, par value $0.05 per share (the "Common Shares") of record at the close of business on __________, 1998 (the "Record Date") transferable rights (the "Rights") to subscribe (the "Basic Subscription Privilege") for and purchase an aggregate of up to 50,000 shares of the Company's Series B Convertible Preferred Stock, par value $0.05 per share (the "Series B Preferred Stock" and with respect to the Series B Preferred Stock underlying the Rights, the "Offering Shares"). The Rights will expire at 5:00 p.m., Eastern Standard Time, on _______ ___, 1998, unless extended as described herein (the "Expiration Date"). The term "Rights Offering" or "Offering" includes the distribution of the Rights and the issuances of the Offering Shares upon the exercise of the Rights. A Holder will receive the Right to purchase one share of Series B Preferred Stock for each 50 Common Shares held on the Record Date (the "Underlying Shares"); provided, however, that Rights will not be distributed to Holders who reside in jurisdictions where the securities offered hereby (the "Securities") have not been registered or where an exemption from registration is not available, as described more fully below. Each Right will entitle the Holder to purchase one share of Series B Preferred Stock for $_____ per share (the "Subscription Price"), and each share of Series B Preferred Stock will be immediately convertible, at no cost to the Holder thereof, into 33 Common Shares. No fractional Rights or cash in lieu thereof will be distributed or paid by the Company. The number of Rights distributed will be rounded down to the nearest whole number. The Rights will be evidenced by transferable certificates; provided, however, that the Oversubscription Privilege (as defined below) is not transferable and transferees of Rights in jurisdictions where the Securities have not been registered or where an exemption from registration is not available may not exercise the rights. Cover continued on following page. THE RIGHTS WILL ONLY BE GRANTED TO, AND MAY ONLY BE EXERCISED BY, INVESTORS RESIDING IN THE FOLLOWING JURISDICTIONS WHERE THE SECURITIES OFFERED HEREBY HAVE BEEN REGISTERED WITH THE APPROPRIATE SECURITIES REGULATORY AUTHORITIES OR WHERE AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE: OUTSIDE THE UNITED STATES AND IN COLORADO, CONNECTICUT, THE DISTRICT OF COLUMBIA, ILLINOIS, INDIANA, IOWA, KANSAS, MAINE, MARYLAND, MASSACHUSETTS, NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND, VERMONT, VIRGINIA AND WASHINGTON. RIGHTS WILL NOT BE DISTRIBUTED TO HOLDERS WHO RESIDE IN STATES WHERE THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED OR WHERE AN EXEMPTION FROM REGISTRATION IS NOT AVAILABLE. IN ADDITION, THE SERIES B PREFERRED STOCK MAY NOT BE TRANSFERRED TO RESIDENTS OF ANY OF THE FOLLOWING STATES: ARIZONA, FLORIDA, GEORGIA, OHIO, PENNSYLVANIA OR TEXAS. -------------------- ONCE A HOLDER HAS EXERCISED ANY RIGHTS, SUCH EXERCISE MAY NOT BE REVOKED. PRIOR TO DECIDING TO EXERCISE OR SELL RIGHTS, ANY POTENTIAL INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH BELOW UNDER "RISK FACTORS" BEGINNING ON PAGE 13 IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS. -------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------- Price to Proceeds to Public Company (FN1) - --------------------------------------------------------------------------- Per Share................... $ -- $ -- - --------------------------------------------------------------------------- Total Minimum............... $ __________________ $ _________________ - --------------------------------------------------------------------------- Maximum............ $ __________________ $ _________________ - --------------------------------------------------------------------------- (1) Before offering and subscription expenses. -------------------- DELIVERY OF THE CERTIFICATES REPRESENTING THE RIGHTS IS EXPECTED TO BE MADE ON OR ABOUT ____ _, 1998. -------------------- THE DATE OF THIS PROSPECTUS IS __________, 1998 [RED HERRING] Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Each Holder may also subscribe ("the Oversubscription Privilege") at the Subscription Price for some or all of the additional Offering Shares available after satisfaction of all subscriptions pursuant to the Basic Subscription Privilege. The Oversubscription Privilege is not transferable. A Holder of Rights may, at the time of exercise of the Basic Subscription Privilege, exercise the Oversubscription Privilege for up to an aggregate of 50,000 Offering Shares (the "Maximum Offering Shares") minus the Offering Shares subscribed for by such Holder pursuant to the Basic Subscription privileges. If an insufficient number of Offering Shares is available to satisfy fully all elections to exercise the Oversubscription Privilege, then the available Offering Shares will be allocated among the Holders exercising their Oversubscription Privilege such that each such Holder will be entitled to receive a number of Offering Shares which is equal to the number of Offering Shares subscribed to by such Holder pursuant to the Oversubscription Privilege multiplied by a fraction, the numerator of which is the number of the then available Offering Shares and the denominator of which is the aggregate number of Offering Shares subscribed to pursuant to the Oversubscription Privilege. If a proration of the Offering Shares results in a Holder receiving fewer Offering Shares than such Holder subscribed for pursuant to the Oversubscription Privilege, then any excess funds paid by the Holder as the Subscription Price for shares not issued will be returned by the Subscription Agent without interest or deduction. The Company shall terminate the Rights Offering if on the Expiration Date the Company receives aggregate cash proceeds of less than $2.0 million from the exercise of Rights. On June 30, 1998, the last day on which the Company's Common Shares were listed on the Nasdaq National Market ("Nasdaq"), the average of the high and low sales prices of the Common Shares was $1.75 per share. As of July 1, 1998, the Company's Common Shares are no longer listed and traded on Nasdaq but currently trade on the OTC Electronic Bulletin Board, although no assurances can be given that such shares will continue to trade thereon or in the over-the-counter market, in what are commonly referred to as the "pink sheets." As of August 4, 1998, the last sale price for the Common Shares as reported by the OTC Electronic Bulletin Board was $1.88 per Common Share. Neither the Rights nor the Series B Preferred Stock will be listed on an exchange. The Company shall pay broker-dealers fees for their soliciting efforts (the "Soliciting Fees") of ten percent of the Subscription Price paid for each Right which is subscribed; provided that such fees will only be paid in respect of Rights exercised in those jurisdictions described under "PLAN OF DISTRIBUTION -- Distribution Arrangements." The Soliciting Fees will be paid directly to the broker-dealer designated on the applicable portion of the Rights Certificate. Soliciting fees will not be paid on any undesignated exercises of Rights. AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE AND INVOLVES A HIGH DEGREE OF RISK. AN INVESTMENT IN THE SECURITIES SHOULD NOT BE MADE BY AN INVESTOR WHO CANNOT AFFORD THE LOSS OF HIS OR HER ENTIRE INVESTMENT. THE DISTRIBUTION OF THIS PROSPECTUS AND THE OFFERING OF THE SECURITIES IN CERTAIN JURISDICTIONS MAY BE RESTRICTED BY LAW. NO ACTION HAS BEEN TAKEN BY THE COMPANY THAT WOULD PERMIT AN OFFERING OF THE SECURITIES OR THE CIRCULATION OR DISTRIBUTION OF THIS PROSPECTUS OR ANY OFFERING MATERIAL IN RELATION TO THE COMPANY OR THE SECURITIES IN ANY COUNTRY OUTSIDE THE UNITED STATES WHERE ACTION FOR THAT PURPOSE IS REQUIRED. -------------------- THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). DISCUSSION CONTAINING SUCH FORWARD-LOOKING STATEMENTS WILL BE FOUND IN THE MATERIAL SET FORTH UNDER "PROSPECTUS SUMMARY," "RISK FACTORS," "USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS WITHIN THE PROSPECTUS GENERALLY. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH UNDER "RISK FACTORS" AND THE MATTERS SET FORTH IN THIS PROSPECTUS GENERALLY. THE COMPANY CAUTIONS THE READER, HOWEVER, THAT THIS LIST OF FACTORS MAY NOT BE EXHAUSTIVE. -------------------- AVAILABLE INFORMATION The Company currently reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at: Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material also can be obtained from the Public Reference Section of the Commission, at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such site is http://www.sec.gov. In addition, through June 30, 1998, the Company's Common Shares were listed and traded on Nasdaq under the symbol "CDTI", but as of July 1, 1998 were delisted therefrom. Reports and other information, including proxy and information statements, for periods during which the Common Shares were listed on Nasdaq can be inspected and copies can be made at the offices of the National Association of Securities Dealers, Inc. (the "NASD"), 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act, with respect to the Securities offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits thereto, as permitted by the Rules and Regulations of the Commission. For further information, reference is made to the Registration Statement and to the exhibits filed therewith. Statements contained in this Prospectus as to the contents of any contract or other document which has been filed as an exhibit to the Registration Statement are qualified in all respects by reference to such exhibits for a complete statement of their terms and conditions. The Registration Statement and exhibits may be inspected without charge and copied upon payment of prescribed fees at the public reference facilities maintained by the Commission at the address set forth above. The Company intends to furnish the Holders of the Company's Common Shares with annual reports containing financial statements audited by an independent public accounting firm and, in addition to filing quarterly reports on Form 10-Q with the Commission, the Company will issue press releases containing summary financial information for each of the first three fiscal quarters of each fiscal year. PROSPECTUS SUMMARY The following summary is provided for convenience only and is not intended to be complete. It is qualified in its entirety by and should be read in conjunction with the more detailed information and Financial Statements (including the Notes thereto) appearing elsewhere in this Prospectus. For purposes of this document, (i) "minimum subscription" assumes the exercise in cash of a sufficient number of Holders such that the aggregate cash proceeds to the Company equal $2.0 million and (ii) "full subscription" assumes the purchase of all of the Offering Shares offered hereby, including the exercise in cash of the Oversubscription Privilege by certain Holders to compensate for those Holders who do not exercise the Basic Subscription in full. THE COMPANY GENERAL The Company, a Delaware corporation with a principal place of business at 300 Atlantic Street, Stamford, Connecticut 06901, is a development-stage specialty chemical company supplying advanced catalytic fuel additives and systems that reduce harmful emissions from internal combustion engines while improving fuel economy. The Company's two main technology areas are Platinum Fuel Catalysts ("PFCs") for emission control and fuel economy improvement in diesel- and gasoline-fueled engines, and nitrogen oxide ("NOx") reduction systems and chemicals for control of NOx emissions from diesel engines. BACKGROUND The Company was formed in 1994 as a wholly owned subsidiary of Fuel-Tech N.V. ("Fuel Tech"), which had conducted fundamental work regarding the Company's technologies. The Company was spun off by Fuel Tech in a rights offering in December 1995 (the "1995 Rights Offering"), and Fuel Tech currently owns 27.4% of the Company's outstanding Common Shares. The Company raised net proceeds of approximately $10.5 million in the 1995 Rights Offering which, following the repayment of $2.3 million of intercompany loans to Fuel Tech, was sufficient to fund the Company's operations through May of 1998. The Company has since funded its operations through the net proceeds received in connection with the issuance of bridge loan notes (the "Bridge Loan Notes") issued to Fuel Tech and certain other lenders. At its inception, the Company had a limited number of patents for PFCs licensed from Fuel Tech and limited testing results of PFCs. The Company currently has 12 U.S. and 38 International patents on PFCs and NOx reduction systems and has another 83 U.S. and International applications pending. In addition, the Company has completed successful testing of a diesel fuel PFC additive, launched the marketing of a PFC used to rejuvenate aged catalytic converters in Europe, and developed the Advanced Reagent Injection System ("ARIS(TM) 2000") for use in catalytic NOx reduction systems. BUSINESS STRATEGY The Company's strategic objective is to become a leading developer and supplier of (i) PFCs for emission control and fuel economy improvement in diesel- and gasoline-fueled engines and (ii) NOx reduction systems and chemicals for control of NOx emissions from diesel engines. Key elements of the Company's strategy include the following: DEVELOPING MARKETS FOR PFCS AS A DIESEL FUEL ADDITIVE The Company has successfully concluded a study at Delft Technical University in the Netherlands concerning the emission reduction effects of PFCs used with ceramic filters for reduction in particulate emission. The Company has also demonstrated improved emission reduction and increased fuel economy from the use of PFCs without ceramic filters in separate programs at Ricardo Consulting Engineers Ltd. ("Ricardo") and Cummins Engine Co. ("Cummins"). The Company seeks to capitalize on these test results, coupled with the increased regulation of emissions, by developing a market for PFCs in the U.S. and abroad. DEVELOPING MARKETS FOR PFCS AS A GASOLINE ADDITIVE The Company seeks to continue its marketing of PFCs used to rejuvenate aged catalytic converters, and has begun to focus on selling this product through service centers in Europe in conjunction with Holt Lloyd International Ltd. ("Holts"). The Company is also seeking marketing partners to help launch the gasoline product in the U.S. and Asia. COMMERCIALIZING THE ARIS(TM) 2000 The Company has developed a prototype of the ARIS(TM) 2000, an Advanced Reagent Injection System to be used in the selective catalytic reduction of NOx. The Company believes that there is a market for the ARIS(TM) 2000 as a result of increased regulations in California and the Northeast of NOx levels in new and existing large stationary diesels. The Company seeks to commercialize the ARIS(TM) 2000 through cooperative ventures and licenses with engine manufacturers, engine distributors, and catalyst and emission control companies. The Company believes that the net proceeds of the Rights Offering, together with the net proceeds received in connection with the $1.4 million bridge loan financing effected in 1998, will be sufficient to fund the foregoing commercialization efforts through January 2000 (assuming full subscription) and through April 1999 (assuming minimum subscription). See "USE OF PROCEEDS" and "RISK FACTORS." THE RIGHTS OFFERING Rights............. The Company is issuing to each Holder of record of Common Shares on the Record Date one transferable Right for each 50 Common Shares held; provided, however, that Rights will not be distributed to Holders who reside in jurisdictions in which the Securities have not been registered or where an exemption from registration is not available, as described more fully below, and transferees of Rights in jurisdictions where the Securities have not been registered or where an exemption from registration is not available may not exercise the Rights. See "THE RIGHTS OFFERING -- Jurisdictions in Which the Securities Are Offered." The Rights will be evidenced by Rights Certificates. An aggregate of up to 50,000 Rights will be so distributed. No fractional Rights or cash in lieu thereof will be distributed or paid by the Company. The number of Rights distributed will be rounded down to the nearest whole number. As described below under "Amendment and Termination," the Company will terminate the Rights Offering if on the Expiration Date less than an aggregate of $2.0 million worth of Rights have been exercised (calculated based upon a per Common Share price of $2.25, a 12.5% premium over the average bid and ask prices of such shares over the five most recent business days). Accordingly, assuming a Subscription Price of $74.25, a minimum subscription of approximately 26,937 Offering Shares pursuant to the exercise of the Rights is necessary to proceed with the Rights Offering. See "THE RIGHTS OFFERING -- The Rights." Basic Subscription Privilege.......... Each Right will entitle the Holder thereof to purchase at the Subscription Price one share of Series B Preferred Stock. Each share of Series B Preferred Stock will be immediately convertible, at no cost to the Holder thereof, into 33 Common Shares. Certificates representing Offering Shares purchased pursuant to the Basic Subscription Privilege will be delivered to the subscribers as soon as practicable after the Expiration Date and after all prorations contemplated by the terms of the Rights Offering have been effected. See "THE RIGHTS OFFERING -- Subscription Privileges." Oversubscription Privilege.......... Each Holder who exercises all of his or her Rights pursuant to the Basic Subscription Privilege may indicate on the Rights Certificate additional shares of Series B Preferred Stock above the Basic Subscription Privilege up to the Maximum Offering Shares such Holder would like to purchase at the Subscription Price. The Oversubscription Privilege is not transferable. After the Expiration Date, the Company will issue those Offering Shares not purchased through the Basic Subscription Privilege to the Holders who wish to exercise their Oversubscription Privilege. If an insufficient number of Offering Shares is available to satisfy fully all elections to exercise the Oversubscription Privilege, then the available Offering Shares will be allocated among the Holders exercising their Oversubscription Privilege such that each such Holder will be entitled to receive a number of Offering Shares which is equal to the number of Offering Shares subscribed to by such Holder pursuant to the Oversubscription Privilege multiplied by a fraction, the numerator of which is the number of the then available Offering Shares and the denominator of which is the aggregate number of the Offering Shares subscribed to pursuant to the Oversubscription Privilege. If a proration of the Offering Shares results in a Holder receiving fewer Offering Shares than such Holder subscribed for pursuant to the Oversubscription Privilege, then any excess funds paid by that Holder as the Subscription Price for shares not issued will be returned by the Subscription Agent without interest or deduction. See "THE RIGHTS OFFERING -- Subscription Privileges." Series B Preferred Stock.............. Holders of the Series B Preferred Stock are entitled to receive, when, as and if declared by the Board out of funds of the Company legally available therefor, cash dividends at the annual rate of 9% of the $________ per share price and liquidation preference (the "Liquidation Preference"); provided, however, that in lieu of making dividends in cash, the Company may elect, by giving written notice to each holder of the Series B Preferred Stock, to pay dividends in kind at the annual rate of 11% of the Liquidation Preference (cash dividends and dividends in kind are each deemed "Preferred Dividends"). Shares of Series B Preferred Stock are convertible (at the Liquidation Preference of $______ per share), in whole or in part, at the option of the holders thereof ("Optional Conversion"), into Common Shares at a conversion price of $____ per Common Share (equivalent to a conversion rate of 33 Common Shares for each share of Series B Preferred Stock so converted), 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 B Preferred Stock in connection with the conversion thereof, subject to adjustment as set forth in the Certificate of Designation. The Company can force the holder to convert his Series B 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 (as defined in the Certificate of Designation). In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, and subject to the rights of holders of any other series of Preferred Stock, the holders of outstanding shares of Series B Preferred Stock are entitled to receive the sum of $______ per share in cash for each share of Series B Preferred Stock, plus accrued and unpaid Preferred Dividends thereon, out of the assets of the Company available for distribution to stockholders, before any distribution of assets is made to holders of Common Shares or any other capital stock ranking junior to the shares of Series B Preferred Stock and pari passu with holders of Series A Preferred Stock upon a liquidation, dissolution, or winding up of the Company. Certificates representing shares of Series B Preferred Stock will include a legend to the effect that such securities may not be transferred to any resident of any of the following states: Arizona, Florida, Georgia, Ohio, Pennsylvania or Texas. See "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock -- Series B Convertible Preferred Stock." Record Date........ _______________ __ , 1998 Subscription Price.............. The Subscription Price is $_______ per Offering Share. Expiration Date for Rights......... The Rights Offering will expire at 5:00 p.m., Eastern Standard Time, on _______________, 1998, unless extended by the Board of Directors of the Company, in which case the term "Expiration Date" shall mean the latest date and time to which the Rights Offering is extended. Exercise of Rights............. The Basic Subscription Privilege and the Oversubscription Privilege may be exercised by properly completing the Rights Certificates evidencing the Rights and forwarding them, with payment of the Subscription Price for each share of Series B Preferred Stock subscribed for pursuant to the Basic Subscription Privilege and the Oversubscription Privilege, to the Subscription Agent prior to the Expiration Date. If the aggregate Subscription Price paid by an exercising Rights Holder is insufficient to purchase the number of shares of Series B Preferred Stock that the Holder indicates are being subscribed for, or if an exercising Rights Holder does not specify the number of shares of Series B Preferred Stock to be purchased, then the Rights Holder will be deemed to have exercised, first, the Basic Subscription Privilege and, second, the Oversubscription Privilege to purchase shares of Series B Preferred Stock to the full extent of the payment tendered. If the aggregate Subscription Price paid by an exercising Rights Holder exceeds the amount necessary to purchase the number of shares of Series B Preferred Stock for which the Rights Holder has indicated an intention to subscribe, then the Rights Holder will be deemed to have exercised, first, the Basic Subscription Privilege (if not already fully exercised) and, second, the Oversubscription Privilege to the full extent of the excess payment tendered. Once a Rights Holder has exercised the Basic Subscription Privilege or the Oversubscription Privilege, such exercise may not be revoked. See "THE RIGHTS OFFERING -- Exercise of Rights." Any Rights not duly exercised prior to the Expiration Date will expire and become worthless. Amendment and Termination........ The Board of Directors reserves the right to extend the Expiration Date and to amend the terms and conditions of the Rights Offering. Any extension, if made, will be publicly announced through a release to the Dow Jones News Service and as otherwise required by applicable law or regulations. In the event of a material change in the terms of the Rights Offering, there will be an affirmative resolicitation of the Rights Offering by means of a post-effective amendment to the Registration Statement. In the event of such a resolicitation, subscribing Holders will be deemed to have effectively revoked their subscriptions unless they affirmatively confirm their intent to subscribe, and their subscription payments will be returned to them without interest or deduction. The Board of Directors of the Company in its sole discretion, may terminate the Rights Offering and revoke the Rights at any time prior to the Expiration Date or thereafter. In any event, the Company shall terminate the Rights Offering if on the Expiration Date the Company receives aggregate cash proceeds of less than $2.0 million from the exercise of Rights. In the event of such termination, the Company will promptly return to all persons that exercised Rights their subscription payments, without interest or deduction. See "THE RIGHTS OFFERING -- Amendment and Termination." Method of Transferring Rights............. Rights may be purchased or sold through usual investment channels, including banks and brokers. There can be no assurance that an active market will develop for the Rights. The Rights, the underlying shares of Series B Preferred Stock and the Common Shares issuable upon conversion of the Series B Preferred Stock, will not be eligible for trading on Nasdaq. The Rights evidenced by a single Rights Certificate may be transferred in whole by endorsing the Rights Certificate for transfer in accordance with the accompanying instructions; provided, that the related Oversubscription Privilege may not be exercised by the transferee thereof and transferees of Rights in jurisdictions where the Securities have not been registered or where an exemption from registration is not available. A portion of the Rights evidenced by a single Rights Certificate (but not fractional Rights or the Oversubscription Privilege or to persons in jurisdictions where the Securities have not been registered or where an exemption from registration is not available) may be transferred by delivering to the Subscription Agent a Rights Certificate properly endorsed for transfer, with instructions to register such portion of the Rights evidenced thereby in the name of the transferee (and to issue a new Rights Certificate to the transferee evidencing such transferred Rights). In such event, a new Rights Certificate evidencing the balance of the Rights will be issued to the Rights Holder or, if the Rights Holder so instructs, to an additional transferee. The Oversubscription Privilege is not transferable. Holders of Rights wishing to transfer all or a portion of their Rights (subject to the limitations described above) should allow a sufficient amount of time prior to the Expiration Date for (i) the transfer instructions to be received and processed by the Subscription Agent, (ii) a new Rights Certificate for the transferred Rights to be issued and transmitted to the transferee or transferees and a new Rights Certificate for any retained Rights to be issued and transmitted to the transferor and (iii) the Rights evidenced by such new Rights Certificates to be exercised or sold by the recipients thereof. Neither the Company nor the Subscription Agent shall have any liability to a transferee or transferor of Rights if Rights Certificates are not received in time for exercise or sale prior to the Expiration Date. Except for fees paid to broker-dealers and charged by the Subscription Agent that will be paid by the Company, all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the purchase, sale or exercise of Rights will be for the account of the shareholder transferor of the Rights and none of such commissions, fees or expenses will be paid by the Company or the Subscription Agent. The Rights will be eligible for transfer through, and the exercise of the Rights may be effected through, the facilities of the Transfer Agent. See "THE RIGHTS OFFERING -- Method of Transferring Rights." Jurisdictions in Which the Securities Are Offered............ RIGHTS WILL ONLY BE GRANTED TO, AND MAY ONLY BE EXERCISED BY, HOLDERS IN COLORADO, CONNECTICUT, THE DISTRICT OF COLUMBIA, ILLINOIS, INDIANA, IOWA, KANSAS, MAINE, MARYLAND, MASSACHUSETTS, NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND, VERMONT, VIRGINIA AND WASHINGTON AND OUTSIDE THE UNITED STATES. See "THE RIGHTS OFFERING -- Jurisdictions in Which the Securities Are Offered." U.S. Tax Consequences....... Holders who receive Rights will be deemed to be in receipt of property in an amount equal to the fair market value (the "Value") of the Rights on the date they are distributed. Whether the receipt of Rights by a Holder will result in taxable income and the characterization of such income, if any, will be dependent on whether the Company has current and/or accumulated earnings and profits ("E&P"), the tax basis of the stock held by the Holder, and the Value of the Rights. Management of the Company believes that the Company will have no current and/or accumulated E&P for the taxable year in which the Rights are distributed, although no assurances can be given in this regard. Neither the exercise of the Rights nor conversion of the Series B Preferred Stock into Common Shares would result in a taxable event. See "THE RIGHTS OFFERING -- Certain United States Federal Income Tax Consequences to Holders." Capital Stock to be Outstanding After Offering..... 2,516,666 Common Shares(FN1) 2,800 shares of Series A Preferred Stock(FN2) 50,000 shares of Series B Preferred Stock(FN3) Net Cash Proceeds from the Offering(FN4)...... $3.1 million Use of Proceeds ... The net proceeds of the Offering will be used for: marketing, field trials and patents; repayment under the Term Loan (as defined below) to Fuel Tech; and the balance for working capital and general corporate purposes. See "USE OF PROCEEDS." Subscription Agent ............. ChaseMellon Shareholder Services, L.L.C. Information Agent.. ChaseMellon Shareholder Services, L.L.C. - ----------------------------- (1) Excludes 427,784 Common Shares issuable under the Company's stock option plan, 75,000 shares issuable upon exercise of certain warrants, 933,324 Common Shares which would be issuable upon conversion of Series A Preferred Stock which are expected to be issued to Holders of Bridge Loan Notes upon consummation of the Rights Offering, and up to 1,650,000 Common Shares issuable upon conversion of Series B Preferred Stock being offered hereby (assuming full subscription) or 888,921 Common Shares (assuming minimum subscription). See "DESCRIPTION OF CAPITAL STOCK," "MANAGEMENT" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." (2) Assumes conversion of the Bridge Loan Notes upon consummation of the Rights Offering resulting in net proceeds to the Company of at least $1.75 million. (3) Assuming full subscription. Assuming minimum subscription, 26,937 shares of Series B Preferred Stock will be outstanding. (4) Assuming full subscription of the Rights Offering at a price of $74.25 per Right, after deducting Soliciting Fees and expenses of the Rights Offering payable by the Company estimated at $600,000. Assuming minimum subscription using the foregoing assumptions, net cash proceeds would be approximately $1.4 million. RISK FACTORS An investment in the Securities offered hereby involves a high degree of risk and should only be made by investors who can afford a loss of their entire investment. Prospective investors should carefully review and consider the information set forth under the caption "Risk Factors." SUMMARY SELECTED FINANCIAL DATA The following summary selected financial data for each of the five years ended December 31, 1997 and for the period from January 1, 1992 through December 31, 1997 are derived from the audited financial statements of the Company. The summary selected financial data for the three month periods ended March 31, 1997 and 1998 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1998. The summary selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto appearing elsewhere herein. The Company was incorporated on January 19, 1994, as a wholly owned subsidiary of Fuel Tech. Predecessor financial information included below for the period from 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 (which as of March 31, 1998, has declined to a 27.4% interest after giving effect to the exercise of stock options). The Company is a development-stage enterprise, and its efforts from January 1, 1992, to the present time have been devoted to the research, development and commercialization of PFCs and 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 were focused on other applications of PFCs that are 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 and from the summary selected financial data set forth below.
Period Period from from January 1, Year Ended January 1, Three Months 1992, December 31, 1992 Ended through through March 31, December March 31, 1993 1994 1995 1996 1997 31, 1997 1997 1998 1998 ---- ---- ---- ---- ---- -------- ---- ---- ---- STATEMENT OF (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATIONS DATA: Sales................... $ -- $ -- $ -- $ -- $ 199 $ 199 $ 40 $ -- $ 199 Operating expenses...... 131 1,106 1,958 3,812 4,084 11,429 1,051 743 12,172 Net loss during development stage.... 131 1,107 2,024 3,489 3,764 10,853 961 741 11,594 Basic and diluted loss per Common Share..... N/A $0.44 $ 0.81 $1.40 $1.50 N/A $ 0.38 $ 0.29 N/A Weighted-average shares outstanding.......... N/A 2,500 2,500 2,500 2,517 N/A 2,512 2,517 N/A Ratio of earnings to combined fixed charges and preferred dividends (FN1)...... -- -- -- -- -- -- -- -- -- Cash dividends declared. -- -- -- -- -- -- -- -- --
March 31, 1998 ---------------------------------- As Adjusted As Adjusted December 31, Assuming Assuming Full Minimum Subscription Subscription 1993 1994 1995 1996 1997 Actual (FN2) (FN2) ---- ---- ---- ---- ---- ------ ------------ ------------ BALANCE SHEET DATA: (IN THOUSANDS) Current assets.......... $ -- $ 513 $8,882 $5,595 $1,682 $ 982 $5,494 $3,782 Total assets............ -- 513 8,882 5,677 1,750 1,044 5,556 3,844 Working capital (deficit)............ -- (857) 8,395 4,109 788 53 4,565 2,853 Long-term debt.......... -- -- 745 -- 395 395 395 395 Series A Redeemable Preferred Stock...... -- -- -- -- -- -- 1,400 -- Shareholders' equity (deficiency)......... -- (857) 7,650 4,191 461 (280) 2,832 1,120 (1) For the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and for the period from January 1, 1992 through December 31, 1997 and for the three month periods ended March 31, 1997 and 1998 and for the period from January 1, 1992 through March 31, 1998, the Company's earnings were inadequate to cover fixed charges by approximately (in thousands) $131; $1,107; $2,024; $3,489; $3,764; $10,853; $961; $741; and $11,594, respectively. On a pro forma basis, for the periods ended December 31, 1997 and March 31, 1998, the Company's earnings would have been inadequate to cover combined fixed charges and preferred stock dividends by (in thousands) $4,326 and $882 asumming full subscription and that the Series A Preferred Stock and Series B Preferred Stock were outstanding as of the beginning of such periods and $4,124 and $831 assuming minimum subscription and that the Bridge Loan Notes and Series B Preferred Stock were outstanding as of the beginning of such periods, respectively. (2) Adjusted to reflect the receipt by the Company of the estimated net proceeds from the sale of the Securities offered hereby, assuming full subscription or minimum subscription, as the case may be, of the Rights Offering at a price of $74.25 per Offering Share, after deducting Soliciting Fees and expenses of the Rights Offering payable by the Company estimated at $600,000, receipt of the proceeds from the Bridge Loan Notes and, assuming full subscription and conversion of the Bridge Loan Notes into Series A Convertible Preferred Stock.
RISK FACTORS This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"). Discussion containing such forward-looking statements will be found in the material set forth under "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as within the Prospectus generally. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and the matters set forth in this Prospectus generally. The Company cautions the reader, however, that this list of factors may not be exhaustive. The following risk factors should be considered carefully in addition to the other information contained in this Prospectus before purchasing the Securities offered hereby. FACTORS RELATING TO THE COMPANY INDEPENDENT AUDITOR'S REPORT The report of the Company's independent auditors with respect to the financial statements of the Company for the year ended December 31, 1997 contains an explanatory paragraph as to the Company's ability to continue as a going concern. Among the factors cited by the auditors as raising substantial doubt as to the Company's ability to continue as a going concern is that, with respect to the periods covered, the Company incurred recurring operating losses and its operations have not produced a positive cash flow. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", and the financial statements of the Company, the notes thereto and the Report of Independent Auditors included therein. LIQUIDITY AND CAPITAL REQUIREMENTS At the date of this prospectus, the Company has cash resources, including the $1.4 million Bridge Loan from Fuel Tech and certain other lenders, estimated to be sufficient for its needs through November 1998. The Company is actively seeking additional financing of approximately $1.4 million to $3.1 million (net of estimated Subscription Fees and expenses of the offering of $600,000) through the Rights Offering. Although the Company believes that it will be successful in its capital raising efforts, there is no guarantee that the Company will be able to raise such capital on terms satisfactory to the Company. Accordingly, at March 31, 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," and the Report of Independent Auditors and the related financial statements and the notes thereto as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 and for the period from January 1, 1992 through December 31, 1997 (the "Annual Financial Statements") and the financial statements and the note thereto as of March 31, 1997 and 1998 and for each of the three months ended March 31, 1997 and 1998 and for the period from January 1, 1992 through March 31, 1998 (the "Interim Financial Statements"). CONTINUING OPERATING LOSSES The Company has had minimal revenues through March 31, 1998. Even if the Company consummates the Rights Offering and/or other financing alternative, the Company expects to incur operating losses through at least the first half of 1999. 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." COMPETITION Competition in the diesel fuel additive market will come from large additive suppliers. The Company is not currently in competition with other fuel additive manufacturers. When active marketing of the Company's PFC is in progress, the Company anticipates competing on the basis of price, proprietary technology, effectiveness and ease of use of the PFC and 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 new engine technology. NO ASSURANCES OF ADDITIONAL FUNDING Based on the Company's operating plan, management believes that the proceeds from the Rights Offering, together with the net proceeds received in connection with the $1.4 million Bridge Loan effected in 1998, will be sufficient to meet the Company's anticipated cash needs and finance its operations through January 2000 (assuming full subscription) and through April 1999 (assuming minimum subscription), although no assurances can be given in this regard. Thereafter, the Company anticipates that it may require additional funding in the form of a public or private offering of the Company's securities. Any offering of the Company's equity securities may result in immediate and significant dilution to the shareholders 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 commercial efforts and marketing programs and field trials, as well as conditions then prevailing in the relevant capital markets. There can be no assurance that such funding will be available when needed or on terms acceptable to the Company. If the Company is unable to obtain sufficient additional financing, its ability to meet its current plans for expansion will be materially adversely affected, and the Company will not be able to continue as a going concern. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Report of Independent Auditors in the Annual Financial Statements. LIMITED MARKETING EXPERIENCE To date, the Company has had limited experience and has expended limited efforts in marketing its products. The Company intends to sell its PFCs to additive companies, oil companies, oil distributors and fleets. The Company intends to sell its ARIS(TM) 2000 system to catalyst-system suppliers or engine companies. While the Company is now in active discussions with third parties to achieve this and believes it will be successful, there can be no assurance that the Company will successfully implement its plans. 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 shareholder, are in positions involving the possibility of conflicts of interest with respect to transactions concerning the Company. The Company currently has one independent director. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." 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 PFC 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 -- Products and 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 the PFC and NOx control products of the Company. The failure by the Company to receive market acceptance for the PFC and NOx control products would have an adverse effect on the Company's business, operating results and financial condition. See "BUSINESS -- Products and Markets." NO ASSURANCE OF NECESSARY REGULATORY APPROVALS The Company's products and manufacturing activities are subject to governmental regulation, principally by the Environmental Protection Agency ("EPA") and corresponding foreign and state agencies. The EPA administers the Clean Air Act Amendments of 1990 ("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 the 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. The Company received registration for its PFC from the EPA to be used as an aftermarket treatment for individual vehicles and in bulk fuel supplies for diesel. The Company has received registration status under the EPA fuel additive regulations for three additional PFCs with the original PFC. The Company has received consent from the U.K. Ministry of Health for use of the PFC in diesel fuel. See "BUSINESS -- Regulations -- USA" and "BUSINESS - -- Regulations -- International." The Company has registered the cerium products and is in the process of registering platinum/cerium bimetallic products. The Company will be required to register the gasoline product and apply for a waiver before this product can be marketed in the U.S. There can be no assurance that such registrations will be obtained. 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 -- Protection of Proprietary Information." RAW MATERIAL PRICE VOLATILITY The cost of raw materials, including platinum, rhodium and cerium, will have a direct impact on the future pricing and profitability of the Company's products. 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 these materials 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 to (i) retain current key personnel, (ii) attract and retain qualified sales and marketing personnel and (iii) develop and maintain relationships with research institutions and other outside consultants. The loss of key personnel, or the inability of the Company to hire or retain qualified personnel or the failure to assimilate effectively such personnel could have a material adverse effect on the Company's business, operating results and financial condition. See "BUSINESS -- Employees." FOREIGN CURRENCY RISK To date, sales, marketing and testing of the Company's PFCs have been limited principally to 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 significant effect on the Company's operations in the future. The Company intends to manage the risk to such exposure, if any, by entering into foreign currency futures and option contracts. FACTORS RELATING TO THE SECURITIES POSSIBLE ADVERSE FUTURE ACCOUNTING EFFECT ON EARNINGS PER SHARE ALLOCABLE TO COMMON SHARES If, on issuance of the Series B Preferred Stock, its $____ per share stated value is less than the then-current market price of the 33 Common Shares into which it is convertible, the excess of that market price over $_____ multiplied by the number of shares of Series B Preferred Stock issued (the "Aggregate Discount") will be treated under accounting rules applicable to the Company as analogous to a dividend with respect to the Series B Preferred Stock. For accounting purposes, the Aggregate Discount will increase the loss attributable to Common Shareholders for purposes of computation of basic loss per share and may affect the diluted loss per share computation in the fiscal quarter and year in which the Rights Offering is completed. The Company cannot predict the market price of the Common Shares on the date of issuance of the Series B Preferred Stock, and therefore it cannot now estimate whether an Aggregate Discount will exist or, if it does exist, the amount of the Aggregate Discount with respect to any assumed number of shares of Series B Preferred Stock to be issued in the Transaction. Solely as an example of the accounting effect, assuming that (1) the stated value per Series B Preferred Stock was $74.25, (2) the reported closing price of Common Shares at the time of issuance of the Series B Preferred Stock was $2.50 and (3) 50,000 shares of Series B Preferred Stock were issued in the Transaction, the Aggregate Discount would be $412,500. This Aggregate Discount would increase the annual basic loss per share by $.16 per share (based upon 2,516,666 shares of the Company's Common Stock outstanding at March 31, 1998). ACCOUNTING CONSEQUENCES PERTAINING TO SERIES A CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE PREFERRED STOCK Upon completion of the Rights Offering, the Series B Preferred Stock will initially be reflected in the Company's balance sheet net of the Soliciting Fees and expenses of the Rights Offering (estimated to be $600,000). Pursuant to applicable accounting rules and SEC regulations, the Company will be required to accrete the carrying value of such stock to its liquidation value. Such accretion will be recognized over a period of five years. The carrying amount of such stock shall be further periodically increased by amounts representing dividends earned but not paid. The aforementioned increases in carrying amount will decrease retained earnings and will increase the loss per share attributable to common shareholders. Pursuant to applicable accounting standards, any dividends which are paid in kind on the Series A Preferred Stock or on the Series B Preferred Stock, will be recorded in the Company's balance sheet as an increase to the accumulated deficit or reduction in retained earnings, as the case may be, and an increase in the carrying value of such stock. Accordingly, dividends that are paid in kind will increase the loss per share attributable to common shareholders and will result in additional dilution of ownership interest attributable to existing common shareholders. TAX CONSEQUENCES TO SHAREHOLDERS ON SALE OF RIGHTS OR SERIES B PREFERRED STOCK The Company believes that the Rights Offering will result in a taxable distribution to recipients of Rights. However, in the event it is determined that the distribution of the Rights is a non-taxable distribution, sale of the Rights and the Series B Preferred Stock may be subject to certain restrictions. See "CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS." If the Rights or stock acquired is characterized, for federal income tax purposes, as being "stock other than common stock," then the amount realized from the sale of such stock or Rights may, in whole or in part, be treated as ordinary income. The Company believes that, because the conversion rights granted to holders of the Series B Preferred Stock provide the unrestricted right to participate in future corporate growth, the Rights, the Series B Preferred Stock and the Common Shares received as a result of conversion of the Series B Preferred Stock should be treated as common stock for these purposes. There is no clear statutory definition of the term "stock other than common stock" however, and it is possible for the Internal Revenue Service (the "IRS") to challenge this position. Even if the Rights or the Series B Preferred Stock are classified as "stock other than common stock," there are several methods available to shareholders to avoid the adverse tax consequences arising from this designation. Ordinary income treatment will not apply on sale or other disposition of the Rights or the Series B Preferred Stock: (i) if the sale terminates the entire stock interest of the shareholder in the Company; (ii) if the Series B Preferred Stock is converted to Common Shares and the sale is of the Common Shares; (iii) in transactions where gain or loss to the shareholder is not recognized; or (iv) where it is established to the satisfaction of the Secretary of the Treasury that the transactions were not in pursuance of a plan having one of its principal purposes the avoidance of federal income tax. If the Rights and the Series B Preferred Stock are not treated as "stock other than common stock," or if one of the above exceptions apply, then a shareholder who sells the Rights or the Series B Preferred Stock will recognize gain or loss equal to the difference between the sale proceeds and such shareholder's basis (if any) in the Rights or the Series B Preferred Stock sold. Such gain or loss will generally be capital gain or loss, long or short-term, depending upon the holding period for the security sold. For tax years ending after 1997, the Internal Revenue Service Restructuring and Reform Bill of 1998 generally provides for a twelve month holding period for qualification of capital gains as long-term. DELISTING FROM NASDAQ Effective July 1, 1998, the Company's Common Shares were delisted from Nasdaq for failing to meet Nasdaq's new net tangible asset/market capitalization/net income requirement. As a result, the Company's Common Shares currently trade on the OTC Electronic Bulletin Board, although no assurance can be given that such shares will continue to trade thereon or that they will trade in the over-the-counter market, in what are commonly referred to as the "pink sheets." Nasdaq's listing requirements have become more stringent since the Company's original listing in December 1995, and there can be no assurance that the Company will be able to relist its Common Shares on Nasdaq. POSSIBLE ADVERSE EFFECT OF PENNY STOCK REGULATIONS ON THE LIQUIDITY OF THE COMPANY'S SECURITIES In the absence of the Common Shares being quoted on Nasdaq and for so long as the Common Shares continue to trade at market prices below $5.00 per share (see "PRICE RANGE OF COMMON SHARES"), the Common Shares will be deemed to be "penny stock" under the Exchange Act. Accordingly, trading in the Common Shares is covered by Rule 15g-9 promulgated under the Exchange Act. Under such rule, broker-dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. The Commission adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include an equity security listed on Nasdaq, and an equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average revenue of at least $6,000,000 for the preceding three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith. For so long as the Common Shares are subject to the regulations applicable to penny stocks, the market liquidity for the Common Shares will be severely affected, limiting the ability of broker-dealers to sell the Common Shares and the ability of purchasers in this Offering to sell their Common Shares in the secondary market. There is no assurance that trading in the Common Shares will not continue to be subject to these or other regulations that would adversely affect the market for such securities. UNCERTAIN MARKET FOR THE RIGHTS AND THE SERIES B PREFERRED STOCK The Series B Preferred Stock and the Rights will not be listed for trading. There can be no assurance that a market for the Rights will develop prior to their Expiration Date; nor can there be assurance that a market for the Series B Preferred Stock will develop. If a market develops for the Rights or the Series B Preferred Stock, there is no assurance as to the price at which the Rights or Series B Preferred Stock will trade. Any market that may develop may be volatile and unreliable. Following the Expiration Date, a subscribing Holder may or may not be able to sell shares of Series B Preferred Stock purchased in the Rights Offering at a price equal to or greater than the Subscription Price. There can also be no assurance that the Common Shares issuable upon conversion of the Series B Preferred Stock will trade at or above the Subscription Price. When made, the election of a Holder to exercise Rights in the Rights Offering is irrevocable. Moreover, until certificates are delivered, subscribing Holders may not be able to sell the Series B Preferred Stock that they have purchased in the Rights Offering. As described herein, the Series B Preferred Stock is convertible into Common Shares which currently trade on the OTC Electronic Bulletin Board, although no assurances can be given that such shares will continue to trade thereon or in the over-the-counter market, in what are commonly referred to as the "pink sheets." See "-- Delisting from Nasdaq" above. POSSIBLE VOLATILITY OF STOCK PRICE; LOW TRADING VOLUME There has been significant volatility in the market prices of publicly traded shares of emerging growth technology companies, including the Company's Common Shares. 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 securities. In addition, there has been insignificant average daily trading volume of the Company's Common Shares (including days during which no trades were consummated) since public trading of the Common Shares commenced. To the extent this trading pattern continues, the price of the Common Shares may fluctuate significantly as a result of relatively minor changes in demand for such shares and sales of stock by Holders. DILUTION Holders who do not exercise their Rights will experience a significant decrease in their proportionate interest in the equity ownership and voting power of the Company. The sale of the Rights may not compensate a shareholder for all or any part of any reduction in the market value of such shareholder's Common Shares resulting from the Rights Offering. Holders who do not exercise or sell their Rights will relinquish any value inherent in the Rights. As described herein, Rights will only be distributed to, and may only be exercised by, Holders residing outside the United States and in certain states. After giving effect to the exercise of the Rights and the subsequent conversion of the Series B Preferred Stock (assuming full subscription of the Rights and not including the conversion of the Series A Preferred Stock and outstanding stock options and warrants), the Company will have approximately 4,166,666 Common Shares issued and outstanding (3,405,587 assuming minimum subscription). Purchasers of Series B Preferred Stock will experience immediate and substantial dilution in the net tangible book value per share attributable to the Common Shares underlying the Series B Preferred Stock. See "DILUTION." NO DIVIDENDS ON COMMON SHARES, SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK The Company has not paid dividends on its Common Shares since its inception and does not intend to pay any dividends to its Holders of Common Shares in the foreseeable future. Holders of the Series A Preferred Stock and Series B Preferred Stock are entitled to receive, when, as and if declared by the Board out of funds of the Company legally available therefor, cash dividends at the annual rate of 9% of the $500 stated value and liquidation preference of the Series A Preferred Stock price per share and 9% of the $_____ stated value and liquidation preference of the Series B 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 and Series B Preferred Stock, to pay dividends in kind at the annual rate of 11% 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 and Series B 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 July 1, 1998. Preferred Dividends on shares of Series A Preferred Stock and Series B 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 shares of the Series A Preferred Stock and Series B Preferred Stock in shares of Series A Preferred Stock and shares of Series B Preferred Stock, respectively, 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 "DIVIDEND POLICY." Pursuant to applicable accounting standards, any dividends which are paid in kind on the Series A Preferred Stock or on the Series B Preferred Stock, will be recorded in the Company's balance sheet as an increase to the accumulated deficit or reduction in retained earnings, as the case may be, and an increase in the carrying value of such stock. Accordingly, dividends that are paid in kind will increase the loss per share attributable to Common Shareholders and will result in additional dilution of ownership interest attributable to existing Common Shareholders. FUTURE SALES OF COMMON SHARES The sale, or availability for sale, of substantial amounts of Common Shares in the public market subsequent to this Offering pursuant to Rule 144 under the Securities Act or otherwise could adversely affect the market price of the Common Shares and could impair the Company's ability to raise additional capital through the sale of its equity securities or debt financing. THE RIGHTS OFFERING THE RIGHTS The Company is issuing to each Holder of record of Common Shares on the Record Date one transferable Right for each 50 Common Shares held; provided, however, Rights will not be distributed to Holders who reside in jurisdictions in which the Securities have not been registered or where an exemption from registration is not available, as described more fully below, and transferees of Rights in jurisdictions where the Securities have not been registered or where an exemption from registration is not available may not exercise the Rights. The Rights will be evidenced by Rights Certificates. An aggregate of up to 50,000 Rights will be so distributed. No fractional Rights or cash in lieu thereof will be distributed or paid by the Company. The number of Rights distributed will be rounded down to the nearest whole number. As described below under "Amendment and Termination," the Company will terminate the Rights Offering if on the Expiration Date the Company receives aggregate cash proceeds of less than $2.0 million from the exercise of Rights (calculated based upon a per Common Share price of $2.25, a 12.5% premium over the average bid and ask prices of such shares over the five most recent business days). Accordingly, assuming a Subscription Price of $74.25, a minimum subscription of approximately 26,937 Offering Shares pursuant to the exercise of the Rights is necessary to proceed with the Rights Offering. Expiration Date The Rights will expire on ______________ _, 1998, at 5:00 p.m. Eastern Standard Time, thirty days after the effective date of this Prospectus, unless extended by the Board of Directors of the Company, in which case the term "Expiration Date" shall mean the latest date and time to which the Rights Offering is extended. After the Expiration Date, unexercised Rights will be null and void. The Company will not be obligated to honor any purported exercise of Rights received by the Subscription Agent after the Expiration Date, regardless of when the documents relating to that exercise were sent, except pursuant to the procedures described below. SUBSCRIPTION PRIVILEGES Basic Subscription Privilege Each Right will entitle the registered Holder thereof to purchase at the Subscription Price one share of Series B Preferred Stock. Each share of Series B Preferred Stock will be immediately convertible at no cost to the Holder thereof, into 33 Common Shares. Certificates representing Underlying Shares purchased pursuant to the Basic Subscription Privilege will be delivered to the subscribers as soon as practicable after the Expiration Date and after all prorations contemplated by the terms of the Rights Offering have been effected. Oversubscription Privilege Each Holder who exercises all of his or her Rights pursuant to the Basic Subscription Privilege may indicate on the Rights certificate additional shares of Series B Preferred Stock above the Basic Subscription Privilege up to the Maximum Offering Shares such Holder would like to purchase at the Subscription Price. The Oversubscription Privilege is not transferable. After the Expiration Date, the Company will issue those Offering Shares not purchased through the Basic Subscription Privilege to the Holders who wish to exercise their Oversubscription Privilege. If an insufficient number of Offering Shares is available to satisfy fully all elections to exercise the Oversubscription Privilege, then the available Offering Shares will be allocated among the Holders exercising their Oversubscription Privilege such that each such Holder will be entitled to receive a number of Offering Shares which is equal to the number of Offering Shares subscribed to by such Holder pursuant to the Oversubscription Privilege multiplied by a fraction, the numerator of which is the number of the then available Offering Shares and the denominator of which is the aggregate number of Offering Shares subscribed to pursuant to the Oversubscription Privilege. If a proration of the Offering Shares results in a Holder receiving fewer Offering Shares than such Holder subscribed for pursuant to the Oversubscription Privilege, then any excess funds paid by that Holder as the Subscription Price for shares not issued will be returned by the Subscription Agent without interest or deduction. Certificates representing Offering Shares purchased pursuant to the Oversubscription Privilege will be delivered to subscribers as soon as practicable after the Expiration Date and after all prorations and adjustments contemplated by the terms of the Rights Offering have been effected. SUBSCRIPTION PRICE The Subscription Price is $______ per Offering Share. The Subscription Price is payable in cash or by check, money order or wire transfer, all as more completely set forth under "THE RIGHTS OFFERING -- Exercise of Rights." METHOD FOR PRICING The terms of the Rights Offering, including the Subscription Price of $______, were determined by the Board of Directors of the Company. Among the factors considered in determining the Subscription Price are: the recent market prices of the Common Shares, the terms of the Series B Preferred Stock, including dividend and liquidation preferences, anticipated market and economic conditions, estimates of the business potential and prospects of the Company, the Company's status as a development-stage company, the Company's prior investment in its products, its future estimated cash requirements to commercialize its products, the risks of the business, and consultation with financial advisors. EXERCISE OF RIGHTS The Basic Subscription Privilege and the Oversubscription Privilege may be exercised by properly completing the Rights Certificates evidencing the Rights and forwarding them, with payment of the Subscription Price for each share of Series B Preferred Stock subscribed for pursuant to the Basic Subscription Privilege and the Oversubscription Privilege, to ChaseMellon Shareholder Services, L.L.C., the Subscription Agent, prior to the Expiration Date. Payment may only be made (a) by check or postal, telegraphic or express money order, payable to ChaseMellon Shareholder Services, L.L.C., as Subscription Agent, or (b) by wire transfer of funds to the account maintained by the Subscription Agent for the purpose of accepting subscriptions at ABA No. 021000021, Chase Manhattan Bank, New York, New York, Reorganization No. 323-213057, for Clean Diesel Technologies, Inc., Attn: Evelyn O'Connor. The Subscription Price will be deemed to have been received by the Subscription Agent only upon (i) clearance of any uncertified check, (ii) receipt by the Subscription Agent of any certified check or cashier's check or of any postal, telegraphic or express money order, or (iii) receipt of collected funds in the Subscription Agent's account designated above. If paying by uncertified personal check, please note that the funds paid thereby may take at least five (5) business days to clear. Accordingly, Holders who wish to pay the Subscription Price by means of uncertified personal check are urged to make payment sufficiently in advance of the Expiration Date to ensure that such payment is received and clears by such time and are urged to consider, in the alternative, payment by means of certified or cashier's check, money order or wire transfer of funds. All funds received in payment of the Subscription Price shall be held by the Subscription Agent in a segregated interest bearing account in the name of the Company. If Rights Certificates are sent by mail, Rights Holders are urged to use insured, registered mail, return receipt requested. If a Holder wishes to exercise Rights, but time will not permit such Holder to cause the Rights Certificates evidencing those Rights to reach the Subscription Agent prior to the Expiration Date, such Rights may nevertheless be exercised if all of the following conditions (the "Guaranteed Delivery Procedures") are met: (i) the Holder has caused payment in full of the Subscription Price for each Offering Share being subscribed for pursuant to the Basic Subscription Privilege and the Oversubscription Privilege to be received (in the manner set forth above) by the Subscription Agent prior to the Expiration Date; (ii) the Subscription Agent receives, at or prior to the Expiration Date, a guarantee notice (a "Notice of Guaranteed Delivery"), substantially in the form provided with the Instructions as to Use of Clean Diesel Technologies, Inc. Rights Certificates (the "Instructions") distributed with the Rights Certificates, from a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. ("NASD"), or from a commercial bank or trust company having an office or correspondent in the United States (each, an "Eligible Institution"), stating the name of the exercising Holder, the Number of Rights represented by the Rights Certificate held by such Holder, the number of Offering Shares being subscribed for pursuant to the Basic Subscription Privilege, if any, pursuant to the Oversubscription Privilege, and guaranteeing the delivery to the Subscription Agent of the Rights Certificates evidencing those Rights within five (5) trading days following the date of the Notice of Guaranteed Delivery; and (iii) the properly completed Rights Certificates evidencing the Rights being exercised, with any signatures guaranteed as required, is received by the Subscription Agent within five (5) trading days following the date of the Notice of Guaranteed Delivery relating thereto. The Notice of Guaranteed Delivery may be delivered to the Subscription Agent in the same manner as Rights Certificates at the addresses set forth below, or may be transmitted to the Subscription Agent by telegram or facsimile transmission (telecopier no. (201) 296-4293). Additional copies of the form of Notice of Guaranteed Delivery are available upon request from the Subscription Agent at the address set forth below. If the aggregate Subscription Price paid by an exercising Rights Holder is insufficient to purchase the number of shares of Series B Preferred Stock that the Holder indicates are being subscribed for, or if an exercising Rights Holder does not specify the number of shares of Series B Preferred Stock to be purchased, then the Rights Holder will be deemed to have exercised, first, the Basic Subscription Privilege and, second, the Oversubscription Privilege to purchase shares of Series B Preferred Stock to the full extent of the payment tendered. If the aggregate Subscription Price paid by an exercising Rights Holder exceeds the amount necessary to purchase the number of shares of Series B Preferred Stock for which the Rights Holder has indicated an intention to subscribe, then the Rights Holder will be deemed to have exercised, first, the Basic Subscription Privilege (if not already fully exercised) and, second, the Oversubscription Privilege to the full extent of the excess payment tendered. Once a Rights Holder has exercised the Basic Subscription Privilege or the Oversubscription Privilege, such exercise may not be revoked. Any Rights not duly exercised prior to the Expiration Date will expire and become worthless. Funds received in payment pursuant to the Oversubscription Privilege will be held in a segregated account pending issuance of the Offering Shares. Record Holders of Common Shares such as brokers, trustees or depositories for securities, who hold shares for the account of others, should contact the respective beneficial owners of such shares as soon as possible to ascertain the beneficial owners' intentions to obtain instructions with respect to the Rights. If a beneficial owner so instructs, the record owner of Common Shares should complete appropriate Rights Certificates and submit them to the Subscription Agent with the proper payment. The Company shall pay broker-dealers Soliciting Fees of ten percent of the Subscription Price paid for each Right which is subscribed; provided that such fees will only be paid in respect of Rights exercised in those jurisdictions described under "PLAN OF DISTRIBUTION -- Distribution Arrangements." See "PLAN OF DISTRIBUTION." Additionally, beneficial owners of Common Shares or Rights held through such a nominee Holder should contact the nominee Holder and request the nominee Holder to effect transactions in accordance with the beneficial owner's instructions. The Instructions accompanying the Rights Certificates should be read carefully and followed in detail. RIGHTS CERTIFICATES SHOULD BE SENT WITH PAYMENT TO THE SUBSCRIPTION AGENT. DO NOT SEND RIGHTS CERTIFICATES TO THE COMPANY. THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF THE RIGHTS HOLDERS. IF SENT BY MAIL, RIGHTS HOLDERS ARE URGED TO SEND RIGHTS CERTIFICATES AND PAYMENTS BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND ARE URGED TO ALLOW A SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS. All questions concerning the timeliness, validity, form and eligibility of any exercise of Rights will be determined by the Company, whose determinations will be final and binding. The Company, in its sole discretion, may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any Right. Rights Certificates will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Company determines, in its sole discretion. Neither the Company nor the Subscription Agent will be under any duty to give notification of any defect or irregularity in connection with the submission of Subscription Rights or incur any liability for failure to give such notification. ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE METHOD OF EXERCISING RIGHTS OR REQUESTS FOR ADDITIONAL COPIES OF THIS PROSPECTUS SHOULD BE DIRECTED TO CHASEMELLON SHAREHOLDER SERVICES, L.L.C. ("THE INFORMATION AGENT"), AT THE ADDRESS SET FORTH BELOW UNDER "INFORMATION AGENT". JURISDICTIONS IN WHICH THE SECURITIES ARE OFFERED THE RIGHTS WILL ONLY BE GRANTED TO, AND MAY ONLY BE EXERCISED BY, INVESTORS RESIDING IN THE FOLLOWING JURISDICTIONS WHERE THE SECURITIES OFFERED HEREBY HAVE BEEN REGISTERED WITH THE APPROPRIATE SECURITIES REGULATORY AUTHORITIES OR WHERE AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE: OUTSIDE THE UNITED STATES AND IN COLORADO, CONNECTICUT, THE DISTRICT OF COLUMBIA, ILLINOIS, INDIANA, IOWA, KANSAS, MAINE, MARYLAND, MASSACHUSETTS, NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND, VERMONT, VIRGINIA AND WASHINGTON. RIGHTS WILL NOT BE DISTRIBUTED TO HOLDERS WHO RESIDE IN STATES WHERE THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED OR WHERE AN EXEMPTION FROM REGISTRATION IS NOT AVAILABLE. IN ADDITION, THE SERIES B PREFERRED STOCK MAY NOT BE TRANSFERRED TO RESIDENTS OF ANY OF THE FOLLOWING STATES: ARIZONA, FLORIDA, GEORGIA, OHIO, PENNSYLVANIA OR TEXAS. NO REVOCATION ONCE A HOLDER OF RIGHTS HAS PROPERLY EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE AND/OR THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED. AMENDMENT AND TERMINATION The Board of Directors reserves the Right to extend the Expiration Date and to amend the terms and conditions of the Rights Offering. Any extension, if made, will be publicly announced through a release to the Dow Jones News Service and as otherwise required by applicable law or regulations. In the event of a material change in the terms of the Rights Offering, there will be an affirmative resolicitation of the Rights Offering by means of a post-effective amendment to the Registration Statement. In the event of such a resolicitation, subscribing Holders will be deemed to have effectively revoked their subscriptions unless they affirmatively confirm their intent to subscribe, and their subscription payments will be returned to them without interest or deduction. The Board of Directors of the Company in its sole discretion, may terminate the Rights Offering and revoke the Rights at any time prior to the Expiration Date or thereafter. In any event, the Company shall terminate the Rights Offering if on the Expiration Date the Company receives aggregate cash proceeds of less than $2.0 million from the exercise of Rights. In the event of such termination, the Company will promptly return to all persons that exercised Rights, their subscription payments, without interest or deduction. METHOD OF TRANSFERRING RIGHTS Rights may be purchased or sold through usual investment channels, including banks and brokers. There can be no assurance that an active market will develop for the Rights. The Rights, the underlying shares of Series B Preferred Stock and the Common Shares issuable upon conversion of the Series B Preferred Stock, will not be eligible for trading on Nasdaq. The Rights evidenced by a single Rights Certificate may be transferred in whole by endorsing the Rights Certificate for transfer in accordance with the accompanying instructions. A portion of the Rights evidenced by a single Rights Certificate (but not fractional Rights or the Oversubscription Privilege or to persons in jurisdictions where the Securities have not been registered or where an exemption from registration is not available) may be transferred by delivering to the Subscription Agent a Rights Certificate properly endorsed for transfer, with instructions to register such portion of the Rights evidenced thereby in the name of the transferee (and to issue a new Rights Certificate to the transferee evidencing such transferred Rights). In such event, a new Rights Certificate evidencing the balance of the Rights will be issued to the Rights Holder or, if the Rights Holder so instructs, to an additional transferee. The Oversubscription Privilege is not transferable. Holders of Rights wishing to transfer all or a portion of their Rights (subject to the limitations described above) should allow a sufficient amount of time prior to the Expiration Date for (i) the transfer instructions to be received and processed by the Subscription Agent, (ii) a new Rights Certificate for the transferred Rights to be issued and transmitted to the transferee or transferees and a new Rights Certificate for any retained Rights to be issued and transmitted to the transferor and (iii) the Rights evidenced by such new Rights Certificates to be exercised or sold by the recipients thereof. Neither the Company nor the Subscription Agent shall have any liability to a transferee or transferor of Rights if Rights Certificates are not received in time for exercise or sale prior to the Expiration Date. EXCEPT FOR CERTAIN FEES PAID TO BROKER-DEALERS AND CHARGED BY THE SUBSCRIPTION AGENT THAT WILL BE PAID BY THE COMPANY, ALL COMMISSIONS, FEES AND OTHER EXPENSES (INCLUDING BROKERAGE COMMISSIONS AND TRANSFER TAXES) INCURRED IN CONNECTION WITH THE PURCHASE, SALE OR EXERCISE OF RIGHTS WILL BE FOR THE ACCOUNT OF THE TRANSFERRING HOLDER OF THE RIGHTS AND NONE OF SUCH COMMISSIONS, FEES OR EXPENSES WILL BE PAID BY THE COMPANY OR THE SUBSCRIPTION AGENT. The Rights will be eligible for transfer through, and the exercise of the Rights may be effected through, the facilities of the Transfer Agent. NO RECOMMENDATION Neither the Company nor the Board of Directors of the Company makes any recommendations regarding whether Rights Holders should sell their Rights or whether Rights Holders should exercise their Rights. PARTICIPATION BY FUEL TECH Fuel Tech has not yet made a determination as to whether it will participate in the Rights Offering, and will do so following the distribution of the Rights based upon several factors, including the offering price, Fuel Tech's financial position and other factors. If Fuel Tech were to participate, it may desire to participate through the conversion of the outstanding $495,000 loan by one of its subsidiaries to the Company. Such a participation, if agreed to in the sole discretion of the Company, would represent a Basic Subscription in respect of 31.9% of the Common Shares currently owned by Fuel Tech. SUBSCRIPTION AGENT The Company has engaged ChaseMellon Shareholder Services, L.L.C. as the Subscription Agent for the Rights Offering. The Company will pay the fees and expenses of the Subscription Agent, and has also agreed to indemnify the Subscription Agent from certain liabilities which it may incur in connection with the Rights. INFORMATION AGENT The Company has appointed ChaseMellon Shareholder Services, L.L.C. as Information Agent for the Rights Offering. The Company will pay the fees and expenses of the Information Agent and has also agreed to indemnify the Information Agent from certain liabilities that it may incur in connection with the Rights Offering. Any questions or requests for assistance concerning the method of exercising Rights to purchase Series B Preferred Stock or for additional copies of this Prospectus can be directed to the Information Agent in the continental United States at ChaseMellon Shareholder Services, L.L.C., 450 West 33rd Street, New York, NY 10001, Phone: (888) 224-2745 and in the United Kingdom at Computershare Services, P.L.C., P.O. Box, Consort House, East Street, Bedminister, Bristol, BS 991XZ, Phone: 1179-370-672. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS The following is a general summary of certain United States Federal income tax consequences (the "Tax Consequences") to the Company's Holders who are citizens or residents of the United States of the proposed distribution to such Holders of Rights to acquire shares of Series B Preferred Stock of the Company. This summary does not address any state, local, foreign, estate or gift tax considerations. This summary is included for general information only. This summary is based upon laws, regulations, revenue rulings and decisions as of July 10, 1998, all of which are subject to change or differing interpretations; any such change could have a retroactive effect and may also have a negative tax impact. The tax treatment of a Holder may vary depending upon the Holder's particular circumstances and certain Holders such as tax exempt corporations, insurance companies, "S" corporations, banks, foreign estates or trusts, foreign corporations and persons who are not citizens or residents of the United States, may be subject to special rules not discussed below. This summary is limited to Holders who are citizens or residents of the United States or corporations organized under the laws of a state of the United States who will hold the Rights as "capital assets" within the meaning of Section 1221 of the Internal Revenue code of 1986, as amended (the "Code"). HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE OFFERING AND THE RIGHTS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. RECEIPT OF RIGHTS BY HOLDERS Code Section 305(b)(5) provides that a distribution of convertible preferred stock is taxable under Code Section 301 as a dividend unless it is established that such distribution will not have the result of a disproportionate distribution. Rights to acquire convertible preferred stock are treated the same as the stock itself. Holders in jurisdictions where Securities have not been registered or where an exemption for registration is not available will not receive, or be able to exercise, the Rights. Holders of less than fifty (50) Common Shares shall not receive any Rights pursuant to this offering plan. Additionally, management believes that some Holders will exercise their Rights and some will not and there is an Oversubscription Privilege. Consequently, the distribution of Rights will be a disproportionate distribution and will be taxable as a dividend pursuant to Code Section 301. Therefore, a Holder who receives Rights will (i) recognize ordinary income (treated as a dividend for Federal income tax purposes) equal to the lesser of: (a) the Value of the Rights on the date of receipt, or (b) the Company's current and/or accumulated earnings and profits ("E&P") for the taxable year in which the Rights are distributed; (ii) reduce the adjusted tax basis of the Common Shares of the Company held by the Holder by the excess of the Value of the Rights over the amount required to be treated as a dividend; and (iii) recognize capital gain to the extent such excess Value exceeds the adjusted tax basis of the Company's Common Shares held by the Holder. Characterization of the capital gain recognized for Federal income tax purposes, if any, as long term or short term capital gain, is determined by reference to each Holder's individual holding period for the Company Common Shares. Management of the Company believes that the Company will have no current and/or accumulated E&P for the taxable year in which the Rights are distributed. Consequently, Management believes that no portion of the Rights will be taxable as ordinary income to Holders. No attempt has been made to independently verify whether current and/or accumulated E&P exist or are anticipated to exist for the taxable year of the distribution of the Rights. Accordingly, there can be no assurance that current and/or accumulated E&P exist or will exist for the taxable year of the distribution of the Rights. In any event, the Company will provide each Holder with an information statement after the close of the taxable year in which the Rights are distributed indicating the amount, if any, of the distribution that is required to be treated as ordinary income under the foregoing rules. DETERMINATION OF VALUE The fair market value of property is a question of fact and acknowledged experts may disagree as to the fair market value of a particular item of property. In some instances, the fair market value of property may not be ascertainable for tax purposes which may postpone income recognition for Federal income tax purposes. The Rights would constitute a distribution or property. In the instant case, no appraisal of the Rights will be obtained, but it is anticipated that the Rights will be purchased and sold through usual investment channels and the selling price thereof at or near the date the Rights are distributed will likely be deemed the Value of the Rights. No assurance can be given as to what the Value of the Rights will be or that the Rights will be considered to have an ascertainable fair market value. TAX BASIS OF RIGHTS Holders receiving Rights will have a tax basis therein equal to their Value. As to Holders, their basis in their shares will be reduced, but not below zero, by an amount equal to the excess of such Value over the amount, if any, treated as ordinary income under the rules discussed above. SALE OF RIGHTS A Holder who sells Rights prior to exercise will recognize a short-term gain or loss equal to the difference between his tax basis in the Rights sold and the amount realized on the sale. EXERCISE OF RIGHTS; BASIS OF STOCK RECEIVED The exercise of Rights will not have any separate Federal income tax consequences, nor will the receipt of the shares of Series B Preferred Stock upon such exercise. Such shares will have a basis equal to the amount paid therefor on exercise plus the Holder's tax basis in the Rights exercised. LAPSE OF RIGHTS PRIOR TO EXERCISE If a Holder does not sell or exercise the Rights received, and the Rights expire, the Holder will realize a short-term capital loss equal to the tax basis of the expired Rights. No adjustment to the basis of the Company shares of a Holder will result. CONVERSION OF PREFERRED STOCK Holders who convert their Series B Preferred Stock into Common Shares will not recognize any gain or loss upon such conversion. A Holder's basis in the Common Shares acquired through conversion will be equal to the basis which the Holder had in the Series B Preferred Stock so converted. The Holding period for such Common Shares shall include the holding period for the converted Series B Preferred Stock. NON-DISPROPORTIONATE DISTRIBUTION Treasury Regulations Sections 1.305-6 provide that where a conversion right (of preferred into common shares) may be exercised over a period of many years and the dividend rate is consistent with market conditions at the time of distribution of the stock, there is no basis for predicting at what time and the extent to which the stock will be converted, the distribution may not be a "disproportionate distribution." If the distribution of Rights is not a disproportionate distribution, it may be tax free pursuant to Code Section 305. In the event the distribution of Rights is determined to be a tax-free transaction, several consequences may result, one of which is that the Series B Preferred Stock received may be treated as "Section 306 stock." Although the Company believes that the preferred stock which would be received on exercise of the Rights would not be Section 306 stock, it is possible for the Internal Revenue Service to challenge this position. The effect of such a designation upon various aspects of this offering are summarized below for information purposes. Code Section 306 generally provides that where a corporation distributes preferred stock to its shareholders in a tax-free distribution, the shareholders will recognize ordinary income at such time as such preferred stock is "disposed of." Code Section 306(c)(2) provides that stock shall not be "Section 306" stock if no part of the distribution would have been a dividend if, in lieu of the stock (or rights) distribution, a cash distribution would have been made. It should be noted, however, that dividend consequences of a distribution of cash are determined as of the end of the taxable year in which the distribution is made. Although management believes that there will be no current or accumulated E&P as of the end of the tax year in which the distribution occurs, there can be no assurance that that will be so. Therefore, in the event there is any E&P, current or accumulated as of the end of the year in which the distribution of Rights occurs, and the distribution itself is determined to be a tax-free distribution, any gain recognized on the disposition of the Rights or the preferred stock received on exercising the Rights would be taxable as ordinary income and not as capital gain. The basis and the holding period for computation of long-term or short-term capital gain or loss of the Rights would be determined with reference to the basis of the previously owned Common Shares. The basis provisions of Code Section 307 would require a Holder to allocate the adjusted basis of the previously owned Common Shares between the previously owned Common Shares and the Rights based on relative fair market value (after the distribution of the Rights). Code Section 307(b) provides an exception to the allocation of basis requirement if the fair market value of the Rights are less than fifteen (15%) percent of the fair market value of the previously owned stock. In such cases, the allocation of basis is not required but becomes an election available to the stockholder. As discussed above, no representation or assurances can be made as to the Value of the Rights. If a Holder's basis in the Rights is determined with reference to his previously owned Common Shares, lapse of the Rights would result in a capital loss measured by the Holder's basis in the Rights and the determination of whether such loss is long-term or short-term would be the same as the holding period of the previously owned Common Shares. A Holder who converts the Series B Preferred Stock into Common Shares will not recognize gain or loss on such conversion. Under certain circumstances, sale of the Common Shares acquired thereby may be treated as being sale of "stock other than common stock" such that any resulting gain would be treated as ordinary income rather than capital gain. Even if the Rights, the Series B Preferred Stock or resultant Common Shares are treated as "stock other than common stock," there are several methods available to Holders to avoid the adverse tax consequences arising from such designation. One such method would be the sale of the entire stock interest of the Holder. RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS For the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and for the period from January 1, 1992 through December 31, 1997 and for the three month periods ended March 31, 1997 and 1998 and for the period from January 1, 1992 through March 31, 1998, the Company's earnings were inadequate to cover fixed charges by approximately (in thousands) $131; $1,107; $2,024; $3,489; $3,764; $10,853; $961; $741; and $11,594, respectively. USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 50,000 shares of Series B Preferred Stock offered hereby, are expected to be approximately $3.1 million, assuming an offering price of $74.25 per share, estimated Subscription Fees and expenses of $600,000 and full subscription of the Rights. All of the net proceeds of the Subscription Rights will be paid to the Company. Assuming minimum subscription using the foregoing assumptions, net cash proceeds would be approximately $1.4 million. The Company expects to use the net proceeds of the Rights Offering, assuming full subscription, and apply them to the following budgeted uses: $1,700,000 for marketing, field trials and patents; repayment of $200,000 plus $45,000 of interest to Fuel Tech under the Term Loan (as defined below); and the balance for working capital and general corporate purposes. The Company expects to use the net proceeds of the Rights Offering, assuming minimum subscription, and apply them to the following budgeted uses: $750,000 for marketing, field trials and patents; repayment of $100,000 plus $26,000 of interest to Fuel Tech under the Term Loan (as defined below); and the balance for working capital and general corporate purposes. The allocation of the net proceeds of this offering set forth above represents the Company's best estimate based upon its present plans and certain assumptions regarding general economic and industry conditions and the Company's future revenues and expenditures. The Company reserves the Right to reallocate the proceeds within the above described categories or to other purposes in response to, among other things, changes in its plans, industry conditions, and the Company's future revenues and expenditures. Based on the Company's operating plan, management believes that the net proceeds from this offering, together with the $1.4 million Bridge Loan effected in 1998, will be sufficient to meet the Company's anticipated cash needs and finance its operations through January 2000 (assuming full subscription) and through April 1999 (assuming minimum subscription). Thereafter, the Company anticipates that it may require additional financing to meet its current or future plans. See "RISK FACTORS -- Factors Relating to the Company -- Independent Auditor's Report" and "-- Liquidity and Capital Requirements" and "-- No Assurances of Additional Funding." Net proceeds not immediately required for the purposes described above will be invested principally in U.S. government securities, short-term certificates of deposit, money market funds, or other high-grade, short-term, interest-bearing investments. As described herein, Fuel Tech has not yet made a determination as to whether it will participate in the Rights Offering, and will do so following the distribution of the Rights based upon several factors, including the offering price, Fuel Tech's financial position and other factors. If Fuel Tech were to participate, it may desire to participate through the conversion of the outstanding $495,000 loan by one of its subsidiaries to the Company. If Fuel Tech were to participate by converting such loan (for which the Company's consent would be required) and, assuming full subscription, net cash proceeds, as well as outstanding indebtedness of the Company, would decrease by approximately $495,000. Any such conversion, if agreed by the Company, would not be included in calculating aggregate cash proceeds received by the Company in determining whether the minimum subscription has been met. PRICE RANGE OF COMMON SHARES The Company's Common Shares were listed on Nasdaq under the symbol "CDTI" through June 30, 1998. Effective July 1, 1998, the Common Shares were delisted and currently trade on the OTC Electronic Bulletin Board, although no assurances can be given that such shares will continue to trade thereon or in the over-the-counter market, in what are commonly referred to as the "pink sheets". The following table sets forth the high and low sale prices by quarter through June 30, 1998 as reported by Nasdaq, and for July 1 through July 29, 1998 in the OTC Electronic Bulletin Board. High Low ---- --- 1st Quarter 1996................................ 7 3/8 5 2nd Quarter 1996................................ 6 3/8 4 3/8 3rd Quarter 1996................................ 6 3 7/8 4th Quarter 1996................................ 4 1/4 2 1st Quarter 1997................................ 5 1/2 2 2nd Quarter 1997................................ 4 1/2 3 1/4 3rd Quarter 1997................................ 4 1/8 2 1/4 4th Quarter 1997................................ 3 3/4 1 3/16 1st Quarter 1998................................ 3 1/2 1 3/8 2nd Quarter 1998................................ 1 3/4 1 3/4 3rd Quarter 1998 (through August 4, 1998)....... 2 1 7/8 As of August 4, 1998, the last sale price for the Common Shares as reported by the OTC Electronic Bulletin Board was $1.88 per Common Share. As of _______ __, 1998, there were ___ Holders of record of the Common Shares. DIVIDEND POLICY The Company has to date not paid dividends on its Common Shares and does not intend to pay any dividends to its Holders of Common Shares in the foreseeable future. Holders of the Series A Preferred Stock and Series B Preferred Stock are entitled to receive, when, as and if declared by the Board out of funds of the Company legally available therefor, cash dividends at the annual rate of 9% of the $500 stated value and liquidation preference of the Series A Preferred Stock price per share and 9% of the $______ stated value and liquidation preference of the Series B Preferred Stock price per share, respectively; 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 and Series B Preferred Stock, as the case may be, to pay dividends in kind at the annual rate of 11% 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 and Series B 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 July 1, 1998. Preferred Dividends on shares of Series A Preferred Stock and Series B 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 shares of the Series A Preferred Stock and Series B Preferred Stock in shares of Series A Preferred Stock and Series B Preferred Stock, respectively, and any earnings which the Company may realize in the foreseeable future will be retained to finance the development and expansion of the Company. CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1998, and the as adjusted capitalization of the Company as of March 31, 1998 after giving effect to (i) the issuance of $1.4 million of Bridge Loan Notes, (ii) the distribution of and the exercise of the Rights by Holders of Common Shares and the contribution of approximately $3.1 million (assuming full subscription, net of estimated Soliciting Fees and expenses of the Rights Offering of $600,000), to the Company's capital and the conversion of the Bridge Loan Notes into Series A Convertible Preferred Stock and (iii) the distribution of and the exercise of the Rights by Holders of Common Shares and the contribution of approximately $1.4 million (assuming minimum subscription, net of estimated Soliciting Fees and expenses of the Rights Offering of $600,000), to the Company's capital, in each case as if such events occurred as of March 31, 1998. See "USE OF PROCEEDS."
March 31, 1998 -------------------------------------------- (in thousands) AS ADJUSTED AS ADJUSTED AS ADJUSTED FOR FOR BRIDGE LOAN FOR RIGHTS RIGHTS OFFERING ACTUAL OFFERING (FULL (MINIMUM SUBSCRIPTION) SUBSCRIPTION) ------------ ----------- ------------- ----------- Short-term Debt Current Portion Term Loan payable to Platinum Plus, Inc. $ 100 $ 100 $ 100 $ 100 (FN1)............................ ------------ ----------- ------------- ----------- Total short-term debt......... 100 100 100 100 ------------ ----------- ------------- ----------- Long-term Debt Term Loan payable to Platinum Plus, Inc. (FN1).............. 395 395 395 395 Bridge Loan payable to Fuel Tech. -- 500 (FN2) -- (FN6) 500 (FN2) Bridge Loan payable to other -- 900 (FN2) -- (FN6) 900 (FN2) lenders ......................... ------------ ------------ ------------ ----------- Total long-term debt.......... 395 1,795 395 1,795 ------------ ------------ ------------- ----------- Series A Redeemable Preferred Stock (FN3).................... -- -- 1,400 -- Shareholders' (Deficit) Equity Series B Preferred Stock (FN4)... -- -- 3,112 1,400 Common Stock (FN5)............... 126 126 126 126 Additional Paid-in Capital........... 11,188 11,188 11,188 11,188 Deficit accumulated during the development stage................. (11,594) (11,594) (11,594) (11,594) ------------ ------------ -------------- ------------ Total Shareholders' (Deficit) Equity. (280) (280) 2,832 1,120 ------------ ------------- ------------- ----------- Total Capitalization................. $ 215 $ 1,615 $ 4,727 $ 3,015 ============ ============ ============= =========== - ------------------------------------------------ (1) Platinum Plus, Inc. ("Platinum Plus") is a wholly owned subsidiary of Fuel Tech. The principal amount of the Term Loan 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. Platinum Plus has reserved the right, however, to call this payment at any time. As of the date of this prospectus, Platinum Plus has not demanded repayment. Interest at a rate of 8% 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 Note 7 to the Annual Financial Statements for information regarding the loan payable by the Company. As described under "USE OF PROCEEDS," Fuel Tech has not yet decided whether it will participate in the Rights Offering. If Fuel Tech were to participate by converting such loan (for which the Company's consent would be required) and the Rights Offering was fully subscribed, net cash proceeds from the Rights Offering, as well as outstanding indebtedness of the Company, would decrease by approximately $495,000. If Fuel Tech were to participate and the Rights Offering was minimally subscribed, the outstanding indebtedness of the Company would decrease by approximately $495,000 and shareholders' equity would increase by approximately $495,000. (2) Assumes receipt of the proceeds of the Bridge Loan as of March 31, 1998. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Bridge Loan." (3) For a description of the Series A Convertible Preferred Stock issuable upon the conversion of the Bridge Loan Notes, see "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock -- Series A Convertible Preferred Stock" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Terms of Series A Convertible Preferred Stock." Shares of Series A Convertible Preferred Stock, once issued, are convertible at the option of the Holders thereof into Common Shares at a conversion price of $1.50 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. Series A Convertible Preferred Stock is redeemable at the holder's option after four years. (4) For a description of the Series B Convertible Preferred Stock, see "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock -- Series B Convertible Preferred Stock." Shares of Series B Convertible Preferred Stock, once issued, are convertible at the option of the Holders thereof into 33 Common Shares at no cost to such Holder. (5) Based on the number of shares outstanding at March 31, 1998. Excludes (i) 427,784 shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of $3.50 per share; and (ii) 75,000 shares of Common Stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $7.66 per share. (6) Assumes mandatory conversion of the Bridge Loan Notes into Series A Preferred Stock. In the event that the Rights Offering does not meet the minimum net subscription of $1.75 million required under the terms of the Bridge Loan Notes to automatically convert the Bridge Loan Notes into Series A Preferred Stock, the Bridge Loan may be converted at any time at the option of the Bridge Loan Lenders after January 31, 1999. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Bridge Loan."
DILUTION At March 31, 1998, the Company had a negative tangible net worth of $280,000 or $0.11 per Common Share based on the 2,516,666 Common Shares outstanding. Negative tangible net worth per share represents the amount of the Company's total assets less the amount of its intangible assets and liabilities, divided by the number of Common Shares outstanding. After giving effect to the receipt of net proceeds (assuming a public offering price of $74.25 per share of Series B Preferred Stock, full, minimum and midpoint subscription of the Rights and the immediate conversion of the foregoing shares of Series B Preferred Stock into shares of Common Stock) from the sale of the securities offered hereby, the pro forma net tangible book value of the Company at March 31, 1998, would have been approximately $.83, $.51 and $.68 per Common Share, respectively. This would result in dilution to the new public investors (i.e., the difference between the Offering Price of a Common Share underlying the Series B Preferred Stock offered hereby and the net tangible book value thereof after giving effect to this Offering) of approximately $1.43, $1.74 and $1.57 per Common Share (based on full, minimum and midpoint subscription), respectively. The following table illustrates the per share dilution under three scenarios: (i) full subscription of the Rights; (ii) minimum subscription of the Rights; and (iii) a midpoint between the first two scenarios.
Minimum Full Subscription Subscription Midpoint -------------------- -------------------- -------------------- Public offering price per Common Share underlying the Series B Preferred Stock offered hereby at March 31, 1998 (FN1).... $2.25 $2.25 $2.25 Pro forma tangible book value per Common Share after Offering...................... Negative tangible book value per Common Share at March 31, 1998................. $(.11) $(.11) $(.11) Increase in net tangible book value per Common Share attributable to new investors............................... .94 .83 .62 .51 .79 .68 ------- --------- ------- --------- ------- --------- Dilution per Common Share to new investors (FN2)(FN3)(FN4)........................... $1.43 $1.74 $1.57 ==================== ==================== ==================== - ------------------------- (1) Public offering price per Common Share is calculated as though the Series B Convertible Preferred Stock is converted into the underlying Common Shares of the Company, pursuant to the conversion provisions of such stock discussed elsewhere herein. (2) At March 31, 1998, 427,784 Common Shares are issuable pursuant to the Company's 1994 Incentive Plan (the "Plan"). Options with exercise prices less than $2.25 per Common Share, subject to the Plan's vesting provisions, will result in further dilution to new investors of $.01, $.01 and $.01 per Common Share assuming full subscription, minimum subscription and midpoint subscription, respectively. (3) The dilution amounts set forth above under "Full Subscription", Minimum Subscription" and "Midpoint" assume subscription to 50,000 shares, 26,937 shares and 38,469 shares of Series B Convertible Preferred Stock, respectively. (4) If the holders of the Bridge Loan Notes were to exercise the conversion provisions of such notes into Series A Convertible Preferred Stock and convert such stock into the Company's Common Shares, the amounts set forth above for "Dilution per Common Share to new investors" under the columns "Full Subscription", Minimum Subscription" and "Midpoint" would have been reduced to $1.33, $1.57 and $1.44, per share, respectively.
The following table sets forth, as of the date of this Prospectus, the number of Common Shares purchased, the percentage of Common Shares purchased, the total consideration paid (before expenses of the 1995 Rights Offering and Subscription Fees and expenses of this Offering), the percentage of total consideration paid and the average price per share paid, by the existing shareholders of the Company and the investors in this Offering assuming the maximum proceeds to the Company from the Rights Offering (i.e. full subscription).
Shares Purchased Average -------------------------- Price per Number Percentage Amount Percentage Share ----------- ----------- ----------- ----------- ----------- New Investors.................. 1,650,000 39.6% $ 3,712,500 22.8% $ 2.25 Existing Shareholders.......... 2,516,666 60.4% 12,569,000 77.2% 4.99 ----------- ----------- ----------- ----------- ----------- TOTAL(FN2)................ 4,166,666 100.0% $16,281,500 100.0% 3.91 (FN1) =========== =========== =========== =========== =========== - ------------------ (1) Assuming full subscription of the Rights Offering, conversion of the Bridge Loan Notes into Series A Preferred Stock and, subsequent conversion of such Series A Preferred Stock into the Company's Common Shares, the average price per share paid by all shareholders would decrease from $3.91 to $3.47 per share. (2) Excludes any conversion of Series A Preferred Stock into Common Shares.
The following table sets forth, as of the date of this Prospectus, the number of Common Shares purchased, the percentage of Common Shares purchased, the total consideration paid (before expenses of the 1995 Rights Offering and Subscription Fees and expenses of this Offering), the percentage of total consideration paid and the average price per share paid, by the existing shareholders of the Company and the investors in this Offering assuming the minimum proceeds to the Company from the Rights Offering (i.e. minimum subscription).
Shares Purchased Average -------------------------- Price per Number Percentage Amount Percentage Share ----------- ----------- ----------- ----------- ----------- New Investors.................. 888,921 26.1% $ 2,000,100 13.7% $ 2.25 Existing Shareholders.......... 2,516,666 73.9% 12,569,000 86.3% 4.99 ----------- ----------- ----------- ----------- TOTAL..................... 3,405,587 100.0% $14,569,100 100.0% 4.28 =========== =========== =========== =========== ===========
SUMMARY SELECTED FINANCIAL DATA The following summary selected financial data for each of the five years in the period ended December 31, 1997 and for the period from January 1, 1992 through December 31, 1997 are derived from the audited financial statements of the Company. The summary selected financial data for the three month periods ended March 31, 1997 and 1998 are derived from unaudited financial statements of the Company. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1998. The summary selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto appearing elsewhere herein. 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 at such time a 27.6% ownership interest in the Company (which as of March 31, 1998, has declined to a 27.4% interest after giving effect to the exercise of stock options). The Company is a development-stage enterprise, and its efforts from January 1, 1992, to the present time have been devoted to the research, development and commercialization of PFCs and 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 were focused on other applications of PFCs that are 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 and from the summary selected financial data set forth below.
Period Period from from January 1, January 1, 1992, Three Months 1992 Years Ended through Ended through December 31, December 31, March 31, March 31, 1993 1994 1995 1996 1997 1997 1997 1998 1998 ------ ------ ------ ------ ------ ------ ------ ----- ------ STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales..................... $ -- $ -- $ -- $ -- $ 199 $ 199 $ 40 $ -- $ 199 Costs and expenses: Cost of sales.......... -- -- -- -- 132 132 23 -- 132 General and administrative......... -- 507 963 1,842 1,730 5,042 496 451 5,493 Research and development............ 86 441 796 1,747 1,985 5,317 457 236 5,553 Patent filing and 45 158 199 223 237 938 75 56 994 maintenance............ ------ ------ ------ ------ ------ ------ ------ ----- ------ Loss from operations...... 131 1,106 1,958 3,812 3,885 11,230 1,011 743 11,973 Interest expense (income), net.................... -- 1 66 (323) (121) (377) (50) (2) (379) ------ ------ ------ ------ ------ ------ ------ ----- ------ Net loss during development stage...... $ 131 $1,107 $2,024 $3,489 $3,764 $10,853 $ 961 $ 741 $11,594 ====== ====== ====== ====== ====== ======= ====== ===== ======= Basic and diluted loss per Common Share........... N/A $ 0.44 $ 0.81 $ 1.40 $ 1.50 N/A $ 0.38 $ 0.29 N/A Weighted-average shares outstanding............ N/A 2,500 2,500 2,500 2,517 N/A 2,512 2,517 N/A Ratio of earnings to combined fixed charges and preferred stock dividends (FN1)........ -- -- -- -- -- -- -- -- -- Cash dividends declared... -- -- -- -- -- -- -- -- --
December 31, March 31, 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- BALANCE SHEET DATA: (IN THOUSANDS) Current assets.......... $ -- $ 513 $ 8,882 $ 5,595 $ 1,682 $ 982 Total assets............ -- 513 8,882 5,677 1,750 1,044 Current liabilities..... -- 1,370 487 1,486 894 929 Long-term debt.......... -- -- 745 -- 395 395 Working capital (deficit)............ -- (857) 8,395 4,109 788 53 Shareholders' equity (deficiency)......... -- (857) 7,650 4,191 461 (280) (1) For the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and for the period from January 1, 1992 through December 31, 1997 and for the three month periods ended March 31, 1997 and 1998 and for the period from January 1, 1992 through March 31, 1998, the Company's earnings were inadequate to cover fixed charges by approximately $131; $1,107; $2,024; $3,489; $3,764; $10,853; $961; $741; and $11,594, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, development and, to a limited extent, commercialization of PFCs and NOx reduction technologies to reduce emissions from diesel engines. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997, VERSUS THREE MONTHS ENDED MARCH 31, 1998 Sales and Cost of sales were $40,000 and $23,000, respectively, for the first quarter of 1997 and zero in the comparable period in 1998. The Company's products were purchased by Holts, pursuant to a supply agreement entered into in September 1996 (the "September 1996 Supply Agreement"). 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. In December 1997, Holts was acquired by Prestone Products, Inc. ("Prestone"), a division of AlliedSignal. Based on management and product line changes at Holts resulting from the Prestone acquisition, Holts did not order any product in the first half of 1998, and the Company expect delays in sales to Holts in 1998. General and administrative expenses decreased from $496,000 in the first quarter of 1997 to $451,000 in the comparable period in 1998. The decrease is the result of the implementation of some of the Company's plans to minimize expenses in order to conserve cash, pending securing additional working capital. Such plans included reducing the administrative staff from four to two, closing the Company's U.K. office and reducing management fees charged to the Company by Fuel Tech. These efforts were partially offset by the increased costs associated with obtaining financing. Research and development expenses were $457,000 in the first quarter of 1997 versus $236,000 in the comparable period in 1998. The Company significantly reduced research and development costs in 1998 due in part to a shift in emphasis toward commercialization versus research and development. Other factors include the completion of a number of fundamental programs in 1997, the deferral of certain field trials due to the Company's diminishing working capital position 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. Patent filing and maintenance expenses decreased from $75,000 in the first three months of 1997 to $56,000 in the comparable period in 1998. Expenses were higher in 1997 due to the costs associated with new patent filings for the Company's NOx reduction technology. Interest income decreased from $64,000 in the first three months of 1997 to $13,000 in the comparable period in 1998 as a result of the Company's diminishing cash position. The Company is currently taking steps to minimize costs and expenses in order to conserve cash pending securing additional working capital, and consequently, expects costs and expenses to be lower in 1998 than in 1997, although no assurances can be given in this regard. 1996 VERSUS 1997 Sales and Cost of sales were zero in 1996 and $199,000 and $132,000, respectively, in 1997 as the Company started selling small quantities of product to Holts in 1997. The Company's products were purchased by Holts, pursuant to the September 1996 Supply Agreement. 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. As described above, Holts was acquired by Prestone in December 1997, and as a result the Company expects delays in sales to Holts in 1998 . See "-- Results of Operations -- Three Months Ended March 31, 1997, Versus Three Months Ended March 31, 1998" and the Annual Financial Statements. As the Company begins selling product again, gross margin is expected to improve in the future as the PFC processing costs charged to the Company will be reduced with subsequent production batches. General and administrative expenses decreased from $1,842,000 in 1996 to $1,730,000 in 1997. The decrease was primarily due to a reduction in management fees charged by Fuel Tech as the Company hired its own personnel and, in August 1996, terminated certain services furnished by Fuel Tech. Research and development expenses were $1,747,000 in 1996 versus $1,985,000 in 1997. The increase was primarily due to the costs associated with significant test programs on light-duty and heavy-duty engines and the addition of three senior technical employees in mid-year 1996. The programs included the use of the Company's PFC in gasoline and diesel vehicles, the testing of NOx control technologies in conjunction with Engelhard Corporation and the Nalco Fuel Tech joint venture (which is now wholly-owned by Fuel Tech) and engine testing of the PFC as required to maintain registration with the U.S. Environmental Protection Agency. Some of the programs relating to the PFC and NOx control were done in collaboration with Cummins Engine Company, a major U.S. diesel engine manufacturer. The Company announced that the use of the PFC in conjunction with advanced heavy-duty engine design techniques and a diesel particulate filter had achieved U.S. federal emission levels for 2004. The Company also developed a platinum/cerium bimetallic fuel additive based on a platinum and cerium compound. This product achieved emission reductions of 25-35% on new light-duty diesels. Certification testing of the bimetallic additive for Taiwan buses equipped with particulate filters began in late 1997 and field trials are expected to be expanded in the second quarter of 1998. Discussions with oil distribution companies in the U.S., Europe and Asia are expected to lead to engine testing and field trials of the PFC or bimetallic additive in the second half of 1998. Based on the extent of the market interest and the improved cost and performance of the bimetallic additive, the Company entered into negotiations with a third party for the supply of a cerium product based on the Company's specifications. In late 1997, the Company signed a development and marketing agreement with AMBAC of Springfield, Massachusetts, for the fabrication of the ARIS(TM) 2000 urea injection equipment suitable for stationary and mobile engine NOx control. AMBAC is a major supplier of fuel injection equipment for diesel engine manufacturers worldwide. A prototype system was completed in the second quarter of 1998. Patent filing and maintenance expenses remained relatively flat, increasing from $223,000 in 1996 to $237,000 in 1997. 1995 VERSUS 1996 General and administrative expenses increased from $963,000 in 1995 to $1,842,000 in 1996. The increase was due to expenses associated with the Company establishing its own 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 (the "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 Fuel Tech executives full-time in August 1996. Research and development expenses were $796,000 in 1995 versus $1,747,000 in 1996. The increase was 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 1996, 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. Patent filing and maintenance expenses were $199,000 in 1995 versus $223,000 in 1996. The increase was primarily attributable to the preparation and filing of new patent applications. LIQUIDITY AND SOURCES OF CAPITAL The Company is a development-stage company and has incurred losses since inception (January 1, 1992) aggregating $10,853,000 and $11,594,000 at December 31, 1997, and March 31, 1998, 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, it sold no product in the first half of 1998 and 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 obtains the long-term financing it is seeking. On May 20, 1998, the $500,000 commitment was converted into a bridge loan (the "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 automatically converts into Series A Convertible Preferred Stock upon the conclusion of a public or private financing that contributes $1.75 million of additional net proceeds to the Company (including the Rights Offering, if consummated and assuming it meets such conditions). The Bridge Loan is secured by all of the Company's intellectual property. The Company has 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 from the Bridge Loan. For the period from January 1, 1992, through March 31, 1998, the Company used cash of $11,071,000 in operating activities. In 1997, the Company repaid $250,000 of a $745,000 promissory demand note ("Demand Note") with Fuel Tech and restructured the remaining amount into a $495,000 term note ("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. Platinum Plus has reserved the right, however, to call this payment at any time. As of the date of this prospectus, Platinum Plus has not demanded repayment. 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 "USE OF PROCEEDS." At December 31, 1996 and 1997, and March 31, 1998, the Company had cash, cash equivalents and short-term investments of $5,270,000, $1,239,000, and $657,000, respectively. Working capital at those dates was $4,109,000, $788,000, and $53,000, respectively. At December 31, 1996, the Company owed Fuel Tech $745,000 under the Demand Note, while at December 31, 1997, and March 31, 1998, the Company owed Fuel Tech $495,000 under the Term Note. In light of the Company's diminishing cash and working capital, the Company has taken steps to decrease expenditures in 1998, as more fully discussed in "Results of Operations -- Three Months Ended March 31, 1997 Versus Three Months Ended March 31, 1998." 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 PFC, 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. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Technology Assignments." In September 1996, the Company entered into a supply agreement with Holts to sell the Company's PFC 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 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 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 PFC 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. See "BUSINESS -- Platinum Plus -- Europe and Asia." 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 noted, the Company anticipates incurring additional losses through the foreseeable future as it further pursues its research, development and commercialization efforts. Management anticipates, with the proceeds of the $1.4 million Bridge Loan, having sufficient resources to fund its operations through November 1998. The Company intends to fund its future cash needs through the Rights Offering. Although management believes that it will be successful in its fund-raising efforts, there is no guarantee that such funds will be available on terms satisfactory to the Company. As discussed elsewhere in this Prospectus, if the Rights Offering is fully subscribed or the minimum subscription is obtained, the Company anticipates receiving $3.1 million and $1.4 million, respectively, net of Soliciting Fees and expenses of the offering estimated to be $600,000. The Company believes that the net proceeds of the Rights Offering, together with the net proceeds of $1.4 million from the bridge financing effected in 1998, will be sufficient for the commercialization of its PFC and NOx products through January 2000 (assuming full subscription) and through April 1999 (assuming minimum subscription), although no assurances can be given in this regard. Thereafter, the Company anticipates that it may require additional funding in the form of a public or private offering of the Company's securities. Any offering of the Company's equity securities may result in immediate and significant dilution to the shareholders 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 commercial efforts, marketing programs and field trials, as well as conditions then prevailing in the relevant capital markets. There can be no assurance that such funding will be available when needed or on terms acceptable to the Company. Absent a successful Rights Offering, and without continued sufficient financing from an alternative source, the Company's ability to meet its current plans for expansion will be materially adversely affected, and the Company will not be able to continue as a going concern beyond November 1998. See Note 1 to the Annual Financial Statements, the Report of Independent Auditors, and the Note to the Interim Financial Statements. Holders of the Series A Preferred Stock and Series B Preferred Stock are entitled to receive, when, as and if declared by the Board out of funds of the Company legally available therefor, cash dividends at the annual rate of 9% of the $500 stated value and liquidation preference of the Series A Preferred Stock price per share and 9% of the $______ stated value and liquidation preference of the Series B Preferred Stock price per share, respectively; 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 and Series B Preferred Stock, as the case may be, to pay dividends in kind at the annual rate of 11% 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 and Series B 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 July 1, 1998. Preferred Dividends on shares of Series A Preferred Stock and Series B 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 shares of Series A Preferred Stock and Series B Preferred Stock in shares of Series A Preferred Stock and Series B Preferred Stock, respectively, and any earnings which the Company may realize in the foreseeable future will be retained to finance the development and expansion of the Company. IMPACT OF YEAR 2000 The Company is in the process of completing an assessment of the impact that the millennium may have on its computer software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The project is estimated to be completed not later than December 31, 1998, which is prior to any possible impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose any operational problems for its computer systems. Management believes that the cost to the Company, if any, related to this issue will be insignificant. In addition, during 1998, the Company intends to communicate with its vendors to ascertain the status of their Year 2000 initiatives. FOREIGN CURRENCY RISK To date, sales, marketing and testing of the Company's PFCs have been limited principally to 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 significant 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. BUSINESS GENERAL The Company, a Delaware corporation with a principal place of business at 300 Atlantic Street, Stamford, Connecticut 06901, is a development-stage specialty chemical company supplying advanced catalytic fuel additives and systems that reduce harmful emissions from internal combustion engines while improving fuel economy. The Company's two main technology areas are Platinum Fuel Catalysts ("PFCs") for emission control and fuel economy improvement in diesel- and gasoline-fueled engines, and Nitrogen Oxide ("NOx") reduction systems and chemicals for control of NOx emissions from diesel engines. BACKGROUND The Company was formed in 1994 as a wholly owned subsidiary of Fuel Tech, which had conducted fundamental work regarding the Company's technologies. The Company was spun off by Fuel Tech in a rights offering in 1995 (the "1995 Rights Offering"), and Fuel Tech currently owns 27.4% of the Company's outstanding Common Shares. The Company raised net proceeds of approximately $10.5 million in the 1995 Rights Offering which, following the repayment of $2.3 million of intercompany loans to Fuel Tech, was sufficient to fund the Company's operations through May of 1998. The Company has since funded its operations through the net proceeds received in connection with the issuance of the Bridge Loan Notes issued to Fuel Tech and certain other lenders. At its inception, the Company had patents for PFCs licensed from Fuel Tech and limited testing results of PFCs. The Company currently has 12 U.S. and 38 International patents on PFCs and NOx reduction systems and has another 83 U.S. and International applications pending. In addition, the Company has completed successful testing of a diesel fuel PFC additive, launched the marketing of a PFC used to rejuvenate aged catalytic converters in Europe, and developed the Advanced Reagent Injection System ("ARIS(TM) 2000") for use in catalytic NOx reduction systems. BUSINESS STRATEGY The Company's strategic objective is to become a leading developer and supplier of (i) PFCs for emission control and fuel economy improvement in diesel- and gasoline-fueled engines and (ii) NOx reduction systems and chemicals for control of NOx emissions from diesel engines. Key elements of the Company's strategy include the following: DEVELOPING MARKETS FOR PFCS AS A DIESEL FUEL ADDITIVE The Company has successfully concluded a study at Delft Technical University in the Netherlands concerning the emission reduction effects of PFCs used with ceramic filters for reduction in particulate emission. The Company has also demonstrated improved emission reduction and increased fuel economy from the use of PFCs without ceramic filters in separate programs at Ricardo and Cummins. The Company seeks to capitalize on these test results, coupled with the increased regulation of emissions, by developing a market for PFCs in the U.S. and abroad. DEVELOPING MARKETS FOR PFCS AS A GASOLINE ADDITIVE The Company seeks to continue its marketing of PFCs used to rejuvenate aged catalytic converters, and has begun to focus on selling this product through service centers in Europe in conjunction with Holts. The Company is also seeking marketing partners to help launch the gasoline product in the U.S. and Asia. COMMERCIALIZING THE ARIS(TM) 2000 The Company has developed a prototype of the ARIS(TM) 2000, an Advanced Reagent Injection System to be used in the selective catalytic reduction of NOx. The Company believes that there is a market for the ARIS(TM) 2000 as a result of increased regulations in California and the Northeast of NOx levels in large stationary diesels. The Company seeks to commercialize the ARIS(TM) 2000 through cooperative ventures and licenses with engine manufacturers, engine distributors and catalyst and emission control companies. REGULATIONS - USA DIESEL ENGINES 1990. In the U.S., the EPA established specific regulations under Title II of the CAAA pertaining to the control of NOx and particulates from diesel engines. Existing urban buses in major metropolitan areas were required to reduce particulate emissions during engine rebuild as of January 1995 and, beginning in 1998, there will be new NOx level standards in place for urban buses and new diesel engines. 1995. The EPA, California Air Resources Board and major diesel manufacturers signed a Statement of Principles directed toward development of low-NOx engines to be in service by the year 2004, which became law in 1997. New limits are 2.5 g/bhp-hr for NOx and 0.1 g/bhp-hr for particulates. 1996. The EPA and the engine manufacturers signed a Statement of Principles calling for a three-tiered progression to low emission standards regarding emission limits for new off-road engines used in construction, agricultural and industrial equipment. 1997. The EPA issued its proposed regulatory program for all non-road diesel engines except locomotives, mining equipment and marine engines. These standards broadly parallel the transport engine standards and include a voluntary low-emission engine certification standard to promote early introduction of low-emitting engines. The EPA issued proposed regulations for controlling emissions from new and rebuilt diesel locomotive engines that call for reductions in NOx emissions of 40%-60% beginning in the year 2000. 1998. The EPA is expected to announce retrofit guidelines to support the use of emission control technologies on existing engines as part of the states' efforts to comply with ambient air quality standards and qualify for emission credit. The EPA has sued one engine manufacturer and is in negotiations with others over the use of "defeat devices" which the EPA alleges increases NOx emissions. Management believes that settlement may require advanced or accelerated introduction of low-emission engines. 1999 and thereafter. The EPA is required to review the progress of emission control technology with a view toward further tightening of the 2004 limits. Industry experts generally agree that an integrated system approach will be needed to meet these regulations, including the use of advanced engine design, reformulated fuel, fuel additives and exhaust aftertreatment systems. Regulators are showing concern at recent research results which show that while new engine technology made great reduction in the total mass of particulates, the total number of particulates is not reduced. Indeed, the number of ultra-fine particles can increase. Separate research has shown that diesel emissions may be toxic and that toxicity is associated with soot particles. While no regulations have yet been made as a result of these research findings, the Company considers it probable that there will be a further tightening of regulations of particulate emissions; further, there may well be regulation to reduce the very fine particles. Current regulation in California and the Northeast states for large stationary diesel engines sets NOx levels at a 50% to 90% reduction from normal levels achieved from current production engines under federally mandated Best Available Control Technology ("BACT") and Lowest Achievable Emission Rate ("LAER") requirements in ozone non-attainment areas. GASOLINE ENGINES Current regulations affecting new gasoline engine emissions require increasingly lower emissions, longer durability and enhanced in-use inspection of catalyst-equipped passenger vehicles, leading to the need for technological advancements in catalytic converter design. Current regulation for inspection and maintenance of gasoline vehicles is now leading states to introduce programs for testing of the existing fleet and for corrective measures to be taken where vehicles fail measurement of NOx, Hydrocarbon ("HC") or Carbon Monoxide ("CO"). Based upon a report of the Manufacturers of Emission Control Association ("MECA"), as of June 1998, 28 states have implemented or were planning to implement inspection and maintenance programs. REGULATIONS - INTERNATIONAL Europe has similar regulations to the U.S. but with different measurement standards, and in general, implementation is one year later than when the U.S. Euro III Vehicle Emission Regulations become effective in the year 2000 and Euro IV Vehicle Emission Regulations in the year 2005. Current regulations for tunneling and mining equipment in Germany, Switzerland and Austria now require the use of particulate filters. Japan, Korea and Taiwan have introduced regulations for both diesel and gasoline engines which are not identical but tend to follow U.S. practice. MARKETS FOR PRODUCTS On-highway markets for the PFC are the consumer aftermarket, including diesel and gasoline fuel additives; truck and bus fleets; bulk fuel distributors; and engine manufacturers. Off-road markets include mining, construction, agricultural, railroad and marine. Markets for the NOx reduction systems are engine manufacturers and distributors for both stationary and mobile sources and catalyst manufacturers. PLATINUM FUEL CATALYSTS These are fuel additives comprised of platinum, rhodium and/or palladium, which are used in minute concentrations in fuel (selling for a few (U.S.) cents per gallon of fuel treated) to improve combustion, reduce emissions and improve the performance and reliability of emission control equipment. The PFC may also be used in conjunction with other metallic additives such a copper, iron, manganese or cerium. The Company's test programs have shown the bimetallic additive of platinum and cerium to be highly effective in diesel engines. The Company's Platinum Plus(R) bimetallic additive has been chemically formulated to harness the synergy between platinum and cerium at very low levels of metal. Levels as low as 5 ppm of metal in fuel have been found to be effective. PLATINUM PLUS - EUROPE AND ASIA In September 1996, the Company entered into an agreement with Holts, the world's largest car care company, to test market the PFC under the Platinum Plus trademark for diesel fuel in Europe and Asia. The agreement also pertains to a gasoline product launched by Holts in early 1997, the results of which were disappointing. Holts reported that consumers did not understand what the product did and indeed few consumers knew if their cars even had a catalytic converter. Test marketing by Holts concluded that the product should be sold as a technical sale through service and repair shops. Holts is considering how to better reposition the product. The agreement with Holts is currently a non-exclusive agreement for Europe and certain Far East markets and may be terminated at the Company's option after March 1999. For a further discussion of the terms of the agreement with Holts, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Sources of Capital." PLATINUM PLUS - THE AMERICAS This market is not covered by the agreement with Holts. Discussions are in progress with several potential partners for the blending, distribution and marketing of Platinum Plus in the Americas. To sell in the U.S., registration is required of the platinum/cerium bimetallic diesel product and the platinum/rhodium gasoline product. The Company expects the expense of the gasoline product testing and registration to be substantially borne by marketing partners. The Company anticipates shipping its catalytic concentrates to one or several licensed blenders which will add diluents, solvents and other components to make additive formulations for sale to packagers and additive resellers. The Company may also have its concentrates blended for direct sale by the Company or sales agents to large end users. PFCS FOR PARTICULATE FILTERS AND CATALYTIC OXIDIZERS The most effective method of reducing diesel particulate (smoke) is by particulate filter or catalytic oxidizer. There are limitations when these devices are used alone, which the PFC have been proven to ameliorate. In two separate tests on typical bus engines, one on a Gardner engine and one on a Cummins engine, the combination of the PFC and a catalytic oxidizer established high levels of performance in both cases. This work was conducted in conjunction with Lubrizol's Engine Control Systems ("ECS") subsidiary, a leading supplier of oxidizers and traps. The Company is currently evaluating its PFC in conjunction with ECS as part of an industry-sponsored program for off-road equipment. A program has successfully been concluded at Delft Technical University, Netherlands, into the fundamental mechanism of metallic additive in the oxidation of diesel soot with a special focus on a system using platinum as part of a bimetallic-catalyst system. The results show that a bimetallic additive catalyst of platinum and cerium in use with a ceramic filter in the diesel exhaust gives performance superior to any system known. Furthermore, it gives a significantly lower oxidation temperature for the soot while using much lower metal levels in the fuel than other known additive filter system. The PFC bimetallic was effective at levels of 5.5 ppm versus 50-100 ppm required for other additives. The Company also reached agreement with Cummins' Advanced Technology Group to evaluate the applications of the PFC with oxidizers and traps for a new generation of low-emission engines. Tests of the Company's fuel additive/trap system conducted with an advanced Cummins diesel engine design cut particulate emissions 94% while achieving a more than 50% reduction in NOx in relation to current standards and met the year 2004 emission limits for new engines. The tests confirm results reported by Delft in the lowering of the oxidation temperature for soot. The Company believes that there is a market for the platinum/cerium additive in Taiwan where a bus fleet trial confirmed the performance of the platinum/cerium filter system. The Company also believes that a medium term market for the platinum/cerium additive is with filters for new vehicles, especially light duty vehicles. In this regard, PSA Peugeot, France, has announced that it intends to introduce particulate filters on new cars in 2000. Other manufacturers are considering the early introduction of filter systems. The Company recently agreed to additive/filter programs with 3M and Englehard Corporation, both of whom are looking for lower soot oxidation temperatures through the use of fuel additives with their trap systems. Using the platinum/cerium additive in vehicles with filters presents a potentially large market. This is driven by increasing concern about fine particle emissions; whereas new engines produce little smoke, the total number of particles has increased. Management believes that filters are the preferred remedy capable of removing more than 90% of the particles. This focus is given further weight by the probable classification by California of diesel emissions as toxic. The toxicity is most associated with soot particles. Once collected on the filter, the soot must be oxidized to prevent the filter from clogging, and that is where the additive is needed. PFC FOR ENGINES WITHOUT PARTICULATE FILTERS OR CATALYTIC OXIDIZERS PREMIUM DIESEL Tests of the Company's platinum/cerium additive have demonstrated that emissions are significantly reduced on both heavy duty engines and automobile engines without particulate filters or catalytic oxidizers. Moreover, the emission benefits are usually accomplished by a fuel economy improvement. The Company believes that there is a near-term market developing in the U.S. for a combustion catalyst (such as platinum and cerium) to reduce smoke, gaseous and particulate emissions from the current fleet of engines. This market is a result of pending EPA retrofit guidelines which provide for State Implementation Plans ("SIP") credits, as well as state programs for enforcement of smoke regulation, which include random highway smoke tests with substantial penalties for failure. The Company has its platinum product registered with the EPA for sale in bulk diesel fuel and has registered with the EPA two families of cerium products under "grouping" provisions of additive registration regulations. Currently, it can sell the individual products to all on-highway and off-road applications under these registrations. However, the Company believes the price and performance of its bimetallic additive is far superior to either additive alone. The Company is required to complete engine tests in order to register the combined additive so that it can be sold as a composite package and also before the combined product can be sold by refiners or additive companies. The Company can sell the two separate products directly to fleets and oil distributors for use together in commercial tests and trials while undergoing registration of the combined product with the EPA. The Company expects to complete these engine tests and the subsequent registration of the platinum/cerium additive in September or October of 1998. Off-road applications of the bimetallic additive do not require EPA registration. The Company intends to launch the platinum/cerium additive under the Platinum Plus label to oil distributors and fleets in the second half of 1998 as well as to off-road applications. The Company intends to use a network of experienced additive sales/service agents to reach these markets, as well as establish a distribution network through the Company's blenders. PFC FOR GASOLINE In a cooperative program with Holts, the Company developed a platinum and rhodium bimetallic additive for gasoline. The function of the additive is to rejuvenate an aged catalytic converter. Tests were carried out at Ricardo to evaluate different additive formulations. The tests concluded that the platinum/rhodium additive improved the reductions in emissions of HC, CO and NOx. The reduction in tail pipe emissions after one tank of treated fuel were long lived (5,000 miles) with a gradual fall-off of CO reduction. Holts subsequently marketed the product in the U.K. in 1997 in the consumer aftermarket through auto part stores. The results were disappointing. Holts reported that consumers did not understand what the product did and indeed few consumers knew if their cars even had a catalytic converter. Test marketing by Holts concluded that the product should be sold as a technical sale through service and repair shops. Holts is considering how to better reposition the product. The agreement with Holts is currently a non-exclusive agreement for Europe and certain Far East markets and may be terminated at the Company's option after March 1999. The Company has interest from marketing and distribution companies for the gasoline product in the U.S. Management estimates that the population of cars with catalytic converters in the U.S. is approximately 140 million. Since the implementation of enhanced inspection and maintenance programs, data from two states indicates that 5%-15% of those cars tested are failing inspection and maintenance tests. This is expected to increase as enhanced inspection and maintenance programs are fully implemented in certain states. In order to sell the product in the U.S., the Company is required to conduct engine tests that register the product and apply for a waiver. There is also a need to demonstrate the effectiveness of the product on U.S. vehicles under U.S. test standards. The Company is seeking to establish a cooperative program with one or more marketing companies to fund the test and registration program with a view toward launching the product in the U.S. in the second half of 1999, although no assurances can be given in this regard. TOTAL MARKET FOR PFC Management believes the total worldwide usage of diesel and gasoline fuels is approximately 350 billion gallons per annum of which approximately 150 billion gallons are diesel and 200 billion gallons are gasoline. Based upon this estimation, at a projected treatment cost of two cents (U.S.) per gallon of fuel treatment, 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 the platinum additive is already registered in the U.S. and did not strictly need to be registered in Europe, 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 was 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 has completed additional engine testing to maintain its EPA registration as required of all fuel and fuel additive manufacturers. The Company has applied for and received registration for two families of cerium additives. It does not expect to have to carry out engine tests since EPA rules allow that when a metallic additive is registered by one company and engine tests are filed by that company, often companies may file using the same engine data (grouping provisions) subject to agreeing upon payment terms with the original registrant. In the case of cerium, Rhodia Rare Earths, a subsidiary of Rhodia S.A., has conducted engine tests and registered. While the Company has not yet agreed to terms with Rhodia Rare Earths, it expects to do so in the near term. PLATINUM AND CERIUM The Company is required to make a separate registration of the platinum/cerium combination before it can blend the two products and sell it for bulk fuel blending for on-highway use. The Company can sell the products without the registration for off-road applications and can sell the platinum and cerium separately, for use together, to fleets and oil distributors on a trial basis, but not to refiners or additive blenders. Thus, the Company has determined to make a separate registration and to carry out the engine tests on the combined additives. This program is expected to be completed by October 1998. GASOLINE ADDITIVES - PLATINUM AND RHODIUM The Company will be required to carry out an engine test, register, and apply for a waiver in order to sell this product into the U.S. aftermarket. 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. 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. The Company is working on two programs to commercialize NOx reduction systems. NOX REDUCTION PRODUCT - ARIS(TM) 2000 The Company has developed an Advanced Reagent Injection System (ARIS(TM) 2000). This system injects reagent--typically urea--over a catalyst in the exhaust system of a diesel engine to achieve NOx reduction of up to 90%. The complete system of ARIS(TM) 2000 plus catalyst is generally called "urea SCR." SCR means Selective Catalytic Reduction, a process widely used to reduce NOx from gas turbines and furnaces. While SCR systems are available for diesel engines, the current systems are uneconomical, often costing as much as the engine. The challenge has been to develop a simple, reliable, low-cost injection system that can be produced with typical automotive components which could eventually be mass produced. The catalysts are similar to those used in gas turbines and boilers and are already made by such catalyst manufacturers as Engelhard Corporation, Johnson Matthey, Mitsubishi and Siemens. Current regulations in California and the Northeast states for large stationary diesel engines sets NOx levels at a 50% to 90% reduction from normal levels achieved from current production engines under federally mandated Best Available Control Technology ("BACT") and Lowest Achievable Emission Rate ("LAER") requirements in ozone non-attainment areas. Cost effective systems are not yet available. As a result, gas engines are being installed, which cost more to buy and to run than the ARIS(TM) 2000. The Company intends to sell the ARIS(TM) 2000 to total system suppliers, engine companies, engine distributors, or the assemblers of generation sets, compressors, pumps, etc. Currently the Company has a cooperative-development agreement with AMBAC, West Springfield, MA, to develop the injectors used in the ARIS(TM) 2000 system. A prototype system has been built and tested. The next stage will be to complete detailed engineering of the production unit and carry out durability testing. The Company expects to carry out this next stage in cooperation with a system supplier or catalyst supplier. While the Company is in discussions with several parties, there can be no assurance that a system supplier will wish to cooperate in commercializing ARIS(TM) 2000, nor that detailed engineering and durability tests will be successful. NOXOUT(TM) 3200 SCR REAGENT The Company, working in conjunction with Fuel Tech, has developed proprietary specifications and formulations for NOxOUT 3200 reagent, an aqueous blend of urea and corrosion inhibitors for use with urea-based SCR systems for diesels. While especially effective with the ARIS(TM) 2000 injection system, NOxOUT 3200 is also suited for use with other injection systems and is under evaluation by several engine and catalyst companies investigating its performance with their engines and catalysts. As agreed with Fuel Tech, the Company will market the NOxOUT 3200 reagent to engine companies, catalyst companies and end-users. The Company will receive a royalty on sales of NOxOUT 3200 by Fuel Tech urea licensees and a commission on the specialty component sales by Fuel Tech to the urea licensees involved in blending of NOxOUT 3200. The agreement between Fuel Tech and the Company is subject to consummation of detailed terms and conditions between the two parties regarding duration, responsibilities, and other terms. SOURCES OF SUPPLY The Company has outsourcing arrangements with two companies in the precious metal refining industry and may make arrangements with others. The Company has made the product itself in the past but considers outsourcing to a precious metal refinery to be more cost effective. The Company is negotiating for a source of cerium to use in its bimetallic diesel additive. RESEARCH AND DEVELOPMENT The Company employs five full-time individuals, including two executive officers, in engineering and product development as of the date of this report. During the years ended December 31, 1995, 1996 and 1997, and for the three months ended March 31, 1998 the Company's research and development expenses exclusive of patent costs totaled approximately $796,000, $1,747,000, $1,985,000 and $236,000, respectively. The Company expenses all development costs as incurred. PROTECTION OF PROPRIETARY INFORMATION The Company holds the rights to a number of patents and patent applications pending. There can be no assurance that pending patent applications will be approved or that the issued patents or pending applications will not be challenged or circumvented by competitors. Certain critical technology incorporated in the Company's products is protected by trademark and trade secret laws and confidentiality and licensing agreements. There can be no assurance that such protection will prove adequate or that the Company will have adequate remedies for disclosure of its trade secrets or violations of its intellectual property rights. INSURANCE The Company maintains coverage for the customary risks inherent in its operations. Although the Company believes its insurance policies to be adequate in the amount and coverage for its current operations, no assurance can be given that this coverage will, in fact, be or continue to be available in adequate amounts or at a reasonable cost or that such insurance will be adequate to cover any future claims against the Company. EMPLOYEES The Company has seven 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 four outside technical consultants on specific projects related to platinum, engines and NOx reduction. FACILITIES The Company 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 TECHNOLOGY ASSIGNMENTS The Company's technology is comprised of patents, patent applications, trade or service marks, data and know-how. This technology was acquired by assignment from Fuel Tech or developed internally. The assignment agreement provides for running royalties of 2.5% of gross revenues derived from the sale of the PFC, commencing in 1998 and terminating in 2008. The Company may at any time terminate the royalty obligation by payment to Fuel Tech in any year from 1998 through 2008 amounts, depending on the year, declining from $12 million in 1998 to $1.1 million in 2008. The Company, as owner, maintains the technology at its expense. The Company currently has 12 U.S. and 38 International patents on PFCs and NOx reduction systems and has another 83 U.S. and International applications pending. These patents and patent applications cover the means of controlling the four principal emissions from diesel engines (NOx, particulates, CO and HC). LEGAL PROCEEDINGS The Company is not involved in any legal proceedings. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers and key employees of the Company, their positions held with the Company and their ages are as follows: Name Age Position ---- --- -------- Ralph E. Bailey 74 Chairman of the Board of Directors, Director Jeremy D. Peter-Hoblyn 58 President and Chief Executive Officer, Director James M. Valentine 44 Executive Vice President and Chief Operating Officer, Director Charles W. Grinnell 61 Vice President, General Counsel and Corporate Secretary, Director Scott M. Schecter 41 Vice President, Treasurer and Chief Financial Officer John A. de Havilland 60 Director Douglas G. Bailey 48 Director Directors are elected each year for a period of one year at the Company's annual meeting of shareholders and serve until their successors are duly elected by the shareholders. Vacancies and newly created directorships resulting from any increase in the number of authorized directors may be filled by a majority vote of the directors then in office. Officers are elected by, and serve at the pleasure of, the Board of Directors. The Board has an Audit Committee comprised of Messrs. Ralph E. Bailey and de Havilland. There are no other committees of the Board of Directors. Compensation matters are determined by the full membership of the Board. The following is a brief summary of the background of each director and executive officer of the Company: RALPH E. BAILEY Ralph E. Bailey has been Chairman of the Board and a director of the Company since July 1996. He has been a director and Chairman of American Bailey Corporation ("ABC"), a privately owned business acquisition and development company, which owns a significant equity stake in Fuel Tech, since 1984. Mr. Bailey is the former Chairman and Chief Executive Officer of Conoco, Inc. and a former Vice Chairman of E.I. du Pont de Nemours & Co. Mr. Bailey is also a director and shareholder of Rowan Companies, Inc. and is Chairman of the Board, Chief Executive Officer and a director of Fuel Tech. JEREMY D. PETER-HOBLYN Jeremy D. Peter-Hoblyn has been the President and Chief Executive Officer of the Company since its inception. He also has been a director of Fuel Tech since 1984 and was Chief Executive Officer of that company from 1993 to 1996. JAMES M. VALENTINE James M. Valentine has been Executive Vice President and Chief Operating Officer of the Company since its inception. From the period 1990 through 1993, Mr. Valentine was the head of his own energy and environmental consulting firm. Mr. Valentine has been a director of Fuel Tech since 1993. CHARLES W. GRINNELL Charles W. Grinnell has been Vice President, General Counsel and Corporate Secretary of the Company since its inception and has held the same positions with Fuel Tech since 1987. Mr. Grinnell has been a partner in the Stamford, Connecticut law firm of Huth & Grinnell, LLC since 1992. SCOTT M. SCHECTER Scott M. Schecter has served as Vice President, Chief Financial Officer and Treasurer of the Company and of Fuel Tech since January 1994. From June 1990 to January 1994, Mr. Schecter was Senior Vice President and Chief Financial Officer of American Vision Centers, Inc. From May 1986 through June 1990, Mr. Schecter served as a corporate development officer of W.R. Grace and Company. JOHN A. DE HAVILLAND John A. de Havilland has been a director of the Company since its inception. Mr. de Havilland was a director of J. Henry Schroder Wagg & Co. Ltd. from 1971 until his retirement in 1990 and a director of Fuel Tech from 1984 to 1998. DOUGLAS G. BAILEY Douglas G. Bailey has been a director of the Company since March 31, 1998. Mr. Bailey, who is the son of Ralph E. Bailey, has been the President and Chief Executive Officer of ABC since 1984. Mr. Bailey is Chairman and Chief Executive Officer of Golden Casting Corporation and a Director of DieselCast France S.A., both affiliates of ABC. Mr. Bailey is a director of Fuel Tech. EXECUTIVE COMPENSATION The table below sets forth information concerning compensation for services in all capacities awarded to, earned by or paid to Mr. Jeremy D. Peter-Hoblyn, President and Chief Executive Officer, Mr. James M. Valentine, Executive Vice President and Chief Operating Officer and Eric N. Balles, Vice President-Technology, during the fiscal years ending December 31, 1995, 1996 and 1997, the only executive officers of the Company who earned total compensation in excess of $100,000 during fiscal year 1997 (the "Named Executive Officers"). Mr. Balles resigned from the Company effective September 30, 1997. Prior to August 1, 1996, for Mr. Valentine and December 1, 1996, for Mr. Peter-Hoblyn, the amounts of annual compensation shown below were paid by Fuel Tech and allocated to and reimbursed by the Company to Fuel Tech.
SUMMARY COMPENSATION TABLE Long-Term --------- Shares Underlying Annual Options Name and Principal Position Year Salary(FN1) Other(FN2) Granted (#) - --------------------------- ---- ----------- ---------- ----------- Jeremy D. Peter-Hoblyn.............. 1997 250,000 71,525 35,000 President and Chief 1996 229,667 64,996 -- Executive Officer 1995 162,500 35,500 17,200 James M. Valentine.................. 1997 220,000 29,523 35,000 Executive Vice President 1996 209,833 26,727 -- and Chief Operating Officer 1995 165,000 24,923 10,000 Eric N. Balles...................... 1997 120,000 12,625 -- Vice President-Technology 1996 56,910 4,776 25,000 - ---------------------- (1) Effective February 16, 1998, Mr. Peter-Hoblyn voluntarily reduced his base salary by $62,500 to $187,500. Effective July 1, 1988, Mr. Peter-Hoblyn's salary reduction became a deferral of such salary. Effective July 1, 1998, Messrs. Peter-Hoblyn and Valentine voluntarily reduced their salaries by $10,000 each to $177,500 and $210,000, respectively. Reinstatement of the $10,000 reduction is at the discretion of the individual involved. (2) The amounts designated "other" in 1997, 1996 and 1995 include, respectively, for Mr. Peter-Hoblyn, pension contributions to a purchased annuity of $45,200, $45,833 and $32,500; for Mr. Valentine, 401 (k) plan contributions of $9,550, $8,793 and $7,313 and medical insurance premiums of $13,068, $11,671 and $9,441; and for Mr. Balles medical insurance premiums of $9,475 and $3,376.
DIRECTORS' COMPENSATION The Company provides an annual retainer of $15,000, a meeting fee of $2,000 per board meeting and $1,000 per diem for services not involving board meetings, plus associated expenses for directors who are not employees of the Company. Mr. Ralph E. Bailey, however, is paid an annual retainer of $15,000 and is reimbursed for his expenses of attending meetings and for office expenses as Chairman of the Company. Mr. Ralph E. Bailey, commencing October 1997, Mr. de Havilland, commencing January 1998, and Mr. Douglas G. Bailey, commencing in March 1998, have deferred their annual retainer payments pending improvement in the Company's financial position. In addition, on June 5, 1998, the directors have elected to waive their meeting fees pending improvement in the Company's financial position. Where a non-employee director is employed or otherwise compensated by an affiliated Company, such as Fuel Tech, the retainer and meeting fees are paid to the affiliated company, unless waived. Fuel Tech was paid those retainers and fees for 1997 in the amount of $56,850. Directors who are employees of the Company receive no compensation for their service as directors. EMPLOYMENT AGREEMENTS Mr. Peter-Hoblyn has an employment agreement with the Company which provides that he will serve as the President and Chief Executive Officer of the Company. Mr. Peter-Hoblyn's employment agreement commenced on December 6, 1996 and continues until terminated by either party as described more fully therein. The employment agreement provides for the payment of an annual base salary of $250,000, participation in benefit programs previously extended to him by Fuel Tech or its affiliates (the Company's predecessor) and payment of up to $50,000 for the annual premium for a U.K. based annuity (less any amounts received from the Company's benefit or profit sharing plans). Mr. Valentine has an employment agreement with the Company which provides that he will serve as the Executive Vice President and Chief Operating Officer of the Company. Mr. Valentine's employment agreement commenced on August 1, 1996 and continues until terminated by either party as described more fully therein. The employment agreement provides for an annual base salary of $220,000 and participation in the Company's benefit plans. For a description of voluntary reductions by Messrs. Peter-Hoblyn and Valentine of their base salaries, see "Summary Compensation Table" above. STOCK OPTION PLAN In 1994, the Board of Directors adopted and the shareholders approved the Company's 1994 Incentive Plan (the "Plan"). The Plan is intended to set forth a flexible structure within which the Company may utilize various compensation devices to recruit and retain the services of such key persons as may be required to manage and carry out the Company's business. The Plan provides for the grant of options to employees, officers, directors and consultants of the Company to purchase up to such number of shares of Common Shares as the Board of Directors shall from time to time determine, provided that such shares in the aggregate shall not exceed 17.5% of the Company's issued and outstanding shares. At the date of this Prospectus, 427,784 options under the Plan are outstanding. The Plan is designed so that awards thereunder may be settled in the form of the Company's shares and in a manner complying with applicable U.S. securities laws. Under the Plan, the Boards of Directors may grant incentive awards to participants in the form of non-qualified stock options, stock appreciation rights, restricted stock, performance awards, bonuses or any other form of share based or non-share based award or any combination of these awards (collectively referred to herein as the "Award(s)"). Share based Awards shall at the time of grant have an exercise price of or be valued at not less than 100% of the fair market value of the shares on the date of the Award, as determined by the Administrator. Share based Awards shall be outstanding for a period of six months prior to the exercise thereof or the receipt of benefits thereunder and may not be outstanding for a period in excess of ten years. Absent approval of the Board of Directors, awards and agreements evidencing Awards may be assigned or transferred only pursuant to the laws of descent and distribution, and during the life of the holder of an Award, only the holder may exercise or receive the benefit of the Award. OPTIONS GRANTED TO DATE UNDER THE PLAN The following table sets forth information concerning stock options granted from the inception of the Plan to date to those persons who are now (i) the Named Executive Officers, (ii) all executive officers as a group, (iii) each director, (iv) all non-executive employees as a group and (v) all employees, including executive officers as a group. On August 4, 1998 the closing price of the Company's Common Shares was $1.88 per share. All stock options become exercisable upon a change of control as defined in the Plan.
Number Exercise Expiration Name of Shares Prices Dates/Vesting ---- --------- ------ ------------- Ralph E. Bailey.............................................. 25,000 $4.50 2006(FN1) 5,000 $4.625 2007(FN4) Douglas G. Bailey............................................ 15,000 $2.03 2008(FN4) Eric N. Balles............................................... 25,000 $4.50 2006(FN5) John A. de Havilland......................................... 7,500 $6.82 2005(FN2) 5,000 $4.625 2007(FN4) Charles W. Grinnell.......................................... 6,250 $2.50 2002(FN2) 5,750 $6.82 2005(FN2) 10,000 $4.625 2007(FN4) 7,500 $2.03 2008(FN4) Jeremy D. Peter-Hoblyn....................................... 25,000 $0.20 2001(FN3) 25,000 $2.00 2001(FN2) 17,200 $6.82 2005(FN2) 10,000 $4.625 2007(FN4) 25,000 $4.625 2007(FN4) 7,500 $2.03 2008(FN4) James M. Valentine........................................... 25,000 $0.20 2001(FN2) 25,000 $2.00 2001(FN2) 10,000 $6.82 2005(FN2) 10,000 $4.625 2007(FN4) 25,000 $4.625 2007(FN4) 7,500 $2.03 2008(FN4) Executive officers as a group (four in number)............... 290,700 $0.20-$6.82 2001-2008(FN2)(FN3)(FN4) All employees, including executive officers as a group 335,700 $0.20-$6.82 2001-2008(FN1)(FN2)(FN3)(FN4) (nine in number)........................................... Non-executive employees as a group (five in number).......... 45,000 $2.03-$6.50 2002-2008(FN1)(FN4) - ------------------------ (1) These options become first exercisable in three equal installments on the first through the third anniversaries of grant. (2) These options are now vested and exercisable. (3) 16,666 of these options were exercised in 1997 and the remaining 8,334 shares are now exercisable. (4) These options become first exercisable in three equal installments on the grant and on the first and second anniversaries of grant. (5) 8,333 of these options are vested and exercisable, the balance having been cancelled.
OPTION GRANTS IN THE LAST FISCAL YEAR
Potential Realizable Value of Assumed Annual Number of % of Total Rates of Stock Price Shares Options Appreciation for Option Underlying Granted to Exercise or Term Options Employees in Base Price ---- Name Granted (#) 1997 ($/Sh) Expiration Date 5% 10% ---- ----------- ---- ------ --------------- -- --- Jeremy D. Peter-Hoblyn....... 35,000 44% $4.625 2/6/07 $102,000 $258,000 Eric N. Balles............... -- -- -- -- -- -- James M. Valentine........... 35,000 44% $4.625 2/6/07 $102,000 $258,000
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
Number of Number of Securities Securities Value of Value of Underlying Underlying Unexercised Unexercised Unexercised Unexercised in-the-Money in-the-Money Options at Options at Options at Options at Shares Fiscal Year Fiscal Fiscal Fiscal Acquired on Value End/ Year End/ Year End/ Year End/ Name Exercises Realized Exercisable Unexercisable Exercisable Unexercisable ---- --------- -------- ----------- ------------- ----------- ------------- Jeremy D. Peter-Hoblyn............... 16,666 $50,832 62,200 23,334 $29,601 $0 James M. Valentine......... 0 $0 71,666 23,334 $66,900 $0 Eric N. Balles............. 0 $0 8,333 0 $0 $0
PRINCIPAL SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of Common Shares as of June 30, 1998 by (i) each person known to the Company to own beneficially more than five percent of the outstanding Common Shares, (ii) each director of the Company, (iii) the named Executive Officers, and (iv) all directors and executive officers as a group. Number of Percentage of Class Shares After Beneficially Before Offering Name and Address of Beneficial Owner Owned Offering (FN1) - ------------------------------------ ----- -------- ----- Fuel Tech (FN2)....................... 689,147 27.4 16.5 Ralph E. Bailey (FN3)(FN4)............ 26,666 1.1 (FN*) Douglas G. Bailey (FN3)(FN4).......... 5,000 (FN*) (FN*) Eric N. Balles (FN3).................. 8,333 (FN*) (FN*) John A. de Havilland (FN3)............ 10,833 (FN*) (FN*) Charles W. Grinnell (FN3)............. 29,008 1.2 (FN*) Jeremy D. Peter-Hoblyn (FN3).......... 121,918 4.8 2.9 James M. Valentine (FN3).............. 91,771 3.6 2.2 All Directors and Officers as a Group (seven persons) (FN3)............... 326,992 13.0 7.9 - ------------------------ * Less than one percent (1.0%) (1) Assumes full subscription of the Rights Offering, no participation by management or Fuel Tech and that all shares of Series B Preferred Stock are immediately converted into Common Shares. Fuel Tech and the directors and executive officers have not yet determined whether they will participate in the Rights Offering. Fuel Tech and management will make a determination as to whether to participate in the Rights Offering after the distribution of the Rights based upon several factors, including the Offering Price, their respective financial resources and, in the case of Fuel Tech, applicable covenants. (2) The address of Fuel Tech is Castorweg 22-24, Curacao, Netherlands Antilles and the address of each other beneficial owner is c/o Clean Diesel Technologies, Inc., Suite 702, 300 Atlantic Street, Stamford, Connecticut 06901. (3) Includes shares subject to options exercisable presently and within 60 days for Mr. Ralph E. Bailey, 11,666 shares; Mr. Douglas G. Bailey, 5,000 shares; Mr. Balles, 8,333 shares; Mr. de Havilland, 10,833 shares; Mr. Grinnell, 21,166 shares; Mr. Peter-Hoblyn, 76,366 shares; Mr. Valentine, 85,832 shares; and for all directors and officers as a group, 251,529 shares. (4) For the description of ABC which is controlled by Messrs. Ralph and Doug Bailey, see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Relationship with Fuel Tech; Conflicts of Interest." CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT AND SERVICES AGREEMENT Effective July 1995 and amended June 1996, the Company and Fuel Tech have entered into a Management and Services Agreement (the "Management and Services Agreement") under which Fuel Tech's corporate staff provides certain administrative services, including legal advice, risk management, tax advice and certain technical and other services to the Company. The Company is assessed fees equal to, depending on the type of service, 3% or 10% of the Company's fixed reimbursable costs for these services. As of May 1998, the fee was fixed at 3% for all of the Company's reimbursable costs. The fee may be changed by mutual agreement of the Company and Fuel Tech. Management believes that the charges under the Management and Services Agreement are reasonable and that the terms of the Management and Services Agreement are fair to the Company. The Management and Services Agreement may be canceled by either party on or before May 15 in any year. TECHNOLOGY ASSIGNMENTS The Company's technology is comprised of patents, patent applications, trade or service marks, data and know-how. A substantial portion of this technology is held under assignments of technology from Fuel Tech and Fuel Tech affiliates. The assignments provide for running royalties payable to Fuel Tech commencing in 1998 of 2.5% of gross revenues derived from platinum fuel catalysts. 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. TERM LOAN Under an unsecured promissory note of November 5, 1997, the Company owes approximately $495,000 to Platinum Plus, Inc. ("Platinum Plus"), a wholly owned subsidiary of Fuel Tech, repayable in installments of $100,000 on July 1 in each of the years 1998 through 2000 and approximately $195,000 on July 1, 2001, bearing interest at eight percent per annum. On July 1, 1998, Platinum Plus elected to defer the repayment of the $100,000 of principal which was payable on that date. Platinum Plus has reserved the right, however, to call this payment at any time. As of the date of this prospectus, Platinum Plus has not demanded repayment. The interest accrued on the note as of July 1, 1998 was paid by the Company. See "USE OF PROCEEDS." BRIDGE LOAN Fuel Tech and a group of London based investors (the "Bridge Loan Lenders") executed a letter of intent with the Company to provide the Company with a Bridge Loan of $1.4 million at ten percent interest per annum due April 15, 2001, secured by all of the intellectual property of the Company. A $500,000 short-term note and security agreement entered into with Fuel Tech in February 1998 was canceled and Fuel Tech's $500,000 portion of the Bridge Loan substituted for that instrument. The Bridge Loan will, as a debt instrument and through its security interest, be preferred in liquidation over all other securities of the Company, debt or equity. No class of debt senior to the Bridge Loan may be issued absent the prior consent of a majority in interest of the Bridge Loan Lenders. The Bridge Loan may be converted into up to 2,800 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") of the Company at any time at the option of the Bridge Loan Lenders, but is required to be converted on (i) the conclusion of a public or private financing contributing $1.75 million of net proceeds to the Company (including, if it meets this condition, the Rights Offering), or (ii) voluntary conversion of 60% of the Bridge Loan. John A. de Havilland, a director of the Company and of Fuel Tech, is also a director of The Shimpling Trust Limited which is a Bridge Loan Lender in the amount of $250,000. TERMS OF SERIES A PREFERRED STOCK In connection with the Company's Bridge Loan, the Board designated 10,000 shares of Series A Preferred Stock. The Bridge Loan is convertible into the Series A Preferred Stock at the lenders' discretion and is mandatorily convertible upon the conclusion of a public or private financing that contributes at least $1.75 million of net proceeds to the Company. Accordingly, upon consummation of the Rights Offering, assuming subscription of at least 31,650 Rights pursuant to the Rights Offering at a Subscription Price of $74.25 and estimated Soliciting Fees and expenses of $600,000, the Bridge Loan Notes will be converted into Series A Preferred Stock. Holders of the Bridge Loan Notes have agreed not to convert the Bridge Loan into Series A Preferred Stock prior to the earlier of the conclusion of a public or private financing that contributes at least $1.75 million of net proceeds to the Company (including the Rights Offering) or January 31, 1999. See "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock -- Series A Convertible Preferred Stock." REGISTRATION RIGHTS The Company has agreed as of November 15, 1997 under certain circumstances to provide registration rights to Fuel Tech for one demand and unlimited incidental registrations at Company cost for the sale of Common Shares held by Fuel Tech, if such registration should be legally required for Fuel Tech to sell such shares. The terms of the Bridge Loan provide that on conversion of the Bridge Loan Notes into Series A Preferred Stock, the holders of Series A Preferred Stock may have three demand (each of $1 million in value and not more often than one in any twelve months) and unlimited incidental registrations at Company cost for the Common Shares underlying the Series A Preferred Stock held by the holders, if registration should be legally required for such holders to sell such underlying 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 controlling shareholder, are in positions involving the possibility of conflicts of interest with respect to transactions involving the Company. The Company and Fuel Tech have entered into contractual arrangements governing certain transactions and relationships between them. These agreements were executed while the Company was a subsidiary or affiliate of Fuel Tech and were not the result of arm's-length negotiations. Accordingly, there is no assurance that the terms and conditions of these agreements are as favorable to the Company as might have been obtained from independent third parties. Six of the Company's officers or directors are employees or directors to the Board of Fuel Tech. Three of these persons are also officers of Fuel Tech and Fuel Tech subsidiaries. Although these persons seek to devote such time to the affairs of the Company as the Company's needs require, they must balance the Company's need for their time with the needs of Fuel Tech and its subsidiaries. Ralph E. Bailey and Douglas G. Bailey were elected Managing Directors of Fuel Tech which currently owns 27.4 percent of the issued and outstanding Common Shares of the Company. Pursuant to a Securities Purchase Agreement dated as of March 23, 1998 (the "Purchase Agreement"), certain affiliates and related parties of ABC (the "Investors") purchased 4.75 million common shares of Fuel Tech and warrants to purchase an additional 3 million of such common shares. Under the terms of a related shareholders agreement, the Investors, for a period of ten years and so long as they own not less than a certain specified minimum percentage of the issued and outstanding common shares of Fuel Tech, will be entitled from time to time to nominate two Managing Directors of Fuel Tech who are representatives of the Investors and one independent director. Also, during such period, the Investors will be entitled to nominate up to 50% of the directors of Fuel Tech, Inc., the operating subsidiary of Fuel Tech which owns substantially all of the operating assets of the Fuel Tech Group. The Company expects to resolve potential conflicts of interest with Fuel Tech on a case-by-case basis, taking into consideration relevant factors including its existing agreements with Fuel Tech, applicable stock exchange rules and prevailing corporate practices. Fuel Tech, however, may exercise its influence in its own best interests. NOXOUT(TM) 3200 SCR REAGENT For a description of arrangements between the Company and Fuel Tech regarding the development of proprietary specifications and formulations for NOxOUT 3200 SCR Reagent, see "BUSINESS -- NOxOUT(TM) 3200 SCR Reagent." DESCRIPTION OF CAPITAL STOCK The following summary description of the Company's capital stock is qualified in its entirety by reference to the Company's Certificate of Incorporation, as amended, the Certificate of Designation for the Series A Preferred Stock and the form of the Certificate of Designation for the Series B Preferred Stock, which are attached as exhibits to the Registration Statement. COMMON SHARES The Company is authorized to issue up to 15,000,000 Common Shares, $0.05 par value per share. As of the date of this Prospectus, 2,516,666 Common Shares are issued and outstanding. Holders of Common Shares are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. There is no cumulative voting for election of Directors. Subject to the prior rights of any series of preferred stock which may from time to time be outstanding, if any, Holders of Common Shares are entitled to receive ratably dividends when, as, and if declared by the Board of Directors, out of funds legally available therefor and, upon the liquidation, dissolution, or winding up of the Company, are entitled to share ratably in all assets remaining after payment of liabilities and payment of accrued dividends and liquidation preferences on the Preferred Stock, if any. Holders of Common Shares have no preemptive rights and have no rights to convert their Common Shares into any other securities. The outstanding Common Shares are, and the Common Shares to be outstanding upon completion of this Offering will be, validly authorized and issued, fully paid, and nonassessable. PREFERRED STOCK The Company is authorized to issue up to 100,000 shares of preferred stock, $0.05 par value per share (the "Preferred Stock"). The Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by shareholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion rights, redemption rights, and sinking fund provisions. SERIES A CONVERTIBLE PREFERRED STOCK On March 31, 1998, the Board of Directors designated 100,000 shares as Series A Convertible Preferred Stock, $0.05 par value per share (the "Series A Preferred Stock"). RANKING Upon liquidation, dissolution and winding up, proceeds are distributed to holders of Series A Preferred Stock and Series B Preferred Stock, pro rata, based on the original issue price of such shares, and prior to the Holders of Common Shares. DIVIDENDS Holders of the Series A Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors out of funds of the Company legally available therefor, cash dividends at the annual rate of 9% of the $500.00 per share price and liquidation preference (the "Liquidation Preference"); 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 11% 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 July 1, 1998. Preferred Dividends on shares of Series A Preferred Stock shall be cumulative and shall accrue from the date of original issuance. VOTING RIGHTS Holders of the Series A Preferred Stock are entitled to vote on all matters as a class with the holders of the Common Shares and Series B Preferred Stock and in such event are entitled to one vote for each Common Share into which the Series A Preferred Stock is convertible. The holders of Series A Preferred Stock are entitled to vote as a separate class on the election of two directors. In addition, the approval of the holders of at least 60 percent of the shares of Series A Preferred Stock, voting as a separate class, will be required to: (i) amend, alter, or repeal any of the provisions of the Certificate of Incorporation so as to affect adversely the powers, preferences or rights of the holders of the shares of Series A Preferred Stock then outstanding or reduce the minimum time for any required notice to which the holders of the shares of Series A Preferred Stock then outstanding may be entitled; (ii) authorize or create, or increase the authorized amount of, any securities ranking senior to the shares of Series A Preferred Stock or any securities that by their terms rank pari passu with the shares of Series A Preferred Stock, either as to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Company; (iii) authorize the payment of dividends on the Common Shares; (iv) repurchase any Common Shares, except in connection with the termination of employment of a holder of such stock or otherwise pursuant to the terms of the Plan; (v) enter into a transaction whose consummation results in a Change of Control (as defined in the Certificate of Designation) of the Company; (vi) authorize or create, or increase the number of authorized shares of Series A Preferred Stock; or (vii) other than to add two additional board seats in connection with the initial issuance of Series A Preferred Stock, increase the size of the Board of Directors of the Company. REDEMPTIONS AND CONVERSIONS The shares of 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 this Certificate of Designation at the redemption price of $500.00 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. Shares of Series A Preferred Stock are convertible (at the Liquidation Preference of $500.00 per share), in whole or in part, at the option of the holders thereof ("Optional Conversion"), unless previously redeemed, into Common Shares at a conversion price of $1.50 per Common Share (equivalent to a conversion rate of 333.33 Common Shares for each share of Series A Preferred Stock so converted), 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, subject to adjustment as set forth in the Certificate of Designation. The Company can force the holder to convert his 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 Series A Preferred Stock be scheduled to occur, on a pro rata basis quarterly over 18 months. Subject to the provision for adjustment set forth in the Certificate of Designation, each share of 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 $10,000,000 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 Series A Preferred Stock. ANTI-DILUTION In the event that additional Common Shares or securities exercisable or convertible into Common Shares are issued without consideration or at a price less than the applicable conversion price for the Series A Preferred Stock in effect on the date of and immediately prior to such issue, then, subject to certain exceptions, the applicable conversion price of the Series A Preferred Stock shall be reduced, concurrently with such issue, to a price determined by multiplying such conversion price by a fraction, the numerator of which shall be the number of Common Shares outstanding immediately prior to such issue plus the number of shares of Common Shares which the aggregate consideration received by the Company for the total number of additional Common Shares so issued would purchase at such conversion price; and the denominator of which shall be the number of shares of Common Shares outstanding immediately prior to such issue plus the number of such additional Common Shares so issued. LIQUIDATION In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, and subject to the rights of holders of any other series of Preferred Stock, the holders of outstanding shares of Series A Preferred Stock are entitled to receive the sum of $500.00 per share in cash for each share of Series A Preferred Stock, plus accrued and unpaid Preferred Dividends thereon, out of the assets of the Company available for distribution to stockholders, before any distribution of assets is made to holders of Common Shares or any other capital stock ranking junior to the shares of Series A Preferred Stock and pari passu with holders of Series B Preferred Stock upon liquidation, dissolution, or winding up. If, upon any voluntary or involuntary liquidation, dissolution, or winding up of the Company, the assets of the Company are insufficient to permit the payment of the full preferential amounts payable with respect to the shares of Series A Preferred Stock, the Holders shall share ratably in any distribution of assets of the Company in proportion to the full respective preferential amounts to which they are entitled, in each case on a per share basis. After payment of the full amount of the liquidating distribution to which they are entitled, the holders shall not be entitled to any further participation in any distribution of assets by the Company. A consolidation or merger of the Company with or into one or more other Companies (whether or not the Company is the Company surviving such consolidation or merger), or a sale, lease or exchange of all or substantially all of the assets of the Company, shall not be deemed to be a voluntary or involuntary liquidation, dissolution, or winding up of the Company. SERIES B CONVERTIBLE PREFERRED STOCK In connection with the Rights Offering, the Board of Directors designated 50,000 shares as Series B Convertible Preferred Stock, $0.05 par value per share (the "Series B Preferred Stock"). RANKING Upon liquidation, dissolution and winding up, proceeds are distributed to holders of Series A Preferred Stock and Series B Preferred Stock, pro rata, based on the original issue price of such shares, and prior to the holders of Common Shares. DIVIDENDS Holders of the Series B Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors out of funds of the Company legally available therefor, cash dividends at the annual rate of 9% of the $________ per share price and liquidation preference (the "Liquidation Preference"); provided, however, that in lieu of making dividends in cash, the Company may elect, by giving written notice to each holder of the Series B Preferred Stock, to pay dividends in kind at the annual rate of 11% of the Liquidation Preference (cash dividends and dividends in kind are each deemed "Preferred Dividends"). Dividends payable to the holders of the Series B 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 B Preferred Stock shall be cumulative and shall accrue from the date of original issuance. VOTING RIGHTS Holders of the Series B Preferred Stock are entitled to vote on all matters as a class with the holders of the Common Shares and Series A Preferred Stock and in such event are entitled to one vote for each Common Share into which the Series B Preferred Stock is convertible. CONVERSIONS Shares of Series B Preferred Stock are convertible (at the Liquidation Preference of $______ per share), in whole or in part, at the option of the holders thereof ("Optional Conversion"), into Common Shares at a conversion price of $____ per Common Share (equivalent to a conversion rate of 33 Common Shares for each share of Series B Preferred Stock so converted), 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, subject to adjustment as set forth in the Certificate of Designation. The Company can force the holder to convert his Series B 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. Subject to the provision for adjustment set forth in the Certificate of Designation which will be filed with the Secretary of State immediately prior to the consummation of the sale of the Series B Preferred Stock offered hereby, each share of Series B 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 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 Series B Preferred Stock. ANTI-DILUTION In the event that additional Common Shares or securities exercisable or convertible into Common Shares are issued without consideration or at a price less than the applicable conversion price for the Series B Preferred Stock in effect on the date of and immediately prior to such issue, then, subject to certain exceptions, the applicable conversion price of the Series B Preferred Stock shall be reduced, concurrently with such issue, to a price determined by multiplying such conversion price by a fraction, the numerator of which shall be the number of shares of Common Shares outstanding immediately prior to such issue plus the number of shares of Common Shares which the aggregate consideration received by the Company for the total number of additional Common Shares so issued would purchase at such conversion price; and the denominator of which shall be the number of Common Shares outstanding immediately prior to such issue plus the number of such additional Common Shares so issued. LIQUIDATION In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, and subject to the rights of holders of any other series of Preferred Stock, the holders of outstanding shares of Series B Preferred Stock are entitled to receive the sum of $______ per share in cash for each share of Series B Preferred Stock, plus accrued and unpaid Preferred Dividends thereon, out of the assets of the Company available for distribution to stockholders, before any distribution of assets is made to holders of Common Shares or any other capital stock ranking junior to the shares of Series B Preferred Stock and pari passu with holders of Series A Preferred Stock upon liquidation, dissolution, or winding up. If, the assets of the Company are insufficient to permit the payment of the full preferential amounts payable with respect to the shares of Series B Preferred Stock under such circumstances, the Holders shall share ratably in any distribution of assets of the Company in proportion to the full respective preferential amounts to which they are entitled, in each case on a per share basis. After payment of the full amount of the liquidating distribution to which they are entitled, the holders shall not be entitled to any further participation in any distribution of assets by the Company. A consolidation or merger of the Company with or into one or more other Companies, or a sale, lease or exchange of all or substantially all of the assets of the Company, shall not be deemed to be a voluntary or involuntary liquidation, dissolution, or winding up of the Company. Certificates representing shares of Series B Preferred Stock will include a legend to the effect that such securities may not be transferred to any resident of any of the following states: Arizona, Florida, Georgia, Ohio, Pennsylvania or Texas. SHARES ELIGIBLE FOR FUTURE SALE The Company currently has 2,516,666 Common Shares outstanding. Upon completion of this Offering (assuming full subscription), the Company will have Series A and Series B Preferred Stock outstanding which will be convertible into 933,324 and 1,650,000 additional Common Shares, respectively. The Common Shares underlying the Series B Preferred Stock, except for certain shares owned by "affiliates," including Fuel Tech, are or will be freely tradable without further registration under the Securities Act. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including a person who may be deemed to be an "affiliate" of the Company as that term is defined under the Securities Act, will be entitled to sell within any three month period a number of shares beneficially owned for one year that does not exceed the greater of (i) 1% of the then outstanding Common Shares, or (ii) the average weekly trading volume in the Common Shares during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice, and the availability of current public information about the Company. However, a person who is not deemed to have been an affiliate of the Company during the 90 days preceding a sale by such person, and who has beneficially owned Common Shares for two years, may sell such shares without regard to the volume, manner of sale, or notice requirements of Rule 144. Following this Offering, the Company cannot predict the effect, if any, that sales of Common Shares pursuant to Rule 144 or otherwise, or the availability of such shares for sale, will have on the market price prevailing from time to time. Nevertheless, sales by the current shareholders of substantial amounts of Common Shares in the public market could adversely affect prevailing market prices for the Common Shares. In addition, the availability for sale of a substantial amount of Common Shares acquired through the Rights could adversely affect prevailing market prices for the Common Shares. PLAN OF DISTRIBUTION DISTRIBUTION ARRANGEMENTS Outside of the United States, and in Colorado, Connecticut, the District of Columbia, Maryland, New Jersey and New York, the Company will pay to broker-dealers registered or exempt from registration in the relevant jurisdiction a fee for their soliciting efforts (the "Soliciting Fees"). Ten percent of the Subscription Price paid for the Series B Preferred Stock which is subscribed for will be paid to such broker-dealers. The Soliciting Fees will be paid directly to the broker-dealer designated on the applicable portion of the Rights Certificate. Soliciting Fees will not be paid on any undesignated exercise of Rights, to any broker-dealer not registered or exempt from registration in the relevant jurisdiction, or in the United States except with respect to subscriptions by Holders in the states listed above. TRANSFER AGENT The Company has appointed ChaseMellon Shareholder Services, L.L.C. as Transfer Agent for its Common Shares. LEGAL MATTERS The validity of the Securities offered hereby will be passed upon for the Company by the law firm of Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations), New York, NY. EXPERTS The financial statements of Clean Diesel Technologies, Inc. at December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997, and for the period from January 1, 1992 through December 31, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about the Company's ability to continue as a going concern as described in Note 1 to the Annual Financial Statements) appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. INDEX TO FINANCIAL STATEMENTS PAGE - ----------------------------- ---- Audited Financial Statements Report of Independent Auditors............................................ F-2 Balance Sheets as of December 31, 1996, and 1997.......................... F-3 Statements of Operations for the years ended December 31, 1995, 1996, and 1997 and for the period from January 1, 1992, through December 31, 1997.............................. F-4 Statements of Changes in Shareholders' Equity (Deficiency) for the years ended December 31, 1995, 1996, and 1997....................... F-5 Statements of Cash Flows for the years ended December 31, 1995, 1996, and 1997 and for the period from January 1, 1992, through December 31, 1997............................................... F-6 Notes to Financial Statements............................................. F-7 Unaudited Interim Financial Statements Balance Sheet as of March 31, 1998 (unaudited)............................ F-14 Statements of Operations for the three months ended March 31, 1997, and 1998, and for the period from January 1, 1992, through March 31, 1998 (unaudited)..................... F-15 Statements of Cash Flows for the three months ended March 31, 1997, and 1998, and for the period from January 1, 1992, through March 31, 1998 (unaudited)...................................... F-16 Note to Financial Statements (unaudited).................................. F-17 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 1997, and the related statements of operations, shareholders' equity (deficiency), and cash flows for each of the three years in the period ended December 31, 1997 and for the period from January 1, 1992, through December 31, 1997. 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 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, and for the period from January 1, 1992, through December 31, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming Clean Diesel Technologies, Inc. will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses and its operations have not produced a positive cash flow. These conditions raise substantial doubt about the Company's ability to continue as a going concern. (Management's plans as to these matters are also described in Note 1.) The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty. /s/ ERNST & YOUNG LLP Stamford, Connecticut February 26, 1998 CLEAN DIESEL TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY)
BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA) DECEMBER 31 ------------------------------ 1996 1997 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents.................................... $ 3,270 $ 1,239 Short-term investments....................................... 2,000 -- Inventories.................................................. 103 205 OTHER CURRENT ASSETS......................................... 222 238 --------- --------- Total current assets......................................... 5,595 1,682 Other assets................................................. 82 68 --------- --------- TOTAL ASSETS $ 5,677 $ 1,750 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses........................ $ 741 $ 794 Loan payable to Fuel-Tech N.V................................ 745 100 --------- --------- TOTAL CURRENT LIABILITIES.................................... 1,486 894 LOAN PAYABLE TO FUEL-TECH N.V. -- 395 SHAREHOLDERS' EQUITY: Preferred Stock, par value $0.05 per share, authorized 100,000 shares, no shares issued and outstanding.......... -- -- Common Shares, par value $0.05 per share, authorized 5,000,000 shares, issued and outstanding 2,500,000 and 2,516,666 shares.......................................... 125 126 Additional paid-in capital................................... 11,155 11,188 Deficit accumulated during development stage................. (7,089) (10,853) --------- --------- TOTAL SHAREHOLDERS' EQUITY................................... 4,191 461 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $ 5,677 $ 1,750 ========= ========= See accompanying notes.
CLEAN DIESEL TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA) Period from January 1, 1992, For the years ended December 31 through ------------------------------------------------- December 31, 1995 1996 1997 1997 --------- --------- --------- --------- Sales.................................. $ -- $ -- $ 199 $ 199 Costs and expenses: Cost of sales.......................... -- -- 132 132 General and administrative............. 963 1,842 1,730 5,042 Research and development............... 796 1,747 1,985 5,317 Patent filing and maintenance.......... 199 223 237 938 --------- --------- --------- --------- Loss from operations................... 1,958 3,812 3,885 11,230 Interest income........................ (33) (383) (165) (581) Interest expense to Fuel-Tech N.V...... 99 60 44 204 --------- --------- --------- --------- NET LOSS DURING DEVELOPMENT STAGE $ 2,024 $ 3,489 $ 3,764 $ 10,853 ========= ========= ========= ========= BASIC AND DILUTED LOSS PER COMMON SHARE $ 0.81 $ 1.40 $ 1.50 N/A ========= ========= ========= ========= AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,500 2,500 2,517 N/A ========= ========= ========= ========= See accompanying notes.
CLEAN DIESEL TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) (IN THOUSANDS) Deficit Deficit Accumulated Total Common Shares Additional During Shareholders' ------------------------- Paid-In Development Equity Shares Amount Capital Stage (Deficiency) --------- --------- --------- --------- --------- BALANCE AT JANUARY 1, 1995................. 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 Net loss for year.......................... -- -- -- (3,764) (3,764) Issuance of stock purchase warrants........ -- -- 30 -- 30 Exercise of stock options.................. 17 1 3 -- 4 --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1997............... 2,517 $ 126 $ 11,188 $ (10,853) $ 461 ========= ========= ========= ========= ========= See accompanying notes.
CLEAN DIESEL TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF CASH FLOWS (IN THOUSANDS) PERIOD FROM JANUARY 1, 1992, FOR THE YEARS ENDED DECEMBER 31 THROUGH ---------------------------------------------- DECEMBER 31, 1995 1996 1997 1997 --------- --------- --------- --------- OPERATING ACTIVITIES Net loss................................... $ (2,024) $ (3,489) $ (3,764) $ (10,853) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation............................ -- 12 24 36 Issuance of stock purchase warrants..... -- 30 30 60 Changes in operating assets and liabilities: Inventories........................... (15) (88) (102) (205) Other current assets.................. (1) (221) (16) (238) Accounts payable and accrued expenses. 230 320 53 794 Other assets.......................... -- (18) -- (18) Due to Fuel-Tech N.V.................. -- (66) -- (66) --------- --------- --------- --------- Net cash used in operating activities...... (1,810) (3,520) (3,775) (10,490) --------- --------- --------- --------- FINANCING ACTIVITIES Proceeds from 1995 Rights Offering net of $630 of brokerage commissions........... 9,138 2,018 -- 11,156 Expenses of 1995 Rights Offering........... (425) -- -- (425) Repayment of expenses of 1995 Rights Offering paid by Fuel-Tech N.V.......... (200) -- -- (200) Issuance of Common Shares to parent........ -- -- -- 250 Net parent company investment.............. -- -- -- 469 Proceeds of loan from Fuel-Tech N.V........ 1,695 -- -- 2,874 Repayment of loan to Fuel-Tech N.V......... (2,063) -- (250) (2,313) Proceeds from exercise of stock options.... -- -- 4 4 --------- --------- --------- --------- Net cash provided from (used in) financing activities.............................. 8,145 2,018 (246) 11,815 --------- --------- --------- --------- INVESTING ACTIVITIES Sale (purchase) of short-term investments.. -- (2,000) 2,000 -- Purchase of fixed assets................... -- (76) (10) (86) --------- --------- --------- --------- Net cash provided by (used in) investing -- (2,076) 1,990 (86) activities............................. --------- --------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................. 6,335 (3,578) (2,031) 1,239 Cash and cash equivalents at beginning of period.................................. 513 6,848 3,270 -- --------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD. $ 6,848 $ 3,270 $ 1,239 $ 1,239 ========= ========= ========= ========= Cash payments for interest to Fuel-Tech N.V..................................... $ -- $ 63 $ 44 $ 107 NON-CASH ACTIVITIES Contribution of net parent company investment to capital of the Company.... $ -- $ -- $ -- $ 469 Stock subscription receivable.............. $ 2,018 $ -- $ -- $ 2,018 Issuance of stock purchase warrants........ $ -- $ 30 $ 30 $ 60 See accompanying notes.
Clean Diesel Technologies, Inc. (A Development-Stage Company) 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, 1997, have been devoted to the research, development and commercialization of Platinum Fuel Catalysts ("PFC"), some of which are 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 the PFC 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. The Company began selling its PFC on a commercial basis to the consumer car care market in the first quarter of 1997, for use in the aftertreatment of fuel (see Note 8). In order to sell the PFC in other markets, however, additional research and development testing may 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 the PFC and governmental regulations, principally by the U.S. Environmental Protection Agency and corresponding foreign and state agencies. The accomplishment of these objectives by the Company will require additional capital and there can be no assurance that such capital will be available. 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 aforementioned recurring operating losses, the Company has been unable to generate a positive cash flow. The Company is actively seeking additional financing in the amount of $5 million through a private placement or other arrangement and is currently in discussion with several interested parties; however, the Company has not received a commitment from any such party. Although the Company believes that it will be successful in its capital raising efforts, there is no guarantee that the Company will be able to raise such capital on terms satisfactory to the Company. The Company has developed contingency plans in the event its financing efforts are not successful. Such plans include cost reductions (both general and administrative and research and development), licensing the Company's technologies and selling its intellectual property. Accordingly, at December 31, 1997, there is substantial doubt as to the Company's ability to continue as a going concern. On February 17, 1998, the Company received a commitment from Fuel Tech to provide short-term financing in the amount of up to $500,000. Borrowings pursuant to this agreement will be secured by the Company's intellectual property. The Company's management believes that, with this loan from Fuel Tech, the Company has adequate capital to fund its operations through the first half of 1998. 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, 1997, substantially all of the Company's cash and cash equivalents consisted of $1 million in U.S. Government obligations and a $0.2 million deposit with a financial institution. All financial instruments are reflected in the accompanying balance sheets at amounts that approximate fair market value. Short-term investments at December 31, 1996, consisted of United States Government-backed mortgages, which matured in 1997. The Company classified such investments as held to maturity and, accordingly, they were carried at amortized cost in the accompanying balance sheet at December 31, 1996. INVENTORIES Inventories are stated at lower of cost or market and consist of finished product. Cost is determined using the first-in, first-out (FIFO) method. RESEARCH AND DEVELOPMENT COSTS Costs relating to the research, development and testing of products are charged to operations as they are incurred. These costs include test programs, 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. Included in accrued expenses at December 31, 1997, are liabilities for research and development expenses owing to Ricardo Consulting Engineers Ltd., Delft University and Johnson Matthey of $166,533, $53,559 and $51,719, respectively. STOCK-BASED COMPENSATION The Company accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Under the Company's current plan, options may be granted at not less than the fair market value on the date of grant and therefore no compensation expense is recognized for the stock options granted. In 1996, the Company adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. BASIC AND DILUTED LOSS PER COMMON SHARE 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. 3. TAXATION The Company accounts for income taxes in accordance with the "liability method." Prior to December 12, 1995, the Company's operations were included in the consolidated U.S. federal income tax return of Fuel Tech, Inc. At December 31, 1996 and 1997, the Company had tax losses available for offset against future years' earnings of approximately $6.4 million and $10 million, respectively. Temporary differences were insignificant as of such dates. Approximately $0.9 million, $2.0 million, $3.5 million and $3.6 million of the tax loss carryforwards expire in 2009, 2010, 2011 and 2012, respectively. The Company has not recognized any benefit from the aforementioned tax loss carryforwards. Under the provisions of the United States Tax Reform Act of 1986, utilization of the Company's U.S. federal tax loss carryforwards (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). 4. SHAREHOLDERS' EQUITY 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 Bridge 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 Shares 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, shareholders 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. In 1997, the percentage was further increased from 12 1/2% to 17 1/2%. The policy of the Board was to grant stock options vesting in three equal portions on the first through third anniversaries of the grant date for grants prior to 1997, and in equal portions on the grant date and the first and second anniversaries of the grant date for grants awarded in 1997. If compensation expense for the Company's plan had been determined based on the fair value at the grant dates for awards under its plan, consistent with the method described in SFAS No. 123, the Company's net loss and basic and diluted loss per share would have been increased to the pro forma amounts indicated below: 1995 1996 1997 ---- ---- ---- Net loss (000's): As reported.................. $2,024 $3,489 $3,764 Pro forma.................... 2,031 3,600 4,040 Basic and diluted loss per share: As reported.................. $ 0.81 $ 1.40 $ 1.50 Pro forma.................... 0.81 1.44 1.59 In accordance with the provisions of SFAS No. 123, the pro forma disclosures include only the effect of stock options granted in 1995, 1996 and 1997. The application of the pro forma disclosures presented above are not representative of the effects SFAS No. 123 may have on operating results and earnings (loss) per share in future years due to the timing of stock option grants and considering that options vest over a period of three years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The fair value of each option grant, for pro forma disclosure purposes, was estimated on the date of grant using the modified Black-Scholes option pricing model with the following weighted-average assumptions: 1995 1996 1997 ---- ---- ---- Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 6.4% 6.8% 5.72% Expected volatility 65.4% 54.3% 61.3% Expected life of option 4 years 4 years 4 years The following table presents a summary of the Company's stock option activity and related information for the years ended December 31:
1995 1996 1997 --------------------------- --------------------------- --------------------------- OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE ------- -------------- ------- -------------- ------- -------------- Outstanding, beginning of year................... 125 $ 1.10 222 $ 2.86 287 $ 3.25 Granted................... 97 5.13 65 4.59 115 4.61 Exercised................. -- -- -- -- (17) 0.20 Forfeited................. -- -- -- -- (20) 4.52 ---- ------ -------- ------ ---- ------ Outstanding, end of year.. 222 $ 2.86 287 $ 3.25 365 $ 3.77 ==== ====== ======= ====== ==== ====== Exercisable, end of year.. 63 $ 1.40 189 $ 3.11 259 $ 3.41 Weighted-average fair value of options granted during the year................... $ 2.79 $ 2.25 $ 2.18
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ------------------------------------------------------ ------------------------------ WEIGHTED-AVERAGE RANGE OF EXERCISE NUMBER OF REMAINING WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE - ----------------- --------- ---------------- ---------------- --------- ---------------- $.20 - $2.00 108,334 3.5 years $ 1.24 108,334 $ 1.24 2.50 - 4.63 192,500 8.0 4.21 91,663 3.82 5.63 - 6.82 64,450 7.8 6.70 59,449 6.75 - ----------------- --------- ---------------- ---------------- --------- ---------------- $.20 - $6.82 365,284 5.8 years $ 3.77 259,446 $ 3.41
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 as determined by utilization of the Black-Scholes option pricing model. 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 market price on the date of issue). The warrant expires on March 17, 2004. Included in the Company's Financial Statements is $30,000 of expense, as determined by utilization of the Black-Scholes option pricing model, in 1997, related to the issuance of these purchase warrants, which represented the fair value of the services received. 6. COMMITMENTS The Company is obligated under a sublease agreement for its principal office. Future minimum lease payments at December 31, 1997, are as follows: 1998--$65,000 and 1999--$11,000. For the years ended December 31, 1996 and 1997, rental expense approximated $90,000 and $93,000 respectively. 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). Effective as of October 28, 1994, Fuel Tech granted two licenses to the Company for all patents and rights associated with its Platinum Fuel Catalyst technology. Effective November 24, 1997, the licenses were canceled and Fuel Tech assigned to the Company all such patents and rights on terms substantially similar to the licenses. In exchange for the assignment, the Company will pay Fuel Tech a royalty of 2.5% of its annual gross revenue from sales of the Platinum Fuel Catalysts, commencing in 1998. The royalty obligation expires in 2008. The Company may terminate the royalty obligation to Fuel Tech by payment of $12 million commencing in 1998 and declining annually to $1,090,910 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. 7. RELATED PARTY TRANSACTIONS On July 1, 1995, the Company entered into a $745,000 promissory demand note ("Demand Note") with Fuel Tech bearing an interest rate of 8% per annum. Pursuant to the Company's agreement with Fuel Tech, Fuel Tech did not demand repayment during 1996. In the first quarter of 1997, the Company repaid $250,000 of this note. Throughout the life of the note, the Company has made monthly interest payments on the unpaid balance. On November 5, 1997, the Company entered into a $495,000 promissory note ("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. Interest at a rate of 8% per annum is payable on the unpaid balance on each principal payment date. On February 17, 1998, the Company received a commitment of up to $500,000 from Fuel Tech to fund its cash requirements until such time as the Company obtains the long-term financing it is seeking. The $500,000 from Fuel Tech will be in the form of a grid note, bearing interest at the rate of 10% per annum. The note will be secured by all of the Company's intellectual property and is repayable, in full, on or before June 17, 1998. Average trade balances due to Fuel Tech for the years ended December 31, 1996 and 1997, approximated $183,000 and $69,000, 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 $904,000, $1,232,000 and $403,000 for the years ended December 31, 1995, 1996 and 1997, respectively, and $3,204,000 for the period from January 1, 1992, through December 31, 1997. Cost allocations for such periods were based on the amount of management time devoted to the Company. Certain services furnished by Fuel Tech to the Company were terminated in mid-year 1996. In the opinion of the Company's management, such cost allocations are fair and reasonable and are on terms no less favorable than could be obtained from a third party. During 1994, Fuel Tech contributed $469,000 to the Company and the Company issued 2,500,000 Common Shares to Fuel Tech for $250,000. 8. MARKETING AND JOINT DEVELOPMENT AGREEMENTS In September 1996, the Company entered into a supply agreement with Holt Lloyd International Ltd. ("Holts") of the United Kingdom to sell the Company's PFC under the Company's Platinum Plus trademark for use with Holts'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 were test-marketed by Holts in Europe in the fourth quarter of 1996, with commercial sales commencing in the first quarter of 1997. This agreement also provides for collaborative testing of the Company's PFC product for gasoline-fueled vehicles, which will be marketed under similar terms by Holts. This product was launched by Holts in Europe in late 1997 under the Cat Guard name. In December 1997, Holts was acquired by Prestone Products, Inc., a division of AlliedSignal. Based on management and product line changes at Holts, and as a result of the Prestone acquisition, the Company expects a delay in the buildup of sales to Holts in 1998. 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 for stationary diesels. 9. SUBSEQUENT EVENT On February 26, 1998, the Company was notified by Nasdaq that it was not in compliance with the new net tangible assets/market capitalization/net income requirements. As such, Nasdaq informed the Company that, unless the Company requests a temporary exemption to this requirement, its securities will be delisted at the close of business on March 16, 1998. The Company has requested a temporary exemption to this requirement, which will temporarily stay the delisting.
BALANCE SHEET (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) March 31, 1998 ------------ ASSETS Current assets: Cash and cash equivalents.......................................... $ 657 Inventories........................................................ 203 Other current assets............................................... 122 ------------ Total current assets............................................... 982 Other assets....................................................... 62 ------------ Total assets....................................................... $ 1,044 ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses.............................. $ 829 Loan payable to Fuel-Tech N.V...................................... 100 ------------ Total current liabilities.......................................... 929 Loan payable to Fuel-Tech N.V...................................... 395 Shareholders' equity (deficit): Preferred Stock, par value $0.05 per share, authorized 100,000 shares, no shares issued and outstanding........................ -- Common Shares, par value $0.05 per share, authorized 5,000,000 shares, issued and outstanding 2,516,666 shares................. 126 Additional paid-in capital......................................... 11,188 Deficit accumulated during development stage....................... (11,594) ------------ Total shareholders' equity (deficit)............................... (280) ------------ Total liabilities and shareholders' equity (deficit)............... $ 1,044 ============ See note to financial statements.
STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA) Period from Three Months Ended January 1, 1992, March 31, through 1997 1998 March 31, 1998 ------- ------- --------- Sales.................................................... $ 40 $ -- $ 199 Costs and expenses: Cost of sales............................................ 23 -- 132 General and administrative............................... 496 451 5,493 Research and development................................. 457 236 5,553 Patent filing and maintenance............................ 75 56 994 ------- ------- --------- Loss from operations..................................... 1,011 743 11,973 Interest income.......................................... (64) (13) (594) Interest expense......................................... 14 11 215 ------- ------- --------- Net loss during development stage........................ $ 961 $ 741 $ 11,594 ======= ======= ========= Basic and diluted loss per common share.................. $ 0.38 $ 0.29 N/A ======= ======= ========= Average number of common shares outstanding........................................... 2,512 2,517 N/A ======= ======= ========= See note to financial statements.
STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) Period from Three Months Ended January 1, 1992, March 31 through 1997 1998 March 31, 1998 ------------- ------------- ------------- OPERATING ACTIVITIES Net cash used in operating activities................. $ (1,075) $ (581) $ (11,071) ------------- ------------- ------------- 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 N.V.............................. -- -- (200) Issuance of Common Shares to parent................... -- -- 250 Net parent company investment......................... -- -- 469 Proceeds of loan from Fuel-Tech N.V................... -- -- 2,874 Repayment of loan to Fuel-Tech N.V.................... (250) -- (2,313) Proceeds from exercise of stock options............... 3 -- 4 ------------- ------------- ------------- Net cash (used in) provided from financing activities. (247) -- 11,815 ------------- ------------- ------------- INVESTING ACTIVITIES Net cash used in investing activities................. (5) (1) (87) ------------- ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................... (1,327) (582) 657 Cash and cash equivalents at beginning of period............................................. 3,270 1,239 -- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,943 $ 657 $ 657 ============= ============= ============= See note to financial statements.
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 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 month period ended March 31, 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 accompanying Financial Statements and footnotes thereto for the year ended December 31, 1997. Clean Diesel Technologies, Inc. (the "Company") is a development-stage enterprise, and its efforts from January 1, 1992, through March 31, 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 PFC 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 PFC on a commercial basis to the consumer car care market for use in the aftertreatment of fuel. In order to sell the PFC in other markets, however, additional research and development testing may 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 the PFC, and governmental regulations, principally by the Environmental Protection Agency and corresponding foreign and state agencies. The accomplishment of these objectives by the Company will require additional capital and there can be no assurance that such capital will be available. As more fully described under the caption "Related Party Transactions" below, the Company has received a $1.4 million bridge loan and is actively seeking additional funding. With the net proceeds of the bridge loan, the Company's management believes that the Company has adequate capital to fund its operations up to November 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Sources of Capital" elsewhere in this Prospectus. 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 $1.4 million bridge loan mentioned above, the Company is actively seeking additional financing of $2.0 million to $3.75 million through the Rights Offering. Although the Company believes that it will be successful in its capital raising efforts, there is no guarantee that the Company will be able to raise such capital on terms satisfactory to the Company. Accordingly, at March 31, 1998, there continues to be substantial doubt as to the Company's ability to continue as a going concern. See "Management's Discussions and Analysis of Financial Condition and Results of Operations - -- Liquidity and Sources of Capital" elsewhere in this prospectus. INVENTORIES Inventories are stated at 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 market price on the date of issue). The warrant expires on March 17, 2004. Included in the Company's March 31, 1997 Statement of Operations is $30,000 of expense related to the issuance of this purchase warrant, which represented the fair value of services received, as determined by utilization of the Black-Scholes option pricing model. RELATED PARTY TRANSACTIONS 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 obtains the long-term financing it is seeking. The $500,000 commitment has subsequently been converted into a bridge loan (the "Bridge Loan"), which will constitute senior debt, will bear interest at the rate of ten percent per annum and will be due April 15, 2001. The Bridge Loan is automatically convertible into Series A Convertible Preferred Stock upon the conclusion of a public or private financing that contributes $1.75 million of additional net proceeds to the Company. The bridge loan is secured by all of the Company's intellectual property. Subsequent to March 31, 1998, the Company received from outside investors an additional $900,000 of financing under the same bridge loan. The Company believes that, with the $1.4 million Bridge Loan described above, it has sufficient cash balances to fund its operations through November 1998. The Company is actively seeking additional financing in the amount of $2.0 million to $3.75 million through the Rights Offering. Although the Company believes that it will be successful in its capital raising efforts, there is no guarantee that the Company will be able to raise such capital on terms satisfactory to the Company. SUBSEQUENT EVENTS On February 26, 1998, the Company was notified by Nasdaq that it was not in compliance with the new net tangible assets/market capitalization/net income requirements. As such, the Company's securities were delisted at the close of business on June 30, 1998. Quotations as to the Company's shares have continued to be available on the OTC Bulletin Board. In May 1998, the Company received $950,000 of the proceeds from the $1.4 million Bridge Loan, as more fully described in "Related Party Transactions" above. The remaining proceeds of $300,000 and $150,000 were received in June and July 1998, respectively. The Company is currently using the proceeds to fund its operations. On June 17, 1998, the shareholders of the Company voted to increase the authorized capital of the Company from 5,100,000 shares, par value $0.05, to 15,100,000 shares, par value $0.05. Of the authorized capital, 15,000,000 will be designated as Common Shares and 100,000 as Preferred Stock. On July 1, Platinum Plus, Inc. elected to defer repayment of the $100,000 of principal due on the $495,000 Term Loan. Platinum Plus has reserved the right, however, to call this payment at any time. As of the date of this prospectus, Platinum Plus, Inc. has not demanded repayment. The interest accrued on the note as of July 1, 1998 was paid by the Company. NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. CLEAN DIESEL NEITHER THE DELIVERY OF THIS TECHNOLOGIES, INC. PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY 50,000 RIGHTS TO ACQUIRE SHARES OF IMPLICATION THAT THE INFORMATION SERIES B CONVERTIBLE PREFERRED STOCK HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE OR, IN THE CASE OF INFORMATION INCORPORATED HEREIN BY REFERENCE, THE DATE OF FILING WITH THE COMMISSION. ------------------------ TABLE OF CONTENTS PAGE ---- PROSPECTUS SUMMARY................3 50,000 SHARES OF SERIES B CONVERTIBLE RISK FACTORS.....................13 PREFERRED STOCK THE RIGHTS OFFERING..............20 USE OF PROCEEDS..................29 DIVIDEND POLICY..................30 CAPITALIZATION...................31 DILUTION.........................33 SUMMARY SELECTED FINANCIAL DATA..35 1,650,000 SHARES OF COMMON STOCK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......37 BUSINESS.........................42 MANAGEMENT.......................51 PRINCIPAL SHAREHOLDERS...........57 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........57 DESCRIPTION OF CAPITAL STOCK.....59 ---------- SHARES ELIGIBLE FOR FUTURE SALE..65 PROSPECTUS PLAN OF DISTRIBUTION.............65 ---------- LEGAL MATTERS....................65 EXPERTS..........................66 FINANCIAL STATEMENTS............F-1 ___________, ____ 1998 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemization of all expenses (subject to future contingencies) incurred or expected to be incurred by the Company in connection with the issuance and distribution of the securities being offered hereby other than broker-dealer commissions (items marked with an asterisk (*) represent estimated expenses): Registration Fee.......................... $ 1,100 Blue Sky Filing Fees and Expenses*........ $ 15,000 Printing and Engraving Costs*............. $ 35,000 Transfer Agent, Subscription Agent and Information Agent Fees*................ $ 15,000 Legal Fees and Expenses*.................. $ 250,000 Accounting Fees and Expenses*............. $ 50,000 Miscellaneous*............................ $ 33,900 ------------ TOTAL* $ 400,000 ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS Delaware General Corporation Law, Section 102(b)(7), enables a corporation in its original certificate of incorporation or an amendment thereto validly approved by shareholders to eliminate or limit personal liability of members of its Board of Directors for violations of a director's fiduciary duty of care. However, the elimination or limitation shall not apply where there has been a breach of the duty of loyalty, failure to act in good faith, engaging in intentional misconduct or knowingly violating a law, paying a dividend or approving a stock repurchase which is deemed illegal or obtaining an improper personal benefit. In accordance with Delaware law, the Company's Certificate of Incorporation eliminates in certain circumstances the liability of directors of the Company for monetary damages for breach of their fiduciary duty as directors. This provision does not eliminate the liability of a director (i) for a breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions by the director not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for a willful or negligent declaration of an unlawful dividend, stock purchase or redemption or (iv) for transactions from which the director derived an improper Personal benefit. In addition, the Company's Certificate of Incorporation includes provisions to indemnify its officers and directors and other persons against expenses, judgments, fines and amounts paid in settlement in connection with threatened, pending or completed suits or proceedings against such persons by reason of serving or having served as officers, directors, or in other capacities, except in relation to matters with respect to which such persons shall be determined not to have acted in good faith, unlawfully or in the best interests of the Company. With respect to matters as to which the Company's officers and directors and others are determined to be liable for misconduct or negligence in the performance of their duties, the Company's Certificate of Incorporation provides for indemnification only to the extent that the Company determines that such person acted in good faith and in a manner not opposed to the best interests of the Company. Insofar as limitation of, or indemnification for, liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling the Company pursuant to the foregoing, the Company has been informed that in the opinion of the Commission, such limitation or indemnification is against public policy as expressed in the Securities Act, and therefore, unenforceable. The Company's officers and directors are, or may become, in their individual capacities, officers, directors, controlling shareholders and/or partners of other entities engaged in a variety of businesses. Thus, there exists potential conflicts of interest, including, among other things, time, effort, and corporate opportunity, incident to involvement with such other business entities. The officers and directors have a fiduciary duty of loyalty to the Company to disclose to the Company business opportunities which come to their attention which may be in the Company's area of interest, functionally and geographically. The officers and directors of the Company are not precluded from contracting or dealing with the Company or affiliated entities, subject, however, to fully disclosing real or potential conflicts and documenting such disclosures in corporate minutes and obtaining approval from a majority of the Company's disinterested directors. Delaware General Corporation Law, Section 145, permits a corporation organized under Delaware law to indemnify directors and officers with respect to any matter in which the director or officer acted in good faith and in a manner he reasonably believed to be not opposed to the best interests of the Company, and, with respect to any criminal action, had reasonable cause to believe his conduct was lawful. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In May, June and July, 1998, the Company entered into a Bridge Loan agreement with certain lenders, including Fuel Tech, for an aggregate of $1.4 million. The Bridge Loan is convertible into 2,800 shares of Series A Convertible Preferred Stock at the lenders' discretion or upon conclusion of a specified public or private financing. The issuance of the notes evidencing the Bridge Loan and the underlying Series A Convertible Preferred Stock were made in reliance on Section 4(2) of, and/or Regulation S under, the Securities Act of 1933. ITEM 16. EXHIBITS The following exhibits are filed herewith: Exhibit No. Title - -------- ----- 3(i)(a) Certificate of Incorporation, as amended. *3(i)(b) Certificate of Designation of Series A Convertible Preferred Stock of the Company. 3(i)(c) Form of Certificate of Designation of Series B Convertible Preferred Stock of the Company. **3(ii) By-Laws. +++4a Specimen Stock Certificate. 4b Specimen Subscription Certificate. 4c Instructions as to use of Subscription Certificates. 4d Notice of Guaranteed Delivery (filed as Exhibit A to Instructions). 4e Affidavit of Lost, Stolen, Destroyed or Mutilated Rights Certificate(s) (filed as Exhibit B to Instructions). 4f Cover letter to Holders of Common Shares. 4g Cover letter to securities dealers, commercial banks, brokers, trust companies and other nominees. 4h Suggested form letter to clients of securities dealers, commercial banks, brokers, trust companies and other nominees. 4i Instruction to Record Date Holder. 4j DTC Participant Oversubscription Exercise Form. 4k Nominee Holder Certification. +++5 Opinion Letter of Fried, Frank, Harris, Shriver & Jacobson as to legality of shares being registered. ***10a Assignment of Intellectual Property Rights Fuel-Tech N.V. to Platinum Plus, Inc. as of November 5, 1997. ***10b Assignment of Intellectual Property Rights Fuel Tech, Inc. to the Company as of November 5, 1997. ***10c Assignment Agreement as of November 5, 1997 among Platinum Plus, Inc., Fuel-Tech N.V. and the Company. ++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 Platinum Plus, Inc., dated November 5, 1997. ***10h Grid Note and Security Agreement of the Company to Platinum Plus, Inc., dated February 17, 1998 (data in Schedule A included in Schedules to Exhibits 10a, b and c). ****10i Office Premises Lease of January 26, 1996. ***10j Registration Rights Agreement between the Company and Fuel Tech of November 5, 1997. **10k License Agreement between Fuel Tech and the Company, effective October 28, 1994. **10l License Agreement between the Company and Platinum Plus, Inc., effective October 28, 1994. ++++10m Supply Agreement between the Company and Holt Lloyd International Ltd. dated September 12, 1996. ++++10n Joint Development Agreement by and among Englehard Corporation, the Company, and Nalco Fuel Tech dated November 11, 1996. ++++10o Cooperative-development Agreement by and between the Company and AMBAC International dated December 17, 1997. *10p Bridge Loan Agreement between the Company and the several lenders set forth on Schedule A thereto dated May 8, 1998. 10q Supplemental Agreement dated as of July 10, 1998 to Bridge Loan Agreement dated as of May 8, 1998 among the Company, the Lenders under the Bridge Loan Agreement and the Lenders who have agreed to become parties to the Supplemental Agreement. 10r Second Supplemental Agreement to Bridge Loan Agreement dated as of August 3, 1998 among the Company, the Lenders under the Bridge Loan Agreement and the Lenders who have agreed to become parties to the Supplemental Agreement. 10s Agreement by and between Jeremy D. Peter-Hoblyn and the Company dated as of December 2, 1996. 10t Agreement by and between James M. Valentine and the Company dated as of September 12, 1997. +++10u Subscription Agent Agreement by and between the Company and ChaseMellon Shareholder Services, L.L.C. dated ________ ___, 1998. 12 Statement Re: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. 23a Consent of Ernst & Young LLP. +++23b Consent of Fried, Frank, Harris, Shriver & Jacobson (contained in Opinion filed as Exhibit 5). 24 Power of Attorney (see page II-5). - ------------------------------------------------ * Previously filed as an Exhibit to Form 8-K dated May 26, 1998, and incorporated by reference herein. ** Previously filed as an Exhibit to Registration Statement on Form S-1 of August 16, 1995, No. 33-95840, and incorporated by reference herein. *** Previously filed as an Exhibit to Form 10-K for the year ended December 31, 1997, and incorporated by reference herein. **** 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. ++ Previously filed as an Exhibit to Form 10-K for the year ended December 31, 1996 and incorporated by reference herein. +++ To be filed by amendment. ++++ Portions of these exhibits have been omitted pursuant to a request for confidential treatment. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the Registration Statement; and (iii)To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be treated as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Offering. (4) The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by the underwriters during the subscription period, the amount of unsubscribed securities to be purchased by the underwriters, and the terms of any subsequent reoffering thereof. If any public offering by the underwriters is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering. (5) For purposes of determining liability under the Act: (i) The information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the Registration Statement as of the time it was declared effective; and (ii) Each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by undersigned, thereunto duly authorized, in the City of Stamford, State of Connecticut, on August 7, 1998. CLEAN DIESEL TECHNOLOGIES, INC. By: /s/ Jeremy D. Peter-Hoblyn ------------------------------------ Jeremy D. Peter-Hoblyn, President and Chief Executive Officer, Director Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. WE, THE UNDERSIGNED OFFICERS AND DIRECTORS OF CLEAN DIESEL TECHNOLOGIES, INC., hereby severally constitute and appoint Jeremy D. Peter-Hoblyn, Scott M. Schecter and Charles W. Grinnell, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Registration Statement on Form S-1 filed herewith and any and all pre-effective and post-effective amendments to said Registration Statement, and generally to do all things in our names and behalf in our capacities as officers and directors to enable Clean Diesel Technologies, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Registration Statement and any and all amendments thereto. Name Capacity Date ---- -------- ---- /s/ Jeremy D. Peter-Hoblyn - -------------------------- Jeremy D. Peter-Hoblyn President and Chief August 7, 1998 Executive Officer, Director (principal executive officer) /s/ James M. Valentine - -------------------------- James M. Valentine Executive Vice President August 7, 1998 and Chief Operating Officer, Director /s/ Charles W. Grinnell - -------------------------- Charles W. Grinnell Vice President, General August 7, 1998 Counsel and Corporate Secretary; Director /s/ Scott M. Schecter - -------------------------- Scott M. Schecter Vice President, Treasurer August 7, 1998 and Chief Financial Officer (principal financial and accounting officer) /s/ John A. de Havilland - ------------------------ John A. de Havilland Director August 7, 1998 /s/ Ralph E. Bailey - ------------------------ Ralph E. Bailey Chairman of the Board, August 7, 1998 Director /s/ Douglas G. Bailey - ------------------------ Douglas G. Bailey Director August 7, 1998 *By /s/ Charles W. Grinnell ------------------------------ Charles W. Grinnell Attorney-in-Fact EX-3.(I)(A) 2 Exhibit 3(i)(a) CERTIFICATE OF INCORPORATION OF CLEAN DIESEL TECHNOLOGIES, INC. 1. The name of the corporation is Clean Diesel Technologies, Inc. 2. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the city of Wilmington, County of New Castle. The name of its registered agent at such address is the Corporation Trust Company. 3. The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 4. The corporation shall have authority to issue the total number of Five Million (5,000,000) shares of the par value each of One Dollar ($1.00) per share, amounting in the aggregate to Five Million Dollars ($5,000,000.00) all of which shall be Common Stock. 5. The name and mailing address of each incorporator is Name Address ---- ------- Charles W. Grinnell 1055 Washington Blvd. Stamford CT 06901 6. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the by-laws of the corporation. 7. Elections of Directors need not be by written ballot unless the by-laws of the corporation shall so provide. 8. Meetings of stockholders may be held within or without the state of Delaware, as the by-laws may provide. The books of the corporation may be kept outside of the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the by-laws of the corporation. 9. (a) A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director except that this Article 9 shall not eliminate or limit a director's liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation law, or (iv) for any transaction from which the director derived an improper personal benefit. (b) If the Delaware General Corporation Law is amended after approval by the stockholders of this Article 9 to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended from time to time. (c) Any repeal or modification of this Article 9 shall not increase the personal liability of any director of this corporation for any act or occurrence taking place prior to such repeal or modification, or otherwise adversely affecting any right or protection of a director of the corporation existing at the time of such repeal or modification. 10. (a) Except as otherwise provided below, the corporation, shall, to the fullest extent indemnify each person who is, or shall have been, a director, officer, employee, or agent of the corporation or who is or was a director, officer, employee or agent of the corporation and is serving, or shall have served, at the request of the corporation , as a director, officer, employee or agent of another organization or in any capacity with respect to any employee benefit plan of the corporation, against all liabilities and expenses (including judgments, fines, penalties, amounts paid or to be paid in settlement, and reasonable attorneys fees) imposed upon or incurred by any such person (the "Indemnitee") in connection with, or arising out of, the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be a defendant or with which he may be threatened or otherwise involved, directly or indirectly, by reason of his being or having been such a director, officer, employee or agent or as a result of his serving or having served with respect to any such employee benefit plan; provided, however, that the corporation shall provide no indemnification with respect to any matter as to which any such Indemnitee shall be finally adjudicated in such action suit or proceeding not to have acted in good faith in the reasonable belief that his action was (i) in the best interests of the corporation or (ii) to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. (b) The right to indemnification conferred in this Article 10 shall include the right to be paid by the corporation for liabilities and expenses incurred in connection with the settlement or compromise of any such action, suit or proceeding, pursuant to a consent decree or otherwise, unless a determination is made, within forty-five (45) days after receipt by the corporation of a written request by the Indemnitee for indemnification, that such settlement or compromise is not in the best interests of the corporation or, to the extent such matter related to service with respect to an employee benefit plan, that such settlement or compromise is not in the best interests of the participants or beneficiaries of such plan. Any such determination shall be made (i) by the board of directors of the corporation by a majority vote of a quorum consisting of disinterested directors, or (ii) if such quorum is not obtainable, by a majority of the disinterested directors then in office. Notwithstanding the foregoing, if there are less than two disinterested directors of the corporation then in office, the board of directors shall promptly direct that independent legal counsel (who may be regular legal counsel to the corporation) determine, based on facts known to such counsel at such time, whether such Indemnitee acted in good faith in the reasonable belief that this action was in the best interests of the corporation or the participants or beneficiaries of any such employee benefit plan, as the case may be; and, in such event, indemnification shall be made to such Indemnitee unless, within forty-five (45) days after receipt by the corporation of the request by such Indemnitee for indemnification, such independent legal counsel in a written opinion to the corporation determines that such Indemnitee did not act in good faith in the reasonable belief that his action was in the best interests of the corporation or the participants or beneficiaries of any such employee benefit plan, as the case may be. (c) As a condition precedent to his right to be indemnified, the Indemnitee must give the corporation notice in writing as soon as practicable of any action, suit or proceeding involving him for which indemnity will or could be sought. With respect to any action, suit or proceeding of which the corporation is not notified, the corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to such Indemnitee. After notice from the corporation to the Indemnitee of its election so to assume such defense, the corporation shall not be liable to such Indemnitee for any legal or other expenses subsequently incurred by such Indemnitee in connection with such claim, but the fees and expenses of such counsel incurred after notice from the corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the corporation and the Indemnitee in the conduct of the defense of such action or (iii) the corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases, the fees and expenses of counsel for the Indemnitee shall be at the expense of the corporation, except as otherwise expressly provided by this article. The corporation shall not be entitled to assume the defense of any claim brought by or on behalf of the corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in (ii) above. (d) Subject to paragraph 4 above, the right to indemnification referred to in this article shall include the right to be paid by the corporation for expenses (including reasonable attorneys' fees) incurred in defending a civil on criminal action, suit or proceeding in advance of its final disposition, subject to receipt of an undertaking by the Indemnitee to repay such payment if it is ultimately determined that the Indemnitee is not entitled to indemnification under this article. Such undertaking may be accepted without reference to the financial ability of such Indemnitee to make such repayment. Notwithstanding the foregoing, no advance shall be made by the corporation under this paragraph (d) if a determination is reasonably and promptly made by the board of directors by a majority vote of a quorum consisting of disinterested directors or, if such quorum is not obtainable, by a majority of the disinterested directors of the corporation then in office or, if there are not at least two disinterested directors then in office, by independent legal counsel (who may be regular legal counsel to the corporation) in written opinion that, based on facts known to the board of directors or counsel at such time, such Indemnitee did not act in good faith in the reasonable belief that his action was in the best interests of the corporation or the participants or beneficiaries of an employee benefit plan of the corporation, as the case may be. (e) If an Indemnitee is entitled under any provision of this article to indemnification by the corporation for some or a portion of the liabilities or expenses imposed upon or incurred by such Indemnitee in the investigation, defense, appeal or settlement of any action, suit or proceeding but not, however, for the total amount thereof, the corporation shall nevertheless indemnify the Indemnitee for the portion of such liabilities or expenses to which such Indemnitee is entitled. (f) The right to indemnification and the payment of expenses incurred in defending any action, suit or proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or thereafter acquire under any statute, provision of the articles of incorporation, by-laws, agreement, vote of stockholders of managing directors or otherwise. Without limiting the generality of the foregoing, the corporation, acting through its board of directors, may enter into agreements with any director or employee of the corporation providing for indemnification rights equivalent to or greater than the indemnification rights set forth in this article. (g) The corporation may purchase and maintain insurance, at its expense, to protect itself and any director or employee of the corporation or another organization or employee benefit plan against any expense or liability incurred by him in any such capacity, or arising out of the status as such. (h) The corporation's obligation to provide indemnification under this article shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the corporation or any other person. (i) Without the consent of a person entitled to the indemnification and other rights provided in this article, no amendment modifying or terminating such rights shall adversely affect such person's rights under this article with respect to the period prior to such amendment. (j) If this Article or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Indemnitee as to any liabilities and expenses with respect to any action, suit or proceedings to the full extent permitted by any applicable portion of this article that shall not have been invalidated and to the full extent permitted by applicable law. (k) As used in this article, the term "director" "officer" "employee" "agent" and "person" include their respective heirs, executors, administrators and legal representatives and an "interested" director is one against whom in such capacity the proceedings in question or another proceeding on the same or similar grounds is then pending. 11. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. THE UNDERSIGNED incorporator does hereby set his hand this 10th day of January 1994 for the purpose of forming a corporation under the General Corporation Law of the state of Delaware. /s/ Charles W. Grinnell ----------------------- Charles W. Grinnell CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF CLEAN DIESEL TECHNOLOGIES, INC. THE UNDERSIGNED does hereby certify that Clean Diesel Technologies, Inc. has duly adopted the following amendment of its articles of incorporation in accordance with the provisions of Section 242 of the Delaware General Corporation Law: Article 4. of the certificate of incorporation of the Corporation be, and it hereby is, revoked in its entirety and the following be, and it hereby is, substituted in its place: "4. The corporation shall have authority to issue the total number of Ten Million (10,000,000) shares of the par value of $0.05 per share, amounting in the aggregate to Five Hundred Thousand Dollars ($500,000) all of which shall be common stock." Dated: October 17, 1994 CLEAN DIESEL TECHNOLOGIES, INC. By: /s/ Charles W. Grinnell ----------------------- Charles W. Grinnell Vice President CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF CLEAN DIESEL TECHNOLOGIES, INC. THE UNDERSIGNED does hereby certify that CLEAN DIESEL TECHNOLOGIES, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), has duly adopted the following amendment and restatement of Article 4 of its Amended Certificate of Incorporation in accordance with the provisions of ss. 242 of the Delaware General Corporation Law: Article 4 of the certificate of incorporation of the Corporation be, and it hereby is, amended and restated in its entirety and the following, be, and it hereby is, substituted in its place as follows: "4. The corporation shall have authority to issue the total number of Five Million One Hundred Thousand (5,100,000) shares of the par value of $0.05 per share, amounting in the aggregate to Two Hundred and Fifty-Five Thousand Dollars ($255,000), Five Million (5,000,000) shares of which shall be designated as common stock and One Hundred Thousand (100,000) of which shall be designated as preferred stock. The preferred stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions set forth in this Certificate, to issue the preferred stock in one or more series and, in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including without limitation, dividend rights, dividend rates, conversion rights, rights and terms of redemption (including sinking fund provisions), and the liquidation preferences of any unissued series of preferred stock and the number of shares constituting any such series; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not above the total number of authorized shares of the class and not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series." IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by its Secretary, Charles W. Grinnell, this 7th day of August, 1995. CLEAN DIESEL TECHNOLOGIES, INC. By: /s/Charles W. Grinnell ------------------------------ Charles W. Grinnell, Secretary CLEAN DIESEL TECHNOLOGIES, INC. CERTIFICATE OF CORRECTION THE AMENDED CERTIFICATE OF INCORPORATION OF CLEAN DIESEL TECHNOLOGIES, INC. CLEAN DIESEL TECHNOLOGIES, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: That, Section 4 of the Amended Certificate of Incorporation of Clean Diesel Technologies, Inc. filed with the Delaware Secretary of State on August 5, 1995 (the "Certificate") inaccurately reflected the action adopted by the sole stockholder. Section 4 of the Certificate should read as follows: 4. The corporation shall have authority to issue the total number of Five Million One Hundred Thousand (5,100,000) shares of the par value of $0.05 per share, amounting in the aggregate to Two Hundred and Fifty-Five Thousand Dollars ($255,000), Five Million (5,000,000) shares of which shall be designated as common stock and One Hundred Thousand (100,000) of which shall be designated as preferred stock. The preferred stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions set forth in this Certificate, to issue the preferred stock in one or more series and, in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including without limitation, dividend rights, dividend rates, conversion rights, rights and terms of redemption (including sinking fund provisions), and the liquidation preferences of any unissued series of preferred stock and the number of shares constituting any such series; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not above the total number of authorized shares of the class and not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. In no event, however, may the board of Directors issue preferred stock which has the effect of voting as a class during the tendering of an offer to purchase 51% or more of the voting securities of the Company. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Correction to be signed by its Secretary, Charles W. Grinnell, this _______ day of August, 1995. CLEAN DIESEL TECHNOLOGIES, INC. By: /s/Charles W. Grinnell ------------------------------- Charles W. Grinnell, Secretary CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF CLEAN DIESEL TECHNOLOGIES, INC. THE UNDERSIGNED does hereby certify that CLEAN DIESEL TECHNOLOGIES, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), has duly adopted the following amendment of Article 4 of its Certificate of Incorporation in accordance with the provisions of ss. 242 of the Delaware General Corporation Law: Article 4 of the certificate of incorporation of the Corporation be, and it hereby is, amended by revoking in its entirety the first paragraph of said Article 4 and the following being, and it hereby is, substituted in its place, as follows: "4 The corporation shall have authority to issue the total number of Fifteen Million One Hundred Thousand (15,100,000) shares of the par value of $0.05 per share, amounting in the aggregate to Seven Hundred Fifty Five Thousand Dollars ($755,000), and of such shares Fifteen Million (15,000,000) shall be designated as common stock and One Hundred Thousand (100,000) shall be designated as preferred stock." IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment of Certificate of Incorporation to be signed by its Secretary, Charles W. Grinnell, this 17th day of June 1998. CLEAN DIESEL TECHNOLOGIES, INC. By: /s/ Charles W. Grinnell -------------------------------- Charles W. Grinnell, Secretary EX-3.(I)(C) 3 Exhibit 3(i)(c) FORM OF CERTIFICATE OF DESIGNATION OF SERIES B CONVERTIBLE PREFERRED STOCK OF CLEAN DIESEL TECHNOLOGIES, INC. Pursuant to Section 151 of the General Corporation Law of the state of Delaware, Clean Diesel Technologies, Inc. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the state of Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors of the Corporation (the "Board") in Article 4 of the Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation"), and in accordance with the provisions of Section 151 of the General Corporation Law of the state of Delaware, the Board on ______ __, 1998, adopted the following resolution creating a series of preferred stock designated as Series B Convertible Preferred Stock. RESOLVED, that, pursuant to the authority expressly granted and vested in the Board by the provisions of the Certificate of Incorporation, there hereby is created, out of the 100,000 shares of preferred stock, $0.05 par value per share, authorized in Article 4 of the Certificate of Incorporation (the "Preferred Stock"), a series (the "Series") of the Preferred Stock consisting of 50,000 shares, which Series shall have the following powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions. Section 1. Designation and Size of Issue; Ranking. (a) The designation of this Series shall be "Series B Convertible Preferred Stock" ("Convertible Preferred Stock"). The number of shares of this Series shall be 50,000 registered shares, $0.05 par value per share. The price and liquidation preference (the "Liquidation Preference") of shares of this Series shall be $______ per share. (b) The shares of Convertible Preferred Stock shall rank senior to all other classes of equity securities of the Corporation as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, unless the terms of such equity securities provide otherwise. Section 2. Dividends. (a) The Holders of record shall be entitled to receive, when, as and if declared by the Board out of funds of the Corporation legally available therefor, cash dividends at the annual rate of 9% of the Liquidation Preference of each share; provided, however, that in lieu of making dividends in cash, the Corporation may elect, by giving written notice to each Holder, to pay dividends in kind at the annual rate of 11% of the Liquidation Preference (cash dividends and dividends in kind are each deemed "Preferred Dividends"). Dividends payable to the Holders 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 __________. Preferred Dividends on shares of Convertible Preferred Stock shall be cumulative and shall accrue from the date of original issuance. Preferred Dividends shall be payable to Holders of record as they appear on the stock register of the Corporation on such record dates, not less than 15 nor more than 60 days preceding the Dividend Payment Date thereof, as shall be fixed by the Board. Preferred Dividends (or amounts equal to accrued and unpaid Preferred Dividends) payable on shares of Convertible Preferred Stock for any period less than a full quarterly dividend period (or, in the case of the first Preferred Dividend, from the date of initial issuance of the shares of Convertible Preferred Stock to, but excluding, the first Dividend Payment Date) shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in any period less than one month. Preferred Dividends shall accrue on a daily basis whether or not there are funds of the Corporation legally available for the payment of such dividends and whether or not such Preferred Dividends are declared. Accrued but unpaid Preferred Dividends shall accrue as of the Dividend Payment Date on which they first become payable, but no interest shall accrue on accumulated but unpaid Preferred Dividends. (b) Any dividend payment made on the shares of Convertible Preferred Stock shall first be credited against the earliest accrued but unpaid dividend due with respect to the shares of Convertible Preferred Stock. Section 3. Conversions. (a) Conversion at Option of a Holder. Shares of Convertible Preferred Stock are convertible (at the Liquidation Preference of $______ per share), in whole or in part, at the option of the Holder thereof ("Optional Conversion"), unless previously redeemed, into shares of Common Stock, par value of $0.05 ("Common Stock"), at a conversion price of $_____ per share of Common Stock (equivalent to a conversion rate of 33 shares of Common Stock for each share of Convertible Preferred Stock so converted), 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 Convertible Preferred Stock in connection with the conversion thereof, subject to adjustment as set forth below (the "Conversion Price") . Optional Conversion of shares of Convertible Preferred Stock may be effected by delivering certificates evidencing such shares of Convertible Preferred Stock, together with written notice of conversion and a proper assignment of such certificates to the Corporation or in blank, to the office of the transfer agent for the shares of Convertible Preferred Stock or to any other office or agency maintained by the Corporation for that purpose and otherwise in accordance with Optional Conversion procedures established by the Corporation. Each Optional Conversion shall be deemed to have been effected immediately before the close of business on the date on which the foregoing requirements shall have been satisfied. The Optional Conversion shall be at the Conversion Price in effect at such time and on such date. The Holders at the close of business on a record date for any payment of declared Preferred Dividends shall be entitled to receive the Preferred Dividend payable on such shares of Convertible Preferred Stock on the corresponding Dividend Payment Date notwithstanding the Optional Conversion of such shares of Convertible Preferred Stock following such record date and before such Dividend Payment Date. However, shares of Convertible Preferred Stock surrendered for Optional Conversion after the close of business on a record date for any payment of declared Preferred Dividends and before the opening of business on the next succeeding Dividend Payment Date must be accompanied by payment to the Corporation in cash of an amount equal to the Preferred Dividends on such shares of Convertible Preferred Stock to be converted attributable to the current quarterly dividend period payable on such date. A Holder on any Dividend Payment Date will receive the dividend on such shares of Convertible Preferred Stock payable on that date and will be able to convert such shares of Convertible Preferred Stock after the record date for such dividend without paying an amount equal to such dividend to the Corporation upon the Optional Conversion. Except as provided above, upon any Optional Conversion of shares of Convertible Preferred Stock, the Corporation shall make no payment of or allowance for unpaid Preferred Dividends, whether or not in arrears on such shares of Convertible Preferred Stock as to which Optional Conversion has been effected or for previously declared dividends or distributions on the shares of Common Stock issued upon Optional Conversion. (b) Conversion at the Option of the Corporation. The Corporation can force the Holder to convert his Convertible Preferred Stock, in whole or in part, into shares of Common Stock at any time on or after the date that the average Closing Price (as defined in Section 12) of the shares of Common Stock equal or exceed $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 this Series B Convertible Preferred Stock be scheduled to occur, on a pro rata basis quarterly over 18 months. (c) Mandatory Conversion. Subject to the provision for adjustment set forth below, each share of Convertible Preferred Stock shall be automatically converted into a number of shares of Common Stock at the Conversion Price in the event that the Corporation consummates a Qualified IPO (as defined in Section 12) (such event, a "Mandatory Conversion"). In the event of a Mandatory Conversion, accrued and unpaid dividends will also convert into shares of Common Stock, on the same terms as the underlying Preferred Stock. (d) Deemed Issuance of Additional Common Stock. The shares of Common Stock ultimately Issuable (as defined in Section 12) upon exercise of an option (including the shares of Common Stock ultimately Issuable upon conversion or exercise of a Convertible Security (as defined in Section 12) Issuable pursuant to an option) are deemed to be Issued when the option is Issued. The shares of Common Stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an option) shall be deemed Issued upon Issuance of the Convertible Security. The maximum number of shares of Common Stock Issuable is determined without regard to any future adjustments permitted under the instrument creating the options or Convertible Securities. (e) Adjustment of Conversion Price for Diluting Issuances. (i) Weighed Average Adjustment. If the Corporation Issues additional Common Stock after the original Issuance date of the Convertible Preferred Stock and the consideration per share of additional Common Stock (determined pursuant to this Section 3(f)) is less than the Conversion Price in effect immediately before such Issue, the Conversion Price in effect immediately before such Issue shall be reduced, concurrently with such Issue, to a price (calculated to the cent) determined by multiplying the Conversion Price by a fraction: (A) the numerator of which is the number of shares of Common Stock outstanding immediately before such Issue plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for such additional Common Stock would purchase at the Conversion Price in effect immediately before such Issue, and (B) the denominator of which is the number of shares of Common Stock outstanding immediately before such Issue plus the number of shares of such additional Common Stock. (ii) Adjustment of Number of Shares. Upon each adjustment of the Conversion Price, the number of shares of Common Stock issuable upon conversion of the Convertible Preferred Stock shall be increased to equal the quotient obtained by dividing (a) the product resulting from multiplying (x) the number of shares of Common Stock issuable upon conversion of the Convertible Preferred Stock and (y) the Conversion Price, in each case as in effect immediately before such adjustment, by (b) the adjusted Conversion Price. (iii) Securities Deemed Outstanding. For the purpose of this Section 3, all securities issuable upon exercise of any outstanding Convertible Securities or options, warrants, or other rights to acquire securities of the Corporation shall be deemed to be outstanding. (f) No Adjustment for Issuances Following Deemed Issuances. No adjustment to the Conversion Price shall be made upon the exercise of options or conversion of Convertible Securities. (g) Adjustment Following Changes in Terms of Options or Convertible Securities. If the consideration payable to, or the number of shares of Common Stock Issuable by, the Corporation increases or decreases, respectively, pursuant to the terms of any outstanding options or Convertible Securities, the Conversion Price shall be recomputed to reflect such increase or decrease. The recomputation shall be made as of the time of the Issuance of the options or Convertible Securities. Any changes in the Conversion Price that occurred after such Issuance because other shares of additional Common Stock were Issued or deemed Issued shall also be recomputed. (h) Recomputation Upon Expiration of Options or Convertible Securities. The Conversion Price computed upon the original Issue of any options or Convertible Securities, and any subsequent adjustments based thereon, shall be recomputed when any options or rights of conversion under Convertible Securities expire without having been exercised. In the case of Convertible Securities or options for Common Stock, the Conversion Price shall be recomputed as if the only shares of additional Common Stock Issued were the shares of Common Stock actually Issued upon the exercise of such securities, if any, and as if the only consideration received therefor was the consideration actually received upon the Issue, exercise or conversion of the options or Convertible Securities. In the case of options or Convertible Securities, the Conversion Price shall be recomputed as if the only Convertible Securities Issued were the Convertible Securities actually Issued upon the exercise thereof, if any, and as if the only consideration received therefor was the consideration actually received by the Corporation (determined pursuant to Section 3(f)), if any, upon the Issue of the options for the Convertible Securities. (i) Limit on Readjustments. No readjustment of the Conversion Price pursuant to Section 3(h) or 3(i) shall increase the Conversion Price more than the amount of any decrease made in respect of the Issue of any options or Convertible Securities. (j) 30-Day Options. In the case of any options that expire by their terms not more than 30 days after the date of Issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such options. (k) Computation of Consideration. The consideration received by the Corporation for the Issue of any additional Common Stock shall be computed as follows: (i) Cash. Cash shall be valued at the amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends. (ii) Property. Property other than cash shall be computed at the fair market value thereof at the time of the Issue as determined in good faith by the Board. (iii) Mixed Consideration. The consideration for additional Common Stock Issued together with other property of the Corporation for consideration that covers both shall be determined in good faith by the Board. (iv) Options and Convertible Securities. The consideration per share of additional Common Stock for options and Convertible Securities shall be determined by dividing: (A) the total amount, if any, received or receivable by the Corporation for the Issue of the options or Convertible Securities, plus the minimum amount of additional consideration (as set forth in the instruments relating thereto; without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon exercise of the options or conversion of the Convertible Securities, by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) ultimately Issuable upon the exercise of such options or the conversion of such Convertible Securities. (l) Stock Dividends. In case at any time the Corporation shall declare a dividend or make any other distribution upon any stock of the Corporation which is payable in Common Stock or Convertible Securities, any Common Stock or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (m) Adjustment for Certain Special Dividends. In case the Corporation shall declare a dividend upon the Common Stock payable otherwise than out of earnings or earned surplus, determined in accordance with generally accepted accounting principles, and otherwise than in Common Stock or Convertible Securities, the Conversion Price in effect immediately subsequent to the declaration of such dividend shall be determined by subtracting from the Conversion Price in effect immediately prior to such declaration the amount of cash (or, if the distribution is for property other than cash, the fair market value of such property determined reasonably and in good faith by the Board) distributed in respect of one share of Common Stock. For the purpose of the foregoing, a dividend other than in cash shall be considered payable out of earnings or earned surplus (other than revaluation of paid in surplus) only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend as determined, reasonably and in good faith, by the Board. Such reductions shall take effect as of the date on which a record is taken for the purpose of such dividend, or, if a record is not taken, the date as of which the holder of Common Stock of record entitled to such dividend are determined. (n) Subdivision or Combination of Stock. In case the Corporation shall at any time subdivide the outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of shares issuable upon conversion of the Convertible Preferred Stock immediately prior to such subdivisions shall be proportionately increased, and conversely, in case the outstanding shares of Common Stock shall be combined at any time into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased and the number of shares issuable upon conversion of the Convertible Preferred Stock immediately prior to such combination shall be proportionately reduced. (o) Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. In case the Corporation (i) consolidates with or merges into any other corporation and is not the continuing or surviving corporation of such consolidation or merger, or (ii) permits any other corporation to consolidate with or merge into the Corporation and the Corporation is the continuing or surviving corporation but, in connection with such consolidation or merger, the Common Stock is changed into or exchanged for stock or other securities of any other corporation or cash or any other assets, or (iii) transfers all or substantially all of its properties and assets to any other corporation, or (iv) effects a capital reorganization or reclassification of the capital stock of the Corporation in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or assets with respect to or in exchange for Common Stock, then, and in each such case, proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this Section 3(p), upon the conversion of the Convertible Preferred Stock at any time after the consummation of such consolidation, merger, transfer, reorganization or reclassification, each Holder shall be entitled to receive (at the Conversion Price in effect for shares issuable upon such conversion of the Convertible Preferred Stock immediately prior to such consummation), in lieu of shares issuable upon such conversion of the Convertible Preferred Stock prior to such consummation, the stock and other securities, cash and assets to which such Holder would have been entitled upon such consummation if such Holder had so converted such Convertible Preferred Stock immediately prior thereto (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in this Section 3). (p) Notice of Adjustment. Whenever the number of shares issuable upon the conversion of the Convertible Preferred Stock or the Conversion Price is adjusted, as provided in this Section 3, the Corporation shall prepare and mail to each Holder a certificate setting forth (i) the Conversion Price and the number of shares issuable upon the conversion of the Convertible Preferred Stock after such adjustment, (ii) a brief statement of the facts requiring such adjustment and (iii) the computation by which such adjustment was made. (q) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares of Common Stock owned or held by or for the account of the Corporation. The disposition of any shares of Common Stock owned or held by or for the account of the Corporation shall be considered an issue of Common Stock for the purpose of this Section 3. (r) Certain Adjustment Rules. (i) The provisions of this Section 3 shall similarly apply to successive transactions. (ii) If the Corporation shall declare any dividend referred to in Section 3 (m) or Section 3 (n) and if any Holder converts all or any part of the Convertible Preferred Stock after such declaration, but before the payment of such dividend, the Corporation may elect to defer, until the payment of such dividend, issuing to such Holder the shares of Common Stock issuable upon such conversion over and above the shares issuable upon such conversion on the basis of the Conversion Price in effect prior to such adjustment; provided, however, that the Corporation shall deliver to each such Holder a due bill or other appropriate instrument evidencing such Holder's right to receive such additional shares upon the payment of such dividend. (iii) If the Corporation shall declare any dividend referred to in Section 3(m) or Section 3(n) and shall legally abandon such dividend prior to payment, then no adjustment shall be made pursuant to this Section 3 in respect of such declaration. (s) Exceptions to Adjustment to Conversion Price. Notwithstanding anything herein to the contrary, no adjustment to the Conversion Price or the number of shares issuable upon exercise of the Warrants shall be made in the case of the following: (i) the issuance of any shares of Common Stock upon conversion of the Convertible Preferred Stock; (ii) the grant of options or stock awards to purchase or acquire Common Stock to employees, officers or directors of the Corporation, or the adjustment of the exercise price thereof pursuant to the Corporation's 1994 Incentive Plan or any successor plan or plans thereto (the "Plan"); and (iii) the issuance of shares of Common Stock to any employees, officers or directors of the Corporation upon the exercise or settlement of any stock award to purchase or acquire Common Stock granted pursuant to the Plan. Section 4. No Fractional Shares. No fractional shares or script representing fractional shares of Common Stock shall be issued upon conversion of any shares of Convertible Preferred Stock. In lieu of any fractional share otherwise issuable in respect of the aggregate number of shares of Convertible Preferred Stock of any holder that are converted on any Optional Conversion, such holder shall be entitled to receive an amount in cash (computed to the nearest cent) equal to the same fraction of the Closing Price of the Common Stock determined as of the second Trading Day (as defined in Section 12) immediately preceding the effective date of conversion. If more than one share of Convertible Preferred Stock shall be surrendered for conversion at one time by or for the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of the Convertible Preferred Stock so surrendered. Section 5. Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of Convertible Preferred Stock, as herein provided, free from preemptive rights, such maximum number of shares of Common Stock as shall from time to time be issuable upon the Optional Conversion of all the shares of Convertible Preferred Stock then outstanding. Section 6. Payment of Taxes. The Corporation shall pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on the conversion of shares of Convertible Preferred Stock pursuant to Section 3; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any registration of transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the registered holder of shares of Convertible Preferred Stock converted or to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. Section 7. Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, and subject to the rights of holders of any other series of Preferred Stock, the holders of outstanding shares of Convertible Preferred Stock are entitled to receive the sum of $_______ per share in cash for each share of Convertible Preferred Stock, plus accrued and unpaid Preferred Dividends thereon, out of the assets of the Corporation available for distribution to stockholders, before any distribution of assets is made to holders of Common Stock or any other capital stock ranking junior to the shares of Convertible Preferred Stock upon liquidation, dissolution, or winding up. If, upon any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, the assets of the Corporation are insufficient to permit the payment of the full preferential amounts payable with respect to the shares of Convertible Preferred Stock, the Holders shall share ratably in any distribution of assets of the Corporation in proportion to the full respective preferential amounts to which they are entitled, in each case on a per share basis. After payment of the full amount of the liquidating distribution to which they are entitled, the Holders shall not be entitled to any further participation in any distribution of assets by the Corporation. A consolidation or merger of the Corporation with or into one or more other corporations (whether or not the Corporation is the corporation surviving such consolidation or merger), or a sale, lease or exchange of all or substantially all of the assets of the Corporation shall not be deemed to be a voluntary or involuntary liquidation, dissolution, or winding up of the Corporation. Section 8. Effect of Conversions. The person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon any conversion shall be deemed to have become on the date of any such conversion the holder or holders of record of the shares represented thereby; provided, however, that if any surrender on any date when the stock transfer books of the Corporation shall be closed the person or persons in whose name or names the certificate or certificates for such shares are to be issued shall be the record holder or holders thereof for all purposes at the opening of business on the next succeeding day on which such stock transfer books are open. Section 9. Reissuance. Shares of Convertible Preferred Stock that have been issued and reacquired by the Corporation in any manner, including shares purchased, exchanged, redeemed or converted, shall not be reissued as part of such Series and shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized and unisssued shares of the Preferred Stock undesignated as to series and may be redesignated and reissued as part of any other series of Preferred Stock. Section 10. Severability of Provisions. Whenever possible, each provision hereof shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision hereof is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions hereof. If a court of competent jurisdiction should determine that a provision hereof would be valid or enforceable if a period of time were extended or shortened or a particular percentage were increased or decreased, then such Court may make such change as shall be necessary to render the provision in question effective and valid under applicable law. Section 11. Voting Rights. The Holders shall be entitled to vote on all matters and shall be entitled to the number of votes per share of Convertible Preferred Stock equal to the number of votes per share a holder of the shares of Common Stock into which Convertible Preferred Stock is convertible is entitled to, at the record date for the determination of the stockholders entitled to vote on all matters. Except as required by law, or as otherwise provided in this Section 11, the holders of shares of Preferred Stock and Common Stock shall vote together as a single class and not as separate classes. Section 12. Definitions. As used herein: (i) the term "business day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the state of New York are authorized or obligated by law or executive order to close or are closed because of a banking moratorium or otherwise; (ii) the term "Change of Control" shall mean that a person or group of persons (other than Fuel-Tech N.V. ("FTNV") and/or its affiliates and other persons acting with or on behalf of FTNV and/or its affiliates) shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become, directly or indirectly, the beneficial owner of more than 50% of the Corporation's outstanding Common Stock; (iii) the term "Closing Price" shall mean (1) if the Common Stock is listed on one or more stock exchanges or is quoted on the NASDAQ National Market (the "National Market"), the average of the closing sales prices of a share of Common Stock on the primary national or regional stock exchange on which such shares are listed or on the National Market if quoted thereon or (2) if the Common Stock is not so listed or quoted but is traded in the over the counter market (other than the National Market), the average of the closing bid and asked prices of a share of Common Stock, in the case of clauses (1) and (2), for the 20 Trading Days (or such lesser number of trading days as the Common Stock shall have been so listed, quoted or traded) immediately prior to the date of measurement ((l) or (2), the "Principal Trading Market"). (iv) the term "Convertible Securities" shall mean any evidences of indebtedness, shares of stock, or other securities directly or indirectly convertible into or exchangeable for Common Stock. (v) the term "Issue" means to grant, issue, sell, assume or fix a record date for determining persons entitled to receive, any security (including options), whichever of the foregoing is first to occur; (vi) the term "Qualified IPO" shall mean the closing of the sale of shares of Common Stock in a bona fide, firm commitment, underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, (i) resulting in at least $10,000,000 of gross proceeds at a price per share of at least 200% of the Conversion Price being received by the Company; (vii) the term "record date" shall be such date as from time to time fixed by the Board of Directors with respect to the receipt of dividends, the receipt of a redemption price upon redemption or the taking of any action or exercise of any voting rights permitted hereby; and (viii) the term "Trading Day" shall mean any day during which the Principal Market shall be open for business and the Company's Common Stock shall have traded on such Principal Market. Section 13. Transferability. No Holder of shares of this Series B 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. Certificates representing shares of Series B Preferred Stock will include a legend to the effect that such securities may not be transferred to any residents of any of the following states: Arizona, Florida, Georgia, Ohio, Pennsylvania or Texas. IN WITNESS WHEREOF, Clean Diesel Technologies, Inc. has caused this Certificate of Designation to be signed this ___ day of _____, 1998. CLEAN DIESEL TECHNOLOGIES, INC. By: ---------------------------- Name: Charles W. Grinnell Title: Vice President EX-4.B 4 Exhibit 4b THE RIGHTS WILL ONLY BE GRANTED TO, AND MAY ONLY BE EXERCISED BY, INVESTORS RESIDING IN THE FOLLOWING JURISDICTIONS WHERE THE SECURITIES OFFERED HEREBY HAVE BEEN REGISTERED WITH THE APPROPRIATE SECURITIES REGULATORY AUTHORITIES OR WHERE AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE: OUTSIDE THE UNITED STATES AND IN COLORADO, CONNECTICUT, THE DISTRICT OF COLUMBIA, ILLINOIS, INDIANA, IOWA, KANSAS, MAINE, MARYLAND, MASSACHUSETTS, NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND, VERMONT, VIRGINIA AND WASHINGTON. RIGHTS WILL NOT BE DISTRIBUTED TO HOLDERS WHO RESIDE IN STATES WHERE THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED OR WHERE AN EXEMPTION FROM REGISTRATION IS NOT AVAILABLE. IN ADDITION, THE SERIES B PREFERRED STOCK MAY NOT BE TRANSFERRED TO RESIDENTS OF ANY OF THE FOLLOWING STATES: ARIZONA, FLORIDA, GEORGIA, OHIO, PENNSYLVANIA OR TEXAS THE RIGHTS EVIDENCED HEREBY WILL EXPIRE AT 5:00 P.M., EASTERN TIME, ON ________ __, 1998 (UNLESS EXTENDED PRIOR TO THAT DATE) AND WILL BE VALUELESS THEREAFTER (See Reverse hereof) Certificate SUBSCRIPTON CERTIFICATE Certificate for No. ___ Evidencing Right to Purchase Shares _____ Rights of Series B Convertible Preferred Stock of CLEAN DIESEL TECHNOLOGIES, INC. Incorporated under the laws of Delaware THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE COMPANY'S PROSPECTUS DATED ________ __, 1998 (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM CHASEMELLON SHAREHOLDER SERVICES, L.L.C., AS SUBSCRIPTION AGENT. THIS CERTIFIES THAT is the registered owner of the number of Rights set forth above, each of which entitles the owner to subscribe to purchase one share of Series B Convertible Preferred Stock, par value $0.05 per share (the "Series B Preferred Stock") of Clean Diesel Technologies, Inc., a Delaware corporation (the "Company"), for each Right held. The price to be paid to exercise each Right is $____. The Rights are exercisable until 5:00 p.m., Eastern Time, on ______ __, 1998 (the "Expiration Date") unless extended by the Board of Directors of the Company, in which case the term "Expiration Date" shall mean the latest date and time to which the Rights Offering is extended. The Rights are only exercisable upon the terms specified herein and in the Subscription Agent Agreement between the Company and the Subscription Agent dated _______ __, 1998. The exercise of all of the Rights represented by this certificate shall also entitle the holder to exercise Oversubscription Privileges to purchase Shares not purchased by the other holders of Rights, as more fully described in the Subscription Agent Agreement and described in the Prospectus. The holder of this Rights Certificate, as such, shall not be entitled to vote or receive dividends or be deemed for any purpose the holder of the Series B Preferred Stock which may at any time be issuable upon the exercise hereof or the Common Shares, par value $0.05 per Common Share, into which the Series B Preferred Stock is convertible, nor shall anything contained herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting of the Company, or to give or withhold consent to any corporate action, or, to receive notice of meetings or other actions affecting stockholders, or otherwise, until all or a portion of the Rights evidenced by this Rights Certificate have been exercised and the shares of Series B Preferred Stock have been issued. This Certificate shall not be valid for any purpose unless countersigned by the Subscription Agent. WITNESS the facsimile seal of the Company and facsimile signature of the proper officers thereof. DATED: ______ __, 1998 CLEAN DIESEL TECHNOLOGIES, INC. COUNTERSIGNED: By: -------------------------------- President ChaseMellon Shareholder Services, L.L.C. as Subscription Agent By: Attest: ---------------------------- Authorized Signature Treasurer (REVERSE) = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = SECTION 1 - BASIC SUBSCRIPTION EXERCISE TO EXERCISE THE BASIC SUBSCRIPTION PRIVILEGE, complete this Section 1 and Section 3 below and return this Subscription Certificate, with your payment, to ChaseMellon Shareholder Services, L.L.C. at the address set forth in Section 3. Number of Rights Exercised: ------------------------------------------------ (Note: No fractional Rights may be exercised) Payment due on exercise of Basic Subscription Privilege is number of Rights exercised x $_____ per Right = $____________. = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = SECTION 2 - OVERSUBSCRIPTION EXERCISE TO EXERCISE THE OVERSUBSCRIPTION PRIVILEGE, complete this Section 2 as well as Section 1 and Section 3. You may not exercise the Oversubscription Privilege (i) if you are a transferee of the Rights evidenced hereby or, in the case of securities held in street name, the particular beneficial owner is a transferee thereof, and (ii) unless you have exercised your Basic Subscription Privilege in full or, in the case of securities held in street name, the particular beneficial owner has exercised its Basic Subscription Privilege in full. (The actual number of shares available for purchase will depend upon the number of basic Rights exercised by all holders and the other shareholders exercising the Oversubscription Privilege, and is subject to proration as set forth in the Subscription Agent Agreement and described in the Prospectus.) Number of Shares Subscribed For:_________________________________ Payment due on exercise of Oversubscription Privilege is number of Shares subscribed for x $_____ per Share = $__________. = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = SECTION 3 - PAYMENT INSTRUCTIONS; REPRESENTATIONS AND WARRANTIES AND CERTIFICATIONS Payment in Full For All Shares Subscribed For Under Section 1 and Section 2 Must Accompany this Certificate Total payment* due under Section1 plus Section 2 = $_______________. (*Make your check payable to ChaseMellon Shareholder Services, L.L.C.) I hereby represent, warrant and certify that (i) I have been provided with a copy of the Prospectus, (ii) I reside outside the United States or in one of the following states: [to come]* and (iii) I hereby tender payment of the purchase price for the shares sought to be purchased. *(NOTE - this Subscription Certificate may NOT be exercised by holders who cannot make this representation, warranty and certifications) IMPORTANT - RIGHTS HOLDERS SIGN HERE AND, IF RIGHTS ARE EXERCISED, COMPLETE SUBSTITUTE FORM W-9 Authorized Signature(s) of Subscriber(s): ------------------------------------ Print Name(s): ---------------------------------------------------------------- Address: -------------------------------------------------------------------- (Including Zip Code) Telephone Number(s): (_____) __________________ (_____) Tax Identification or Social Security No(s).: --------------------------------- (Must be signed by the Rights holder(s) exactly as name(s) appear(s) on this Subscription Certificate. If signature is by trustee(s), executor(s), administrator(s), guardian(s), attorney(s)-in-fact, agent(s), officer(s) of a corporation or another acting as a fiduciary or representative capacity, please provide the following information. See Instructions.) Authorized Signature(s): ----------------------------------------------------- Print Name(s): ---------------------------------------------------------------- Capacity: -------------------------------------------------------------------- Address: --------------------------------------------------------------------- (Including Zip Code) Telephone Number(s): ---------------------------------------------------------- Tax Identification or Social Security No.: ---------------------------------------------------------- (Complete Substitute Form W-9) Please mail, deliver or wire transfer cash, check or money order payable to ChaseMellon Shareholder Services, L.L.C., P.O. Box 3301, South Hackensack, NJ 07606, for the total amount due to the Subscription Agent at the appropriate address below: By Overnight or Express Delivery, By Hand Delivery, or First Class Mail: By Facsimile Transmissions: ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C. 85 Challenger Road (201) 296-4293 Overpeck Centre Ridgefield Park, NJ 07660 Attention: Reorganization If you have any questions, call: ChaseMellon Shareholder Services, L.L.C. at (888) 224-2745. = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = SECTION 4 - DELIVERY INSTRUCTIONS (Fill out ONLY if delivery is to be made to an address not shown on the other side of this Certificate.) Name: ------------------------------------------------------------------------- Address: -------------------------------------------------------------------- = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = EX-4.C 5 Exhibit 4c CLEAN DIESEL TECHNOLOGIES, INC. INSTRUCTIONS AS TO USE OF RIGHTS CERTIFICATES ----------------------- CONSULT THE INFORMATION AGENT, OR YOUR BANK OR BROKER, IF YOU HAVE ANY QUESTIONS AFTER READING THESE INSTRUCTIONS ----------------------- The following instructions relate to the rights offering (the "Offering") by Clean Diesel Technologies, Inc., a Delaware corporation (the "Company"), to the holders ("Holders") of the Company's outstanding common shares, par value $0.05 per share (the "Common Shares") as described in the Company's Prospectus dated __________ __, 1998 (the "Prospectus"). Holders of record (the "Record Date Holder") of the Company's Common Shares at the close of business on __________ __, 1998 (the "Record Date") are receiving one transferable subscription right (each a "Right") for each 50 shares of the Company's Common Shares held on the Record Date; provided, however, that Rights will not be distributed to Record Date Holders who reside in jurisdictions where the Rights have not been registered or where an exemption from registration is not available, as described more fully in the Prospectus. Each Right entitles the holder thereof (the "Rights Holder") to subscribe for and purchase from the Company one share of the Company's Series B Convertible Preferred Stock, par value $0.05 per share (the "Series B Preferred Stock") (the "Basic Subscription Privilege") at the subscription price (the "Subscription Price") of $____, and each share of Series B Preferred Stock will be immediately convertible, at no cost to the holder thereof, into 33 Common Shares. No fractional Rights or cash in lieu thereof will be distributed or paid by the Company. An aggregate number of up to 50,000 shares of Series B Preferred Stock (the "Underlying Shares") will be distributed in connection with the Offering. Subject to the proration and possible reduction described below, each Right also entitles any Record Date Holder exercising in full the Basic Subscription Privilege the right to subscribe for additional Common Shares available after satisfaction of all subscriptions, pursuant to the Basic Subscription Privilege (the "Oversubscription Privilege"). The Oversubscription Privilege is not transferable. Subject to the allocation and possible reduction described below, Common Shares will be available for purchase pursuant to the Oversubscription Privilege only to the extent that any Underlying Shares are not subscribed for through the Basic Subscription Privilege. If the Underlying Shares are not subscribed for through the Basic Subscription Privilege (the "Excess Shares") are not sufficient to satisfy all subscriptions pursuant to the Oversubscriptions Privilege, the Excess Shares will be allocated pro rata (subject to the elimination of fractional shares) among those Record Date Holders exercising the Oversubscription Privilege. The Subscription Price is payable in cash. See "THE RIGHTS OFFERING" in the Prospectus. The Rights will expire at 5:00 p.m. Eastern time on __________ __, 1998, unless otherwise extended by the Company in its sole discretion (in either case, the "Expiration Date"). The number of Rights to which you are entitled is printed on the face of your Rights Certificate. You should indicate your wishes with regard to the exercise, transfer or sale of your Rights by completing the appropriate form or forms on the reverse side of your Rights Certificate and returning the Rights Certificate to the Subscription Agent in the envelope provided. Once a Rights Holder has properly exercised the Basic Subscription Privilege or the Oversubscription Privilege, such exercise may not be revoked. YOUR RIGHTS CERTIFICATE OR NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE SUBSCRIPTION AGENT AND PAYMENT OF THE SUBSCRIPTION PRICE INCLUDING FINAL CLEARANCE OF ANY UNCERTIFIED CHECKS MUST BE RECEIVED BY THE SUBSCRIPTION AGENT, AT OR BEFORE 5:00 P.M. EASTERN TIME ON __________ __, 1998. YOU MAY NOT REVOKE ANY EXERCISE OF A RIGHT. 1. Subscription Privileges. To Exercise Rights. To exercise your Rights, complete Form 1 of your Rights Certificate and send to the Subscription Agent your properly completed and executed Rights Certificate together with payment in full of the Subscription Price for each Underlying Share subscribed for pursuant to the Basic Subscription Privilege and the Oversubscription Privilege. Payment of the Subscription Price must be made for the full number of Underlying Shares being subscribed for (a) by check or bank draft, or postal, telegraphic or express money order, in each case, payable to Mellon Securities Trust Company, as Subscription Agent, or (b) by wire transfer of funds to the account maintained by the Subscription Agent for such purpose of accepting subscriptions at The Chase Manhattan Bank, New York, New York, ABA #021000021, Account #323-213057, FBO Clean Diesel Technologies, Attention: ChaseMellon Shareholder Services, L.L.C., Evelyn O'Connor (with Subscriber's name), the Subscription Price will be deemed to have been received by the Agent only upon (i) clearance of any uncertified check, (ii) receipt by the Subscription Agent of any certified check or cashier's check, or of any postal, telegraphic or express money order or (iii) receipt of collected funds in the Subscription Agent's account designated above. IF PAYING BY UNCERTIFIED CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE AT LEAST FIVE (5) BUSINESS DAYS TO CLEAR. ACCORDINGLY, RIGHTS HOLDERS WHO WISH TO PAY THE SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED CHECK ARE URGED TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH PAYMENT IS RECEIVED AND CLEARS BEFORE THE EXPIRATION DATE AND ARE URGED TO CONSIDER IN THE ALTERNATIVE, PAYMENT BY MEANS OF CERTIFIED CHECK, BANK DRAFT, MONEY ORDER OR WIRE TRANSFER OF FUNDS. If you exercise less than all of the Rights evidenced by your Rights Certificate by so indicating on Form 1 of your Rights Certificate, the Subscription Agent will either (i) issue to you a new Rights Certificate representing the remaining rights or (ii) if you so indicate on Form 2 of your Rights Certificate, issue a new Rights Certificate to a designated transferee. If no indication is made, the Subscription Agent will issue to you a new Rights Certificate evidencing the unexercised Rights. If you choose, however, to have a new Rights Certificate sent to you or a designated transferee, such new Subscription Rights Certificate may not be received in sufficient time to permit you or the designated transferee to sell or exercise the Rights evidenced thereby. If you have not indicated the number of Rights being exercised, or if you have not forwarded full payment of the Subscription Price for the number of Rights that you have indicated are being exercised, then you will be deemed to have exercised the Basic Subscription Privilege with respect to the maximum number of Rights which may be exercised for the aggregate payment delivered by you and, to the extent that the aggregate payment delivered by you exceeds the product of the Subscription Price multiplied by the number of Rights which may be exercised for the aggregate payment delivered by you and, to the extent that the aggregate payment delivered by you exceeds the product of the Subscription Price multiplied by the number of Rights evidenced by the Rights Certificate(s) delivered by you (such excess being the "Subscription Excess"), you will be deemed to have exercised the Oversubscription Privilege to purchase, to the extent available, that number of whole, Excess Shares equal to the quotient obtained by dividing the Subscription Excess by the Subscription Price and any amount remaining after such division shall be returned to you. To Exercise Rights through a Nominee. If you wish to have your bank, broker or other nominee exercise some or all of your Rights, you must complete Forms 1, 2 and 3 of your Rights Certificate, providing clear direction as to how many Rights are to be exercised and what action should be taken in regards to any unexercised Rights. Banks, brokers and other nominees who exercise the Oversubscription Privilege on behalf of the beneficial owners of Rights will be required to certify to the Subscription Agent and the Company, by delivery to the Subscription Agent of a Nominee Holder Oversubscription Certification in the form available from the Subscription Agent or the Information Agent, the aggregate number of Rights as to which the Oversubscription Privilege are being exercised and the number of Underlying Shares thereby subscribed for by each beneficial owner of Rights on whose behalf such nominee holder is acting. To Exercise Rights if Rights Certificate Might Not Properly Reach the Subscription Agent Prior to the Expiration Date. You may cause a written guarantee substantially in the form of Exhibit A to these instructions (the "Notice of Guaranteed Delivery") from a member firm of an approved Signature Guarantee Medallion Program (an "Eligible Institution"), to be received by the Subscription Agent at or prior to the Expiration Date or complete the information provided in Form 1 of the Rights Certificate; payment in full of the applicable Subscription Price may be made separately as long as said payment is also received by the Subscription Agent at or prior to the Expiration Date. Such Notice of Guaranteed Delivery must state your name, the number of Rights represented by your Rights Certificate and the number of Underlying Shares being subscribed for pursuant to the Basic Subscription Privilege and being subscribed for, if any, pursuant to the Oversubscription Privilege, and the Eligible Institution must guarantee the delivery to the Subscription Agent of your properly completed and executed Rights Certificate(s) evidencing those Rights within five (5) Trading Days, following the date of the Notice of Guaranteed Delivery. If this procedure is followed, your Rights Certificate(s) must be received by the Subscription Agent within five (5) Trading Days following the date of the Notice of Guaranteed Delivery relating thereto. Additional copies of the Notice of Guaranteed Delivery may be obtained upon request from the Information Agent. 2. The Subscription Agent and the Information Agent The address and telephone number of the Subscription Agent and the Information Agent are as follows: In the U.S.: In the U.K.: Chemical Mellon Shareholder Computershare Services, P.L.C. Services P. O. Box 859 450 West 33rd Street, 15th Consort House Floor East Street New York, New York 10001 Bedminister, Bristol (800) 814-0304 BZ991XZ 1179-370-672 3. Issuance and Delivery of Stock Certificates, Etc. The following issuances, deliveries and payments will be made to you at the address shown on the face of your Rights Certificate unless you provide special payment, issuance or delivery instructions to the contrary by completing the applicable part of Form 3 of your Rights Certificate. Series B Preferred Stock Certificates. Subject to satisfaction of the minimum conditions required, the Subscription Agent will issue and mail in accordance with the instruction of the exercising Rights Holder, a certificate representing Underlying Shares purchased pursuant to the valid exercise of Rights, as soon as practicable after the Expiration Date and all prorations and reductions contemplated by the Offering have been effected. See "THE RIGHTS OFFERING - Subscription Privileges" in the Prospectus. Refunding of Excess Payments. As soon as practicable after the Expiration Date and after all prorations and possible reductions contemplated by the terms of the Offering have been effected, the Subscription Agent will return by mail without interest or deduction to each Rights Holder exercising the Oversubscription Privilege any excess funds received in payment of the Subscription Price for Underlying Shares that were subscribed for by such Rights Holder but not allocated to such Rights Holder pursuant to the Oversubscription Privilege. 4. To Sell or Transfer Rights. Sale of Rights through a Bank, Broker or Other Nominee. To sell or transfer all Rights evidenced by a Rights Certificate through your bank, broker or other nominee, so indicate on Forms 2 and 4 of your Rights Certificate and deliver your properly completed and executed Rights Certificate to your bank or broker. Your Rights Certificate should be delivered to your bank or broker in sufficient time for the Rights to be sold. If Form 2 of your Rights Certificate is completed without designating a transferee, the Subscription Agent may thereafter treat the bearer of the Rights Certificate as the absolute owner of all of the Rights evidenced by such Rights Certificate for all purposes, and the Subscription Agent will not be affected by any notice to the contrary. Because your bank or broker cannot issue Rights Certificates, if you wish to sell less than all of the Rights evidenced by a Rights Certificate, either your bank or broker must instruct the Subscription Agent as to the action to be taken with respect to the Rights that are not to be sold, or your bank or broker must first have your Rights Certificate divided into Rights Certificates evidencing the appropriate numbers of Rights by following the instructions in Section 5 below. Transfer of Rights to a Designated Transferee. To sell or transfer all of your Rights to a transferee other than a bank or broker, you must complete Form 2 of your Rights Certificate in its entirety, execute the Rights Certificate and have your signature guaranteed by a bank, broker, dealer, municipal securities dealer, municipal securities broker, government securities dealer, government securities broker, credit union, national securities exchange, registered securities association, or clearing agency or savings association under an approved Signature Guarantee Medallion Program (an "Eligible Guarantor Institution"). A Rights Certificate that has been properly transferred in its entirety may be exercised by a new Rights Holder without having a new Rights Certificate issued. To exercise, or otherwise take action with respect to, such a transferred Rights Certificate, the new Rights Holder should deliver the Rights Certificate, together with payment of the applicable Subscription Price and complete separate instructions signed by the new Rights Holder to the Subscription Agent in sufficient time to permit the Subscription Agent to take the desired action. The new Rights Holder may not exercise the Oversubscription Privilege. The new Rights Holder may be subject to the prorations and possible reductions described in Section 1 above. Only the Subscription Agent can issue Rights Certificates. However, you may transfer a portion of the Rights evidenced by a single Rights Certificate (but not fractional Rights) by delivering to the Subscription Agent a Rights Certificate properly endorsed for transfer, with instructions to register that portion of the Rights indicated therein in the name of the transferee and to issue a new Rights Certificate to the transferee evidencing the transferred Rights. In that event, a new Rights Certificate evidencing the balance of the Rights will be issued to you or, if you so instruct, to an additional transferee. Alternatively, you may divide your Rights Certificate into Rights Certificates evidencing appropriate numbers of Rights for transfer by following the instructions in Section 5 below. If you wish to transfer all or a portion of your Rights (but not fractional Rights), you should allow a sufficient amount of time prior to the Expiration Date for (i) the transfer instructions to be received and processed by the Subscription Agent, (ii) new Rights Certificates to be issued and transmitted to the transferor(s), with respect to transferred Rights, and to you with respect to retained Rights, if any, and (iii) the Rights evidenced by the new Rights Certificates to be exercised or sold by the recipients thereof. Such amount of time could range from four to six business days, depending upon the method by which delivery of the Rights Certificates and payment is made and the number of transactions which you instruct the Subscription Agent to effect. Neither the company nor the Subscription Agent will have any liability to a transferee or transferor of Rights if Rights Certificates are not received in time for exercise or sale prior to the Expiration Date. THE RIGHTS WILL ONLY BE GRANTED TO, AND MAY ONLY BE EXERCISED BY, INVESTORS RESIDING IN THE FOLLOWING JURISDICTIONS WHERE THE SECURITIES OFFERED HEREBY HAVE BEEN REGISTERED WITH THE APPROPRIATE SECURITIES REGULATORY AUTHORITIES OR WHERE AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE: OUTSIDE THE UNITED STATES AND IN COLORADO, CONNECTICUT, THE DISTRICT OF COLUMBIA, ILLINOIS, INDIANA, IOWA, KANSAS, MAINE, MARYLAND, MASSACHUSETTS, NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND, VERMONT, VIRGINIA AND WASHINGTON. RIGHTS WILL NOT BE DISTRIBUTED TO HOLDERS WHO RESIDE IN STATES WHERE THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED OR WHERE AN EXEMPTION FROM REGISTRATION IS NOT AVAILABLE. IN ADDITION, THE SERIES B PREFERRED STOCK MAY NOT BE TRANSFERRED TO RESIDENTS OF ANY OF THE FOLLOWING STATES: ARIZONA, FLORIDA, GEORGIA, OHIO, PENNSYLVANIA OR TEXAS. 5. To Divide a Rights Certificate. To have your Rights Certificate divided into two or more Rights Certificates, evidencing the same aggregate number of rights, send your Rights Certificate, together with complete separate instructions (including specification of the denominations into which you wish your Rights to be divided) signed by you, to the Subscription Agent, allowing a sufficient amount of time for new Rights Certificates to be issued and returned so they can be used prior to the Expiration Date. Alternatively, you may ask a bank or broker to effect such actions on your behalf. Your signature must be guaranteed by an Eligible Guarantor Institution (as defined in Section 4) if any of the new Rights Certificates are to be issued in a name other than that in which the original Rights Certificate was issued. Rights Certificates may not be divided into fractional Rights, and any instruction to do so will be rejected. As a result of delays in the mail, the time of the transmittal, the necessary processing time and other factors, you or your transferee may not receive such new Rights Certificates in time to enable the Rights Holder to complete a sale or exercise by the Expiration Date. Neither the Company nor the Subscription Agent will be liable to either a transferor or transferee for any such delays. 6. Signatures. Execution by Rights Holder. The signature on the Rights Certificate must correspond with the name of the Rights Holder exactly as it appears on the face of the Rights Certificate without any alteration or change whatsoever. Persons who sign the Rights Certificate in a representative or other fiduciary capacity must indicate their capacity when signing and, unless waived by the Company in its sole and absolute discretion, must present to the Subscription Agent satisfactory evidence of their authority to so act. Execution by Person Other than Rights Holder. If the Rights Certificate is executed by a person other than the Rights Holder named on the face of the Rights Certificate, proper evidence of authority of the person executing the Rights Certificate must accompany the same unless, for good cause, the Company dispenses with proof of authority. Signature Guarantees. Unless your Rights Certificate (i) provides that the Underlying Shares to be issued pursuant to the exercise of the Rights represented thereby are to be issued to you or (ii) is submitted for the account of an Eligible Institution (as defined in Section 1), your signature on each Rights Certificate must be guaranteed by an Eligible Guarantor Institution (as defined in Section 4). 7. Method of Delivery. The method of delivery of Rights Certificates and payment of the Subscription Price to the Subscription Agent will be at your election and risk, but, if sent by mail, you are urged to send such materials by registered mail, properly insured, with return receipt requested, and are urged to allow a sufficient number of days to ensure delivery to the Subscription Agent and, if you are paying by uncertified check, the clearance of payment of the Subscription Price prior to the Expiration Date. Because uncertified checks may take at least five (5) business days to clear, you are strongly urged to consider payment by means of certified check, cashier's check, money order or wire transfer. 8. Lost, Stolen, Destroyed or Mutilated Rights Certificates. Upon receipt by the Company and the Subscription Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity and/or security satisfactory to them, in their sole discretion, and reimbursement to the Company and the Subscription Agent of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Rights Certificate, if mutilated, the Subscription Agent will make and deliver a new Rights Certificate of like tenor to the registered Rights Holder in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. If required by the Company or the Subscription Agent, an indemnity bond must be sufficient in the judgment of each party to protect the Company, the Subscription Agent or any agent thereof from any loss which any of them may suffer if a lost, stolen, destroyed or mutilated Rights Certificate is replaced. See Exhibit B hereto. 9. Special Provisions Relating to The Delivery of Rights through The Depository Trust Company. In the case of Rights that are held of record through The Depository Trust Company ("DTC"), exercises of the Basic Subscription Privilege (but not the Oversubscription Privilege) may be effected by instructing DTC to transfer Rights (such Rights being "DTC Rights") from the DTC account of the Rights Holder to the DTC account of the Subscription Agent, together with payment of the Subscription Price for each Underlying Share subscribed for pursuant to the Basic Subscription Privilege. The Oversubscription Privilege in respect of DTC Rights may not be exercised through DTC. The holder of DTC Rights may exercise the Oversubscription Privilege in respect thereof by properly executing and delivering to the Subscription Agent, at or prior to the Expiration Date, a DTC Participant Oversubscription Exercise Form, in the form available from the Information Agent or the Subscription Agent, together with payment of the appropriate Subscription Price for the number of Excess Shares for which the Oversubscription Privilege is exercised. If a Notice of Guaranteed Delivery relates to Rights with respect to which exercise of the Basic Subscription Privilege will be made through DTC and such Notice of Guaranteed Delivery also relates to the exercise of the Oversubscription Privilege, a DTC Participant Oversubscription Exercise Form must also be received by the Subscription Agent in respect of such exercise of the Oversubscription Privilege at or prior to the Expiration Date. 10. Transfer Taxes. Except for certain fees paid to broker-dealers and charged by the Subscription Agent that will be paid by the Company, all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the purchase, sale or exercise of Rights will be for the account of the transferring Holder of the Rights, and none of such commissions, fees or expenses will be paid by the Company or the Subscription Agent. 11. Irregularities. All questions concerning the timelines, validity, form and eligibility of any exercise of Rights will be determined by the Company, whose determinations will be final and binding. The Company in its sole discretion, may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any Right. Rights Certificates will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Company determines, in its sole discretion. Neither the Company, nor the Subscription Agent will be under any duty to give notification of any defect or irregularity in connection with the submission of Rights Certificates or incur any liability for failure to give such notification. The Company reserves the right to reject any exercise if such exercise is not in accordance with the terms of the Offering or not in proper form or if the acceptance thereof or the issuance of the shares of Series B Preferred Stock pursuant thereto could be deemed unlawful. EXHIBIT TO INSTRUCTIONS IMPORTANT TAX INFORMATION Under the U.S. Federal income tax law, (1) dividend payments that may be made by the Company on shares of Common Stock issued upon the exercise of Rights, and (2) payments that may be remitted by the Subscription Agent to Rights Holders in respect of Rights sold on such Rights Holders' behalf by the Subscription Agent, may be subject to backup withholding, and each Rights Holder who either exercises Rights or requests the Subscription Agent to sell Rights should provide the Subscription Agent (as the Company's agent, in respect of exercised Rights, and as payer in respect of Rights sold by the Subscription Agent) with such Rights Holders' correct taxpayer identification number on the Substitute Form W-9 in the Subscription Right Certificate. If such Rights Holder is an individual, the taxpayer identification number is his or her social security number. If the Subscription Agent is not provided with the correct taxpayer identification number in connection with such payments, the Rights Holder may be subject to a $50 penalty imposed by the Internal Revenue Service. Exempt Rights Holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and information reporting requirements. In general, for a foreign individual to qualify as an exempt recipient, the Rights Holder must submit a statement, signed under the penalties of perjury, attesting to that individual's exempt status. Such statements can be obtained from the Subscription Agent. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Company or the Subscription Agent, as the case may be, will be required to withhold 31% of any such payments made to the Rights Holder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained. Purpose of Substitute Form W-9 To prevent backup withholding, the Rights Holder is required to notify the Subscription Agent of his or her correct taxpayer identification number by completing the Substitute Form W-9 included as a part of the Subscription Right Certificate certifying that the taxpayer identification number provided on Substitute Form W-9 is correct (or that such Rights Holder is awaiting a taxpayer identification number). What Number to Give the Subscription Agent The Rights Holder is required to furnish the Subscription Agent such Rights Holder's social security number or employer identification number. If the Rights are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. EXHIBIT A TO INSTRUCTIONS NOTICE OF GUARANTEED DELIVERY FOR SHARES OF SERIES B PREFERRED STOCK OF CLEAN DIESEL TECHNOLOGIES, INC. SUBSCRIBED FOR UNDER BASIC SUBSCRIPTION AND THE OVER-SUBSCRIPTION PRIVILEGE As set forth in the Prospectus under "THE RIGHTS OFFERING --Exercise of Rights", this form or one substantially equivalent hereto may be used as a means of effecting subscription and payment for all shares of the Company's Series A Preferred Stock subscribed for under the Basic Subscription and the Over-Subscription Privilege. Such form may be delivered by hand or sent by facsimile transmission, overnight courier or mail to the Subscription Agent. The Subscription Agent is: CHASEMELLON SHAREHOLDER SERVICES By Mail: By Hand: By Express Mail ChaseMellon Shareholder ChaseMellon or Overnight Courier: Services Shareholder Services, ChaseMellon Post Office Box 3301 L.L.C. Shareholder Services, South Hackensack, NJ 07606 120 Broadway 85 Challenger Road, 13th Floor Overpeck Centre, New York, NY 10271 Ridgefield Park, NJ 07660 By Facsimile: Attn: Reorg. Dept. ChaseMellon Shareholder Services (201) 296-4293 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A TELECOPY OR FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY The New York Stock Exchange member firm or bank or trust company which completes this form must communicate the guarantee and the number of Shares subscribed for (under both the Basic Subscription and the Over-Subscription Privilege) to the Subscription Agent and must deliver this Notice of Guaranteed Delivery of Payment, guaranteeing delivery of (i) payment in full for all Subscribed Shares and (ii) a properly completed and signed copy of the Rights Certificate, to the Subscription Agent prior to 5:00 p.m. New York City time, on the Expiration Date. Failure to do so will result in a forfeiture of the rights. GUARANTEE The undersigned, a member firm of the New York Stock Exchange or a bank or trust company, (i) guarantees delivery to the Subscription Agent by 3 trading days after the expiration or all extensions thereof of (A) a properly completed and executed Rights Certificate, and (B) payment of the full Subscription Price for Shares subscribed for on Basic Subscription and pursuant to the Over-Subscription Privilege, as subscription for such Shares as indicated herein or in the Rights Certificate. - --------------------------------------- ------------------------------------- NUMBER OF SHARES ON BASIC SUBSCRIPTION NUMBER OF SHARES ON OVER-SUBSCRIPTION PRIVILEGE - -------------------------------------- ------------------------------------- Name of Firm Authorized Signature - -------------------------------------- ------------------------------------- Address Title Name: - -------------------------------------- -------------------------------- Zip Code (Please Type or Print) - -------------------------------------- ------------------------------------- Telephone Number Date EXHIBIT B TO INSTRUCTIONS AFFIDAVIT OF LOST, STOLEN, DESTROYED OR MUTILATED RIGHT CERTIFICATE(S) CERTIFICATE NO(s) _______________________ (if available) for _____________________ Rights to purchase Series B Preferred Stock of Clean Diesel Technologies, Inc. I am the lawful owner of the above-described representing Rights Certificate(s) to purchase shares of Common Stock of Clean Diesel Technologies, Inc. (the "Company") at an exercise price of $___ per share. The Rights Certificate(s) has (have) not been exercised, endorsed, cashed, negotiated, transferred, assigned or otherwise disposed of. I have made a diligent search for the Rights Certificate(s) and have been unable to find it (them) and make this affidavit for the purpose of inducing the Company and ChaseMellon Shareholder Services to issue a new Rights Certificate of like tenor, and hereby agree to surrender the Rights Certificate(s) for cancellation should I, at any time, find the Rights Certificate(s). In consideration of the receipt of a new Rights Certificate(s), I agree to completely indemnify, protect and hold harmless the Company and ChaseMellon Shareholder Services and any other party to the transaction (the "Obligees") from and against all loss, costs and damages, including court costs and attorneys' fees, which they may be subject to or liable for in respect of the cancellation of Rights Certificate(s). The rights according to the Obligees under the preceding sentence shall not be limited by the negligence, inadvertance, accident, oversight or breach of any duty or obligation on the part of the Obligees or their respective officers, employees and agents or their failure to inquire into, contest or litigate any claim, whenever such negligence, inadvertence, accident, oversight, breach or failure may occur or have occurred. PLEASE DATE AND SIGN BELOW: Dated: ----------------, 1988 -------------------------------------- (Signature of Holder) -------------------------------------- (Signature of Holder) (Must be signed above by registered holder(s) or by person(s) authorized to receive the cash payments) EX-4.F 6 Exhibit 4f [CLEAN DIESEL TECHNOLOGIES, INC. LETTERHEAD] Dear Shareholder: You will find enclosed the Preliminary Prospectus (the "Prospectus") and other materials relating to the rights offering (the "Rights Offering") by Clean Diesel Technologies, Inc. ("CDT"). Please carefully review the enclosed Prospectus, including the sections titled "The Rights Offering," which describes how you may participate in the Rights Offering, "Business," which more fully describes the Company's business, "Management's Discussion and Analysis of Financial Condition and Results of Operations," which more fully describes the Company's financial position, and "Risk Factors," which describes certain risks associated with an investment in securities of the Company, as well as the same sections in the final Prospectus which will be mailed after the Registration Statement relating to the prospectus is declared effective by the Securities and Exchange Commission. Capitalized terms used but not described herein have the respective meanings set forth in the Prospectus. The following is a brief review of our products and markets, and current financial situation. When we formed CDT, we had patents for Platinum Fuel Catalysts ("PFCs") licensed from Fuel Tech and limited testing results of PFCs. We now have 12 US and 38 International patents on PFCs and nitrogen oxide ("NOx") reduction systems and have another 83 US and International applications pending. In addition, the Company has completed successful testing of a diesel fuel PFC additive, launched the marketing of a PFC used to rejuvenate aged catalytic converters in Europe, and developed the Advanced Reagent Injection System ("ARIS(TM) 2000") for use in catalytic NOx reduction systems. The Company has successfully completed a study at Delft Technical University in the Netherlands to determine the fundamental mechanism of metallic additives. In particular, we investigated the function of platinum as part of a composite additive with other catalysts. Results of the study show that a system of a bimetallic additive of platinum and cerium (Pt/Ce) with a ceramic filter: * gives performance superior to any system known, * gives a significantly lower oxidation temperature for soot, and * uses much lower metal levels in the fuel than other known additive filter systems. The Delft paper has provoked excellent market response from engine companies and catalyst system companies. The results reported by Delft were confirmed in demonstrations at Cummins Engine Company by a test in Switzerland. While the foregoing results refer to a system incorporating filters, we have demonstrated that the Pt/Ce additive also gives significant emission reductions on engines without particulate filters or oxidizers. Moreover, the emission benefits are usually accompanied by a fuel economy improvement. We now have to complete registration of the combined Pt/Ce additive with the EPA in order to be able to sell the combined additive for on-road use in the U.S. We expect to complete the registration by October of 1998. In the US, we believe there is a near term market developing for additives for diesel fuel which will reduce smoke, gaseous and particulate emissions from the current fleet of engines. The market is a result of pending EPA retrofit guidelines which provide for State Implementation Plans ("SIP") credits, as well as state programs for enforcement of smoke regulation, which include random highway smoke tests with substantial penalties for failure. We believe that another market for Pt/Ce is in Taiwan, where a bus fleet trial confirmed the performance of the Pt/Ce filter system. We believe that a medium term market for Pt/Ce is with filters for new vehicles, especially light duty vehicles. Peugeot has announced they will introduce filters in 2000. Using the Pt/Ce additives in vehicles with filters presents a potentially very large market. This is driven by increasing concern about fine particle emissions; whereas new engines produce little smoke, the total number of particles has increased. Management believes that filters are seen as the preferred remedy capable of removing more than 90% of the particles. This focus is given further weight by the probable classification by California of diesel emissions as toxic. The toxicity is most associated with soot particles. Once collected on the filter, the soot must be oxidized to prevent the filter from clogging, and that is where the additive is needed. Our second product is a gasoline additive which rejuvenates aged catalytic converters. This work was jointly funded by Holt Lloyd International Ltd. ("Holts"), which launched the product in the UK in 1997 in the consumer aftermarket through auto parts stores. The results were disappointing. Holts concluded that consumers did not understand what the product does and the majority did not know if their cars had catalytic converters. Test marketing by Holts concluded that the product should be sold through service and repair shops. Holts is considering how to better reposition the product. In the US, we have interest from marketing companies to package and sell the gasoline product. We are seeking a marketing partner who will fund or jointly fund the necessary registration and demonstration of this product in the US. The product may be launched in the US during the second half of 1999, although no assurances can be given in this regard. Our third product is for NOx reduction. We have developed, built, and tested a prototype system called the ARIS(TM) 2000 (Advanced Reagent Injection System). The ARIS system injects urea over a catalyst to achieve NOx reduction of up to 90%. The catalysts are similar to catalysts used in gas turbines and boilers and are made by catalyst manufacturers. We plan to commercialize this system through cooperative ventures and licenses. Current regulation in California and the Northeast states for large stationary diesel engines sets NOx levels at a 50% to 90% reduction from normal levels achieved from current production engines under federally mandated Best Available Control Technology ("BACT") and Lowest Achievable Emission Rate ("LAER") requirements in ozone non-attainment areas. Cost effective systems are not yet available. As a result, gas engines are being installed, which cost more to buy and to run than the ARIS(TM) 2000. The Company intends to sell the ARIS(TM) 2000 to total system suppliers, engine companies, engine distributors or the assemblers of generation sets, compressors, pumps, etc. In summary, we started with a partially-developed diesel additive with no defined market and a concept for a NOx reduction system. * We now have developed a diesel PFC additive which is effective both for emission reduction from engines and significantly improves the performance of filters. * We have launched the marketing of a PFC used to rejuvenate aged catalytic converters in Europe. * We have developed the ARIS(TM) 2000 for use in catalytic NOx reduction systems. Through the net proceeds of the Rights Offering, together with the net proceeds from the recent bridge financing, CDT seeks to commercialize the foregoing products. If you have any questions concerning the Rights Offering, please feel free to telephone the Information Agent at ( ) . On behalf of the Board of Directors, we thank you for your support and confidence and look forward to continuing to serve you. Sincerely, Jeremy D. Peter-Hoblyn President and Chief Executive Officer, Director THIS LETTER CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT. DISCUSSION CONTAINING SUCH FORWARD-LOOKING STATEMENTS WILL BE FOUND IN THE MATERIAL SET FORTH UNDER "PROSPECTUS SUMMARY, "RISK FACTORS," "USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS WITHIN THE PROSPECTUS GENERALLY. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH UNDER "RISK FACTORS" AND THE MATTERS SET FORTH IN THIS PROSPECTUS GENERALLY. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS LETTER SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY JURISDICTION. THE USE OF THIS LETTER IS AUTHORIZED ONLY WHEN PRECEDED OR ACCOMPANIED BY A PROSPECTUS. EX-4.G 7 Exhibit 4g 50,000 Shares of Series B Convertible Preferred Stock CLEAN DIESEL TECHNOLOGIES, INC. Series B Convertible Preferred Stock (par value $0.05 per share) Initially Offered Pursuant to Rights Distributed to Shareholders To Securities Dealers, Commercial Banks, Brokers, Trust Companies and Other Nominees: Enclosed are a Prospectus, dated ___________ ____, 1998 (the "Prospectus"), and Instructions as to Use of Rights Certificates (the "Instructions"), relating to the offering of up to 50,000 shares of Series B Convertible Preferred Stock, par value $0.05 per share (the "Series B Preferred Stock"), of Clean Diesel Technologies, Inc. (the "Company), at a subscription price of $_______ per share in cash, pursuant to transferable subscription rights ("Rights") initially distributed to holders of record ("Record Date Holders") of the Company's outstanding common shares, par value $0.05 per share (the "Common Shares") as of the close of business on _______ __, 1998 (the "Record Date"); provided, however, that Rights will not be distributed to and may not be exercised by, Record Date Holders who reside in jurisdictions where the Rights have not been registered or where an exemption from registration is not available, as described more fully in the Prospectus. The Rights are described in the Prospectus and evidenced by a Rights Certificate (a "Rights Certificate") registered in your name or the name of your nominee. Each beneficial owner of the Company's Common Shares registered in your name or the name of your nominee is entitled to one Right for each 50 Common Shares so owned by such beneficial owner on the Record Date and each share of Series B Preferred Stock will be immediately convertible, at no cost to the holder thereof, into 33 Common Shares. No fractional Rights or cash in lieu thereof will be distributed or paid. We are asking you to contact your clients for whom you hold the Company's Common Shares registered in your name, or in the name of your nominee to obtain instructions with respect to the Rights. You will be reimbursed for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. The Company will pay all transfer taxes, if any, applicable to the sale of Series B Preferred Stock to a Rights Holder upon exercise of Rights, subject to certain exceptions described in the Prospectus and the Rights Certificate. Enclosed are copies of the following documents: 1. The Prospectus; 2. The Instructions; 3. A form letter which may be sent to your clients for whose accounts you hold shares of the Company's Common Shares registered in your name or the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Rights; 4. Rights Certificates; 5. A Nominee Holder Oversubscription Certification; and 6. A Notice of Guaranteed Delivery. Your prompt action is requested. The Rights will expire at 5:00 p.m. Eastern Standard Time, on ___________ __, 1998, unless extended by the Company (the "Expiration Date"). TO EXERCISE RIGHTS, PROPERLY COMPLETED AND EXECUTED RIGHT CERTIFICATE(S) (UNLESS THE GUARANTEED DELIVERY PROCEDURES ARE COMPLIED WITH) AND PAYMENT IN FULL FOR ALL RIGHTS EXERCISED MUST BE DELIVERED TO THE SUBSCRIPTION AGENT AS INDICATED IN THE PROSPECTUS PRIOR TO THE EXPIRATION DATE. EXERCISE OF OVERSUBSCRIPTION PRIVILEGES (AS DEFINED IN THE PROSPECTUS) MUST BE ACCOMPANIED BY A COMPLETE NOMINEE HOLDER OVERSUBSCRIPTION CERTIFICATION. THE RIGHTS WILL ONLY BE GRANTED TO, AND MAY ONLY BE EXERCISED BY, INVESTORS RESIDING IN THE FOLLOWING JURISDICTIONS WHERE THE SECURITIES OFFERED HEREBY HAVE BEEN REGISTERED WITH THE APPROPRIATE SECURITIES REGULATORY AUTHORITIES OR WHERE AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE: OUTSIDE THE UNITED STATES AND IN COLORADO, CONNECTICUT, THE DISTRICT OF COLUMBIA, ILLINOIS, INDIANA, IOWA, KANSAS, MAINE, MARYLAND, MASSACHUSETTS, NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND, VERMONT, VIRGINIA AND WASHINGTON. RIGHTS WILL NOT BE DISTRIBUTED TO HOLDERS WHO RESIDE IN STATES WHERE THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED OR WHERE AN EXEMPTION FROM REGISTRATION IS NOT AVAILABLE. IN ADDITION, THE SERIES B PREFERRED STOCK MAY NOT BE TRANSFERRED TO RESIDENTS OF ANY OF THE FOLLOWING STATES: ARIZONA, FLORIDA, GEORGIA, OHIO, PENNSYLVANIA OR TEXAS. Additional copies of the enclosed materials may be obtained from, and Rights holders requesting assistance or information may call, the Information Agent, ChaseMellon Shareholder Services at 888-224-2745 in the U.S. or Computershare Services, P.L.C. at 1179-370-672 in the U.K. Very truly yours, CLEAN DIESEL TECHNOLOGIES, INC. ------------------------------- Jeremy D. Peter-Hoblyn President and Chief Executive Officer NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON AS AN AGENT OF THE COMPANY, THE SUBSCRIPTION AGENT OR ANY OTHER PERSON MAKING OR DEEMED TO BE MAKING OFFERS OF THE COMMON STOCK, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO THE OFFERING, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS OR THE SUBSCRIPTION DOCUMENTS. EX-4.H 8 Exhibit 4h 50,000 Shares of Series B Convertible Preferred Stock CLEAN DIESEL TECHNOLOGIES, INC. Series B Convertible Preferred Stock (par value $0.05 per share) Initially Offered Pursuant to Rights Distributed to Shareholders To Our Clients: Enclosed for your consideration are a Prospectus, dated ______ __, 1998 ("Prospectus"), and the Instructions as to Use of Rights Certificates (the "Instructions") relating to the offering (the "Offering") of up to 50,000 shares of Series B Convertible Preferred Stock, par value $0.05 per share (the "Series B Preferred Stock"), of Clean Diesel Technologies, Inc. (the "Company"), at a price of $____ per share (the "Subscription Price") pursuant to transferable rights ("Rights") distributed to holders of record ("Record Date Holders") of the Company's outstanding common shares, par value $0.05 per share (the "Common Shares"), at the close of business on ________ ___, 1998 (the "Record Date"); provided, however, that Rights will not be distributed to Record Date Holders who reside in jurisdictions where the Rights have not been registered or where an exemption from registration is not available, as more fully described in the Prospectus. As described in the accompanying Prospectus, you will receive one Right for each 50 Common Shares carried by us in your account as of the Record Date. Each Right will entitle you to subscribe for and purchase from the Company one share of Series B Preferred Stock (the "Basic Subscription Privilege") at the Subscription Price and each share of Series B Preferred Stock will be immediately convertible, at no cost to the holder thereof, into 33 Common Shares. If you fully exercise the Basic Subscription Privilege you will also have the right (the "Oversubscription Privilege") to subscribe, at the Subscription Price, for additional shares of Series B Preferred Stock available after satisfaction of all subscriptions pursuant to the Basic Subscription Privilege (the "Excess Shares"). If the number of Excess Shares is not sufficient to satisfy all subscriptions pursuant to the Oversubscription Privilege, the Excess Shares will be allocated pro rata among those Rights Holders exercising the Oversubscription Privilege. Rights to exercise the Basic Subscription Privilege are transferable, and Rights Holders that wish to sell their Rights may do so. There can be no assurance, however, that a trading market in the Rights will develop prior to their Expiration Date (as defined below). If a market develops for the Rights, there is no assurance as to the price at which the Rights will trade. The materials enclosed are being forwarded to you as the beneficial owner of the Company's Common Shares carried by us in your account but not registered in your name. Exercises and sales of Rights may only be made by us as the registered holder of Rights and pursuant to your instructions. Accordingly, we request instructions as to whether you wish us to elect to subscribe for any Series B Preferred Stock or attempt to sell any Rights to which you are entitled pursuant to the terms and subject to the conditions set forth in the enclosed Prospectus and Instructions. Your instructions to us should be forwarded as promptly as possible to permit us to exercise or sell Rights on your behalf in accordance with the provisions of the Offering. The Offering will expire at 5:00 p.m. Eastern Standard Time on_______ __, 1998, unless extended by the Company (the "Expiration Date"). Once a Rights Holder has properly exercised the Basic Subscription Privilege or the Oversubscription Privilege, such exercise may not be revoked. If you wish to have us, on your behalf, exercise Rights to purchase any Series B Preferred Stock to which you are entitled or attempt to sell such Rights, please so instruct us by completing, executing and returning to us the instruction form on the reverse side of this letter. THE RIGHTS WILL ONLY BE GRANTED TO, AND MAY ONLY BE EXERCISED BY, INVESTORS RESIDING IN THE FOLLOWING JURISDICTIONS WHERE THE SECURITIES OFFERED HEREBY HAVE BEEN REGISTERED WITH THE APPROPRIATE SECURITIES REGULATORY AUTHORITIES OR WHERE AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE: OUTSIDE THE UNITED STATES AND IN COLORADO, CONNECTICUT, THE DISTRICT OF COLUMBIA, ILLINOIS, INDIANA, IOWA, KANSAS, MAINE, MARYLAND, MASSACHUSETTS, NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND, VERMONT, VIRGINIA AND WASHINGTON. RIGHTS WILL NOT BE DISTRIBUTED TO HOLDERS WHO RESIDE IN STATES WHERE THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED OR WHERE AN EXEMPTION FROM REGISTRATION IS NOT AVAILABLE. IN ADDITION, THE SERIES B PREFERRED STOCK MAY NOT BE TRANSFERRED TO RESIDENTS OF ANY OF THE FOLLOWING STATES: ARIZONA, FLORIDA, GEORGIA, OHIO, PENNSYLVANIA OR TEXAS. IF WE DO NOT RECEIVE COMPLETE WRITTEN INSTRUCTIONS IN ACCORDANCE WITH THE PROCEDURES OUTLINED IN THE PROSPECTUS, WE WILL NOT EXERCISE, TRANSFER OR SELL YOUR RIGHTS, AND YOUR RIGHTS WILL EXPIRE VALUELESS. ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE OFFERING SHOULD BE DIRECTED TO CHASEMELLON SHAREHOLDER SERVICES, [1-800-814-0304]. Very truly yours, EX-4.I 9 Exhibit 4i THE RIGHTS WILL ONLY BE GRANTED TO, AND MAY ONLY BE EXERCISED BY, INVESTORS RESIDING IN THE FOLLOWING JURISDICTIONS WHERE THE SECURITIES OFFERED HEREBY HAVE BEEN REGISTERED WITH THE APPROPRIATE SECURITIES REGULATORY AUTHORITIES OR WHERE AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE: OUTSIDE THE UNITED STATES AND IN COLORADO, CONNECTICUT, THE DISTRICT OF COLUMBIA, ILLINOIS, INDIANA, IOWA, KANSAS, MAINE, MARYLAND, MASSACHUSETTS, NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND, VERMONT, VIRGINIA AND WASHINGTON. RIGHTS WILL NOT BE DISTRIBUTED TO HOLDERS WHO RESIDE IN STATES WHERE THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED OR WHERE AN EXEMPTION FROM REGISTRATION IS NOT AVAILABLE. IN ADDITION, THE SERIES B PREFERRED STOCK MAY NOT BE TRANSFERRED TO RESIDENTS OF ANY OF THE FOLLOWING STATES: ARIZONA, FLORIDA, GEORGIA, OHIO, PENNSYLVANIA OR TEXAS. CLEAN DIESEL TECHNOLOGIES, INC. INSTRUCTIONS TO RECORD DATE HOLDER The undersigned acknowledge(s) receipt of your letter and the enclosed materials referred to therein relating to the offering of shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock"). This will instruct you whether to exercise or attempt to sell Rights to purchase Series B Preferred Stock distributed with respect to the Common Shares held by you for the account of the undersigned, pursuant to the terms and subject to the conditions set forth in the Prospectus and the related Instructions as to Use of Rights Certificates. 1. Please DO NOT EXERCISE RIGHTS for shares of Series B Preferred Stock. 2. Please EXERCISE RIGHTS for shares of Series B Preferred Stock as set forth below: Basic Subscription Privilege: _________ x $____ = $_____(a) (no. of shares) Oversubscription Privilege: __________ x $____ = $_____(b) (no. of shares) Total Payment Required = $____________(c) Payment in the following amount is enclosed: $__________(d) Please deduct payment from the following account maintained by you as follows: Type of Account ____________ Account No. ___________ AMOUNT TO BE DEDUCTED: $__________(e) 3. Please attempt to SELL ________ RIGHTS. - ------------------------------------------------------------------------------ - ------------------------------------ Signature(s) Please type or print name(s) below - ------------------------------------ Date:-------------------------, 1998 - ------------------------------------ - ------------------------------------------------------------------------------ EX-4.J 10 Exhibit 4j CLEAN DIESEL TECHNOLOGIES, INC. RIGHTS OFFERING --------------------- DTC PARTICIPANT OVERSUBSCRIPTION EXERCISE FORM --------------------- THIS FORM IS TO BE USED ONLY BY DEPOSITORY TRUST COMPANY PARTICIPANTS TO EXERCISE THE OVERSUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO WHICH THE BASIC SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED IN FULL THROUGH THE FACILITIES OF THE DEPOSITORY TRUST COMPANY. ALL OTHER EXERCISES OF OVERSUBSCRIPTION PRIVILEGES MUST BE EFFECTED BY THE DELIVERY OF RIGHTS CERTIFICATES. --------------------- THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE COMPANY'S PROSPECTUS DATED _______ __, 1998 (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE COMPANY AND THE SUBSCRIPTION AGENT. --------------------- THE RIGHTS WILL ONLY BE GRANTED TO, AND MAY ONLY BE EXERCISED BY, INVESTORS RESIDING IN THE FOLLOWING JURISDICTIONS WHERE THE SECURITIES OFFERED HEREBY HAVE BEEN REGISTERED WITH THE APPROPRIATE SECURITIES REGULATORY AUTHORITIES OR WHERE AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE: OUTSIDE THE UNITED STATES AND IN COLORADO, CONNECTICUT, THE DISTRICT OF COLUMBIA, ILLINOIS, INDIANA, IOWA, KANSAS, MAINE, MARYLAND, MASSACHUSETTS, NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND, VERMONT, VIRGINIA AND WASHINGTON. RIGHTS WILL NOT BE DISTRIBUTED TO HOLDERS WHO RESIDE IN STATES WHERE THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED OR WHERE AN EXEMPTION FROM REGISTRATION IS NOT AVAILABLE. IN ADDITION, THE SERIES B PREFERRED STOCK MAY NOT BE TRANSFERRED TO RESIDENTS OF ANY OF THE FOLLOWING STATES: ARIZONA, FLORIDA, GEORGIA, OHIO, PENNSYLVANIA OR TEXAS. VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00 P.M., NEW YORK CITY TIME, ON ________ __ 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). 1. The undersigned hereby certifies to Clean Diesel Technologies, Inc. (the "Company") and ChaseMellon Shareholder Services, as the Subscription Agent, that it is a participant in The Depository Trust Company ("DTC"), that it resides outside the United States or on one of the following states: [to come], and that it has either (i) exercised in full the Basic Subscription Privilege in respect of Rights and delivered such exercised Rights to the Subscription Agent by means of transfer to the DTC account of the Subscription Agent designated in the Prospectus, or (ii) delivered to the Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise in full of the Basic Subscription Privilege and will deliver the Rights called for in such Notice of Guaranteed Delivery to the Subscription Agent by means of transfer to such DTC account of the Subscription Agent. 2. The undersigned hereby exercises the Oversubscription Privilege to purchase, to the extent available, ________ shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock") and certifies to the Company and the Subscription Agent that such Oversubscription Privilege is being exercised for the account or accounts of persons (which may include the undersigned) on whose behalf the Basic Subscription Privilege was exercised in full. 3. The undersigned understands that payment of the Subscription Price of $____ per share for each share of Series B Preferred Stock subscribed for pursuant to the Oversubscription Privilege must be received by the Subscription Agent at or before the Expiration Date and represents that such payment, in the aggregate amount of $_________. (check appropriate box): [ ] has been or is being delivered to the Subscription Agent pursuant to the Notice of Guaranteed Delivery referred to above; [ ] is being delivered to the Subscription Agent herewith; or [ ] has been delivered separately to the Subscription Agent; and, in the case of funds not delivered pursuant to a Notice of Guaranteed Delivery, is or was delivered in the manner set forth below (check appropriate box and complete information relating thereto): [ ] wire transfer of funds: Name of transferor institution -------------------------------- Date of transfer ---------------------------------------------- Confirmation number (if available) ---------------------------- [ ] uncertified check [ ] certified or cashier's check [ ] money order. -------------------------------------- Bank Subscription Confirmation Number -------------------------------------- DTC Participant Number -------------------------------------- Name of DTC Participant By: ----------------------------------- Name: Title: Date: ____________ ___, 1998 PARTICIPANTS EXERCISING THE OVERSUBSCRIPTION PRIVILEGE PURSUANT HERETO MUST SEPARATELY SUBMIT A NOMINEE HOLDER CERTIFICATION TO THE SUBSCRIPTION AGENT. EX-4.K 11 Exhibit 4k CLEAN DIESEL TECHNOLOGIES, INC. NOMINEE HOLDER CERTIFICATION The undersigned, a bank broker or other nominee of Rights ("Rights") to purchase shares of Series B Convertible Preferred Stock, par value $0.05 per share ("Series B Preferred Stock"), of Clean Diesel Technologies, Inc. (the "Company") pursuant to the Rights Offering described and provided for in the Company's Prospectus dated ______ __, 1998 (the "Prospectus"), hereby certifies to the Company and to ChaseMellon Shareholder Services, as Subscription Agent for such Rights Offering, that (1) the undersigned has exercised, on behalf of the beneficial owners thereof (which may include the undersigned), the number of Rights specified below pursuant to the Basic Subscription Privilege (as defined in the Prospectus) on behalf of beneficial owners of Rights who have subscribed for the purchase of additional shares of Series B Preferred Stock pursuant to the Oversubscription Privilege (as defined in the Prospectus), listing separately below each such exercised Basic Subscription Privilege and the corresponding Oversubscription Privilege (without identifying any such beneficial owner), (2) each such beneficial owner's Basic Subscription Privilege has been exercised in full and (3) that each such beneficial owner has indicated in writing that it resides outside the United States or in Colorado, Connecticut, the District of Columbia, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Nevada, New Jersey, New York, North Carolina, Rhode Island, Vermont, Virginia, and Washington. - ------------------------------------------------------------------------------ Number of Shares Number of Shares Rights Pursuant to Pursuant to Owned on the Basic Subscription Oversubscription Record Date Privilege Privilege ----------- --------- --------- - ------------------------------------------------------------------------------ 1. - ------------------------------------------------------------------------------ 2. - ------------------------------------------------------------------------------ 3. - ------------------------------------------------------------------------------ 4. - ------------------------------------------------------------------------------ 5. - ------------------------------------------------------------------------------ 6. - ------------------------------------------------------------------------------ 7. - ------------------------------------------------------------------------------ 8. - ------------------------------------------------------------------------------ 9. - ------------------------------------------------------------------------------ Provide the following information if applicable: - ------------------------------------------------ Depository Trust Company ("DTC") Participant Number - ------------------------------------------------ DTC Basic Subscription Confirmation Number(s) EX-10.M 12 Exhibit 10m The omitted portions indicated by brackets have been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406, promulgated under the Securities Act of 1933, as amended. SUPPLY AGREEMENT between CLEAN DIESEL TECHNOLOGIES, INC. and HOLT LLOYD INTERNATIONAL LTD. AGREEMENT as of the 12th day of September, 1996 between Clean Diesel Technologies, Inc., a Delaware corporation ("CDTI"), with a place of business at Suite 702, 300 Atlantic Street, Stamford, Connecticut, U.S.A. 06901 and Holt Lloyd International Ltd. an English Company ("Holts"), with a place of business at Lloyds House, Alderley Road, Wilmslow, Cheshire SK9 1QT, U.K. Whereas CDTI desires to sell to Holts quantities of a proprietary, platinum fuel catalyst and Holts desires to purchase quantities of such catalyst for use with its diesel fuel additives. NOW THEREFORE, the parties agree as follows: 1. Definitions. (a) "Holts" shall mean Holt Lloyd International Ltd. and the subsidiaries of its ultimate holding company identified in Schedule C. (b) "PFC" shall mean CDTI's proprietary Platinum Fuel Catalyst more particularly identified as Platinum Plus(R) 3100-SC, a superconcentrated product containing 2.0% by weight of platinum metal in a fuel soluble form, and, the specified dose rate of 0.61 ml per 50 liters of diesel fuel, providing 0.25 ppmw of platinum metal in treated fuel. Specifications for the PFC are set on Schedule A-2. (c) "Additives" shall mean Holts' diesel fuel additives containing or intended to contain the PFC. (d) "Application" shall mean the blending at Holts' expense of the PFC with the Additives in containers of up to five liters for use in after-treatment of fuel for both new and used diesel engines in the consumer car care market. (e) "Patents" shall mean those patents owned or licensed to CDTI as more specifically set out on Schedule B-1. (f) "Territories" shall mean each national jurisdiction or state worldwide except in North, Central or South America. (g) "Mark" shall mean the CDTI trademark "Platinum Plus(R)." (h) "Minimum Performance Levels" shall mean the annual quantity in gallons of PFC attributable to Holts' sale of its Additives in a particular Territory. (i) "Gallons" shall mean U.S. gallons, equivalent to 3.785 liters per gallon. (j) "Fixed Term" of this Agreement shall mean the term from the execution of this Agreement until the tenth anniversary thereof. (k) "Extended Term of this Agreement" shall mean the term from the expiration of the Fixed Term until cancellation of this Agreement by either party on ninety (90) days notice. 2. Purchase and Sale. CDTI agrees to supply and sell quantities of the PFC exclusively to Holts for the Application for sale of the Additive in the Territories. Holts agrees to accept and purchase the PFC exclusively from CDTI or its licensed manufacturers only for the Application for sale in the Territories and to pay to CDTI the price therefor set out below. 3. License. (a) CDTI does for the Fixed and Extended Terms of the Agreement license Holts under the Patents to use and sell the PFC and to use the Mark, on an exclusive, royalty-free basis, for the Application for sale of the Additives in the Territories only. CDTI shall execute and deliver to Holts from time to time such registered user agreements as may be appropriate to use of the Mark in the Territories by Holts. Notwithstanding the foregoing, Holts acknowledges CDTI's ownership of and interest in the Mark and agrees that its use of the Mark shall not create in Holts favor any right, title or interest in or to the Mark. (b) Subject to agreement on Minimum Performance Levels by April 30, 1997, CDTI shall not license any other party to use the Mark for diesel fuel or diesel fuel additives in a Territory during the Fixed or Extended Terms of this Agreement when Holts shall hold an exclusive license for the PFC and the Mark for the Application in such Territory. CDTI shall itself retain the right to market and sell the PFC to blenders and fuel suppliers under the Mark. 4. Obligations of Holts. (a) Holts agrees to use its best efforts in the Territories to promote the use of PFCs for the Application as beneficial in mobile diesels both new and retrofit and will at its expense apply for certification of the PFC, or the Additives as the case may be, with appropriate regulatory authorities in the Territories. (b) Holts will use the PFC according to the blending specifications agreed by CDTI attached as Schedule A-1 and Holts will use all reasonable efforts to assure that PFC is blended by Holts or its blenders at the concentration recommended by CDTI. Holts will use due care in the blending of the PFC with the Additives with a view toward protection of its employees or the employees of its agents and contractors. (c) Holts will use the Mark on the Additives containing the PFC and in all advertising concerning such products and only on such Additives and in such advertising. The packaging or labels for such Additives shall identify CDTI as owner of the Mark in such style as from time to time may be approved by CDTI, who shall act reasonably. (d) Holts will notify CDTI as to those jurisdictions in the Territories and to the classes where the Mark shall not have been registered and where Holts requires the Mark to be registered in order to further project sales of the Additives therein. CDTI will at its expense apply for registration of the Mark in such jurisdictions. CDTI shall be the owner of the Mark when so registered. Holts will reimburse CDTI for one-half of the cost of the registration and annual maintenance of the Mark in such jurisdictions, and for the classes where Holts requires the Mark to be registered. 5. Obligations of CDTI. (a) CDTI will use its best efforts to assist Holts in its registration of the Additives or the PFC, as the case may be, with the appropriate regulatory authorities in the Territories, such efforts, however, shall not require the preparation, compilation or delivery of data except data as CDTI shall actually possess and shall not require testing expense, travel expense, legal fees and filing fees to be incurred by CDTI. (b) CDTI will provide to Holts standard product specification sheets (flash point, dosing, etc.), material safety data sheets, and blending instructions. (c) CDTI will cause to be made a standard QC analysis on product provided to Holts and make such analyses available to Holts. (d) CDTI will not during the term of the Agreement sell PFC to other parties for the Application (for the sale of additives similar to the Additives) in the Territories, providing that by March 31st of each calendar year the parties shall have used their reasonable efforts to agree on Minimum Performance Levels for each territory for that calendar year. If the parties cannot agree on a Minimum Performance Level for a specific Territory, then Holts will have a non-exclusive license for that specific Territory for the remainder of that calendar year which non-exclusive license shall continue thereafter for the Fixed or Extended Terms of this Agreement unless such non-exclusive license for such Territory is canceled by CDTI with 90 days written notice. (e) In the event that CDTI formulates an additive package that is technically and commercially suitable for petrol engines, then CDTI shall offer Holts the first right of refusal on a license on terms similar to this Agreement. Product specifications and pricing may differ from this Agreement. 6. Pricing. (a) The price per gallon of PFC through the year ended December 31, 1996 on aggregate orders up to 100 gallons is: Volume $/gal PP 3100-SC ------ ---------------- Up to 100 gal. $[ ] (b) The price per gallon of PFC in excess of 100 gallons in 1996 and after December 31, 1996 and through December 31, 1999, will be adjusted based on the formula set out on Schedule D. After December 31, 1999, pricing of orders will be agreed between CDTI and Holts in a written amendment to this Agreement. If the parties cannot agree in good faith then this Agreement may be terminated by either party with 90 days written notice. In the course of such good faith negotiations either party may invoke the services of a London U.K.-based mediator and the other party shall cooperate with such mediator and both parties shall share the reasonable costs of such mediation. (c) Payment shall be net thirty (30) days from date of receipt at Holts principal sites in the U.K. and France. Delayed payments shall incur a service charge of 1.5% of the unpaid balance per month. (d) Prices are exclusive of freight, customs duties, non-U.S. VAT sales or similar taxes and any local transportation expense following the point of delivery, such costs being for the account of Holts. Prices are inclusive of shipping insurance premiums which are for the account of CDTI. 7. Infringement. (a) CDTI represents and warrants that to the best of its knowledge and belief the use or sale of the PFC or the use of the Mark will not infringe upon the claims of any patent or any trademark issued or to be issued to third parties in the Territories. (b) In the event of an infringement suit, or threatened infringement suit, against Holts by reason of the use of the Mark or the use or sale of the PFC furnished hereunder for the Application, and provided that Holts notifies CDTI promptly in writing of any claim, or threatened claim, of infringement and tenders to CDTI the defense thereof, CDTI at its option agrees either to: (i) control and conduct at its own expense the defense of any such claim or suit provided that Holts furnishes such assistance and information at CDTI's expense as CDTI shall reasonably request, in which case CDTI indemnifies Holts against all reasonable costs, losses and expenses incurred and CDTI agrees to keep Holts informed of the progress of any such matter, or (ii) reject the tender of the defense in which case CDTI indemnifies Holts against all reasonable costs, losses and expenses of Holts in defending against the claims of suit, provided that CDTI shall have the right to be defended by its own counsel in such suit. (c) Regardless of the option selected by CDTI in (b) above, its liability shall not exceed the purchase price of the allegedly infringing goods, nor shall CDTI be liable to Holts for any consequential or punitive damages. If any injunction is issued against the further use of the allegedly infringing goods, CDTI shall have the option of procuring for Holts the right to use the goods or replacing them with a non-infringing product, as long as Holts agrees that such product achieves the same performance as PFC in the Application or of removing them and refunding the purchase price, including costs of duty and freight. 8. Prosecution of Infringements. Both parties shall notify the other of facts which suggest that an infringement of the Patents or the Mark in the Territories may be occurring and shall consult as to the manner of dealing with such infringements. 9. Orders; Quantities; Packing; Claims. CDTI agrees to provide reasonable quantities of PFC in one (1) gallon containers for trial market launches through April 30, 1997. For all orders in quantity up to 100 gallons, Holts shall give CDTI thirty (30) days notice of the quantity to be purchased and shipped each contract month and for orders in excess of 100 gallons, Holts shall give CDTI ninety (90) days notice thereof. No order shall be less than five (5) gallons. Unless Holts specifies otherwise in writing, PFC orders will be packed as CDTI may deem proper for protection against normal handling. An extra charge will be made for special requirements imposed by Holts for preservation, waterproofing and similar added protection or special packing of the PFC. The weights, tares and tests fixed by CDTI's invoice shall govern unless proven to be incorrect. Claims relating to quantity, quality, weight, condition and loss of or damage to any of the PFC sold hereunder shall be waived by Holts unless made in writing within thirty (30) days after receipt of a particular PFC shipment by Holts at its manufacturing sites in the U.K. or France. 10. Title and Risk of Loss. Title and Risk of Loss of all PFC shipments shall pass to Holts upon delivery of a shipment by CDTI to Holts' specified point of delivery. 11. Warranties. CDTI warrants that (a) the PFC is of the quality set forth in CDTI's specifications, attached as Schedule A-2, or as may be otherwise expressly stated in this Agreement, and (b) the title conveyed is good and the product is free from any lawful security interest, lien or encumbrance. CDTI MAKES NO FURTHER REPRESENTATIONS OR WARRANTIES AS TO THE PFC, EXPRESS OR IMPLIED, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 12. Limitation of Liability; Insurance. (a) With respect to the purchase and sale of the PFC hereunder, Holts' exclusive remedy and CDTI's exclusive liability under the Agreement or otherwise, shall be for compensatory damages for CDTI's breach of warranty set forth herein, such liability shall not exceed so much of the purchase price as is applicable to that portion of a particular shipment for which damages are claimed and neither party shall be liable to the other for consequential, statutory or punitive damages. (b) Each of the parties hereto represents and warrants to the other that it or its subsidiaries shall maintain during the Fixed and Extended Terms of this Agreement, product liability insurance cover up to the limit of $2 million (U.S. dollars) in the aggregate and $1 million (U.S. dollars) per claim, and $11 million of total overall coverage for claims arising out of injury to persons or property alleged to have been caused by defects in or use of either the Holts additives or the CDTI PFC, as the case may be. Such policies of insurance shall be with insurance carriers of such standing and capacity as shall be reasonably approved by the other party and shall be properly licensed to issue the coverage contemplated herein. (c) Each of the parties hereto does hereby indemnify and hold harmless the other and the shareholders, directors, officers, and employees of the other, but only up to the amount of the product liability insurance cover required to be maintained hereunder, for all cost, expense (including the fees and expenses of legal counsel), liability and damages imposed on such other party and found to have been caused by defects in or use of the party's product as contemplated hereunder, being Holts' additives or CDTI's PFC, as the case may be. (d) Each of the parties hereto shall cause the other party to be designated as an additional insured under such party's product liability insurance required hereunder and shall, from time to time on request of the other party, procure from its insurance carrier and furnish to such other party certificates evidencing such additional insured status. (e) Each of the parties hereto shall cause its insurance carriers providing the product liability cover required hereunder to waive subrogation with respect to the other party. 13. Force Majure. Neither party shall be liable for its failure to perform hereunder if due to any contingency beyond the reasonable control of the party affected, including but not limited to acts of God, war, fire, bad weather, flood, accident, labor trouble or shortage, civil disturbance, plant shutdown, equipment failure, voluntary or involuntary compliance with any applicable governmental regulation or order, or shortage or inability to obtain (on terms deemed practicable by the party affected) any raw material (including energy), equipment or transportation. CDTI shall not be obligated to deliver the product from other than CDTI's production site in the U.S. and there shall be no obligation to rebuild or repair any damage or destruction to such production or shipping points in order to fulfill this contact. During any period when CDTI is unable to supply the contract quantity of the PFC, whether caused by the circumstances above or otherwise, CDTI may allocate any available product among its customers on such basis as CDTI deems fair and reasonable. 14. Governmental Regulation. CDTI may discontinue, limit or curtail production and sale of PFC due to the requirements of governmental regulation, and may terminate the Agreement on thirty (30) days written notice to Holts, if in CDTI's sole and reasonable opinion such governmental regulations render the production, marketing or transportation of PFC economically, technically or commercially not feasible. 15. Term of Agreement. This Agreement shall remain in effect during the Fixed and Extended Terms hereof. 16. Applicable Law and Arbitration. This Agreement shall be governed by the internal substantive laws of the State of Delaware U.S.A. and the Federal Arbitration Act. This Agreement and all questions of its interpretation or any claims or disputes with respect to any of the transactions contemplated herein shall be determined exclusively in binding arbitration before a single arbitrator under the rules then in force of commercial arbitration of the American Arbitration Association in New York, New York, U.S.A. Any award in such arbitration may be entered in and enforced by any court having jurisdiction. Prior to initiating arbitration the parties agree that they will for a period of not less than sixty (60) days attempt to mediate all disputes and such mediation shall involve at least one face to face discussion between the parties. No arbitrator hereunder shall have any power to award consequential, statutory or punitive damages. Notwithstanding the forgoing, claims or disputes between the parties hereto shall be determined judicially, where such claims or disputes arise in the course of a judicial proceeding brought by a third party against one or both of the parties hereto and one of such parties hereto shall seek reimbursement or indemnity from the other party hereto and each of the parties hereto consents to the jurisdiction of any court in which such judicial proceeding shall arise. 17. Assignment. Neither this Agreement nor any right or obligation hereunder is assignable or transferable by either party in whole or in part without the prior written consent of the other party and any such purported assignment without such consent shall be void, except, however, upon a sale by a party of all or substantially all of its business as a going concern. 18. Notices. All notices hereunder shall be in writing and directed to the addresses of the parties set forth above or to such other address as shall be provided by notice as stipulated herein, and shall be deemed received upon transmission if by facsimile or hand delivery, or five (5) days after transmission, if by mail. IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the date first written above. CLEAN DIESEL TECHNOLOGIES, INC. HOLT LLOYD INTERNATIONAL LTD. By: By: --------------------------- ---------------------------- Title: Title: --------------------------- ---------------------------- SCHEDULE A-1 CDTI/HOLTS SUPPLY AGREEMENT PLATINUM PLUS(R) 3100-SC ------------------------ PRODUCT BLENDING AND USE SPECIFICATIONS --------------------------------------- 1. Holts will blend Platinum Plus(R) 3100-SC with its additives according to the product application sheet supplied by CDTI so as to provide for a concentration of 0.25 ppm platinum in fuel treated with Platinum Plus(R) 3100-SC. 2. Holts will use all reasonable means including the establishment of blending procedures and appropriate analyses of blended additives to assure that Holts and its blenders conform to the blending specifications. 3. These specifications may not be altered without written authorization from CDTI. SCHEDULE A-2 CDTI/HOLTS SUPPLY AGREEMENT PLATINUM PLUS(R) 3100 SC PRODUCT SPECIFICATIONS ---------------------- SPECIFIED PHYSICAL PROPERTIES ----------------------------- Min. Max. ---- ---- Pt Content, Wt % 2.00 2.08 Specific Gravity, 23-24oC 0.88 0.90 Total Halide Content, ppm --- 500 (Full specifications to follow.) SCHEDULE B-1 CDTI/HOLTS SUPPLY AGREEMENT PATENTS LICENSED BY JURISDICTION -------------------------------- Country Patent No. Issue Date Title - ------- ---------- ---------- ------ Australia Pat. 583,580 05/04/89 Fuel Additives and Fuel Containing Soluble Platinum Group Metal Compounds and Use in Internal Combustion Engines Europe (designated Pat. 0189642 03/06/91 Fuel Additives and Fuel contracting states: Containing Soluble Platinum AT, BE, CH, FR, IT, Group Metal Compounds and LI, LU, NL, SE) Use in Internal Combustion Engines Spain Pat. 548,951 04/12/88 Fuel Additives and Fuel Containing Soluble Platinum Group Metal Compounds and Use in Internal Combustion Engines United Kingdom Pat. 2,178,757 10/19/88 Fuel Additives and Fuel Containing Soluble Platinum Group Metal Compounds and Use in Internal Combustion Engines Greece Pat. 85.2745 03/14/86 Fuel Additives and Fuel Containing Soluble Platinum Group Metal Compounds and Use in Internal Combustion Engines Ireland Pat. 58,723 10/21/93 Fuel Additives and Fuel Containing Soluble Platinum Group Metal Compounds and Use in Internal Combustion Engines Japan Pat. 1,931,531 05/12/95 Fuel Additives and Fuel Containing Soluble Platinum Group Metal Compounds and Use in Internal Combustion Engines SCHEDULE B-2 CDTI/HOLTS SUPPLY AGREEMENT PLATINUM PLUS FOREIGN TRADEMARK APPLICATIONS ------------------------------ Country Filing Date Serial No. Registration No. - ------- ----------- ---------- ---------------- China Not available Not available China Not available Not available China Not available Not available EU Community Not available Not available France 11/28/95 95/599 379 95/599 379 Great Britain 11/23/95 2,046,018 Indonesia Not available Not available Indonesia Not available Not available Indonesia Not available Not available Japan 12/5/95 125415/95 Japan 12/5/95 124416/95 Japan 12/5/95 125417/95 Korea 11/27/95 44777/95 Korea 11/27/95 44778/95 Korea 12/27/95 11493/95 Mexico 12/6/95 249,675 Mexico 12/8/95 249,891 Taiwan 7/12/96 85034640 Taiwan 7/12/96 85034641 SCHEDULE C CDTI/HOLTS SUPPLY AGREEMENT HOLTS SUBSIDIARIES COVERED UNDER THE AGREEMENT ---------------------------------------------- Holt Lloyd International Ltd. U.K. Holt Lloyd Ltd. U.K. Holt Lloyd Export Ltd. U.K. Carr & Day & Martin Ltd. U.K. Holt Lloyd SA France Holt Lloyd GmbH Germany Holt Lloyd BV Holland Holt Lloyd Europa BV Holland/Belgium Holt Lloyd SpA Italy Holt Lloyd Ltd. Ireland Holt Lloyd SA Spain Holt Lloyd Australasia Pty. Ltd. Australia Holt Lloyd Ltd. New Zealand Gamlen Environmental Services Ltd. New Zealand Musashi Holt KK Japan Holts Pty. Ltd. South Africa Holt Lloyd International Ltd. has a 35% shareholding in Holt Lloyd & Raposa Lda., Portugal. SCHEDULE D PLATINUM PLUS(R) 3100-SC PRICE ADJUSTMENT SCHEDULE ------------------------- (Valid after December 31, 1996 and through December 31, 1999) 1. Base pricing is based on platinum at $400/T.O. and a product price of $3,300/U.S. gallon for the first 100 gallons, or through December 31, 1996, whichever occurs first. 2. Price on orders subsequent to December 31, 1996, and through December 31, 1999 will be adjusted based on the following formula: Adjusted Price of Platinum Product Price = at time of Order (FN*) x (0.40) ($[ ]) + 0.60 ($[ ]) ----------------------- Base Price @ $400/T.O. 3. Notwithstanding the foregoing, CDTI shall be entitled to a price adjustment if it shall be determined that the above pricing as escalated shall be grossly inequitable. In the course of discussions to alter this pricing structure, either party may invoke the services of a London U.K.-based mediator and the other party shall cooperate with such mediator and both parties shall share the reasonable costs of such mediator. (FN*) Defined as platinum price confirmed by Johnson Matthey on date of written acceptance by CDTI of order. EX-10.N 13 Exhibit 10n The omitted portions indicated by brackets have been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406, promulgated under the Securities Act of 1933, as amended. JOINT DEVELOPMENT AGREEMENT --------------------------- This Agreement is effective as of the 11th day of November 1996 by and among Engelhard Corporation ("Engelhard") having a place of business at 101 Wood Avenue, Iselin, New Jersey 08830; Clean Diesel Technologies, Inc. ("CDT") having a place of business at 300 Atlantic Street, Suite 702, Stamford, Connecticut 06901; and Nalco Fuel Tech ("NFT") having a place of business at 1001 Frontenac Road, Naperville, Illinois 60563. Engelhard has developed NOx reduction catalysts and systems which can reduce NOx emissions in the exhaust stream of diesel engines in the presence of an amine-based reagent through selective catalytic reduction (SCR). CDT and NFT have independently developed and own reagents, reagent injection techniques, injector designs, metering systems, and computer models that, in conjunction with an NOx reduction catalyst, will reduce NOx emissions from diesel engines. CDT, NFT and Engelhard wish to collaborate on the development, demonstration, and commercialization of a urea-based SCR System for use on diesel engine power generator sets manufactured by Cummins Engine Company ("Cummins"). Therefore, the parties agree as follows: 1. Engelhard, CDT, and NFT will collaborate on the selection and testing of Engelhard catalysts and reactors in conjunction with the CDT and NFT supplied reagent, injectors, and metering equipment prior to the prototype testing of the System. Pre-prototype testing will take place at the Engelhard engine lab during 1996 to define overall system performance. 2. CDT and NFT will share confidential Cummins engine data with Engelhard for catalyst selection and design, based on authorization from Cummins. This sharing is contingent upon Engelhard holding such information in strict confidence, in accordance with the requirements of CDT's and NFT's Confidentiality Agreement with Cummins. 3. Prototype testing of the System will take place in conjunction with Cummins on an engine supplied by Cummins during 1997. Engelhard will provide catalysts and reactors and CDT and NFT will provide the reagent and injection/metering system. The timing and responsibility for testing shall be agreed by the parties in advance. 4. Upon successful completion of prototype testing of the System and based on agreement by the parties with Cummins to proceed with commercialization of the System, the parties shall support commercial performance and durability testing of the System as mutually agreed by the parties with Cummins. Engelhard will provide catalyst and reactor and CDT and NFT will provide the injection/metering system and reagent. Unless otherwise agreed by the parties in writing, the direct cost of the engine, engine operations, emissions monitor, and data collection during the durability testing shall not exceed $[ ] per party, with each party paying one-third of the total. 5. Upon successful completion of durability testing to the satisfaction of the parties and Cummins, the parties shall negotiate with Cummins for supply of commercial Systems. CDT and NFT shall be the overall System supplier, with catalyst and reactor supplied to CDT and NFT by Engelhard based on mutually agreed price and terms. 6. Parties confirm that they agree not to analyze or have analyzed any chemical reagents, injectors, metering equipment or catalysts (hereinafter "Samples") provided by one party to another for evaluation during this Agreement, and that all such Samples will be provided free of charge and shall be returned to the party providing such Samples at the end of each test. 7. (a) Each party shall have equal access to the test results for all tests conducted in accordance with this Agreement. Data and results resulting from the work completed during this program ("Subject Data") shall be jointly owned by the parties, but no party shall have the right to publish or disclose such data without the prior written consent of the other parties, which consent will not be unreasonably withheld. Any inventions first jointly conceived and reduced to practice from the work completed under this program ("Subject Inventions") shall be owned by the parties. Any patents resulting from Subject Inventions will be owned by NFT if related to metering equipment or reagents, and by Engelhard if related to catalyst. Each of the two other parties to this agreement shall have a worldwide royalty-free license to make, use, and sell subject to payment of a one-third share of reasonable patent preparation, filing and maintenance costs. Any inventions individually conceived during this program or conceived and reduced to practice outside of this program will in no event be Subject Inventions. (b) All inventions, patents, patent applications, data, know-how and other intellectual property in the possession of or owned by any of the parties prior to the Test shall remain the property of such party and no grant of any right or license whatsoever thereunder to any of the other parties is intended hereby or should be implied, notwithstanding that rights in any such intellectual property may be necessary to enable a party to practice a Subject Invention. No rights or obligations other than those expressly recited herein are to be implied from this Agreement. Except as provided above, and relating to Subject Inventions and Subject Data, no license is hereby granted, directly or indirectly, under any know-how or patent now or hereafter held by or licensed by any of the parties. 9. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New Jersey without regard to the principle of conflict of laws. 10. This Agreement constitutes the entire understanding between the parties hereto with respect to the subject matter indicated above, and its terms may not be changed or amended except by an instrument in writing. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed in triplicate by their duly authorized representatives. CLEAN DIESEL TECHNOLOGIES, INC. ENGELHARD CORPORATION By: By: ------------------------------ ------------------------------ Name: James M. Valentine Name: ---------------------------- ---------------------------- Title: Chief Operating Officer Title: --------------------------- --------------------------- Date: Date: ---------------------------- ---------------------------- NALCO FUEL TECH By: ------------------------------ Name: ---------------------------- Title: --------------------------- Date: ---------------------------- EX-10.O 14 Exhibit 10o The omitted portions indicated by brackets have been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406, promulgated under the Securities Act of 1933, as amended. AGREEMENT This Agreement is made this seventeenth day of December, 1997 by and between Clean Diesel Technologies, Inc., a Connecticut corporation having its principal place of business at 300 Atlantic Street, Suite 702, Stamford, CT 06901-3522 USA (hereinafter referred to as "CDT") and AMBAC International, a Delaware corporation, having its principle place of business at 103 Myron Street, West Springfield, MA 01089 (hereinafter referred to as "AMBAC"). RECITALS WHEREAS, CDT and AMBAC have entered into a Non-Disclosure Agreement, dated 10 October 1997, and attached hereto as (Exhibit A), and WHEREAS, said Non-Disclosure Agreement was concerned with the development, production and application of a CDT Reagent Injection System, hereinafter RIS; and WHEREAS, CDT and AMBAC are desirous of working on a joint effort to cost effectively design, manufacture and market the RIS; and WHEREAS, CDT has the marketing capabilities to identify and to develop various markets and application for the RIS; and WHEREAS, CDT has opportunity to demonstrate an advanced system to industry, and interested parties; and WHEREAS, CDT has applied the present-state RIS technology to select internal combustion engines, furnaces and boiler systems; and WHEREAS, AMBAC has the technical, design, development skills and technology to bring about an advanced system for use in over-the-road, as well as stationary, diesel applications of the RIS; and WHEREAS, AMBAC has the technical, manufacturing, and process skills to cost effectively mass produce all or select components of the advanced RIS; and WHEREAS, CDT and AMBAC desire to reduce their agreements to writing. NOW, THEREFORE, in consideration of the premises, of the mutual covenants herein contained, and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS 1.1 Reagent Injection System - The term "RIS", (Reagent Injection System), shall mean the concepts and embodiments of the systems for injection of reagents into exhaust gases of internal combustion engines, boilers, furnaces and heaters as designed and developed by CDT in whole or in part based upon patents, patent application and know how, owned or licensed by CDT as of the date of this Agreement. These patents and applications are listed in Exhibit "B" entitled CDT RIS PATENTS, attached hereto. Advanced Reagent Injection Reduction System - The term "ARIS" (Advanced Reagent Injection System), shall mean the concept and embodiment of the system, for application to internal combustion engines, furnaces, boilers and heaters, as will exist at the stage of production-readiness, subsequent to the joint design, test, and development efforts by CDT and AMBAC. The scope of the ARIS development program shall be as identified in Exhibit C (Attached hereto). 1.2 LICENSE AGREEMENT RESERVED 1.3 AMBAC. The term "AMBAC" shall mean AMBAC International, its successors, assigns, and agents. 1.4 CDT. The term "CDT" shall mean Clean Diesel Technologies, Inc., its successors, assigns, agents, and any subsidiaries or companies controlled by Clean Diesel Technologies, Inc., i.e. ownership of more than 50% of the voting stock. 1.5 The term "burdened engineering costs" shall mean costs in a range of $45.00 to $60.00 per hour as of the date of this agreement and changes to rates can be agreed upon at quarterly review meetings. ARTICLE II PARTIES 2.1 The Parties to this Agreement are Clean Diesel Technologies, Inc., a Delaware Corporation, and AMBAC International, a Delaware Corporation. ARTICLE III DUTIES OF CDT AND AMBAC 3.1 CDT and AMBAC agree to jointly share all relevant information and technology related to the cost effective design, prototype, test, development, production release, manufacture, process development, and distribution of the ARIS, to be applied to engines, boilers, furnaces and heaters subject to the non-disclosure Agreement. 3.2 CDT and AMBAC agree to share marketing data relating to uses and applications of the ARIS in whatever industry and wherever in the world such marketing may be applicable subject to the terms of confidentiality in Paragraph 11.1 below. 3.3 CDT and AMBAC agree to meet periodically, but no less often than every three (3) months to update, share and exchange the following: (a) Quantity of ARIS anticipated to be sold in various markets during various calendar years; and (b) Cost of producing the ARIS based upon the amortization of the tooling-capital and Sales and Volume projections developed in Section 3.3(a) above; and (c) Cost of AMBAC burdened development engineering expenses expended in the development of a cost effective and readily manufactured ARIS; and (d) Proposals of an Action Plan to meet the objectives of large volume-low cost supplier of ARIS based upon jointly developed cost-volume objectives; ARTICLE IV DUTIES OF CDT 4.1 CDT will be responsible for the following tasks: (a) Timely Provision to AMBAC of Performance Specifications, Initial Drawings, Test and Acceptance Criteria, known material incompatibilities, BOMs, target cost, etc., for the ARIS. (b) Coordinating the ARIS demonstration to interested industry observers. (c) Technical assistance to AMBAC on operation and testing of the ARIS. (d) Technical and physical descriptions of standard components previously used in engine and boiler applications that are intended to be used in the ARIS, i.e., feed pumps, valving, piping, etc. ARTICLE V DUTIES OF AMBAC 5.1 AMBAC will be responsible for the following tasks: (a) Definition, design, development, and documentation of components configuration -- incorporating, as much as is possible, standard components as used in previous installations -- that result in a system capable of injecting urea-based reagents per specification through an injector that will lend itself to actuation by engine management control or other auxiliary controllers. (b) Definition of the optimum mix of tooling and automation to achieve the cost-volume targets established by CDT and AMBAC. (c) Actively participate in the concurrent engineering efforts to assure optimum producibility of the ARIS. (d) Submission to CDT of a full review of proposed design for the purpose of concurrence prior to manufacture of prototype samples. (e) Develop and sell to CDT, prototype/test "samples" at "out-of-pocket" (burdened) cost, whether such samples are procured internal to AMBAC or from an external supplier. AMBAC will expend its best effort to make the first samples available on or before February 15, 1998. Samples will be representative of "Production Intent" units. ARTICLE VI DEVELOPMENT COST SHARING 6.1 Each party to this Agreement will be responsible for its own share of the development cost, with the following qualification: If prior to December 31, 2002, should CDT source manufacturing of the ARIS from another entity, not AMBAC, for reasons not related to any inability on the part of AMBAC to execute competitive production manufacturing, CDT will reimburse, fifty (50%) percent of AMBAC's burdened Engineering as reported in Section 3.3(c) of this Agreement. The engineering costs will be those costs expended and reported from the date this Agreement is signed until the Agreement is terminated in accordance with Section VIII or until 31 December 2000, whichever shall first occur. The payment will be made within sixty (60) days after the effective date of the termination with CDT reserving the right to audit such charges; however, upon mutual written consent, these engineering costs may be paid as royalty payments additional to those as described under Section 7.1(a) of this Agreement. ARTICLE VII ROYALTY PAYMENTS AND LICENSE FEES 7.1 CDT and AMBAC are committed to a "WIN-WIN" program and therefore there will be no Royalty or License fees payable to or from either company for any technology jointly or separately developed from the date of this Agreement until its termination unless the following occurs: (a) If CDT is required to develop another company to manufacture the ARIS and such need to develop another company is not due to any inability of AMBAC to execute competitive production manufacturing, then CDT shall compensate AMBAC in the following manner for a three (3) year period: [ ]% of sales price if sold by CDT or [ ]% of CDT's Negotiated Royalty if licensed to a manufacturer. In the above cases AMBAC shall grant to CDT a worldwide license to manufacture the ARIS using any and all technology developed by AMBAC for production of the ARIS. (b) If CDT is required to develop another company to manufacture the ARIS and such need to develop another company is due to any inability of AMBAC to execute competitive production manufacturing, other than unit cost, then CDT shall not be required to compensate AMBAC and AMBAC shall grant to CDT a rent-free, exclusive, worldwide license to manufacture the ARIS using any and all technology developed by AMBAC for production of the ARIS. Such technology shall be used by CDT or its sub-contractor, agent, or assign only for the purposes of manufacturing the ARIS. (c) After five years, or earlier, upon mutual written agreement, AMBAC shall be permitted to use the ARIS for all of the applications that shall have been developed by AMBAC and first disclosed to CDT subject to the following Royalty schedule: [ ]% royalty of AMBAC sales price will be payable to CDT. (d) If CDT is unable to grow the production volume of the ARIS as per the Production volume below, or has not released AMBAC as per 7.1 (c), above, AMBAC shall be permitted to use ARIS for all applications that shall have been developed by AMBAC, subject to the Royalty schedule of 7.1 (c). Calendar Year Production Volume ------------- ----------------- 2000 [ ] 2001 [ ] 2002 [ ] 7.2 PATENTS. CDT shall retain all patent rights to the ARIS and any patents, applications or licenses as of the date of this agreement. Any patent or improvement that is independently developed by either company during the term of this Agreement and specifically related to the ARIS, shall be the Intellectual Property of the developer and said developer will grant non-exclusive, no-cost, worldwide cross license to such intellectual property for use on the ARIS to the non-developing party, subject to terms under 7. 1. ARTICLE VIII TERM AND TERMINATION OF AGREEMENT 8.1 TERM. The term of this Agreement shall continue until 3 November 2002, unless terminated earlier in accordance with this Article. Nothing in this Article shall be interpreted as precluding this Agreement from being renewed and extended beyond the Termination Date. 8.2 TERMINATION FOR BANKRUPTCY. Either party shall have the right, at its option, to terminate this Agreement by giving notice to the other party at least ten (10) business days before the termination is to be effective, if: (1) The other party shall be adjudicated or become bankrupt or insolvent as that term is defined in 11 USC Section 101(32); (2) The other party shall file a voluntary petition under any bankruptcy, reorganization, or insolvency law; (3) The other party shall apply for or consent to appointment of a trustee or receiver to take possession of all or substantially all its assets; (4) The other party shall consent to, or shall file an answer admitting the jurisdiction of the court and the material allegations of, an involuntary petition filed under any bankruptcy, reorganization, or insolvency law; (5) Any proceedings of bankruptcy, reorganization, or insolvency shall be commenced against the other party and not be dismissed within 30 calendar days after commencement; (6) The other party shall make any assignment for the benefit of creditors, or other arrangement or composition under any laws for the benefit of insolvent's; (7) Any order shall be entered under any bankruptcy, reorganization, or insolvency law of any jurisdiction, and shall not be dismissed or stayed within thirty (30) calendar days after its entry (a) approving an involuntary petition seeking an arrangement with the creditors of the other party, (b) approving an involuntary petition seeking reorganization, or (c) appointing any receiver or trustee of all or a substantial part of the property of the other party; (8) A trustee or receiver shall be appointed to take possession of all or substantially all assets of the other party and shall not be dismissed within thirty (30) calendar days after appointment; or (9) Any writ of attachment, garnishment, or execution shall be levied against all or substantially all assets of the other party, or all or substantially all assets of the other party shall be subject to any attachment, garnishment, execution, or other judicial seizure, and shall not be removed, released, or bonded within thirty (30) calendar days after the date of the attachment, garnishment, execution, or other judicial seizure. 8.3 TERMINATION BY MUTUAL AGREEMENT. This Agreement shall terminate upon written agreement of all parties to this Agreement to terminate. The Termination shall be effective upon the date the Termination is signed or as may be mutually agreed. ARTICLE IX RIGHTS AFTER TERMINATION 9.1 EFFECT OF TERMINATION. Upon termination or expiration of this Agreement each party shall: (a) Return to the other party all Proprietary information; and (b) Return all Promotional Material. 9.2 OPEN PURCHASE ORDERS. AMBAC shall promptly complete and deliver all Purchase Orders which are open at the date of termination or expiration of this Agreement. 9.3 SURVIVAL. The following Articles shall survive the Termination of this Agreement. ARTICLE X INDEMNIFICATION; ARTICLE XI INTELLECTUAL PROPERTY- CONFIDENTIALITY; ARTICLE VI DEVELOPMENT COST SHARING; ARTICLE VII ROYALTY PAYMENTS AND LICENSE FEES. ARTICLE X INDEMNIFICATION 10.1 In the event that a product liability action or proceeding is brought against AMBAC or CDT related to ARIS or any application using the ARIS, each party shall as promptly as practical, forward to the other party every summons and complaint and hereby gives the other party the right to inspect every other court document received by it, and if the other party is a named party in the action, in no event shall the party take action of settlement without the prior notification of the other party of such proposed action followed by a reasonable period of time, not to exceed ten (10) calendar days to allow the other party to respond to such notification. 10.2 The parties shall promptly notify the other of any potential performance or safety-related defect in the ARIS or in any application that may use the ARIS in any manner whatsoever. ARTICLE XI INTELLECTUAL PROPERTY - CONFIDENTIALITY 11.1 Each party (the "Recipient Party") acknowledges that the other party (the "Disclosing Party") may disclose Information to the Recipient Party which is reduced to writing and marked proprietary or confidential within thirty (30) days of disclosing to the Disclosing Party or other parties ("Proprietary Information"). The Recipient Party agrees to maintain in confidence and not to disclose to any party or reproduce or use except for the purpose of this Agreement any such Proprietary Information, except with the written consent of the Disclosing Party. The foregoing restriction on use and disclosure of the Proprietary Information will not apply: (a) If the information was generally available to the public at the time of disclosure; (b) If the information is already a written record in Recipient Party's files prior to its receipt, under circumstances permitting its disclosure by Recipient Party to other; (c) If Recipient Party at any time lawfully obtains said Information from a third party under circumstances permitting its disclosure by Recipient Party to others; (d) If the Information becomes part of the public domain through no fault of Recipient Party; or (e) After two (2) years from the termination of this Agreement. Upon any termination of this Agreement all proprietary Information in the Recipient Party's possession shall be returned to the Disclosing Party at the request of Disclosing Party. ARTICLE XII TECHNICAL ASSISTANCE 12.1 CDT shall provide at its sole discretion any technical assistance, information and or materials that may be reasonably required for servicing, operating, and installing the ARIS. 12.2 CDT shall determine when the ARIS may be marketed and/or sold. 12.3 CDT, the OEM (if any), distributor or licensed agent, will be responsible for the cost of any application engineering that may be required for the application of the ARIS to internal combustion engines or boilers or heaters or furnaces. 12.4 CDT may request AMBAC to perform certain application engineering tasks, at a cost to be negotiated. ARTICLE XIII MISCELLANEOUS 13.1 FORCE MAJEURE. Any delay or failure of either party to perform its obligations hereunder shall be excused if, and to the extent that it is caused by an event or occurrence beyond the reasonable control of the party and with its fault or negligence, such as, by way of example and not by way of limitation, acts of God, actions by a governmental authority (whether valid or invalid), fires, floods, windstorms, explosions, riots, natural disasters, wars, sabotage, labor problems (including lockouts, strikes and slowdowns), inability to obtain power, material, labor equipment or transportation, or court injunction or order; provided that written notice of such delay (including the anticipated duration of the delay) shall be given by the affected party to the other party within ten (10) days. During the period of such delay or failure to perform by AMBAC, CDT at its option, may have the services to be performed by AMBAC hereunder performed by another party without liability to AMBAC. If requested by CDT, AMBAC shall, within ten (10) days of such request, provide adequate assurances that the delay shall not exceed thirty (30) days. If the delay lasts more than thirty (30) days or AMBAC does not provide adequate assurance that the delay will cease within thirty (30) days, CDT may immediately cancel this Agreement without liability. In the event such a period is experienced by CDT, wherein CDT is unable for reasons as stated above, to accept delivery on ordered and scheduled shipments, AMBAC, at its option, may produce such ordered and scheduled material, storing such undelivered material in a suitable location of its choice, invoking an inventory carrying charge calculated as Sales Price X 10% / 365 days X number of days beyond 30 days delay in shipment. 13.2 RESERVED 13.3 RESERVED 13.4 ADVERTISING. AMBAC shall not, without first obtaining the written consent of CDT, in any manner advertise or publish the fact that AMBAC has contracted to furnish the goods herein ordered, or use any trademarks or trade names of CDT in AMBAC's advertising or promotional materials. Neither party shall, without first obtaining the written consent of the other party, advertise or publish, in any manner, that AMBAC has contracted with CDT to furnish the goods which are the subject matter of this Agreement. CDT shall not advertise the product until authorized in writing by AMBAC, which mutual authorizations shall not be unreasonably withheld. 13.5 RELATIONSHIP OF PARTIES. CDT and AMBAC are independent contracting parties and nothing herein contained shall be construed to create a partnership, employment, joint venture or agency, and neither party shall be liable for the debts, obligations or responsibilities of the other. It is expressly agreed that neither party shall have any authority to assume or create any obligation or responsibility, express or implied, on behalf of or in the name of the other party or to bind the other party in any manner. 13.6 NOTICES. Any notice permitted or required under this Agreement shall be deemed to be given when sent if such notice shall be in writing and personally served, mailed by registered or certified air mail, postage prepaid evidenced by post office receipt of said registration or certification, or transmitted by electronic facsimile transfer with written confirmation personally served or mailed as heretofore provided to the addresses of the parties as follows: To CDT at: Clean Diesel Technologies, Inc. Attn.: Jim Valentine, TJ Tarabuski 300 Atlantic Street Suite 702 Stamford, CT 06901-3522 (203) 327-7050 To AMBAC at: AMBAC International Attn.: Gary Mistalski 103 Myron Street West Springfield, MA 01089 (413) 785-6861 Any party may change its address for purposes of this notice provision by giving the other parties written notice of the new address in the manner set forth above. 13.7 SUCCESSORS OF PARTIES. This Agreement shall be binding on, and shall inure to the benefit of the parties to it and their respective heirs, legal representatives, successors, and assigns. 13.8 ASSIGNMENT. Neither party shall assign or delegate its obligations under this Agreement without the others prior written consent and any attempt to make such an assignment or delegation without such consent shall be void. 13.9 NO IMPLIED WAIVER. The failure of either party at any time to require performance by the other party of any provision of this Agreement shall not in any way affect the right to require such performance at any time thereafter nor shall the waiver by of either party of a right hereunder or a breach of any provision of this Agreement constitute a continuing waiver or waiver of a right or similar breach. No waiver shall be binding unless executed in writing by the party making the waiver. 13.10 SEVERABILITY. If any term or provision hereof is declared void or unenforceable or becomes unlawful in its operation under any statue, regulation, ordinance, executive order or other rule of law, such term or provision shall be deemed reformed or deleted, but only to the extent necessary to comply with such statute, regulation, ordinance, order or rule, and the remaining provisions of this Agreement, which shall continue to be binding and remain in full force and effect. 13.11 GOVERNING LAW; ARBITRATION. This Agreement, its interpretation and any disputes or controversies concerning the transactions contemplated herein shall be governed by the internal substantive laws of Delaware and determined in final, binding arbitration before a single arbitration under the then rules of commercial arbitration of the American Arbitration Association (the "AAA"), in Stamford, Connecticut, if initiated by AMBAC, and in West Springfield, Massachusetts, if initiated by CDT. The arbitrator shall have no power to award consequential, statutory or punitive damages. Any award in arbitration may be entered in and enforced by any court having jurisdiction. Prior to commencement of arbitration proceedings, the parties shall participate in a period of mediation of not more than sixty (60) days under AAA rules. 13.12 HEADINGS. The headings of the articles and paragraphs of this Agreement have been herein only to facilitate reference and shall not be given any significance whatsoever in the construction and interpretation of this Agreement. 13.13 EXHIBITS APPENDED. There have been approved, appended, and made a part of this Agreement the following exhibits: "A" Non-Disclosure Agreement; "B", CDT Patents; "C" Scope of ARIS Development Program. In the event of any conflict, the provisions set forth in the body of this Agreement shall be deemed paramount. 13.14 ENTIRE AGREEMENT. This Agreement, together with any attachments, exhibits, or supplements, specifically referencing in this Agreement, constitutes the entire Agreement between CDT and AMBAC pertaining to the subject matter hereof. All prior and contemporaneous agreements, representations, negotiations and understanding of the parties, oral or written, are hereby superseded and merged herein. Each party to this Agreement expressly warrants and represents to the other that it has not relied upon any representation, inducement, promise or agreement, oral or otherwise, by any party, or anyone acting on behalf of any party, which is not embodied herein. No modification, waiver or amendment of this Agreement shall be binding unless fully executed in writing and signed by an authorized representative of each of the parties hereto. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed, in duplicate, by their duly authorized representatives. DATED: 18TH DECEMBER 1997 CLEAN DIESEL TECHNOLOGIES, INC. AMBAC INTERNATIONAL BY: /S/JIM VALENTINE BY: /S/GARY MISTALSKI JIM VALENTINE GARY MISTALSKI TITLE: CHIEF OPERATING OFFICER TITLE: GENERAL MANAGER WEST SPRINGFIELD Exhibit A to Agreement CONFIDENTIALITY AGREEMENT This Confidentiality Agreement (hereinafter referred to as ("Agreement") is entered into by and between CLEAN DIESEL TECHNOLOGIES, INC. 300 Atlantic Street Suite 702 Stamford, CT 06901-3522 USA (hereinafter referred to as "CDT") and AMBAC INTERNATIONAL 103 Myron Street West Springfield, Massachusetts 01089 (hereinafter referred to as "AMBAC") both parties together hereinafter referred to as "Parties" or individually hereinafter referred to as "Party." PREAMBLE WHEREAS, CDT is in the business of designing, developing, and marketing urea based selective catalytic reduction systems (SCR) and related devices and reagents for the transportation and stationary power industries; and WHEREAS, AMBAC amongst others is engaged in the business of design, developing, manufacturing, sale, and distributing diesel fuel injection products; and WHEREAS, the Parties are interested to evaluate a business relationship in which CDT develops (independently or jointly with AMBAC), designs, and supplies to AMBAC certain selective catalytic reduction concepts, ideas, and strategies which utilize AMBAC fuel injection equipment as is or with slight variation, and CDT intends to market such systems; and WHEREAS, the Parties are interested, but not obligated to exchange certain Information (defined herein) pertinent and necessary to the conduct of the Party's stated business relationship. Such "Information" may take the form of drawings, electronic data, product or program descriptions; layouts or renderings; timing or planning schedules; samples, parts, components or systems; cars, models or prototypes; development, procedures, specifications or standards; visual or audiovisual media; and/or any other type of information, inclusive business or operational secrets; methods or inventions; and WHEREAS, the receiving Party agrees to maintain the confidentiality of such Information. NOW THEREFORE, the Parties hereto agree to the following: 1. The purpose of this Agreement is to avoid transfer and disclosure of any of the Information so obtained/gathered and of further developments and copies thereof, to any third party, when the Information has been obtained - in the form of hard copies and clearly marked as confidential or as legally protected or - in any other form; e.g., data communication line or in any verbal discussion and stated as confidential or legally protected by the disclosing Party in a written form within 15 working days after disclosure. Information received in this way shall, within the above period, be treated as confidential by the receiving Party. 2. Such Information must be used exclusively for the purposes set out in the provisions of the preamble. It shall be made accessible to the personnel of the receiving Party only insofar as required for such purposes, and shall be disclosed to third parties only after receipt of the prior written consent of the Party initially providing the Information. 3. Subsequent to obtaining prior written consent from the disclosing Party to transfer/disclose certain limited Information to a specified third party for a clearly defined purpose, the receiving party may forward it only after receipt of written confirmation from such third party that it will avoid any further transfer/disclosure to any other third party and will use the Information only for such defined purpose and in accordance with the terms of this Agreement. 4. The obligation of nondisclosure is not applicable to Information, - which is or becomes generally known other than by violation of this Agreement or - which is made available to the receiving Party by a third party, who was not subject to an obligation of nondisclosure and other than by violation of this Agreement or - of which the receiving Party can prove that it was already in possession prior to the effective date of this Agreement or of which it can prove independent development after the effective date. 5. The Receiving Party of any Information hereunder agrees to handle Information with the same care it uses to avoid disclosure, publication, or circulation of any other type of its own information, documents, drawings, electronic data, descriptions, layouts, renderings, schedules, samples, parts, components, systems, models, prototypes, developments, procedures, specifications, standards, visual/audiovisual media, methods, business/operational secrets, or inventions, which are confidential. 6. Neither of the Parties will derive rights from Information received, even if such rights are legally justified. All rights are reserved to each of the Parties, particularly insofar as the right to obtain patents and utility patents for their own inventions is concerned. Rights to Information disclosed are limited to such rights explicitly agreed herein, additional rights such as license right, copyright, right of use and others are not granted, regardless of whether any valid patent rights exist or not. 7. a. An obligation to disclose Information is not agreed herein. b. Nothing contained herein shall be construed as granting any intellectual property rights except as expressly provided herein. c. Nothing in this Agreement shall be construed as obligating either Party to enter into a business arrangement with the other. Any such arrangement, and the terms and conditions thereof shall be agreed upon separately. d. Nothing in this Agreement shall preclude either Party from entering into a similar relationship with a third party. 8. This Agreement becomes effective when it is executed by both Parties to this Agreement. It will expire three (3) years after the last date of execution, unless this Agreement is previously terminated by either Party hereto by giving the other Party at least three (3) months' advance notice of such termination in writing. 9. With respect to any Information disclosed by either Party hereto to the other Party during the term of this Agreement, the obligations and restrictions set forth in clauses I - 5 above against the transfer, disclosure, and use of such Information shall end seven (7) years after disclosure of such Information and shall survive any expiration or termination of this Agreement prior to the end of such period. 10. Upon request of the disclosing Party, any Information received shall be returned without undue delay at any time such a request has been received and automatically if the Agreement has been terminated. Any transcriptions, copies, records, and further developments thereof shall be destroyed or erased from any Data Processing system or media. Evidence of compliance hereof shall be provided by the receiving party upon written request of the disclosing Party. 11. All agreements between the Parties are Included in this Agreement. Additional verbal agreements have not been made. Changes of and supplements to this Agreement must be agreed to in writing by both Parties to become effective, including any deviation from the aforementioned form requirement. 12. If single provisions of this Agreement shall be or become invalid or unenforceable, the remaining provisions shall continue in full force and effect. The parties shall in this event be obliged to accept as the replacement for the invalid provision a valid provision which corresponds as far as possible to the spirit and the purpose of the invalid provision. 13. The parties will work together in good faith to remedy any difficulties which may arise in connection therewith. In the event disputes do arise in connection with the Agreement which the Parties are unable to settle amicably, the dispute shall be finally settled by arbitration in accordance the then effective Rules of The American Arbitration Association by one arbitrator appointed in accordance with such Rules. The place of proper venue is Hartford, Connecticut, unless otherwise agreed to in writing by the Parties. 14. This Agreement is executed in two counterparts, each of which shall be deemed an original. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement through their duly authorized personnel on the dates set forth below. Each party received one original version of this Agreement. For: For: CLEAN DIESEL TECHNOLOGIES, INC. AMBAC INTERNATIONAL Name: Name: -------------------------- -------------------------- Title: Title: -------------------------- -------------------------- Date: Date: -------------------------- -------------------------- Exhibit B to Agreement (A) U. S. PATENT APPLICATION Reducing NOx Emissions from an Engine by Temperature-Controlled Urea Injection for Selective Catalytic Reduction J. D. Peter-Hoblyn, E. N. Balles, J. E. Hofmann, T. J. Tarabulski (Application submitted April 2, 1997) (B) U. S. PATENT APPLICATION Reducing NOx Emissions from an Engine While Maximizing Fuel Economy T. J. Tarabulski (Application submitted April 4, 1997) Exhibit C to Agreement SCHEMATIC DIAGRAM OF ARIS(TM) EX-10.Q 15 Exhibit 10q SUPPLEMENTAL AGREEMENT TO BRIDGE LOAN AGREEMENT Supplemental Agreement dated as of July 10, 1999 ("this Agreement") to Bridge Loan Agreement dated as of May 8, 1998 (the "Loan Agreement") among Clean Diesel Technologies, Inc., a Delaware corporation (the "Company"), the Lenders under the Loan Agreement and the Lenders who have agreed to become parties hereto as set forth on the attached signature pages, (all such Lenders being referred to collectively herein as the "Lenders"). Article 1.0 Definitions; Terms and Conditions 1.1 Definitions; Terms and Conditions: Rights and Obligations. The definitions and the terms and conditions set forth in the Loan Agreement shall be applicable to this Agreement as if fully set forth herein and, unless expressly set forth herein to the contrary, the rights and obligations of the Company and the Lenders in this Agreement shall be identical to those set forth in the Loan Agreement. Article 2.0 Supplemental Loan 2.1 Additional Loan; Purpose. The Loan Agreement is hereby amended to provide that the original principal amount of the Loan of One Million Two Hundred Fifty Thousand Dollars (U.S. $1,250,000.00) shall be increased and supplemented by an addition to the Loan of up to Seven Hundred Fifty Thousand Dollars (U.S.$750,000.00) (the "Supplemental Amount") for a total aggregate amount of Loan of Two Million Dollars (U.S. $2,000,000.00) (the "Total Loan"). The purpose of the Supplemental Amount shall be the same as set forth in the Loan Agreement. 2.2 Supplemental Lending. The Lenders by their execution of signature pages to this Agreement agree to lend to the Company and the Company agrees to borrow the amounts set forth on such signature pages hereto as each Lender's respective Commitment hereunder and the Company shall deliver and the Lenders shall accept a Note in form similar to Exhibit B of the Loan Agreement evidencing the lending of each such Commitment. Article 3.0 Consents; Security Agreement and Security Interest 3.1 Consents. The several Lenders under the Loan Agreement consent to the lending by the Lenders hereunder of the Supplemental Amount and to the participation by the Lenders hereunder in the benefits of the Loan Agreement and Security Agreement, as amend, for so long as the Loan and the Total Loan shall be outstanding. 3.2 Amendment of Security Agreement: Supplemental Financing Statement. The Company and the Lenders agree that the lien created by the Security Agreement, as amended, shall secure the Total Loan actually made for so long as it shall be outstanding and the Security Agreement be, and it hereby is amended, to provide that the Loan as defined therein shall be a sum equal to the Total Loan actually made and that a supplemental financing statement be filed to reflect such amendment. 3.3 Amendment of Conversion Limit. The limit of conversion of the Notes to Series A Convertible Preferred Stock, par value $0.05 per share, of the Company (the "Series A Stock") set forth in ss.3.1 of the Loan Agreement be, and it hereby is amended, to read 4,000. 3.4 Waiver of Conversion. The Lenders hereby waive their right to voluntarily convert the Notes to Series A Stock until the earlier of (1) January 31, 1999 or (2) completion by the Company of a private or public sale of equity securities, including rights to acquire securities, 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 U.S. $1,750,000.00. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental 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/ James M. Valentine ---------------------- (Vice) President PLATINUM PLUS, INC. By: /s/ Charles W. Grinnell ----------------------- (Vice) President S G ASSOCIATES LIMITED As Agent for the Remaining Lenders under Loan Agreement By: ----------------------- Managing Director The undersigned by its representative thereunto duly authorized does hereby execute and deliver this Supplemental Agreement dated as of July 10, 1998 to Bridge Loan Agreement dated as of May 8, 1998 and designates the amount set forth below as its Commitment under such Agreement. Amount of Commitment: $ 150,000 (one hundred and fifty thousand US dollars) (Name of Lender) POSITIVE SECURITIES LIMITED 31 The Parade, St. Helier Jersey JE2 3QQ, Channel Islands By: ------------------------ Authorized Agent EX-10.R 16 Exhibit 10r SECOND SUPPLEMENTAL AGREEMENT TO BRIDGE LOAN AGREEMENT Second Supplemental Agreement dated as of August 3, 1998 to Bridge Loan Agreement dated as of May 8, 1998 (the "Loan Agreement") among Clean Diesel Technologies, Inc., a Delaware corporation (the "Company"), the Lenders under the Loan Agreement and the Lenders who have agreed to become parties thereto pursuant to the Supplemental Bridge Loan Agreement dated as of July 10, 1998 (collectively, the "Lenders"). Article 1.0 Parri Passu Status with Other Convertible Preferred Stock 1.0. The undersigned Lenders hereby acknowledge and agree with the Company and one another that, if and when any Lenders' Bridge Loan Note is converted into Shares of Series A Convertible Preferred Stock, such Series A convertible Preferred Stock will be treated parri passu in all respects, upon a liquidation, dissolution or winding up of the Company, with ( i) the Series B Convertible Preferred Stock that the Company proposes to issue and (ii) any other class or series of Preferred Stock issued by the Company which by its terms will be treated pari passu with the Series A Convertible Preferred Stock and which is approved by the holders of at least 60% of the shares of Series A Convertible Preferred Stock pursuant to Section 13(c)(ii) of the Certificate of Designation relating to the Series A Convertible Preferred Stock. IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental 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/ C.W. Grinnell ----------------- (Vice) President PLATINUM PLUS, INC. By: /s/ S.M. Schecter ----------------- (Vice) President S G ASSOCIATES LIMITED As Agent for the Remaining Lenders under the Loan Agreement and the Supplemental Loan Agreement. By: /s/ D.R. Gray ------------- Managing Director EX-10.S 17 Exhibit 10s EMPLOYMENT AGREEMENT AGREEMENT made as of the date set forth below by and between Jeremy D. Peter-Hoblyn of Lamellen, Tudy, St. Bodmin, Cornwall, England ("Employee") and Clean Diesel Technologies, Inc., a Delaware corporation (the "Company"), having a place of business at Suite 702, 300 Atlantic Street, Stamford, CT 06901. WHEREAS, the Company desires certain services for itself and Employee desires to contract with the Company to perform such services; NOW THEREFORE, in consideration of the mutual covenants hereinafter recited, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Term: This Agreement shall commence on the date of grant to Employee of a United States L-1 visa and shall continue thereafter until terminated by either party as provided below. 2. Scope of Work; Title: Employee shall be appointed as the President and Chief Executive Officer of the Company. The Company shall also during the term of this agreement cause Employee annually to be nominated as a director of the Company. In such employment, Employee shall on a full-time basis direct all of his efforts toward the performance of such duties as shall be assigned to him by the Board of Directors of the Company acting through its Chairman. "Full time" shall mean no other substantial outside business activities. 3. Salary; Benefits: The Company agrees to cause Employee to be paid for his services hereunder at the rate of US$250,000.00 per year. Employee to be paid such amounts by the Company according to its normal and customary procedures from time to time in effect but not less often than monthly. Employee shall be entitled to participate from time to time in such benefit programs, or equivalent, as shall have heretofore been extended to him by the Company's predecessor, Fuel-Tech N.V. or its affiliates. Additionally, the Company shall expend up to $50,000 for the annual premium for a U.K. based annuity for you (less such amounts as you may receive from the Company's 401K or profit sharing plans). This agreement may not be construed to prevent the Company from rescinding any such other benefit programs for Employee so long as such rescission applies to officers as a class. 4. Expenses: Employee shall be reimbursed by the Company for all ordinary and necessary out-of-pocket expenses incurred by Employee in performing his services hereunder. Such expenses to be reported from time-to-time by Employee on the Company's customary forms of expense report and submitted for approval to the Chairman of the Board of the Company. 5. Termination of Employment: (a) Just Cause. The Company may at any time terminate this agreement for Just Cause. Just Cause shall mean conviction of the employee under, or a plea of guilty by the Employee to, any charge which would constitute a felony under the laws of Connecticut; any instance of fraud, embezzlement, self-dealing, insider trading or similar malfeasance with respect to the Company; or substance abuse which shall, in the sole discretion of the Board of Directors of the Company, limit Employee's performance of his duties. (b) Disability. The Company may terminate this agreement upon the physical disability of Employee, if the Directors shall determine that, as a result of physical disability Employee has for a continuous period of six months been substantially absent from his customary place of work and unable to perform his customary duties. (c) At Will. Either of Employee or Company may terminate this agreement on written notice one to the other. Where Employee shall terminate this agreement by resigning his employment, he shall provide twelve month's written notice thereof to Company. Where Company shall terminate this agreement, Company shall provide salary and benefit continuation (in the amount and of the nature then enjoyed by Employee) to the Employee month-to-month for a period of one year, or until Employee shall sooner find other substantially comparable employment. 6. Discoveries and Inventions: (a) All patentable and unpatentable inventions, discoveries and ideas which are made or conceived by Employee during the term of his employment, and which are based upon or arise out of Employee's services hereunder ("Developments") are or shall become the Company's property. Employee agrees to disclose promptly to the Company each such Development and, upon the Company's request and at its expense, Employee will assist the Company, or its designee, in making application for Letters Patent in any country in the world. Employee further agrees to execute all papers and do all things which may be necessary or advisable to prosecute such applications, and to transfer to and vest in the Company, or its designee, all the right, title and interest in and to such Developments, and all applications for patents and Letters Patent issued thereon. If for any reason Employee is unable to effectuate a full assignment of any such Development, Employee agrees to transfer to the Company, or its designee, Employee's transferable rights, whether they be exclusive or non-exclusive, or as a joint inventor or partial owner of the Development. No action or inaction by the Company shall in any event be construed as a waiver or abandonment of its rights to any such Development except an instrument in writing assigned by an authorized official of the Company by which it specifically states it intends to be bound in such respect. 7. Proprietary Information: Employee will not at any time, either during the term of this Agreement or thereafter, disclose to others, or use for his own benefit or the benefit of others, any of the Developments or any confidential, proprietary or secret information owned, possessed or used by the Company or any of its subsidiaries or affiliates (collectively, "Proprietary Information"), which, by way of illustration, but not limitation, includes devices, structures, machines, data, know-how, business opportunities, marketing plans, forecasts, unpublished financial statements, budgets, licenses and information concerning prices, costs, employees, customers and suppliers. Employee's undertakings and obligations under this Paragraph 7 will not apply to any Proprietary Information which: (a) is or becomes generally known to the public through no action on the part of the Employee or (b) is generally disclosed to third parties by the Company or any of its subsidiaries or affiliates without restriction on such third parties. Upon termination of this Agreement or at any other time upon request, Employee will promptly deliver to the Company all notes, memoranda, notebooks, computer disks, drawings, designs, three dimensional figures, photographs, layouts, diagrams, records, reports, files and other documents (and all copies or reproductions of such materials) in his possession or under his control, whether prepared by him or others, which contain Proprietary Information. Employee acknowledges that this material is the sole property of the Company or a subsidiary or an affiliate of the Company. 8. Non-Competition: Following the termination of Employment for any reason, Employee agrees that Employee will not recruit, entice, induce or encourage any of the Company's other employees or consultants to engage in any activity which, were it done by Employee, would violate any provision of this Agreement. For a two-year period after termination of employment Employee will not accept employment or provide consulting services where such employment or services reasonably will involve the use of Proprietary Information for the benefit of others or the divulging of Proprietary Information. During such two-year period and before performing any services for others, as employee or consultant or otherwise, in the actual lines of business in which Employee has performed services for the Company, its subsidiaries or affiliates, Employee will notify the Company of the general nature of the services to be performed and the party for whom they will be performed and Employee will, also, prior to undertaking such service or employment inform the other party of the existence of this covenant in this Agreement. Employee admits that breach of his covenants hereunder regarding the Company's Proprietary information is likely to cause serious economic injury to the Company. 9. Assignment: This Agreement may not be assigned by either party without the prior written consent of the other party. 10. Continuing Obligations: The Employee's covenants set forth in Sections 6, 7, and 8 above shall continue according to their terms following the termination of this Agreement, and, notwithstanding the provision for arbitration below, such covenants may at any time be judicially enforced by the Company by injunction. 11. Governing Law; Arbitration. This agreement, any and all disputes hereunder or the interpretation hereof or any claim by Employee against the Company shall be governed by and interpreted under Connecticut procedural and substantive law, and thirty (30) days after notice, shall be determined solely by arbitration before a single arbitrator in Stamford, Connecticut, under the employment rules of the American Arbitration Association in effect as of the date of this agreement or otherwise agreed by the parties. The arbitrator shall have no power or authority to award exemplary or punitive damages or any statutory or compounded damages and shall render his award in writing setting forth the basis of his determination. The award of the arbitrator shall be based on the terms of this agreement and the law. Such award shall be final and binding and may be entered into and enforced in any Court having jurisdiction. 12. Exclusivity: The rights of Employee against the Company are not limited in any way by this Agreement, and are not intended to be set forth exclusively hereunder; provided, however, that any and all of Employee's remedies with respect to such rights, shall be limited solely to those available in arbitration hereunder. Employee's rights to salary continuation are in lieu of any severance benefits provided under policies of the Company from time to time in effect. 13. Waiver. The remedies of Employee hereunder have been entered into as a matter of bargain and to the extent any provision of this agreement is or may be construed as a waiver of employee's remedies, Employee does hereby waive such remedies. 14. Notices. All notices hereunder shall be in writing and shall be deemed effective upon receipt, if hand delivered or if sent by facsimile and acknowledged electronically and confirmed by an original confirmation copy mailed first class postage prepaid. Notices by mail or air-courier service shall be deemed effective upon receipt, if sent first class postage prepaid return receipt requested or by air-courier and the sender shall obtain the signed receipt or confirmation of delivery by the courier service. Otherwise, notices shall be deemed effective as of the fifth day after transmission. In each case notices shall be transmitted to the address first given above or such other address as may be given by notice as provided herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EMPLOYEE CLEAN DIESEL TECHNOLOGIES, INC. /s/ Jeremy D. Peter-Hoblyn /s/ Charles W. Grinnell - --------------------------------- ----------------------------------- Jeremy D. Peter-Hoblyn Charles W. Grinnell, Vice President Date: December 2, 1996 Date: December 2, 1996 -------------------------- ---------------------------- EX-10.T 18 Exhibit 10t EMPLOYMENT AGREEMENT AGREEMENT made as of the date set forth below by and between James M. Valentine, 480 Hemlock Road, Fairfield, CT 06430 ("Employee") and Clean Diesel Technologies, Inc., a Delaware corporation (the "Company"), having a place of business at Suite 702, 300 Atlantic Street, Stamford, CT 06901. WHEREAS, the Company desires certain services for itself and Employee desires to contract with the Company to perform such services; NOW THEREFORE, in consideration of the mutual covenants hereinafter recited, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Term: This Agreement shall commence on August 1, 1996, and shall continue thereafter until terminated by either party as provided below. 2. Scope of Work: Title: Employee shall be appointed as the Executive Vice President and Chief Operating Officer of the Company. The Company shall also during the term of this agreement cause Employee annually to be nominated as a director of the Company. In such employment, Employee shall on a full-time basis direct all of his efforts toward the performance of such duties as shall be assigned to him by the President and Chief Executive Officer. "Full time" shall mean no other substantial outside business activities. 3. Salary: Benefits: The Company agrees to cause Employee to be paid for his services hereunder at the rate of US$220,000.00 per year. Employee to be paid such amounts by the Company according to its normal and customary procedures from time to time in effect but not less often than monthly. Employee shall be entitled to participate from time to time in such benefit programs as the Company may customarily extend to its officers as a class. This agreement may not be construed to prevent the Company from rescinding other benefit programs for Employee so long as such rescission applies to officers as a class. 4. Expenses: Employee shall be reimbursed by the Company for all ordinary and necessary out-of-pocket expenses incurred by Employee in performing his services hereunder. Such expenses to be reported from time to time by Employee on the Company's customary form of expense report and submitted for approval of the Company. 5. Termination of Employment: (a) Just Cause. The Company may at any time terminate this agreement for Just Cause. Just Cause shall mean conviction of the employee under, or a plea of guilty by the Employee to, any charge which would constitute a felony under the laws of Connecticut; any instance of fraud, embezzlement, self-dealing, insider trading or similar malfeasance with respect to the Company; or substance abuse which shall, in the sole discretion of the Board of Directors of the Company, limit Employee's performance of his duties. (b) Disability. The Company may terminate this agreement upon the physical disability of Employee. If the Directors shall determine that, as a result of physical disability Employee has for a continuous period of six months been substantially absent from his customary place of work and unable to perform his customary duties. (c) At Will. Either of Employee or Company may terminate this agreement on written notice one to the other. Where Employee shall terminate this agreement by resigning his employment, he shall provide twelve month's written notice thereof to Company. Where Company shall terminate this agreement, Company shall provide salary and benefit continuation (in the amount and of the nature then enjoyed by Employee) to the Employee month-to-month for a period of one year, or until Employee shall sooner find other substantially comparable employment. 6. Discoveries and Inventions: (a) All patentable and unpatentable inventions, discoveries and ideas which are made or conceived by Employee during the term of his employment, and which are based upon or arise out of Employee services hereunder ("Developments") are or shall become the Company's property. Employee agrees to disclose promptly to the Company each such Development and, upon the Company's request and at its expense, Employee will assist the Company, or its designee, in making application for Letters Patent in any country in the world. Employee further agrees to execute all papers and do all things which may be necessary or advisable to prosecute such applications, and to transfer to and vest in the Company, or its designee, all the right, title and interest in and to such Developments, and all applications for patents and Letters Patent issued thereon. If for any reason Employee is unable to effectuate a full assignment of any such Development, Employee agrees to transfer to the Company, or its designee, Employee's transferable rights, whether they be exclusive or non-exclusive, or as a joint inventor or partial owner of the Development. No action or inaction by the Company shall in any event be construed as a waiver or abandonment of its rights to any such Development except an instrument in writing assigned by an authorized official of the Company by which it specifically states it intends to be bound in such respect. 7. Proprietary Information: Employee will not at any time, either during the term of this Agreement or thereafter, disclose to others, or use for his own benefit or the benefit of others, any of the Developments or any confidential, proprietary or secret information owned, possessed or used by the Company or any of its subsidiaries or affiliates (collectively, "Proprietary Information"), which, by way of illustration, but not limitation, includes devices, structures, machines, data, know-how, business opportunities, marketing plans, forecasts, unpublished financial statements, budgets, licenses and information concerning prices, costs, employees, customers and suppliers. Employee's undertakings and obligations under this Paragraph 7 will not apply to any Proprietary Information which: (a) is or becomes generally known to the public through no action on part of the Employee or (b) is generally disclosed to third parties by the Company or any of its subsidiaries or affiliates without restriction on such third parties. Upon termination of this Agreement or at any other time upon request, Employee will promptly deliver to the Company all notes, memoranda, notebooks, computer disks, drawings, designs, three dimensional figures, photographs, layouts, diagrams, records, reports, files and other documents (and all copies or reproductions of such materials) in his possession or under his control, whether prepared by him or others which contain Proprietary Information. Employee acknowledges that this material is the sole property of the Company or a subsidiary or an affiliate of the Company. 8. Non-Competition: Following the termination of Employment for any reason, Employee agrees that Employee will not recruit, entice, induce or encourage any of the Company's other employees or consultants to engage in any activity which, were it done by Employee, would violate any provision of this Agreement. For a two-year period after termination of employment and before performing any services for others, as employee or consultant or otherwise, in the actual lines of business in which Employee has performed services for the Company, its subsidiaries or affiliates, Employee will notify the Company of the general nature of the services to be performed and the party for whom they will be performed and Employee will, also, prior to undertaking such service or employment inform the other party of the existence of this covenant in this Agreement Employee admits that breach of his covenants hereunder regarding the Company's Proprietary information is likely to cause serious economic injury to the Company. 9. Assignment: This Agreement may not be assigned by either party without the prior written consent of the other party. 10.Continuing Obligations: The Employee's covenants set forth in Sections 6, 7, and 8 above shall continue according to their terms following the termination of this Agreement, and, notwithstanding the provision for arbitration below, such covenants may at any time be judicially enforced by the Company by Injunction. 11.Governing Law: Arbitration. This agreement, any and all disputes hereunder or the interpretation hereof or any claim by Employee against the Company shall be governed by and interpreted under Connecticut procedural and substantive law, and thirty (30) days after notice, shall be determined solely by arbitration before a single arbitrator in Stamford, Connecticut, under the employment rules of the American Arbitration Association in effect as of the date of this agreement or otherwise agreed by the parties. The arbitrator shall have no power or authority to award exemplary or punitive damages or any statutory or compounded damages and shall render his award in writing setting forth the basis of his determination. The award of the arbitrator shall be based on the terms of this agreement and the law. Such award shall be final and binding and may be entered into and enforced in any Court having jurisdiction. 12.Exclusivity. The rights of Employee against the Company are not limited in any way by this Agreement, and are not intended to be set forth exclusively hereunder; provided, however, that any and all of Employee's remedies with respect to such rights, shall be limited solely to those available in arbitration hereunder. Employee's rights to salary continuation are in lieu of any severance benefits provided under policies of the Company from time to time in effect. 13.Waiver. The remedies of Employee hereunder have been entered into as a matter of bargain and to the extent any provision of this agreement is or may be construed as a waiver of employee's remedies, Employee does hereby waive such remedies. 14.Notices. All notices hereunder shall be in writing and shall be deemed effective upon receipt, if hand delivered or if sent by facsimile and acknowledged electronically and confirmed by an original confirmation copy mailed first class postage prepaid. Notices by mail air-courier service shall be deemed effective upon receipt, if sent first class postage prepaid return receipt requested or by air-courier and the sender shall obtain the signed receipt or confirmation of delivery by the courier service. Otherwise, notices shall be deemed effective as of the fifth day after transmission. In each case notices shall be transmitted to the address first given above or such other address as may be given by notice as provided herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EMPLOYEE CLEAN DIESEL TECHNOLOGIES, INC. /s/ James M. Valentine /s/ Jeremy D. Peter-Hoblyn - ------------------------------ ----------------------------------- James M. Valentine Jeremy D. Peter-Hoblyn, President Date: September 12, 1997 Date: September 12, 1997 ------------------------ ----------------------------- EX-12 19 Exhibit 12 CLEAN DIESEL TECHNOLOGIES, INC. STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (in thousands)
Years Ended December 31, March 31, --------------------------------------------------------- ------------------------- Period Period from from January 1, January 1, 1992 1992 through through December March 31, 1993 1994 1995 1996 1997 31, 1997 1997 1998 1998 ----------------------------------------------------------------------------------------------------------- Net loss(FN1) $131 $1,107 $2,024 $3,489 $3,764 $10,853 $961 $741 $11,594 Interest -- (1) (99) (60) (44) (204) (14) (11) (218) Interest portion of rental expenses -- -- -- (5) (5) (10) (1) (1) (11) ----------------------------------------------------------------------------------------------------------- Adjusted loss 131 1,106 1,925 3,424 3,715 10,639 946 729 11,365 COMPUTATION OF FIXED CHARGES Interest -- 1 99 60 44 204 14 11 218 Interest portion of rental expenses -- -- -- 5 5 10 1 1 11 ----------------------------------------------------------------------------------------------------------- Total fixed charges -- 1 99 65 49 214 15 12 229 ----------------------------------------------------------------------------------------------------------- Deficiency in income to cover fixed charges $131 $1,107 $2,024 $3,489 $3,764 $10,853 $961 $741 $11,594 =========================================================================================================== Pro Forma-Full Pro Forma-Minimum Subscription Subscription --------------------------------------------- December March December March 31, 1997 31, 1998 31, 1997 31, 1998 --------------------------------------------- Net loss(FN1) $3,764 $741 $3,764 $741 Interest expense (44) (11) (44) (11) Interest portion of rental expenses (5) (1) (5) (1) --------------------------------------------- Adjusted loss 3,715 729 3,715 729 COMPUTATION OF FIXED CHARGES Interest expense 44 11 44 11 Interest portion of rental expenses 5 1 5 1 Pro forma interest on bridge loans(FN2) -- -- 140 35 Series A Preferred stock dividends(FN3)(4) 154 39 -- -- Series B preferred stock dividends(FN3)(4) 408 102 220 55 --------------------------------------------- Total fixed charges 611 153 409 102 --------------------------------------------- Pro forma deficiency in income to cover combined fixed charges and preferred stock dividends $4,326 $882 $4,124 $831 ============================================= (1) Net loss does not include any income tax benefit or expense in any period. (2) Assuming Minimum Subscription of the Rights Offering, assumes that the Bridge Loan notes do not convert into Series A Preferred Stock and that interest is payable thereon at the rate of 10% per annum, as if they were outstanding as of the beginning of each respective period. (3) Assumes that dividends will be paid in kind and, accordingly, dividend rate is calculated at 11% per annum, as if the preferred stock was outstanding as of the beginning of each respective period. (4) The Preferred stock dividend requirement has not been adjusted for income taxes due to operating losses and tax loss carryforwards.
EX-23.A 20 Exhibit 23a Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 26, 1998, in the Registration Statement (Form S-1 No. 333-___) and related Prospectus of Clean Diesel Technologies, Inc. for the registration of Rights to purchase 50,000 shares of Series B Convertible Preferred Stock and the registration of such Series B Convertible Preferred Stock and the registration of 1,650,000 Common Shares. /s/ Ernst & Young LLP Stamford, Connecticut August 4, 1998 -----END PRIVACY-ENHANCED MESSAGE-----