-----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, W2azl2CJT0TVBsyUbTpdjkj/ep33Hc54vS4W4one9amy0tkPeTIVH4Qlse9jdRMG CtGycI8WWxlhH8JsiQXotQ== 0000950116-98-000678.txt : 19980331 0000950116-98-000678.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950116-98-000678 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: 10-K SEC ACT: SEC FILE NUMBER: 000-27432 FILM NUMBER: 98577606 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 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended: December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________________ to ____________________ Commission File No. 0-27432 CLEAN DIESEL TECHNOLOGIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 06-1393453 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification Number) Suite 702, 300 Atlantic Street Stamford, CT 06901 (203) 327-7050 ------------------------------------------------------------- (Address and telephone number of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock $0.05 par value per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Aggregate market value of the voting stock held by non-affiliates of the registrant based on the average bid and asked prices of March 18, 1998: $3,883,478. Indicate number of shares outstanding of each of the registered classes of common stock at March 18, 1998: 2,516,666 shares Common Stock, $0.05 par value. Documents incorporated by reference: Certain portions of the Proxy Statement for the annual meeting of stockholders to be held in 1998 described in Parts II, III and IV hereof are incorporated by reference in this report. ================================================================================ Part I Forward-Looking Statements Statements in this Form 10-K which are not historical facts, so-called "forward-looking statements," are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company's filings with the Securities and Exchange Commission. See Item 1. "Business --- Risk Factors of the Business" and also Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Item 1. Business General The Company ("CDT"), a Delaware corporation with a principal place of business at 300 Atlantic Street, Stamford, Connecticut 06901, is a development stage specialty chemical company supplying 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 (PFC) 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. 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 1995 Rights Offering. Fuel Tech retains 27.4% of the Company's outstanding stock. The Company's technologies were acquired by assignment from Fuel Tech or developed internally. Regulations In the U.S., the Environmental Protection Agency ("EPA") has established specific regulations under Title II of the Clean Air Act Amendments of 1990 ("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 as of January 1995 and, beginning in 1998, there will be new NOx level standards in place for urban buses and new diesel engines. Additionally, in July 1995, the EPA, California Air Resources Board and major diesel manufacturers signed a Statement of Principles directed towards 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. The EPA will review the progress of emission control technology in 1999 with a view towards further tightening of the 2004 limits. Industry experts generally agree that an integrated systems approach will be needed to meet these regulations, including the use of advanced engine design, reformulated fuel, fuel additives and exhaust aftertreatment systems. In 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. In September 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 is also working with states to develop 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. Fiscal incentives are being introduced in Europe with the same objective of hastening the introduction of technologies for new low-emission engines. In 1997, the EPA issued proposed regulations for controlling emissions from new and rebuilt diesel locomotive engines which call for reductions in NOx emissions of 40-60% beginning in the year 2000. 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. In Europe, regulations have been published calling for more stringent emissions levels from new diesel and gasoline vehicles in the year 2000 with proposals for further tightening in the year 2005 under Euro III and Euro IV programs. Japan has issued similar requirements. Products and Markets Markets for the PFC are the consumer aftermarket, including diesel and gasoline fuel additives, truck and bus fleets, bulk fuel distributors and engine manufacturers. Markets for the NOx reduction systems are engine manufacturers 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 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 as copper, iron, manganese or cerium. The Company's test programs have shown the bimetallic additive of platinum and cerium to be highly effective. 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 Holt Lloyd International Ltd. ("Holt"), 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 Holt in early 1997. The gasoline product is now on sale in several European markets as a packaged product sold to consumers through major retail outlets and service stations. Rollout in additional markets is planned through 1998 along with a launch of the diesel product in selected markets. Platinum Plus - The Americas This market is not covered by the agreement with Holt. Discussions are in progress with several potential partners for the distribution and marketing of Platinum Plus in the Americas. PFC for Particulate Traps and Catalytic Oxidizers The most effective method of reducing diesel particulate (smoke) is by particulate trap or catalytic oxidizer. There are limitations when these devices are used alone which the PFC 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 new levels of performance in both cases. This work was conducted in conjunction with Lubrizol's Engine Control Systems subsidiary, a leading supplier of oxidizers and traps. The Company also reached agreement in principle with Cummins Engine's Advanced Technology Group to develop the applications of the PFC with oxidizers and traps for a new generation of low-emission engines. Independent tests of the Company's bimetallic fuel additive for gasoline to improve the performance of aged automobile engine catalytic converters showed a 20% reduction for nitrogen oxides, 20% for hydrocarbons ("HC") and 10% for carbon monoxide ("CO") emissions after one treatment. Also, tests of the Company's fuel additive/trap system conducted with an advanced Cummins diesel engine design cut particulate emissions 90% while achieving a more than 50% reduction in NOx in relation to current standards and met the year 2004 emission limits for new engines. In recent years, there has been a growing focus on the application of particulate traps to control emissions from diesel engines. Indeed, the U.K. Government announced in the November 1996 budget a substantial rebate in excise duty for vehicles using particulate traps beginning January 1998. The PFC significantly improve the performance of particulate traps. Cooperative programs are under way with several suppliers of trap systems and are scheduled with several European light-duty diesel engine manufacturers. Premium Diesel The use of PFC in both gasoline and diesel engines is showing a consistent pattern of increasing the activity of catalytic surfaces and thus increasing their lives and reducing emissions overall. In independent tests of the -2- Company's bimetallic (platinum and cerium) fuel additive on new diesel passenger engines, a 25% reduction in particulate emissions was shown as well as reductions in hydrocarbons of 35% and carbon monoxide of 11%. Other independent tests have shown the additive to reduce particulate emissions from older engines by up to 18%. Discussions are under way in the U.S., Europe and the Pacific Rim with oil companies interested in the PFC for application across a range of engines, fuels and markets. Significant fleet testing continues to support premium diesel marketing efforts with oil companies. Total Market for PFC The total worldwide usage of diesel and gasoline fuels is in the order of 350 billion gallons per annum of which approximately 150 billion gallons are diesel and 200 billion gallons are gasoline. At a projected treatment cost of two cents (U.S.)/gallon of fuel, each 1% of the market represents a $70 million revenue opportunity. Health Effects and the Use of Metallic Additives Certain metallic additives have come under scrutiny for their possible effects on health. While the PFC are already registered in the U.S. and did not strictly need to be registered in Europe, where there are no rules for testing such additives, the Company considered it prudent to take a much more proactive view. Therefore, in 1996, the Company began discussions with the Ministry of Transport and the Ministry of Health, regulatory authorities in the United Kingdom, asking for specific consent to the use of platinum metal additives in diesel fuel. In December 1996, the following response was received from the United Kingdom Ministry of Health's Committee on Toxicity: "The Committee is satisfied that the platinum emissions from vehicles would not be in an allergenic form and that the concentrations were well below those known to cause human toxicity." In the U.S., the Company has completed additional engine testing to maintain its EPA registration as required of all fuel and fuel additive manufacturers. Engine test results show that the amount of platinum emitted from use of the Company's PFC is roughly equivalent to platinum attrition from automotive catalytic converters. NOx Reduction Systems and Additives NOx emissions from diesel engines represent as much as half of the emissions from the transport sector in some parts of the U.S. and Europe. Diesel engines emit much more NOx than gasoline vehicles. The catalytic converter systems used in gasoline engines to reduce NOx do not work in diesel engines. This presents a great opportunity since, while much can be done by engine design changes, this is not enough for many applications. The Company is working on two programs to commercialize NOx reduction systems: NOx Reduction for Heavy-Duty Diesel Engines In December 1996, the Company agreed with Engelhard Corporation and Nalco Fuel Tech to commercialize a system of Selective Catalytic Reduction (SCR) for a manufacturer of power-generation diesels. The technology for this system comprises a reagent metering and gasification unit (CDT/Nalco Fuel Tech) followed by a catalyst (Engelhard) and system reagent supply (CDT/Nalco Fuel Tech). This system has demonstrated up to 90% NOx reduction and nearly 100% utilization of reagent in joint engine test programs. It will have the economic benefit of allowing manufacturers to optimize fuel economy while also minimizing NOx and particulate emissions. Furthermore, this system does not require very low-sulfur fuel. Based on interest in the U.S. and Europe, the partners are exploring expanding the agreement to the automotive sector. Retrofit NOx Reduction for Heavy-Duty Diesel Engines In certain applications requiring modest NOx reduction (10-30%), stabilized emulsions of water-in-oil can reduce NOx emissions by lowering in-cylinder combustion temperatures. The Company has developed light-oil-emulsion NOx reduction techniques to serve this segment. LOE-NOx(TM) technology involves the supply of blending equipment and specialty chemicals to disperse water-in-oil and maintain lubricity. The Company has had discussions with a major U.S. engine manufacturer for application of the LOE-NOx technology to stationary diesels used for power generation and is conducting fundamental work with Sandia National Labs on in-cylinder investigation of emulsions using advanced combustion photography. Market for NOx Reduction Systems and Additives The Company finds the NOx control market attractive; there are more than 8 million diesel engines of all types manufactured annually, and since the average life is between 10 and 30 years, there are substantial markets -3- for both new and retrofit applications. One major engine company has described the need for up to several thousand NOx control systems per year for high-horsepower stationary diesel generator sets starting gradually in 1998. The automotive sector will provide a massive market starting in 2000, estimated by one manufacturer to be approximately 100,000 units per year. The EPA has recently charged major engine manufacturers with using defeat devices that cause more than 1 million engines to emit high levels of NOx emissions. This could lead to near-term incentives for low-NOx-emitting engines. 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 individuals, including two executive officers, in engineering and product development as of the date of this report. During the years ended December 31, 1997, 1996 and 1995, the Company's research and development expenses exclusive of patent costs totaled approximately $1,985,000, $1,747,000 and $796,000, 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 will continue to be available in adequate amounts or at a reasonable cost or that such insurance will be adequate to cover any future claims against the Company. Employees The Company has 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. Risk Factors of the Business Investors in the Company should be mindful of the following risk factors relative to the Company's business: Liquidity - Going Concern At the date of this report, the Company has cash resources and a short-term credit facility from Fuel Tech estimated to be sufficient for its needs only through June 1998. See the text below under the captions "Liquidity and Sources of Capital" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Report of Independent Auditors" in Item 8. "Financial Statements." Accordingly, at December 31, 1997, there is substantial doubt as to the Company's ability to continue as a going concern. Competition Competition in the diesel fuel additive market will come from other large additive suppliers. The Company is not currently in competition with other fuel additive 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 in efficiency of distribution. To the Company's knowledge, it does not compete against any major gasoline companies in the PFC market. While the company intends to seek collaborative -4- arrangements with additive suppliers and oil companies, there are no assurances that these arrangements can be negotiated. Competition may also come from alternative fuels including methanol and natural gas, as well as from mechanized adjustments to engines, new injector designs and engine rebuilds. While the Company believes its patent position produces a strong competitive barrier to entry, other platinum-based compounds could be developed outside the Company's issued patents. To this end, the Company is seeking collaborative arrangements with specific platinum manufacturers. Competition in the NOx control market will come from other suppliers of reagent-based post-combustion NOx control systems including large, well-established catalyst and engine manufacturing companies. The Company has formed certain alliances to support its efforts to commercialize NOx control products but there are no assurances that these alliances will be sufficient or be maintained. Lack of a Viable Product; Need for Additional Research and Development The Company was incorporated in January 1994 and, to date, while it has sold small quantities of its PFC for the automotive aftermarket, it has engaged principally in research and development related to its PFC process and NOx reduction technologies. The Company's PFC process may require substantial additional research, development and testing in order to determine its commercial viability. The Company has not proven its PFC technology into new markets other than in a limited number of trials and demonstrations. If the Company successfully field tests its PFC technology, the commercialization of the technology into new markets will require significant additional time and expenditures. The commercialization of the technology will depend on the Company's success in achieving cost-effective production of the PFC, maintaining registration status with the EPA and other regulatory bodies, and forming strategic alliances for marketing and distribution of the PFC. The accomplishment of some or all of these objectives may be delayed or may never occur. In order to accomplish these objectives, the Company will require additional capital to continue the development and commercialization of the PFC technology, and there can be no assurance that such capital will be available. Continuing Operating Losses The Company has had minimal revenues through December 31, 1997. The Company expects to continue to incur operating losses through at least June 1999. There can be no assurance that the Company will achieve or sustain significant revenues or profitability in the future. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." See also "Liquidity - Going Concern" elsewhere herein. No Assurances of Additional Funding The Company is seeking additional funding in the form of a public or private offering of additional shares of the Company's Common Shares. Any offering of the Company's Common Shares may result in immediate and significant dilution to the stockholders of the Company. The ability of the Company to consummate a public offering or to obtain other financing will depend on the status of the Company's research and development and marketing programs and clinical trials, as well as conditions then prevailing in the relevant capital markets. There can be no assurance that such funding will be available when needed or on terms acceptable to the Company. In the event that the Company is unable to raise additional funds, the Company may be required to delay, scale back or severely curtail its development efforts or otherwise impede its ongoing clinical trials, which could have a material adverse effect on the Company's business, operating results, financial condition and long-term prospects. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." See also "Liquidity - Going Concern" elsewhere herein. Limited Marketing Experience The Company intends to enter into strategic alliances with marketing partners. In addition to its supply agreement with Holt Lloyd International Ltd., it is currently engaged in cooperative development and test programs with potential marketing partners and is in discussions with others with a view towards conducting similar programs. There can be no assurance that the Company will successfully implement its sales and marketing plan. Possible Volatility of Stock Price There has been significant volatility in the market prices of publicly-traded shares of emerging growth technology companies. Factors such as announcements of technical developments, establishment of strategic alliances, changes in governmental regulation and developments in patent or proprietary rights may have a significant effect on the market price of the Company's Common Shares. -5- Relationship with Fuel Tech; Conflicts of Interest Directors and officers of Fuel Tech and its subsidiaries who are also directors and officers of the Company, and Fuel Tech as the Company's largest stockholder, are in positions involving the possibility of conflicts of interest with respect to transactions concerning the Company. The Company currently has two independent directors. See Item 13. "Certain Relationships and Related Transactions." Lack of Diversification The Company is engaged in only one principal business, involving the development and commercialization of technology to control emissions from internal combustion engines through the manufacturing and marketing of its PFC and by other products, such as emulsions and urea SCR systems. The Company does not expect to have any material sources of revenues other than from the PFC in the foreseeable future. An adverse development in the Company's business as a result of competition, technological change, government regulation, or any other factor could have a significantly greater impact than if the Company maintained diverse operations. Expansion into New Markets The Company's strategy is to expand beyond the PFC to other types of emission control products for combustion engines, particularly for NOx control. There can be no assurance that the Company will be successful in manufacturing its PFC cost effectively or meet the future demand for emission-reducing fuel additives or NOx control products. Failure to gain market acceptance (either in the engineering or regulatory communities or in the general public) would have a material adverse effect on the Company's business, operating results and financial condition. See "Business --- Products and Markets." Dependence upon Third Party Technology While the PFC 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 PFC 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 PFC 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 EPA and corresponding foreign and state agencies. The EPA administers the CAAA. The Company is subject to the standards and procedures contained in such act and the regulations promulgated thereunder, as well as similar standards procedures and regulations of international regulatory authorities, and is subject to inspection by the EPA and other regulatory bodies for compliance with such standards, procedures and regulations. Failure to receive appropriate approvals or to comply with 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 PFC received registration from the EPA to be used as an aftermarket treatment of individual vehicles and in bulk fuel supplies for diesel. The Company has received registration status under the EPA fuel additive regulations for three additional PFC 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 --- General." No Assurance of Protection of Patents and Proprietary Rights The Company holds licenses to a number of patents and has patent applications pending. There can be no assurance that pending patent applications will be approved or that the issued patents or pending applications will -6- 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." Platinum Price Volatility The cost of platinum will have a direct impact on the future pricing and profitability of the PFC. Although the Company intends to minimize this risk through various purchasing and hedging strategies, there can be no assurance that the Company will be able to do so. A significant increase in the price of platinum could have a material adverse effect on the Company's business, operating results and financial condition. Dependence on Attracting and Retaining Personnel The success of the Company will depend, in large part, on the Company's ability (i) to retain current key personnel, (ii) to attract and retain additional qualified management, scientific and manufacturing personnel and (iii) to develop and maintain relationships with research institutions and other outside consultants and luminaries. The loss of key personnel or the inability of the Company to hire or retain qualified personnel or the failure to assimilate effectively such personnel could have a material adverse effect on the Company's business, operating results and financial condition. See "Business - --- Employees." No Dividends The Company has to date not paid dividends on its Common Stock and does not intend to pay any dividends to its stockholders in the foreseeable future. The Company currently intends to reinvest earnings, if any, in the development and expansion of its business. See Item 5. "Market for Registrant's Common Equity and Related Stockholder Matters." Item 2. Properties Facilities The Company has leased for administrative purposes 2,900 square feet of office space at 300 Atlantic Street, Stamford, Connecticut effective February 1, 1996 through February 28, 1999. Annual base rent under this lease is $65,250. Patents and 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 this royalty obligation by payment to Fuel Tech of amounts commencing in 1998 of $12 million and declining annually to $1,090,910 in 2008. The Company as owner maintains the technology at its expense. During 1997, the Company filed an additional ten patent applications and now has a total of nine U.S. patents granted and 17 international patents. There are currently 23 U.S. patent applications pending and 60 international applications. These patents and patent applications cover the means of controlling the four principal emissions from diesel engines (NOx, particulates, CO and HC). Item 3. Legal Proceedings The Company is not involved in any legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1997, no matters were submitted to a vote of the Company's security holders. -7- Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's shares are listed on the NASDAQ Stock Market, Inc. (Symbol CDTI). Stock price date: High Low ---- --- 4th Quarter 1995, from December 26.......... 7 1/4 6 3/8 1st Quarter 1996............................ 7 3/8 5 2nd Quarter 1996............................ 6 1/8 4 3/8 3rd Quarter 1996............................ 6 3 7/8 4th Quarter 1996............................ 4 1/4 2 1st Quarter 1997............................ 5 1/64 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 13/16 Item 6. Selected Financial Data The Company was incorporated on January 19, 1994, as a wholly owned subsidiary of Fuel Tech. Predecessor financial information included below for the period January 1, 1992, through January 18, 1994, reflects the Company's operations prior to incorporation, at which time it was accounted for as part of Fuel Tech. Effective December 12, 1995, Fuel Tech completed a Rights Offering of the Company's Common Shares, with Fuel Tech retaining a 27.6% ownership interest in the Company. The Company is a development stage enterprise and its efforts from January 1, 1992, to the present time have been devoted to the research, development and commercialization of Platinum Fuel Catalysts and nitrogen oxide reduction technologies to reduce emissions from diesel engines. There were no material activities related to the Company's business in 1991. Prior to 1990, the activities of Fuel Tech were focused on other applications of Platinum Fuel Catalysts that are unrelated to the Company's present or contemplated business and were not material to the overall development of the Company's product. Therefore, such costs have been excluded from the determination of the Company's development costs and from the selected financial data set forth below.
(in thousands, except per share data) Period from For the years ended December 31 January 1, 1992 -------------------------------------------------- through 1997 1996 1995 1994 1993 December 31, 1997 ------ ------ ------ ------ ------ ------------------- STATEMENTS OF OPERATIONS DATA Sales $ 199 $ -- $ -- $ -- $ -- $ 199 Costs and expenses: Cost of sales 132 -- -- -- -- 132 General and administrative 1,730 1,842 963 507 -- 5,042 Research and development 1,985 1,747 796 441 86 5,317 Patent filing and maintenance 237 223 199 158 45 938 --------------------------------------------------- --------- Loss from operations 3,885 3,812 1,958 1,106 131 11,230 Interest (income) expense, net (121) (323) 66 1 -- (377) --------------------------------------------------- --------- Net loss during development stage $3,764 $3,489 $2,024 $1,107 $131 $10,853 =================================================== ========= Basic and diluted loss per common share $ 1.50 $ 1.40 $ 0.81 $ 0.44 N/A N/A Weighted-average shares outstanding 2,517 2,500 2,500 2,500 N/A N/A
December 31 --------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- BALANCE SHEET DATA Current assets $1,682 $5,595 $8,882 $ 513 $ -- Total assets 1,750 5,677 8,882 513 -- Current liabilities 894 1,486 487 1,370 -- Long-term liabilities 395 -- 745 -- -- Working capital (deficit) 788 4,109 8,395 (857) -- Stockholders' equity (deficiency) 461 4,191 7,650 (857) --
-8- No dividends have been paid on the Company's Common Stock and the Company does not intend to pay dividends in the foreseeable future. The Company had approximately 560 beneficial stockholders at December 31, 1997. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company was incorporated on January 19, 1994, as a wholly owned subsidiary of Fuel-Tech N.V. ("Fuel Tech"). Effective December 12, 1995, Fuel Tech completed a Rights Offering of the Company's Common Shares, with Fuel Tech retaining a 27.6% ownership interest in the Company. Net proceeds of the Rights Offering of $10.5 million were contributed to the Company by Fuel Tech. The Company is a development stage enterprise and its efforts from January 1, 1992 (date of inception), to the present time have been devoted to the research, development and commercialization of Platinum Fuel Catalysts ("PFC") and nitrogen oxide ("NOx") reduction technologies to reduce emissions from diesel engines. Results of Operations 1997 Versus 1996 Sales and Cost of sales were $199,000 and $132,000, respectively, as the Company started selling small quantities of product in 1997. The Company's products were purchased by Holt Lloyd International Ltd. ("Holt"), pursuant to a supply agreement entered into in September 1996. Holt launched the Company's PFC products for use with Holt's fuel additives in the aftertreatment of fuel for both gasoline and diesel engines in several European countries, and expects to launch its products in other European markets in 1998. In December 1997, Holt was acquired by Prestone Products, Inc., a division of Allied Signal. Based on management and product line changes at Holt, the Company expects delays in the build-up of sales to Holt in 1998. 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. The selling price of future sales to Holt will be based on the Company's platinum metal purchase price, as stipulated in the September 1996 Supply Agreement and, accordingly, the Company should not have significant exposure with respect to commodity prices. General and administrative expenses decreased to $1,730,000 in 1997 from $1,842,000 in 1996. 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 $1,985,000 in 1997 versus $1,747,000 in 1996. 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 Nalco 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 cerium compound supplied by Rhone-Poulenc. 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 major oil 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 1998. Based on the extent of the market interest and improved cost and performance of the bimetallic additive, the Company entered negotiations with Rhone-Poulenc 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. Engine testing is scheduled for the second quarter of 1998. AMBAC is a major supplier of fuel injection equipment for diesel engine manufacturers worldwide. -9- Patent filing and maintenance expenses remained relatively flat, increasing to $237,000 in 1997 from $223,000 in 1996. The Company expects expenses to be lower in 1998 than in 1997 as it is currently minimizing expenses in order to conserve cash, pending securing additional working capital. Such efforts include reducing the administrative staff from four to two, closing the Company's U.K. office and reducing the management fees charged to the Company by Fuel Tech. Additionally, the Company anticipates a significant reduction in research and development expenditures in 1998 due in part to the completion of a number of fundamental programs in 1997, the deferral of certain field trials due to the Company's working capital position and the Company's expanded participation in collaborative and consortium-based programs with potential customers and industrial partners for which it will be responsible for only a portion of the program costs. 1996 Versus 1995 General and administrative expenses increased to $1,842,000 in 1996 from $963,000 in 1995. The increase was due to expenses associated with the Company establishing its 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. In the first six months of 1996, a greater portion of Fuel Tech management's time was spent on the Company's business activities, which included research programs, establishing relationships with potential marketing partners and hiring staff. The Company established its own payroll and hired some of these executives full-time in August 1996. Research and development expenses were $1,747,000 in 1996 versus $796,000 in 1995. 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 $223,000 in 1996 versus $199,000 in 1995. 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 at December 31, 1997. 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 is still dependent upon sources other than operations to finance its operations and 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 a Rights Offering of its shares by Fuel Tech. The Company then repaid Fuel Tech approximately $2.3 million in intercompany loans. Approximately $2 million of the proceeds raised was received by the Company in January 1996. For the years ended December 31, 1997, 1996 and 1995, and for the period from January 1, 1992, through December 31, 1997, the Company used cash of $3,775,000, $3,520,000, $1,810,000 and $10,490,000, respectively, 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., 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. Interest at a rate of 8% per annum is payable on the unpaid balance on each principal payment date. 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 - 1997 Versus 1996" above. At December 31, 1997 and 1996, the Company had cash, cash equivalents and short-term investments of $1,239,000 and $5,270,000, respectively. Working capital at those dates was $788,000 and $4,109,000, respectively. At December 31, 1997, the Company owed Fuel Tech $495,000 under the Term Note, while at December 31, 1996, the Company owed Fuel Tech $745,000 under the Demand Note. -10- 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. Any borrowings will be secured by the Company's intellectual property. The Company believes that, with this commitment from Fuel Tech, it has sufficient cash balances to fund its requirements through the first half of 1998. The Company is actively seeking additional financing in the amount of $5 million through a private placement or other financing alternative and is currently in discussions with several interested parties, however, no current commitments for financing have been received. 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) as noted above, licensing of the Company's technologies and selling the Company's intellectual property. 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, as of December 31, 1997, there is substantial doubt as to the Company's ability to continue as a going concern. 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 PFC, 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. In September 1996, the Company entered into a supply agreement with Holt Lloyd International Ltd. of the United Kingdom to sell the Company's PFC under the Platinum Plus trademark for use with Holt's fuel additives in the consumer car care market for aftertreatment of fuel for both new and used diesel engines in vehicles. The agreement covers territories worldwide except for North, Central and South America. This agreement has a 10-year term with extension options. The exclusivity of the agreement is determined by the attainment (or reasonable effort toward the attainment) of predetermined minimum performance levels for each territory on a calendar-year basis. The Company's PFC was test-marketed by Holt in Europe in the fourth quarter of 1996, with commercial sales commencing in the first quarter of 1997. The agreement also provides for the marketing of a platinum-based gasoline fuel additive by Holt on similar terms and in similar territories, if developed by the Company. Based on jointly funded testing by Holt and the Company, such a gasoline product was developed by the Company and launched by Holt in September 1997 under the Cat Guard name. 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. -11- Item 8. Financial Statements 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, 1997 and 1996, and the related statements of operations, stockholders' 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, 1997 and 1996, 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 -12- Clean Diesel Technologies, Inc. (A Development Stage Company) Balance Sheets (in thousands except share data) December 31 --------------------- 1997 1996 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,239 $ 3,270 Short-term investments -- 2,000 Inventories 205 103 Other current assets 238 222 -------- -------- Total current assets 1,682 5,595 Other assets 68 82 -------- -------- Total assets $ 1,750 $ 5,677 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 794 $ 741 Loan payable to Fuel-Tech N.V. 100 745 -------- -------- Total current liabilities 894 1,486 Loan payable to Fuel-Tech N.V. 395 -- STOCKHOLDERS' EQUITY: Preferred stock, par value $.05 per share, authorized 100,000 shares, no shares issued and outstanding -- -- Common stock, par value $.05 per share, authorized 5,000,000 shares, issued and outstanding 2,516,666 and 2,500,000 shares 126 125 Additional paid-in capital 11,188 11,155 Deficit accumulated during development stage (10,853) (7,089) -------- -------- Total stockholders' equity 461 4,191 -------- -------- Total liabilities and stockholders' equity $ 1,750 $ 5,677 ======== ======== See accompanying notes. -13- 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, 1997 1996 1995 1997 -------- -------- -------- -------- Sales $ 199 $ -- $ -- $ 199 Costs and expenses: Cost of sales 132 -- -- 132 General and administrative 1,730 1,842 963 5,042 Research and development 1,985 1,747 796 5,317 Patent filing and maintenance 237 223 199 938 -------- -------- -------- -------- Loss from operations 3,885 3,812 1,958 11,230 Interest income (165) (383) (33) (581) Interest expense to Fuel-Tech N.V. 44 60 99 204 -------- -------- -------- -------- Net loss during development stage $ 3,764 $ 3,489 $ 2,024 $ 10,853 ======== ======== ======== ======== Basic and diluted loss per common share $ 1.50 $ 1.40 $ 0.81 N/A ======== ======== ======== ======== Average number of common shares outstanding 2,517 2,500 2,500 N/A ======== ======== ======== ========
See accompanying notes. -14- Clean Diesel Technologies, Inc. (A Development Stage Company) Statements of Changes in Stockholders' Equity (Deficiency) (in thousands)
Deficit Accumulated Total Common Stock Additional During Stockholders' ------------ 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. -15- Clean Diesel Technologies, Inc. (A Development Stage Company) Statements of Cash Flows (in thousands)
Period from For the years ended December 31 January 1, 1992 ------------------------------------------ through 1997 1996 1995 December 31, 1997 ----------- ------------- ------------- ----------------------- OPERATING ACTIVITIES Net loss $(3,764) $(3,489) $(2,024) $(10,853) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 24 12 -- 36 Issuance of stock purchase warrants 30 30 -- 60 Changes in operating assets and liabilities: Inventories (102) (88) (15) (205) Other current assets (16) (221) (1) (238) Accounts payable and accrued expenses 53 320 230 794 Other assets -- (18) -- (18) Due to Fuel-Tech N.V. -- (66) -- (66) ---------- ------------ ------------ ------------ Net cash used in operating activities (3,775) (3,520) (1,810) (10,490) ---------- ------------ ------------ ------------ FINANCING ACTIVITIES Proceeds from Rights Offering net of $630 of brokerage commissions in 1995 -- 2,018 9,138 11,156 Expenses of Rights Offering -- -- (425) (425) Repayment of expenses of Rights Offering paid by Fuel-Tech N.V. -- -- (200) (200) Issuance of common stock to parent -- -- -- 250 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. (250) -- (2,063) (2,313) Proceeds from exercise of stock options 4 -- -- 4 ---------- ------------ ------------ ------------ Net cash provided from (used in) financing activities (246) 2,018 8,145 11,815 ---------- ----------- ----------- ----------- INVESTING ACTIVITIES Sale (purchase) of short-term investments 2,000 (2,000) -- -- Purchase of fixed assets (10) (76) -- (86) ---------- ----------- --------- ----------- Net cash provided by (used in) investing activities 1,990 (2,076) -- (86) ---------- ----------- ---------- ------------ Net (decrease) increase in cash and cash equivalents (2,031) (3,578) 6,335 1,239 Cash and cash equivalents at beginning of period 3,270 6,848 513 -- ---------- ------------ ----------- ------------ Cash and cash equivalents at end of period $ 1,239 $ 3,270 $ 6,848 $ 1,239 ========== ============ ============ ============ Cash payments for interest to Fuel-Tech N.V. $ 44 $ 63 $ -- $ 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. -16- 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 product. 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 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 discussions 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, 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 -17- Clean Diesel Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (Continued) institution. 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. All financial instruments are reflected in the accompanying balance sheets at amounts which 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, 1997 and 1996, the Company had tax losses available for offset against future years' earnings of approximately $10 million and $6.4 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. Stockholders' 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 -18- Clean Diesel Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (Continued) offering, each Fuel Tech shareholder and holder of Fuel Tech's Nil Coupon Non-redeemable Convertible Unsecured Loan Notes ("Note Holders") received a right to purchase one common share of the Company for every 7.65 Fuel Tech shares (or notes convertible into 7.65 Fuel Tech shares) held for $6.50 per Company share. Holders of Fuel Tech options were also allowed to participate, if requested, under the same terms. Two million of the 2.5 million Company shares held by Fuel Tech were offered in the Rights Offering. Approximately 1.8 million Company shares were purchased in the offering, which raised net proceeds, after expenses and broker-dealer commissions aggregating $1.3 million, of approximately $10.5 million, all of which was contributed by Fuel Tech to the Company. In December 1995, after the offering was completed, the Company paid Fuel Tech approximately $2.3 million, which represented the repayment of certain loans made to the Company ($2.1 million), as well as certain expenses of the Rights Offering paid by Fuel Tech ($200,000). As a result of the Rights Offering and Fuel Tech's capital contribution of the net offering proceeds, the Company's additional paid-in capital increased by approximately $10.5 million. On December 26, 1995, the Company's Common Stock commenced trading on the National Association of Securities Dealers Quotation System ("NASDAQ") under the symbol "CDTI." 5. Stock Options and Warrants The Company maintains a stock award plan, the 1994 Incentive Plan (the "Plan"). Under the Plan, awards may be granted to participants in the form of non-qualified stock options, stock appreciation rights, restricted stock, performance awards, bonuses or other forms of share-based or non-share-based awards or combinations thereof. Participants in the Plan may be such of the Company's directors, officers, employees, consultants and advisors (except consultants or advisors in capital-raising transactions) as the directors determine are key to the success of the Company's business. The Company includes 50%-owned subsidiaries or affiliates. In 1996, stockholders amended the Plan to increase from 10% to 12 1/2% the percentage of outstanding shares of the Company used to determine the maximum number of awards to participants. 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 date of grant 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: 1997 1996 1995 -------------------------- Net loss (000's): As reported $3,764 $3,489 $2,024 Pro forma 4,040 3,600 2,031 Basic and diluted loss per share: As reported $1.50 $1.40 $0.81 Pro forma 1.59 1.44 0.81 In accordance with the provisions of SFAS No. 123, the pro forma disclosures include only the effect of stock options granted in 1997, 1996 and 1995. The application of the pro forma disclosures presented above are not representative of the effects SFAS No. 123 may have on operating results and earnings (loss) per share in future years due to the timing of stock option grants and considering that options vest over a period of three years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. -19- Clean Diesel Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (Continued) 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: 1997 1996 1995 ---------------------------- Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 5.72% 6.8% 6.4% Expected volatility 61.3% 54.3% 65.4% 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:
1997 1996 1995 ----------------------------------------------------------------------------------- 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 287 $3.25 222 $2.86 125 $1.10 Granted 115 4.61 65 4.59 97 5.13 Exercised (17) 0.20 -- -- -- -- Forfeited (20) 4.52 -- -- -- -- ----------------------------------------------------------------------------------- Outstanding, end of year 365 $3.77 287 $3.25 222 $2.86 =================================================================================== Exercisable, end of year 259 $3.41 189 $3.11 63 $1.40 Weighted-average fair value of options granted during the year $2.18 $2.25 $2.79
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------- Weighted-Average Range of Number of Remaining Weighted-Average Number of Weighted -Average Exercise 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 $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 services received. -20- Clean Diesel Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (Continued) 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, 1997 and 1996, rental expense approximated $93,000 and $90,000, 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 Catalysts 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, 1997 and 1996, approximated $69,000 and $183,000, respectively. On August 3, 1995, the company signed a Management and Services Agreement with Fuel Tech. According to the agreement, the Company reimburses Fuel Tech for management, services and administrative expenses incurred on behalf of the Company. Additionally, Fuel Tech charged the Company a fee equivalent to an additional 10% of such costs. In June 1996, the Company renegotiated this agreement. Under the new agreement, the Company agreed to pay Fuel Tech a fee equal to an additional 3% or 10% of the costs paid on the Company's behalf, dependent upon the nature of the costs incurred. Prior to the August 1995 agreement, the Company paid Fuel Tech a management fee of $150,000 per quarter, which included the direct costs and associated fees. The Company shares facilities and certain other resources with Fuel Tech and costs are allocated between the companies based on usage. Certain of Fuel Tech's officers and directors serve as officers and directors of the Company and the Company received management and administrative support from Fuel Tech's staff. The financial statements include allocations from Fuel Tech of certain management and administrative costs, which approximate $403,000, $1,232,000 and $904,000 for the years ended December 31, 1997, 1996 and 1995, 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. -21- Clean Diesel Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (Continued) 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. of the United Kingdom to sell the Company's PFC under the Company's Platinum Plus trademark for use with Holt's fuel additives in the aftertreatment of fuel for both new and used diesel engines in the consumer car care market. The agreement covers territories worldwide except for North, Central and South America. The term of this agreement is 10 years with the possibility of a term extension. The exclusivity of the agreement is determined by the attainment (or reasonable effort towards the attainment) of predetermined minimum performance levels for each territory on a calendar-year basis. The Company's PFC was test-marketed by Holt in Europe in the fourth quarter of 1996, with commercial sales 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 Holt. This product was launched by Holt in Europe in late 1997 under the Cat Guard name. In December 1997, Holt was acquired by Prestone Products, Inc., a division of Allied Signal. Based on management and product line changes at Holt, and as a result of the Prestone acquisition, the Company expects a delay in the build-up of sales to Holt 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. 10. Year 2000 Disclosure (Unaudited) 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. -22- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 10. Directors and Executive Officers of the Registrant Information regarding directors and executive officers of the Company will be set forth under the captions "Election of Directors" and "Directors and Executive Officers of the Company" in the Company's Proxy Statement related to the 1998 annual meeting of stockholders (the "Proxy Statement") and is incorporated by reference herein. Item 11. Executive Compensation Information required by this item will be set forth under the caption "Executive Compensation" in the Proxy Statement and is incorporated by reference herein excluding, however, the information under the captions "Report of the Board of Directors on Executive Compensation" and "Performance Graph" which is not incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this item will be set forth under the caption "Principal Stockholders and Stock Ownership of Management" in the Proxy Statement and is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions Information required by this item will be set forth under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated by reference herein. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial Statements The Financial Statements identified below and required by Part II, Item 8. of this Form 10-K are set forth above. Report of Independent Auditors Balance Sheets as at December 31, 1997 and 1996 Statements of Operations for the years ended December 31, 1997, 1996 and 1995 and for the period from January 1, 1992 through December 31, 1997 Statements of Changes in Stockholders' Equity (Deficiency) for the years ended December 31, 1997, 1996 and 1995 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 and for the period from January 1, 1992 through December 31, 1997 (2) Financial Statement Schedules Schedules have been omitted because of the absence of the conditions under which they are required or because the required information where material is shown in the Financial Statements or the notes thereto. -23- (3) Exhibits
Exhibit No. Title Page No. *3(i) Certificate of Incorporation, as amended. *3(ii) By-Laws. *4a Specimen Stock Certificate. **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 Clean Diesel Technologies, Inc. as of November 5, 1997. **10c Assignment Agreement as of November 5, 1997 among Platinum Plus, Inc., Fuel-Tech N.V. and Clean Diesel Technologies, Inc. *****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. **14 Material Foreign Patents (filed with Exhibits 10a, 10b, 10c, 10k and 10l). **23.1 Consent of Auditors, Ernst & Young LLP.
- ------------- * Previously filed as Exhibit to Registration Statement on Form S-1 of August 16, 1995, No. 33-95840, and incorporated by reference herein. ** Filed herewith. *** Previously filed as an Exhibit to Form 10-K for the year ended December 31, 1995, and incorporated by reference herein. **** Previously filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1996, and incorporated by reference herein. ***** Previously filed as an Exhibit to Form 10-K for the year ended December 31, 1996 and incorporated by reference herein. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company for the fourth quarter of 1997. -24- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Clean Diesel Technologies, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CLEAN DIESEL TECHNOLOGIES, INC. March 27, 1998 By: /s/ Jeremy D. Peter-Hoblyn -------------- ----------------------------- Date Jeremy D. Peter-Hoblyn Chief Executive Officer, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of Clean Diesel Technologies, Inc. and in the capacities and on the dates indicated. /s/ Ralph E. Bailey Director and Chairman of the Board of Directors March 27, 1998 ------------------------------- Ralph E. Bailey /s/ Jeremy D. Peter-Hoblyn Chief Executive Officer, President and Director March 27, 1998 ------------------------------- (principal executive officer) Jeremy D. Peter-Hoblyn /s/ Scott M. Schecter Chief Financial Officer, Vice President and Treasurer March 27, 1998 ------------------------------- (principal financial and accounting officer) Scott M. Schecter /s/ James M. Valentine Director, Chief Operating Officer and March 27, 1998 ------------------------------- Executive Vice President James M. Valentine /s/ John A. de Havilland Director March 27, 1998 ------------------------------- John A. de Havilland /s/ Charles W. Grinnell Director, Vice President and Corporate Secretary March 27, 1998 ------------------------------- Charles W. Grinnell
-25- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Clean Diesel Technologies, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CLEAN DIESEL TECHNOLOGIES, INC. March 27, 1998 By: /s/ Jeremy D. Peter-Hoblyn -------------- ----------------------------- Date Jeremy D. Peter-Hoblyn Chief Executive Officer, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of Clean Diesel Technologies, Inc. and in the capacities and on the dates indicated. /s/ Ralph E. Bailey Director and Chairman of the Board of Directors March 27, 1998 ------------------------------- Ralph E. Bailey /s/ Jeremy D. Peter-Hoblyn Chief Executive Officer, President and Director March 27, 1998 ------------------------------- (principal executive officer) Jeremy D. Peter-Hoblyn /s/ Scott M. Schecter Chief Financial Officer, Vice President and Treasurer March 27, 1998 ------------------------------- (principal financial and accounting officer) Scott M. Schecter /s/ James M. Valentine Director, Chief Operating Officer and March 27, 1998 ------------------------------- Executive Vice President James M. Valentine /s/ John A. de Havilland Director March 27, 1998 ------------------------------- John A. de Havilland /s/ Charles W. Grinnell Director, Vice President and Corporate Secretary March 27, 1998 ------------------------------- Charles W. Grinnell
-26- EX-10.A 2 EXHIBIT 10A Exhibit 10a Assignment of Intellectual Property Rights Fuel-Tech N.V. to Platinum Plus, Inc. As of November 5, 1997 Fuel-Tech N.V., a Netherlands Antilles limited liability company "Assignor" (the "Company"), does hereby, as a capital contribution, assign to its wholly-owned subsidiary Platinum Plus, Inc., a Delaware corporation (the "Assignee"), all of the Companys right, title and interest whatsoever in the United States of America and in any other jurisdiction worldwide, in and to: 1. That certain License Agreement effective as of October 28, 1994 between the Company and Clean Diesel Technologies, Inc. (the "License"). 2. All of the intellectual property, including patents, patent applications technology, data and know-how, set forth on Schedule A to the License. 3. The assignee agrees to accept this assignment and to hold Assignor harmless from any cost or expense required to prosecute, maintain or exploit the property described in Section 2 above. 4. Assignor agrees to cooperate with Assignee at the expense of the Assignee in perfecting the assignments made herein and to execute and deliver to the Assignee any further agreements, assignments, instruments, certificates and other documents deemed necessary or appropriate for that purpose by the Assignee. 5. By this assignment the Assignee is the owner of the assigned property in all respects and may deal with such property as it shall deem appropriate. FUEL-TECH N.V. Dated: December 19, 1997 By: /s/ Jeremy D. Peter-Hoblyn -------------------------------------- Jeremy D. Peter-Hoblyn Managing Director Agreed to this 19 day of December, 1997 Platinum Plus, Inc. By: /s/ James M. Valentine ------------------------------ James M. Valentine Executive Vice President State of Connecticut : ) ss Stamford County of Fairfield : The within instrument was acknowledged before me this 19th day of December 1997 by Jeremy D. Peter-Hoblyn, Managing Director of Fuel-Tech N.V., a Netherlands Antilles corporation, and James M. Valentine, Executive Vice President of Platinum Plus, Inc., a Delaware corporation, on behalf of their respective corporations. /s/ Charles W. Grinnell -------------------------------------- Charles W. Grinnell Commissioner of the Superior Court EX-10.B 3 EXHIBIT 10B Exhibit 10b Assigrment of Intellectual Property Rights Fuel Tech, Inc. to Clean Diesel Technologies, Inc. As of November 5, 1997 Fuel Tech, Inc., a Massachusetts corporation ("Assignor"), does hereby assign to Clean Diesel Technologies, Inc., a Delaware corporation ("Assignee"), all of the Assignors right, title and interest whatsoever in the United States of America and in any other Jurisdiction worldwide, in and to: 1. All of the intellectual property, including patents, patent applications, trademarks, and associated inventions, technology, data and know-how, set forth on Schedule A attached hereto and made a part hereof. 2. Assignee agrees to accept this assignment and to hold the Assignor harmless from any cost or expense required to prosecute, maintain or exploit the intellectual property described in Section 1 above. 3. Assignor agrees to cooperate with Assignee at the expense of the Assignee in perfecting the assignments made herein and to execute and deliver to the Assignee any further agreements, assignments, instruments, certificates and other documents deemed necessary or appropriate for that purpose by the Assignee. FUEL TECH, INC. Dated: December 23rd, 1997 By: /s/ C.W. Grinnell ----------------------- Charles W. Grinnell Vice President Agreed to this 23rd day of December, 1997 CLEAN DIESEL TECHNOLOGIES, INC. By: /s/ James M. Valentine ------------------------ James M. Valentine Vice President State of Connecticut: ) ss Stamford County of Fairfield : The foregoing instrument was acknowledged before me this 8th day of January 1998 by Charles W. Grinnell, Vice President of Fuel Tech, Inc., a Massachusetts corporation, and and James M. Valentine, Executive Vice President of Clean Diesel Technologies, Inc., a Delaware corporation, on behalf of their respective corporations. /s/ Diana Baumann ------------------- Notary Public DIANA BAUMANN NOTARY. PUBLIC MY COMMISSION EXPIRES JULY 31, 2001 Schedule A to Assignment as of November 5, 1997 Fuel Tech, Inc. to Clean Diesel Technologies, Inc.
DOCUMENT INVENTOR(s) ABSTRACT APPLICANT/ ASSIGNEE 08/601,530 Epperly Gasoline, gasohol and diesel fuel FTI (P0045G) Sprague additives defined in terms of functional Kelso properties and chemistry, with claims to Bowers regenerating catalytic converters and diesel traps as well as use with oxygenated hydrocarbons. JP 1,931,532 FTI MX 169,226 FTI VE 49.179 FTI EP 189,642 Bowers Both gasoline and diesel additives FTI (P0042A) Sprague combined in one case for foreign filing. AU* 583,580 FTI CA 1,305,607 FTI CL 36,883 FTI ES 548,951 FTI GB 2,178,757 FTI GR 85.2745 FTI DOCUMENT TRADEMARK APPLICANT 73/506,353 Platinum Plus FTI (T0071A) CN 960088945 CN 960088946 CN 960088947 EP 000195933 FR 95/599379 GB 2,046,018 ID D9616748 ID D9616749 ID J9616750 JP 125415/1995 JP 125416/1995 JP 125417/1995 KR 44777/95 KR 44778/95 KR 11493/95 MX 249,675 MX 249,891 TW 770,817 TW 85034641 T0075A Platinum Plus 2 FTI CA
EX-10.C 4 EXHIBIT 10C Exhibit 10c ASSIGNMENT AGREEMENT, effective as of November 5, 1997, among PLATINUM PLUS, INC., a Delaware corporation ("PPI"), with a place of business at 300 Atlantic Street, Stamford CT 06901, Fuel-Tech N.V., a Netherlands Antilles limited liability company ("Fuel Tech") with a place of business at Castorweg 22-24, Curacao, Netherlands Antilles, and CLEAN DIESEL TECHNOLOGIES, INC., a Delaware corporation ("Assignee"), with a place of business at 300 Atlantic Street, Stamford CT 06901 U.S.A., WHEREAS, PPI is a wholly-owned subsidiary of Fuel Tech and Fuel Tech owns approximately 28% of the common stock of the Assignee, WHEREAS, by Agreements effective as of October 28, 1994 between the Assignee and Fuel-Tech N.V. (the "NV License") and between the Assignee and PPI (the "PPI License"), the Assignee became the licensee of certain Technology, WHEREAS, subsequent to the effective date of grant of the PPI and NV licenses, the Assignee reimbursed Fuel Tech, of Fuel-Tech, or its affiliates, the amount of approximately $600,000 on account of development expenses incurred by Fuel Tech, Inc. with respect to the Technology licensed under the NV and PPI Licenses, WHEREAS, this Agreement is in consideration of the reimbursed development expenses, WHEREAS, by an Assignment effective as of November 5, 1997 the Fuel-Tech License and the Technology licensed thereunder were assigned by Fuel-Tech N.V. to PPI, WHEREAS, the Technology licensed under the NV and PPI Licenses is now owned by PPI and the Assignee is desirous of taking an assignment of such Technology and PPI is agreeable to granting such assignment while reserving a royalty as provided in the NV and PPI Licenses, WHEREAS, in order to enhance the value of Fuel Techs investment in the Assignee Fuel Tech is agreeable to this assignment and to guaranteeing the performance of the obligations of PPI hereunder, NOW THEREFORE, it is agreed that: 1. Definitions "Affiliate, shall be a company or a business entity which controls, is controlled by, or is under common control with a party to this agreement. "Control" shall mean sufficient voting power to elect the Board of Directors. For purposes of this agreement neither party hereto shall be an Affiliate of the other. 1 "Technology" shall mean PPI's Patents, Marks and Patent Applications set out on Schedule A attached hereto and all associated data, and know-how related thereto owned by PPI for the addition of noble metals to fuels, for emulsions and for Nox control, all as related to internal combustion engines and control of emissions therefrom. "Termination" shall mean December 31, 2008. 2. Assignment 2.1 PPI hereby assigns, transfers and sets over to Assignee and Assignee hereby accepts from PPI, on the terms and conditions herein and subject to the payment to PPI of the royalties described herein when due, all of PPIs right, title and interest whatsoever in the United States of America and any other jurisdiction to the Technology. 3. Revocation of Licenses 3.1 PPI and the Assignee agree that the NV License and the PPI License are hereby revoked and of no further force and affect. 4. Disclaimers and Limited Warranty 4.1 PPI makes no warranty, express or implied, to Assignee concerning the validity or the utility of the Technology or with respect to any other matter, except that PPI represents and warrants that the Patents and Marks assigned hereunder are in full force and effect and that it has full right and power to assign the rights granted hereunder. 4.2 PPI shall have no responsibility whatsoever to Assignee at any time for any liability which Licensee may incur to any third party with respect to the Technology. 5. Royalties: Right to Terminate 5.1 Assignee shall, within 45 days of the end of each calendar year commencing with the year 1998 and thereafter until Termination, pay PPI as a running royalty an amount equal to two and one half percent (2.5%) of annual gross revenues of whatsoever nature, including license fees and royalties, derived from that portion only of the Technology relating to the addition of noble metals to fuels. 5.2 Assignee shall have the right at any time until Termination on thirty days notice to terminate and extinguish its obligation to pay royalties hereunder and 2 to receive a release of such obligation, by the payment to PPI in any calendar year set out below of the amount set out below opposite such year: 1998 $12,000,000.00 1999 $10,909,091.00 2000 $ 9,818,182.00 2001 $ 8,727,273.00 2002 $ 7,636,364.00 2003 $ 6,545,455.00 2004 $ 5,454,546.00 2005 $ 4,363,637.00 2006 $ 3,272,728.00 2007 $ 2,181,819.00 2008 $ 1,090,910.00 6. Obligations of PPI and Fuel Tech 6.1 PPI shall to the extent practicable cooperate with Assignee, at the expense of the Assignee, in perfecting the assignment of the Technology made herein under local law and in preserving and maintaining the Technology by Licensee and shall execute and deliver to the Assignee any further agreements, assignments, instruments, certificates and other documents deemed necessary or appropriate for that purpose by the Assignee. 6.2 Fuel Tech guarantees the performance by PPI of its obligations under Section 6.1 above. 7. Obligations of Assignee 7.1 Assignee shall within 45 days of the end of each calendar year set out in Section 5.2 above furnish PPI with a written report signed by an authorized official setting forth annual gross revenues derived by Assignee from the Technology subject to royalties and, for each such year, shall thereupon make payment of such royalties, if any, as became due to PPI during such year. 7.2 Assignee shall indemnity and defend PPI against any liability or expense arising out of any claim, proceeding or suit by any third party against PPI to the extent that it is based on an allegation that the Technology licensed hereunder is invalid, owned by another party or infringes a patent in force. 7.3 In the event of Assignees failure to pay when due any royalty hereunder, Assignee shall pay to PPI interest on such unpaid royalties at the rate of ten percent (10%) per annum calculated on the basis of days actually elapsed over a year of 360 days. 3 9. General 9.1 This Agreement and its effects are subject to and shall be construed and enforced in accordance with the internal laws of the State of Delaware and any and all claims, controversies or disputes hereunder shall be resolved by negotiations between the parties and, failing such negotiations, shall, on sixty days written notice from one party to the other, be finally settled by arbitration before a single arbitrator in accordance with the rules then in effect of the American Arbitration Association in Stamford Connecticut and any resulting award may be entered in and enforced by any court having jurisdiction. 9.2 This Agreement is the entire agreement between the Parties and may only be amended by an instrument in writing referring to this agreement and signed by each of the parties. 9.3 Notices hereunder shall be effective in five days, if given by pre-paid, registered or certified airmail; and upon delivery, if acknowledged and given by telex, facsimile or personally; in either case to the addresses set forth above for the parties or to such other address as one party may by such notice inform the other. 9.4 Failure to enforce a right or remedy under this Agreement shall not be deemed to constitute a waiver of such right or remedy. 9.5 The obligations hereunder of a party may, from time to time, be performed by an Affiliate of such party. 9.6 All payments hereunder by Assignee to PPI shall be in cash or by wire transfer. 4 IN WITNESS WHEREOF the parties have signed this Agreement as of the date first set out above, PLATINUM PLUS, INC. CLEAN DIESEL TECHNOLOGIES, INC. By: /s/ Jeremy D. Peter-Hoblyn By: /s/ James M. Valentine ---------------------------- ------------------------------- Jeremy D. Peter-Hoblyn James M. Valentine Title: President Title: Executive Vice President Date: December 19, 1997 Date: December 19, 1997 --------------------- --------------------------- FUEL-TECH N.V. By: /s/ Jeremy D. Peter-Hoblyn ----------------------------- Jeremy D. Peter-Hoblyn Title: Managing Director Date: December 19, 1997 ------------------------- State of Connecticut : ) ss Stamford County of Fairfield : The foregoing instrument was acknowledged before me this 19th day of December 1997 by Jeremy D. Peter-Hoblyn, Managing Director of Fuel-Tech N.V., a Netherlands Antilles corporation, Jeremy D. Peter-Hoblyn President of Platinum Plus, Inc., a Delaware corporation, and James M. Valentine, Executive Vice President of Clean Diesel Technologies, Inc., a Delaware corporation, on behalf of their respective corporations. /s/ Charles W. Grinnell ---------------------------------- Charles W. Grinnell Commissioner of the Superior Court Schedule A to Assignment Agreement as of November 5, 1997 among Platinum Plus, Inc., Fuel-Tech N.V. and Clean Diesel Technologies, Inc. CLEAN DIESEL TECHNOLOGIES PATENT ASSETS
DOCUMENT INVENTOR(S) ABSTRACT APPLICANT/ ASSIGNEE U.S. 4,629,472 Haney Combustion of emulsified fuels is PPI (P0003C) Sullivan improved by the presence of water- soluble precious metal catalysts. U.S. 4,892,562 Bowers Diesel additives comprising fuel-soluble PPI (P0043A) Sprague compounds of platinum group metals. U.S. 4,891,050 Bowers Gasoline additives comprising fuel- PPI (P0043B) Sprague soluble compounds of platinum group metals. EP 189,642 Bowers Both gasoline and diesel additives FTI (P0042A) Sprague combined in one case for foreign filing. AU* 583,580 FTI CA 1,305,607 FTI CL 36,883 FTI ES 548,951 FTI GB 2,178,757 FTI GR 85.2745 FTI IE 58723 FTNV JP 1,931,532 FTI MX 169,226 FTI VE 49.179 FTI U.S. 5,034,020 Epperly Additional specific fuel-soluble platinum PPI (P0049A) Sprague group metal additives for diesel and gasoline engines. Also claims regenerating catalytic converters and diesel traps. AU 635,056 FTNV CA 612,185 FTNV JP 02-511018 FTNV NO 920199 FTNV
- ----------------------- *Country codes in bold italics indicate a patent has been granted in that country.
DOCUMENT INVENTOR(S) ABSTRACT APPLICANT/ ASSIGNEE EP 189,642 Bowers Both gasoline and diesel additives FTI (P0042A) Sprague combined in one case for foreign filing AU* 583,580 FTI CA 1,305,607 FTI CL 36,883 FTI ES 548,951 FTI GB 2,178,757 FTI GR 85.2745 FTI CA 612,107 FTNV DK 1125/91 FTNV EP 451207 (AT, BE, CH, DE, ES, FTNV FR, GB, IT, LU, NL, SE) JP 02-502428 FTNV NO 912536 FTNV U.S. 5,404,841 Valentine Emulsified fuel contains water-soluble Not (P1001B) and fuel-soluble platinum group metals assigned or cerium alone or with other metals such as copper, iron or manganese, and urea to reduce NO(2). CL 1259/94 PPI EP 94927236.3 PPI IN 1097/Del/94 PPI MX 946596 PPI TW NI-085549 PPI U.S. 5,584,894 Valentine Emulsions with up to 70% water and PPI (P1001C) Peter-Hoblyn with lubricity additive and catalyst are used for NOx reduction. Urea and other NOx-reducing agents are optional. CA 2,191,755 FTNV EP 95921501.3 FTNV KR 706920/96 FTNV U.S. 5,535,708 Valentine Similar to P1001B, but claims urea PPI (P1001D) equivalents to reduce no(2)
DOCUMENT INVENTOR(S) ABSTRACT APPLICANT/ ASSIGNEE U.S. 5,266,083 Peter-Hoblyn PPD permits retarding diesel timing to PPI (P1002A) Valentine reduce NOx by reducing the expected Epperly increase in particulates. AU 674,297 PPI CA 2,123,805 PPI EP 93901333.0 (DE, FR, GB, IT, SE) PPI 08/778.860 Peter-Hoblyn Basic application in this series. PPD CDTI (P1004F) Valentine with an optional second catalytic metal Spraque such as Mn, Fe, Cu, Ce, Li or Na, reduces Epperly Co and HC emissions from trap while moderating oxidation of SO(2) to SO(3). CA 2,149,035 FTNV EP 94901430.2 FTNV JP 512366/1994 FTNV KR 701938/95 FTNV MX 937.003 FTNV 08/760,085 Peter-Hoblyn Second application in this series. CDTI (P1004E) Valentine Copper data is added. Sprague Epperly 08/514,978 Peter-Hoblyn Third case in this series. Adds cerium data. PPI (P1004D) Valentine PCT US96/11908 Sprague Epperly
DOCUMENT INVENTOR(S) ABSTRACT APPLICANT/ ASSIGNEE 08/518,251 Peter-Hoblyn PPD is used in combination with a trap PPI (P1009B) and a nox-reducing catalyst and reagent. not available Li and/or Na can be added. New claims (P1009C) specify particulate trap followed by SCR. CL 1009/94 PPI EP 94922518.9 PPI IN 883/Del/94 PPI JP 504646/1995 PPI MX 945.282 PPI TH 023107 PPI TW NI-079182 PPI VE 1424/94 PPI 08/319,620 Peter-Hoblyn Emissions are reduced from two-stroke PPI (P1011A) engines through the use of fuels or motor oils including platinum group metal catalyst which catalyzes a flow-through converter over long periods of operation. IN 1379/Del/94 PPI TH 024351 PPI TW NI-085555 PPI 08/890,145 Peter-Hoblyn Same as P1011A PPI (P1011B) U.S. 5,693,106 Peter-Hoblyn Stability of water-dispersible platinum PPI (P1012B) Valentine compounds and fuel-soluble platinum Sprague compounds are enhanced by addition of a water scavenger or emulsifier. BR PI9606909-0 PPI CA 2,210,256 PPI EP 96902142.7 PPI ID P960085 PPI KR 704820/97 PPI MX 975,258 PPI TH 029654 PPI TW 85100769 PPI ZA 96/0268 PPI
DOCUMENT INVENTOR(S) ABSTRACT APPLICANT/ ASSIGNEE U.S. 5,501,714 Valentine Operation of diesel engines with reduced PPI (P1014A) Peter-Hoblyn platinum particulate emission by utilizing a platinum group metal fuel additive and a pass-through catalytic oxidizer. CA not available PPI CN 96192513.2 PPI EP not available PPI IN 399/Del/96 PPI JP 527851/1996 PPI KR 706395/94 PPI MX 966.977 PPI TH 030425 PPI TW 85102341 PPI ZA 96/1657 PPI PCT Valentine Catalytic ceramic cylinder parts for PPI US96/14079 Peter-Hoblyn internal combustion engines. (P1015A) Sprague 08/597,517 Valentine Method and apparatus for reducing harmful CDTI (P1017A) Peter-Hoblyn emissions from a diesel engine by post Spraque combustion catalyst injection. Water- soluble compounds as well as AcAc and soaps are covered. PCT US97/01606 08/626,780 Peter-Hoblyn Urea is catalytically hydrolyzed and/or CDTI (P1018A) pyrolized by diesel SCR. PCT US97/05468 08/747,716 Knapper Operation of diesel engines with emulsions CDTI (P1019A) Tarabulski for reduced NOx emissions by starting Peter-Hoblyn ignition timing at a set point.
DOCUMENT INVENTOR(S) ABSTRACT APPLICANT/ ASSIGNEE 08/752,344 Peter-Hoblyn System for fueling and feeding chemicals CDTI (P1020B) Valentine to internal combustion engines for NOx Tarabulski reduction emulsifies chemical solution in the fuel and then separates. 08/772,275 Peter-Hoblyn Method and apparatus for reducing harmful CDTI (P1021A) Balles emissions from a lean-burn engine by urea Hofmann injection SCR at elevated temperature and pressure. 08/321,209 Peter-Hoblyn Reducing NOx emissions from an engine CDTI (P1021C) Balles by temperature-controlled urea injection Hofmann for selective catalytic reduction. Tarabulski 08/792,287 Peter-Hoblyn Bimetallic gasoline additive contains CDTI (P1022A) Valentine rhodium acetylacetonate and a fuel- Sprague soluble platinum compound. 08/826,165 Peter-Hoblyn Reducing NOx emissions from an engine CDTI (P1024A) Balles by on-demand generation of ammonia for Hofmann selective catalytic reduction. 08/831,210 Peter-Hoblyn Reducing NOx emissions from an engine CDTI (P1025A) Valentine by selective catalytic reduction Tarabulski utilizing solid reagents. 08/833,175 Tarabulski Reducing NOx emissions from an engine CDTI (P1026A) while maximizing fuel economy. 60/043,266 Peter-Hoblyn Method for reducing emissions from a CDTI (P1027A) Valentine diesel engine TW 86110574 CDTI
DOCUMENT INVENTOR(S) ABSTRACT APPLICANT/ ASSIGNEE 08/868,870 Peter-Hoblyn High-temperature injection of urea for CDTI (P1028A) Tarabulski reducing lean-burn engine no(2) Hofmann emissions by selective catalytic Valentine reduction. 08/854,831 Peter-Hoblyn Low pressure, pyrolization chamber. CDTI (P1029A) Tarabulski Hofmann Balles 08/749,359 Peter-Hoblyn Selective catalytic NOx reduction CDTI (P3034A) utilizing urea with a prechamber to prevent fouling. PCT (not available) 08/215,504 Peter-Hoblyn Enhanced lubricity diesel fuel emulsions NFT (P4006B) Valentine for reduction of nitrogen oxides. Dubin
DOCUMENT TRADEMARK APPLICANT 73/506,353 Platinum Plus FTI (T0071A) CN 960088945 CN 960088946 CN 960088947 EP 000195933 FR 95/599379 GB 2,046,018 ID D9616748 ID D9616749 ID J9616750 JP 125415/1995 JP 125416/1995 JP 125417/1995 KR 44777/95 KR 44778/95 KR 11493/95 MX 249,675 MX 249,891 TW 770,817 TW 85034641 T0075A Platinum Plus 2 FTI CA 74/061,007 Clean Diesel Technologies CDTI (T2003A) EP 000345801 75/243,063 LOE-NOX (T2005A) EP 00616532 CDTI KR1 39214/97 KR2 39215/97 KR3 39216/97 TW1 86042764 TW2 86042763 TW3 86042762
EX-10.G 5 EXHIBIT 10G Exhibit 10g PROMISSORY NOTE $494,62O November 5, 1997 For value received, CLEAN DIESEL TECHNOLOGIES, INC. of 300 Atlantic Street, Stamford Connecticut 06901 ("Borrower") promises to pay to the order of PLATINM PLUS, INC., as nominee for itself and its affiliates as their interests may appear ("Lender") at the office of Lender located at 300 Atlantic Street, Stamford Connecticut 06901, the principal amount of Four Hundred Ninety Four Thousand Six Hundred Twenty and no/100 Dollars ($494,620), payable in three annual installments of One Hundred Thousand Dollars ($100,000) each on July 1 of each of the years 1998 through 2000 and a final installment of One Hundred Ninety Four Thousand Six Hundred Twenty Dollars ($194,620) on July 1, 2001 and on each such principal payment date to pay interest on the unpaid balance thereof at the rate of eight percent (8%) per annum computed on the basis of a year of 360 days and 30 days per month. The Borrower may from time to time without premium or penalty prepay all or any part of the principal of this Note. After ten (10) days notice of any default in payment of principal and interest due on this note, all of the principal and interest accrued hereon may, at the option of the Lender, be declared to be immediately due and payable and interest payable on the unpaid balances of this Note shall thereafter accrue at the rate of ten percent (10%) per annum (the "Default Rate"). All payments on this Note shall be applied first to interest accrued at the Default Rate, next to other accrued interest, and then to unpaid principal, in any case to the amounts thereof most recently outstanding. The Borrower agrees to pay on demand all costs and expenses (including reasonable attorney's fees) incurred or paid by the Lender in enforcing the obligations of Borrower under this Note. This Note shall be governed by and construed under the laws of the State of Connecticut and the Borrower agrees to submit to the jurisdiction of the Stamford, Connecticut Superior Court in any action concerning this Note. Notices hereunder shall be made if in writing, postage prepaid, and mailed first class to the address specified above or to another address by notice so given. CLEAN DIESEL TECHNOLOGIES, INC. By: /s/ J. D. Peter-Hoblyn ------------------------------ Jeremy D. Peter-Hoblyn President EX-10.H 6 EXHIBIT 10H Exhibit 10h GRID NOTE AND SECURITY AGREEMENT $500,000. February 17,1998 CLEAN DIESEL TECHNOLOGIES, INC. ("Borrower") promises to pay PLATINUM PLUS, INC. ("Lender") or order, the principal amount of Five Hundred Thousand Dollars ($500,000), or such lesser amount as is indicated on the reverse hereof as the then unpaid principal balance, one hundred twenty (120) days from the date hereof with interest at the rate of ten percent (10%) per year on such principal balance calculated on the basis of a year of 360 days and 30 day months. This note may be prepaid at any time in whole or in part without penalty or premium. Lender agrees to lend up to Five Hundred Thousand Dollars to Borrower under this Note for Borrower's working capital purposes. All repayments shall be to the account of Lender at its home office, 300 Atlantic Street, Stamford Connecticut 06901. Borrower irrevocably authorizes Lender to endorse on the reverse side hereof the date and principal amount of any borrowing or repayment made after the date hereof from or to Lender. To secure the obligation of this Note Borrower hereby grants to Lender a security interest in and to all of Borrower's Intellectual Property whatsoever, including patents, trademarks and copyrights, applications therefor, and trade secrets, technology, information and data, including the Intellectual Property more particularly listed on Schedule A hereto and proceeds of all such collateral. If the principal hereof in not paid when due, Borrower aqrees to pay all costs of collection thereof and all costs of foreclosure of the security interest granted herein, including reasonable attorneys fees, and for such purpose herby submits to the jurisdiction of the Superior Court of Stamford of the State of Connecticut. In foreclosure of the security interest granted herein, Borrower waives trial by jury and any requirement of notice or of posting a bond. CLEAN DIESEL TECHNOLOGIES, INC. By: /s/ J. D. Peter-Hoblyn ---------------------------- Jeremy D. Peter-Hoblyn President EX-10.J 7 EXHIBIT 10J [CLEAN DIESEL LOGO] November 5, 1997 Fuel-Tech N.V. Castorweg 22-24 Curacao, Netherlands Antilles Re: Stock Registration Rights Dear Sirs: The following sets forth our proposal for registration rights to be granted Fuel-Tech N.V. ("FT") over Clean Diesel Technologies, Inc. ("CDT") common stock owned by FT. If you are in accord with the following, please sign below where indicated. In connection with any proposed sale by FT of quantities of CDT common stock owned by FT and for which FT shall be legally required to deliver a statutory prospectus covered by an effective registration statement, FT shall have the following registration rights: 1. One registration on demand for a number of shares equal in market value to at least $1 million at the time of demand; and 2. An unlimited number of "piggy-back" registrations. In the event of any registration hereunder CDT shall pay all costs involved in such registration including legal, accounting, investment banking and the printing of registration statements and FT's reasonable requirements for prospectuses. Notwithstanding the foregoing, however, FT shall pay or absorb costs involved in any such registration which (i) it voluntarily assumes to protect its interests, such as legal fees, (ii) are associated with the task of furnishing information concerning FT required to be included in the registration statement (iii) the costs of discounts, commissions, and syndicate expenses allocable to the shares to be sold by FT. A "registration" shall mean an effective registration statement, with post-effective amendments as required under the United States securities laws and such other proceedings as may be required under the securities or "blue sky" laws of the various states of the United States so that FT may legally sell or offer to sell the quantities of the CDT securities owned by it which it desires to sell or offer to sell for at least a period of six months from the commencement of the effectiveness of the registration statement. Fuel-Tech Registration Rights, 11/5/97, p. 2 A "piggy-back" registration shall mean a registration of securities to be sold or offered for sale by CDT on its own behalf or on behalf of sellers other than FT (other than for employee benefit plans stock options or the like) in which FT shall participate as a selling securities holder. In any registration hereunder FT shall (i) indemnify CDT for misstatements or omissions of fact concerning FT furnished by FT and required to be included in a registration statement and (ii) shall be guided as to the timing and quantities of securities to be sold or offered for sale by the independent advice of the managing underwriter of the proposed offering. CDT may select the managing underwriter in any registration hereunder subject to the approval of FT which shall not be unreasonably withheld. In the event of a demand registration CDT may itself participate and offer securities on its own behalf with FT acting as a selling securities holder so long, however, as FT shall have reasonable assurance that such arrangement will not interfere with FT's intended sale of securities. Clean Diesel Technologies, Inc. By: /s/ J.D. Peter-Hoblyn ----------------------------- Jeremy D. Peter-Hoblyn President Agreed to and Accepted this 5th day of November, 1997 Fuel-Tech N.V. By: /s/ J.A. de Havilland ------------------------- J.A. de Havilland Managing Director EX-23 8 EXHIBIT 23.1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-16939) pertaining to The 1994 Incentive Plan of Clean Diesel Technologies, Inc. of our report dated February 26, 1998, with respect to the financial statements of Clean Diesel Technologies, Inc. in this Annual Report on Form 10-K for the year ended December 31, 1997. /s/ ERNST & YOUNG LLP Stamford, Connecticut March 27, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
5 US DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 1,239,000 0 0 0 205,000 1,682,000 0 0 1,750,000 894,000 0 0 0 126,000 335,000 1,750,000 199,000 199,000 132,000 0 3,952,000 0 0 (3,764,000) 0 0 0 0 0 (3,764,000) (1.50) 0
-----END PRIVACY-ENHANCED MESSAGE-----