-----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, Tj3zErtsimMs/XgoxF1GDuraszTDSlTvGcywLujZ9qTVaBXy8CmfX0tpkimv179h zd8sjO3zWt6XrBJth8y3YQ== 0001140361-07-006614.txt : 20070330 0001140361-07-006614.hdr.sgml : 20070330 20070330143901 ACCESSION NUMBER: 0001140361-07-006614 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070330 DATE AS OF CHANGE: 20070330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLEAN DIESEL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000949428 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 061393453 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27432 FILM NUMBER: 07731854 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 form10-k.txt CLEAN DIESEL 10-K 12-31-2006 UNITED STATES 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 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2006 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission File 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 or organization Identification No.) SUITE 702, 300 ATLANTIC STREET STAMFORD, CT 06901 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 327-7050 -------------- 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 ----------------------------- (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes No X --- --- Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X --- --- 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. Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X --- --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- The aggregate market value of the voting stock held by non-affiliates of the registrant based on the last sale price as of June 30, 2006 was $39,177,963. As of March 23, 2007, the outstanding number of shares of the registrant's common stock, par value $0.05 per share, was 31,805,839. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Proxy Statement for the annual meeting of stockholders to be held in June 2007 are incorporated by reference into Part III of this report. ================================================================================
CLEAN DIESEL TECHNOLOGIES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 TABLE OF CONTENTS ITEM NUMBER DESCRIPTION PAGE - ------ ----------- ---- 1. Business 3 1A. Risk Factors 13 1B. Unresolved Staff Comments 17 2. Properties 17 3. Legal Proceedings 17 4. Submission of Matters to a Vote of Security Holders 17 5. Market for Clean Diesel Technologies, Inc.'s Common Equity, Related Stockholders' Matters and Issuer Purchases of Equity Securities 18 6. Selected Financial Data 20 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 7A. Quantitative and Qualitative Disclosures about Market Risk 28 8. Consolidated Financial Statements and Supplementary Data 29 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48 9A. Controls and Procedures 48 9B. Other Information 48 10. Directors and Executive Officers of Clean Diesel Technologies, Inc. 48 11. Executive Compensation 48 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 48 13. Certain Relationships and Related Transactions 49 14. Principal Accountant Fees and Services 49 15. Exhibits and Financial Statement Schedules 50 Exhibit Index 50 Signatures 53
The information called for by Items 10, 11, 12, 13 and 14, to the extent not included in this Annual Report on Form 10-K, is incorporated herein by reference to the information to be included under the captions "Election of Directors," "Directors and Executive Officers of Clean Diesel Technologies," "Section 16(a) Beneficial Ownership Reporting Compliance," "Committees of the Board," "Executive Compensation," "Directors' Compensation," "Employment Contracts and Termination of Employment and Change in Control Arrangements," "Compensation Committee Interlocks and Insider Participation," "Report of the Compensation Committee on Executive Compensation," "Security Ownership of Certain Owners," "Security Ownership of Officers and Directors" and "Appointment of Independent Registered Public Accounting Firm" in Clean Diesel Technologies, Inc.'s 2007 Proxy Statement, which is expected to be filed by April 28, 2007. 2 PART I ITEM 1. BUSINESS Pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, this Annual Report on Form 10-K contains forward-looking statements that reflect our estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include all statements that are not historical facts. These statements are often identified by words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "may," "should," "will," "would" and similar expressions. These forward-looking statements are based on information available to us and are subject to numerous risks and uncertainties that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, the forward-looking statements we make in this Annual Report. The discussion in the section "Risk Factors" in Item 1A. of this Annual Report highlight some of the more important risks identified by management but should not be assumed to be the only factors that could affect our future performance. Additional risk factors may be described from time to time in our future filings with the Securities and Exchange Commission (SEC). Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should not place undue reliance on any forward-looking statements. Risk factors are difficult to predict, contain material uncertainties that may affect actual results and may be beyond our control. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10-K, "CDT" and the terms "we," "our" and "us" refer to Clean Diesel Technologies, Inc. and its wholly-owned subsidiary, Clean Diesel International, LLC. The Clean Diesel Technologies, Inc. name and logo, Platinum Plus(R), ARIS(R) and Biodiesel Plus(TM) are either registered trademarks or trademarks of Clean Diesel Technologies, Inc. in the United States and/or other countries. All other trademarks, service marks or trade names referred to in this Annual Report are the property of their respective owners. GENERAL We develop, design, market and license patented technologies and solutions that reduce harmful emissions from internal combustion engines while concurrently improving fuel economy and engine power. We are a Delaware corporation formed in 1994 as a wholly-owned subsidiary of Fuel Tech, Inc., a Delaware corporation (formerly known as Fuel-Tech N.V., a Netherlands Antilles limited liability company) ("Fuel Tech"). We were spun-off by Fuel Tech in a rights offering in December 1995. Since inception, we have developed a substantial portfolio of patents and related proprietary rights and extensive technological know-how. TECHNOLOGY AND INTELLECTUAL PROPERTY Our technology is comprised of patents, patent applications, trade or service marks, data and know-how. Our technology was initially acquired by assignment from Fuel Tech and has subsequently been primarily developed internally. As owner, we maintain the technology at our expense. The agreement with Fuel Tech provides for annual royalties commencing in 1998 and terminating in 2008 of 2.5% of the gross revenue derived from the sale of the Platinum Plus(R) fuel-borne catalyst, a diesel fuel additive for emissions control and fuel economy improvement in diesel engines. We may terminate this royalty obligation at any time by payment to Fuel Tech of $2.2 million in 2007 or $1.1 million in 2008. In 2006, we filed three U.S. and five foreign patent applications. During 2005, we filed ten U.S. and two foreign patent applications. Also in 2005, we acquired 11 granted foreign patents and two U.S. and eight foreign patent applications. As of February 28, 2007, we held 125 patents and an extensive library of performance data and technological know-how. We have patent coverage in North America, Europe, Asia and South America. Our patent portfolio as of February 28, 2007 includes 25 U.S. patents and approximately 100 corresponding foreign patents 3 along with pending 68 U.S. and foreign patent applications. Our scientists and engineers continue to make invention disclosures for which we are in the process of preparing patent applications. Our patents have expiration dates ranging from 2008 through 2025, with the majority of the material patents upon which we rely expiring in 2018 and beyond. We have made substantial investments in our technology and intellectual property and have incurred development costs for engineering prototypes, pre-production models and field-testing of several products and applications. Our intellectual property strategy has been to build upon our base of core technology that we have developed or acquired with newer advanced technology patents developed by or purchased by us. In many instances, we have incorporated the technology embodied in our core patents into patents covering specific product applications, including product design and packaging. We believe this building-block approach provides greater protection to us and our licensees than relying solely on the core patents. Our core patents, advanced patents and patent applications cover the means of controlling the four principal emissions from diesel engines: - nitrogen oxides (NOx); - particulate matter (PM); - carbon monoxide (CO); and - hydrocarbon (HC). Our core patents, advanced patents and patent applications include the following: - Fuel-borne catalyst; - Selective catalytic reduction; - Catalyzed wire mesh filter; - Biofuels; and - Emission control systems. Our key technologies include the following: - The cost effective means of controlling the four principal emissions from diesel engines (nitrogen oxides, particulate matter, carbon monoxide and hydrocarbon). - Reduction of carbon dioxide (CO2) and other greenhouse gas emissions by enhancing combustion efficiency. - Reduction of carbon dioxide and other greenhouse gas emissions by enabling long-term reliable performance of emission control systems. - Effective utilization of strategic catalytic materials such as platinum enables reduced emission control system costs, recycling strategies and low nitrogen dioxide emission levels. - Low cost, reliable and durable diesel particulate filter performance through catalyzed wire mesh filter systems in retrofit applications. Protecting our intellectual property rights is costly and time consuming. Patent filing, prosecution, maintenance and annuity fees for our extensive patent portfolio are a significant portion of our expenses and typically range from $50,000 to $400,000 annually. We incur maintenance fees to maintain our granted U.S. patents and annuity fees to maintain foreign patents and the pendancy of patent applications. We rely on a combination of patent, trademark, copyright and trade secret protection in the U.S. and elsewhere as well as confidentiality procedures and contractual provisions to protect our proprietary technology. Further, we enter into confidentiality and invention assignment agreements with our employees and confidentiality agreements with our consultants and other third parties. 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 our products is protected by patent laws, trade secret laws, confidentiality agreements and licensing agreements. There can be no assurance that such protection will prove adequate or that we will have adequate remedies for disclosure of the trade secrets or violations of the intellectual property rights. 4 BUSINESS STRATEGY Our strategy is to maximize our revenue by penetrating the diesel emission reduction market to the greatest extent possible. To achieve this objective, we will use licensing agreements with original equipment manufacturers (OEMs), Tier One suppliers, retrofit system integrators and other suppliers. Our licensing agreements are usually structured so that we derive revenue from license fees and on-going royalties. In 2007, we will seek broader market coverage by strengthening our marketing and distribution channels through training existing distributors and engaging new distributors. In 2007, we will also stress direct selling of our solutions and products to fleets in various industries by emphasizing the environmental benefits, fuel economy improvements and practical, lower cost emission control available from the use of our solutions and products. We intend to create the market pull for current and potential licensees and ensure that the full value of our technology is realized by the end user. SOLUTIONS AND PRODUCTS We have succeeded in developing technologies and products that, when combined with other after-treatment devices, reduce particulates and nitrogen oxides emissions from diesel engines to or below the U.S. and international regulated emission levels, while also improving fuel economy. This results in a reduction in fuel costs and greenhouse gas emissions, primarily carbon dioxide, as well as a reduction in emissions of particulate matter, nitrogen oxides, carbon monoxide and unburned hydrocarbons. As described below, our products and solutions include the Platinum Plus fuel-borne catalyst; the ARIS(R) selective catalytic reduction system, an advanced reagent injection system used in selective catalytic reduction systems for control of emissions of nitrogen oxides from diesel engines; our diesel particulate filter technology based on catalyzed wire mesh filter elements; and Biodiesel Plus(TM). PLATINUM PLUS FUEL-BORNE CATALYST We have developed and patented our Platinum Plus additive as a diesel fuel soluble, fuel-borne catalyst, which contains minute amounts of fuel-soluble platinum and cerium catalysts. Platinum Plus is used to improve combustion, reduce emissions and improve the performance and reliability of emission control equipment. Platinum Plus fuel-borne catalyst takes catalytic action into engine cylinders where it improves combustion, thereby reducing particulates, unburned hydrocarbons and carbon monoxide emissions, which also results in improving fuel economy. Thus, Platinum Plus fuel-borne catalyst lends itself to a wide range of enabling solutions including fuel economy, diesel particulate filtration, low emission biodiesel, carbon reduction and exhaust emission reduction. Fleet tests using Platinum Plus fuel-borne catalyst have shown improvements in fuel economy of up to 12%. Our Platinum Plus fuel-borne catalyst can be used alone with regular diesel or ultra-low sulfur diesel as well as biodiesel fuel blends to reduce particulate emissions by 10% to 25% within the engine, while also improving the performance of diesel oxidation catalysts and particulate filters. Use of fuel-borne catalysts also keeps particulate filters cleaner by burning off the soot particles at lower temperatures and further reducing toxic emissions of carbon monoxide and unburned hydrocarbons. Platinum Plus has also been shown to provide energy efficiency and emissions reduction benefits when applied with two-stroke gasoline powered engines, including those commonly used in Asian markets. Through our strategic use of independent test laboratories from 1996 to the present, we have conducted research and development programs on platinum fuel catalysts which were conducted by Delft Technical University (Netherlands), Ricardo Consulting Engineers (U.K.), Cummins Engine Company (U.S.) and Southwest Research Institute (U.S.). This approach allows our technical team to execute programs on a cost effective basis while bringing in a wide range of expertise. Most importantly, the results have been independently derived. We received the U.S. Environmental Protection Agency registration in December 1999 for the Platinum Plus fuel-borne catalyst for use in bulk fuel by refiners, distributors and truck fleets. In 2000, we completed the certification protocol for particulate filters and additives for use with particulate filters with VERT, the main recognized authority in Europe that tests and verifies diesel particulate filters for emissions and health effects. In 2001, the Swiss environmental agency BUWAL approved the Platinum Plus fuel-borne catalyst for use with particulate filters. In 2002, the U.S. Mining, Safety and Health Administration accepted Platinum Plus fuel-borne catalyst for use in all underground mines. 5 PLATINUM PLUS FOR FUEL ECONOMY We believe that recent increases in the cost of fuel have made the economic impact of greater fuel economy an important consideration in many industries. Further, recent media focus on global warming and the effects of fuel consumption on the environment have resulted in an increased interest in Platinum Plus fuel-borne catalyst from a standpoint of corporate social responsibility. The improvement attributable to Platinum Plus fuel-borne catalyst may vary as a result of engine age, application in which the engine is used, load, duty cycle, speed, fuel quality, tire pressure and ambient air temperature. Generally, after use of Platinum Plus fuel-borne catalyst during a conditioning period, our customers derive economic benefits from the use of our Platinum Plus fuel-borne catalyst whenever the price of diesel fuel is in excess of $1.25 per U.S. gallon. In other words, at or above that level, the economic benefit our customers derive from use of our Platinum Plus fuel-borne catalyst substantively exceeds the cost of the additive. When coupled with the demand to reduce carbon dioxide emissions from transportation and distributed power generation, the argument for use of Platinum Plus is a compelling one. In 2006 in the U.S., we conducted ten large, on-road fleet fuel economy demonstration trials in a range of industries, including the beverage, grocery and fuel delivery industries. We also conducted a marine trial for a marine ferry operation. The improvements in fuel economy from using Platinum Plus fuel-borne catalyst in these demonstrations ranged up to 12% with an average 8% improvement. The best results were generally attributable to short-haul "stop-and-go" driving, as is generally the pattern for local delivery vehicles, buses and garbage trucks. Lab engine test beds run at original equipment manufacturer test labs and independent research institutes showed up to 8% improvement in fuel economy in modern diesel engines, which have been confirmed by field testing programs. In 2006 in the U.K., we obtained our first U.K. commercial contract upon completion of a fleet trial that demonstrated to the customer the fuel economy benefits and emission control attributable to Platinum Plus fuel-borne catalyst. We have six additional customer trials underway in the U.K. with expected completion in the second half 2007. PLATINUM PLUS FOR DIESEL EMISSION REDUCTION The Platinum Plus fuel-borne catalyst can be used alone with all diesel fuels, including regular sulfur diesel, ultra-low sulfur diesel, arctic diesel (kerosene) and biodiesel fuels to reduce particulate emissions by 10% to 25%. Environmentally conscious corporations and fleets can utilize this solution to voluntarily reduce emissions while obtaining an economic benefit. We received the U.S. Environmental Protection Agency's Environmental Technology Verification in 2003 for our Platinum Plus fuel-borne catalyst and a diesel-oxidation catalyst (the Platinum Plus Purifier System). This system is now being promoted as a solution for cost-effective emissions reduction. EPA verification is given for specific engine groups, and the initial verification and applications are for pre-1996 manufactured engines, which are higher emitters of particulates and nitrogen oxides than newer engines. We also received verification extension for the fuel-borne catalysts with diesel-oxidation catalysts to cover engines manufactured between 1994 and 2003. Verification is needed for the end user of the Platinum Plus fuel-borne catalyst systems to get emissions reduction credit from the Environmental Protection Agency's voluntary retrofit program or California Air Resources Board's mandatory retrofit program. In the U.S., truck fleets, municipalities and off-road equipment operators are generally moving toward using only verified technologies when installing retrofit emissions reduction systems, which is typically mandated for governmentally funded projects. Diesel particulate filters trap up to 95% of the exhaust particulate matter but, in doing so, can become clogged with carbon soot. Use of fuel-borne catalysts reduces the amount of particulate matter which the filter is exposed to, and further reduces emissions of toxic carbon monoxide and unburned hydrocarbons. The fuel-borne catalyst also significantly lowers the temperature at which the captured soot will burn, therefore, allowing the particulate filters to regenerate themselves and stay cleaner during a wider range of operating conditions. Platinum Plus fuel-borne catalyst is increasingly being utilized as a diesel particulate filter regeneration additive. In Europe, it is currently being supplied into the U.K., Denmark, Belgium, Switzerland, Sweden, Austria and Holland markets through our partners and distributors for aftermarket retrofit applications. The Platinum Plus fuel-borne catalyst has also found application in the U.K. to alleviate soot blocking from light drive cycle bus applications. In the U.S., the Platinum Plus fuel-borne catalyst has been accepted for use by the Mine Safety and Health 6 Administration in underground mines and has been successfully used as a regeneration aid for vehicles fitted with lightly catalyzed diesel particulate filters. Furthermore, in the passenger car market where fuel-borne catalyst technology dominates the diesel particulate filter regeneration market, engine testing conducted in 2006 at a European testing institute reconfirmed the ability to reduce total platinum usage of an emission control device by up to 70%, thus, offering significant cost saving for the passenger car manufacturers. We anticipate penetration into this market as we proceed through 2007. PLATINUM PLUS FOR BIODIESEL Platinum Plus fuel-borne catalyst is also effective with regular sulfur diesel, ultra-low sulfur diesel, arctic diesel (kerosene) and biodiesel. When used with blends of biodiesel and ultra-low sulfur diesel, our Biodiesel Plus(TM) product, Platinum Plus fuel-borne catalyst prevents the normal increase in nitrogen oxides associated with biodiesel, as well as offering emission reduction in particulates and reduced fuel consumption. This enables biodiesel producers to differentiate and offer a premium biodiesel with reduced environmental impact and improved performance. The biodiesel market is still in its infancy and is expected to expand over the next years. ARIS SELECTIVE CATALYTIC REDUCTION The ARIS (Advanced Reagent Injection System) is our patented injection system for the injection of reducing reagents for such applications as the low nitrogen oxides trap, active diesel particulate filter regeneration, and selective catalytic reduction. The primary use of the ARIS system to date has been in conjunction with selective catalytic reduction for both stationary diesel engines for power generation and mobile diesel engines used in trucks, buses, trains and boats. The system is comprised of our patented single fluid computer-controlled injector that provides precise injection of nontoxic urea-based reagents into the exhaust of a stationary or mobile engine, where the system then converts harmful nitrogen oxides across a catalyst to harmless nitrogen and water vapor. The system has shown reduction of nitrogen oxides of up to 90% on a steady-state operation and of up to 85% in transient operations. This process, known as selective catalytic reduction, has been in use for many years in power stations, and it is well proven in mobile and stationary applications. The ARIS system is a compact version of the selective catalytic reduction injection system. The principal advantage of the patented ARIS system is that compressed air is not required to operate the system and that a single fluid is used for both nitrogen oxides reduction and injector cooling. The system is designed for high-volume production and is compact, with very few components, making it inherently cheaper to manufacture, install and operate than the compressed air systems, which were first developed for heavy-duty engines. ARIS technology is applicable for reduction of nitrogen oxides from all combustion engine types, ranging from passenger car and light duty to large scale reciprocating and turbine engines, including those using gaseous fuels such as liquefied petroleum gas and compressed natural gas. CATALYZED WIRE MESH DIESEL PARTICULATE FILTER The catalyzed wire mesh filter technology was initially developed by Mitsui Co., Ltd. for use in conjunction with our fuel-borne catalyst as a lower cost and reliable alternative to the traditional heavily catalyzed filter systems. We have verified the system under the U.S. Environmental Protection Agency's Environmental Technology Verification protocol as reducing toxic particulates by up to 76%, carbon monoxide by 60%, hydrocarbons by 80% and nitrogen oxides by 9%. It also provides lower nitrogen dioxide emissions levels relative to traditional, heavily catalyzed filter systems. In 2005, the catalyzed wire mesh filter technology was transferred to us under a technology transfer agreement with Mitsui and PUREarth. Under the agreement, we acquired the worldwide title to the patents and other intellectual properties, excluding Japan. The catalyzed wire mesh filter technology is designed for use in a wide range of diesel engine particulate emission control applications. The catalyzed wire mesh filter technology is a durable, low-cost filter designed to bridge the gap between low efficiency diesel-oxidation catalysts and expensive, heavily catalyzed particulate filters. The wire-mesh filter system is designed to work synergistically with a fuel-borne catalyst for reliable performance on a wide range of engines and with a broad range of fuels. This combined Platinum Plus fuel-borne catalyst/catalyzed wire mesh filter technology is especially suited to solving the challenging problem of delivering a reliable pollution control solution which can be easily retrofitted for the older, higher-emission diesel engines expected to be in service for years to come, and in markets and applications where ultra-low sulfur diesel is not available. 7 In addition to reducing the cost to achieve these emissions improvements, the patented combination with a fuel-borne catalyst permits the catalyzed wire mesh filter to operate effectively at the lower exhaust temperatures found in stop-and-go service applications. The fuel-borne catalyst reduces emissions and allows soot captured in the catalyzed wire mesh filter to be reliably combusted at lower exhaust temperatures. Commercial systems of Platinum Plus fuel-borne catalyst with this durable catalyzed wire mesh filter have demonstrated performance in beverage delivery vehicles, refuse trucks and buses. We received Environmental Protection Agency Environmental Technology Verification in June 2004 for the catalyzed wire mesh filter system, which combines the Platinum Plus fuel-borne catalyst with a catalyzed wire mesh filter. THE MARKET AND THE REGULATORY ENVIRONMENT We estimate that worldwide annual consumption of diesel fuel amounts to approximately 200 billion U.S. gallons, including approximately 50 billion in the U.S., 60 billion in Europe and 50 billion in Asia. NEW DIESEL ENGINES While engine manufacturers have traditionally met emissions regulations by engine design changes, we believe that further reduction in emissions can be achieved best by using combinations of cleaner-burning fuels and after-treatment systems such as diesel-particulate filters and catalytic systems for reducing nitrogen oxides. Like many of the engine-based emissions control strategies these also generally increase fuel consumption. Emissions regulations for new mobile diesel engines in the major markets of North America, Europe and Asia have continued to tighten and are now 40% to 90% lower than previous regulations. Regulations in effect by 2010 in the U.S. and by 2009 in Europe and in Asia are expected to reduce the emissions level for new mobile diesel engines from 85% to 99% of the levels mandated in the mid-1980s. Management expects the market for nitrogen oxide reduction systems in mobile applications to develop between 2007 and 2010. European engine manufacturers have decided to use urea selective catalytic reduction in 2006, beginning with heavy-duty vehicles and likely for use on medium and light vehicles and passenger cars, as well. There is a clear preference to use a single fluid system for the medium and light trucks, passenger cars and SUVs which have no compressed air system. It also seems likely that European manufacturers will adopt particulate filters to meet 2009 regulations which have been ratified by the European Parliament. We have significant intellectual property holdings for the design and implementation of these systems. In May 2004, the U.S. Environmental Protection Agency (EPA) announced proposals to regulate non-road engines. The regulations will be phased in from 2008 to 2014. Proposals include a wide range of construction equipment, agricultural equipment, as well as railroad and marine applications. We believe the U.S. market for diesel engines is poised for significant growth because of the favorable fuel economy performance of diesel engines, coupled with the increased ability to control effectively particulate matter and emissions of nitrogen oxides from such engines. Europe and Asia already use significantly more mobile diesel engines than in the U.S., particularly for passenger and light-duty vehicles. Engine manufacturers have all employed particulate filters to meet new U.S. heavy-duty diesel vehicle regulations for the 2007 model year and have indicated their intent to continue this for particulate matter control in 2010. Major U.S. and European engine manufacturers have committed to adopt urea-selective catalytic reduction. We believe that both particulate filters and nitrogen oxides control technology will be required in Europe and the U.S. in the 2007 to 2010 period. EXISTING DIESEL ENGINES AND THE RETROFIT MARKET While much of the regulatory pressure and the response from engine manufacturers have focused on reducing emissions from new engines, there is increasing concern over pollution from existing diesel engines that have from 20- to 30-year life cycles. The U.S. Environmental Protection Agency has estimated that there are approximately 11 million diesel powered vehicles which need to be retrofitted over the next ten years. We believe this trend underlies the growing interest in the potential market that may exist for retrofitting diesel engines with emissions reduction systems. Stationary diesel engines, construction equipment and public transportation vehicles such as buses and commercial and municipal truck fleets will all be included in such a retrofit diesel engine market. The California Air Resources Board declared diesel particulates to be toxic in 1998, and in 2000, it proposed reductions in particulate emissions from over one million existing engines in California as well as more stringent controls for new engines. The Environmental Protection Agency stated its objective for retrofitting vehicles with 8 particulate controls and developed the Clean School Bus U.S.A. program to reduce emissions on school buses and the Smartway Transport Program to reduce both diesel emissions and fuel consumption on over-the-road trucks. COMPETITION Because our principal strategy is the licensing of our technologies, those companies that could be considered as competitors and as potential licensees of ours should also be considered as our potential customers. There is significant competition among companies that provide solutions for pollutant emissions from diesel engines. Several companies market products that compete directly with our products and other companies offer products that potential customers may consider to be acceptable alternatives. In addition, newly developed products could be more effective and cost-efficient than our current products or those developed in the future. We face direct competition from companies with far greater financial, technological, manufacturing and personnel resources, including BASF (formerly Engelhard), Donaldson, Cummins Filtration, Innospec (formerly Octel), Rhodia and Johnson Matthey. Moreover, many of the current and potential future competitors have substantially more engineering, sales and marketing capabilities, and broader product lines than we do. Because of greater resources, these competitors may be better able to withstand a change in conditions within the industries in which we operate, a change in the prices of raw materials or a change in global economic conditions. We also face indirect competition in the form of alternative fuel consumption vehicles such as those using methanol, hydrogen, ethanol and electricity. We believe that our technologies and products occupy a strong competitive position relative to others in the diesel emissions reduction technology market. Competition in verified particulate reduction systems for retrofit is from catalyst systems suppliers like Johnson Matthey and BASF. These companies employ systems that rely on much greater quantities of platinum than we do and that have the undesirable effect of increasing emissions of nitrogen dioxide, a component of nitrogen oxides and a strong lung irritant. Competition in the diesel fuel additive market is from additive suppliers such as Innospec and Rhodia, who market an iron-based product, and Exotica, who markets a cerium product. Our Platinum Plus fuel-borne catalyst provides fuel economy benefits as it competes on performance in regenerating filters and lowering system cost for the system provider by enabling reduced platinum levels and lower overall metal usage which results in less ash buildup on filters. Platinum Plus fuel-borne catalyst also offers better performance in terms of carbon monoxide reduction and hydrocarbon reduction. In addition, Platinum Plus fuel-borne catalyst is the only fuel additive to provide fuel economy improvement. Finally, in the nitrogen oxides control market, competition is from other suppliers of reagent-based post-combustion nitrogen oxides control systems such as Argillon, Hilite International and KleenAir Systems for retrofit, and Bosch and Hilite International for original equipment manufacturers. Bosch and Purem have stated that they will offer a single fluid system after 2007. However, we already have proprietary technology for a single fluid system which requires no compressed air. SALES AND MARKETING Our products and solutions are sold to customers through our distribution network, direct sales and the efforts of our sales consultants and agents. As of February 28, 2007, our sales and marketing team consisted of seven employees, sales consultants and agents supported by our executive officers and members of our board of directors. MARKET OPPORTUNITY We believe our technologies are applicable to all existing diesel engines, all new engines designed to meet upcoming emission standards and all types of fuel, including biodiesel and ultra-low sulfur diesel. We view the market opportunity as one that may be divided by application and market drivers. Because of the financial benefit of improved fuel economy along with reduction of greenhouse gases, we have begun to place emphasis on fuel economy in the markets we serve. Our intellectual property and technologies are now at the center of developments in the on-road diesel market. Selective catalytic reduction which utilizes our ARIS technology and diesel particulate filtration which can utilize our Platinum Plus technology are core technologies to the development of the pending generation of cleaner diesels. We believe this places us in a strong position going forward. To meet 2010 requirements, some alternative fuels' strategies will also need to consider means of reducing nitrogen oxides emissions. Current projects are demonstrating the effective application of ARIS-based systems with these alternative fuels' vehicles. 9 The two principal market drivers for our products are legislative compliance for emission control and fuel economy improvement. Platinum Plus fuel-borne catalyst is an "enabling technology" that enables emission reductions from the engine itself and enhances performance of the exhaust after-treatment systems while improving fuel economy. The continued tightening of clean air standards, emissions control regulations, pressure for fuel efficiency and growing international awareness of the greenhouse effect should provide us with substantial opportunities in local markets throughout North America, Europe and Asia. Without compromising the fuel economy benefits of diesel, a significant reduction of particulate and nitrogen oxides emissions can only be achieved by using combinations of improved engine design, cleaner burning fuels and after-treatment systems such as diesel particulate filters and catalytic systems. The Platinum Plus fuel-borne catalyst (which improves combustion catalytically and enables higher performance of exhaust treatment devices) and the ARIS selective catalytic reduction technology can form key components of both of these after-treatment systems. The convergence of requirements for emissions compliance and the high cost of fuel make the use of our products economical. With diesel fuel selling at approximately $2.50 per U.S. gallon, or more, in the United States as of February 2007, a fuel savings of as little as 3% corresponds to $0.075 per U.S. gallon and effectively pays the cost of dosing with Platinum Plus fuel-borne catalyst by diesel fleet operators. Our Platinum Plus fuel-borne catalyst in controlled fleet tests showed an average of 8% fuel economy improvement. In Europe, where diesel fuel retails in some countries for as much as four times the U.S. selling price because of the higher tax rate on fuels, potential fuel economy benefits are even more pronounced. MARKETING STRATEGY AND COMMERCIALIZATION After-treatment systems for emissions control from diesel engines are now penetrating the diesel market. The introduction of selective catalytic reduction in Europe and Japan for heavy-duty applications and the move to include diesel particulate traps for diesel passenger cars has confirmed our technology as central to the diesel market. PSA Peugeot has taken the lead and offers particulate filter systems with fuel-borne catalysts on several of its models. Other manufacturers such as Volkswagen and Daimler Chrysler now also offer diesel particulate filters for their larger vehicles. In the U.S., Daimler Chrysler is now promoting the "clean diesel" passenger car under the "Bluetec" brand name which uses selective catalytic reduction to achieve the high nitrogen oxides reduction standards and will likely use airless urea injection. The U.S. Environmental Protection Agency and California Air Resources Board programs are only now beginning to result in the creation of active markets for diesel emissions reduction technologies and products in the U.S. These markets include applications to new vehicles from 2007 onward and retrofit applications in on- and off-road markets, as well as for stationary power generation. Thus, the market for diesel emissions reduction technologies and products is still emerging. We expect growing demand for verified diesel emissions reduction technologies and products to the diesel engine market, owners of existing fleets of diesel-powered vehicles, and expanding requirements from the off road, marine and railroad sectors. At the same time, engine original equipment manufacturers are looking to subsystem suppliers to provide complete exhaust subsystems including particulate filters and/or nitrogen oxides abatement systems and eventually both. It is an essential requirement of the U.S. retrofit market that emissions control products and systems are verified under the Environmental Protection Agency or California Air Resources Board protocols to qualify for credits within the Environmental Protection Agency and California Air Resources Board programs. Funding for these emissions control products and systems is generally limited to those products and technologies that have already been verified. We have received verification from the U.S. Environmental Protection Agency for two systems based upon the use of the Platinum Plus fuel-borne catalyst. Our Platinum Plus Purifier System uses the fuel-borne catalyst and a diesel oxidation catalyst for up to a 50% particulate reduction. Another system of ours is verified for up to 75% reduction and uses a catalyzed wire mesh filter and the Platinum Plus fuel-borne catalyst. We intend to verify our Platinum Plus fuel-borne catalyst in combination with a high performance diesel filter and may also seek to verify our Platinum Plus fuel-borne catalyst with additional emissions control devices manufactured by other vendors. We may receive royalties from sales of such systems or devices in the event sales of these devices include the Platinum Plus fuel-borne catalyst product as part of the devices' verification. We currently manufacture and ship the Platinum Plus fuel-borne catalyst product from a toll blender and from a warehouse in the northeast of the U.S. However, as demand for the product increases, we intend to expand the manufacturing and distribution by supplying platinum concentrate to third parties with U.S. and foreign facilities 10 pursuant to licensing agreements so that these licensees may market the finished Platinum Plus fuel-borne catalyst products to fuel suppliers and end users. We have licensed the ARIS nitrogen oxides reduction technology in both the U.S. and Japan. We plan to widen distribution to Europe and Asia by selling key components with the technology licenses. We believe this strategy of licensing the products and technologies represents the most efficient way to gain widespread distribution quickly and to exploit demand for the technologies in North America, Europe and Asia. We intend to utilize the catalyzed wire mesh filter technology which we have acquired by selling products based upon that technology alone and also in combination with our Platinum Plus fuel-borne catalyst. We have developed new patent applications in cooperation with external research institutions, which are intended to expand the market uses of the catalyzed wire mesh-based diesel particulate filter technology. HEALTH EFFECTS, ENVIRONMENTAL MATTERS AND REGISTRATION OF ADDITIVES We are subject to environmental laws in all the countries in which we do business. Management believes that CDT is in compliance with applicable laws, regulations and legal requirements. Engine tests in the U.S. and Switzerland show that, when used in conjunction with a diesel particulate filter, from 99% to 99.9% of the Platinum Plus catalyst metal introduced to the fuel system by the fuel-borne catalyst is retained within the engine and exhaust and that the amount of platinum emitted from the use of Platinum Plus fuel-borne catalyst is roughly equivalent to platinum attrition from automotive catalytic converters. Metallic fuel additives have come under scrutiny for their possible effects on health. We registered our platinum additive in 1997 in both the U.S. and the U.K. The platinum-cerium bimetallic additive required further registration in the U.S. that involved a 1,000-hour engine test and extensive emission measurements and analysis. The registration of the platinum-cerium bimetallic additive was completed in 1999 and issued in December 1999. Germany, Austria and Switzerland have set up a protocol (VERT) for approving diesel particulate filters and additive systems used with them. We completed the required tests under the VERT protocol in 2000 and in January 2001, the Swiss authority BUWAL approved our Platinum Plus fuel-borne catalyst fuel additive for use with a diesel particulate filter. The U.K. Ministry of Health's Committee on Toxicity reviewed our Platinum Plus product and all the data submitted by us in December 1996 and stated, "The Committee is satisfied that the platinum emission from vehicles would not be in an allergenic form and that the concentrations are well below those known to cause human toxicity." Radian Associates, an independent research consulting firm, reviewed our data and the literature on platinum health effects in 1997 and concluded, "The use of Clean Diesel Technologies' platinum containing diesel fuel additive is not expected to have an adverse health effect on the population under the condition reviewed." Radian Associates also concluded that emissions of platinum from the additive had a margin of safety ranging from 2,000 to 2,000,000 times below workplace standards. The U.S. Mining Safety and Health Administration accepted the use of Platinum Plus fuel-borne catalyst with particulate filters in 2002, and also allowed its use in all fuel used in underground mining, even without filters. We initiated independent tests in January 2005 to address questions from the Environmental Protection Agency on the use of our fuel-borne catalyst resulting from growing commercial interest in its diesel emission control products. The results from testing of our Platinum Plus fuel-borne catalyst over eight months at laboratories recognized and approved by the Environmental Protection Agency confirmed that any potentially allergenic platinum emissions from the use of the Platinum Plus fuel-borne catalyst were hundreds to thousands of times below the lowest published safe level and were consistent with reported platinum emissions from catalyzed control devices, in the opinion of the scientists. REVENUE Our operating revenue consists of fuel additives (primarily, our patented, EPA-registered Platinum Plus fuel-borne catalyst products and concentrate), hardware (primarily, our patented ARIS advanced reagent injector and dosing systems for selective catalytic reduction of nitrogen oxides, our EPA-verified Platinum Plus Purifier System, 11 our fuel-borne catalyst and a diesel-oxidation catalyst, and catalyzed wire mesh filters, including EPA-verified catalyzed wire mesh filters used in conjunction with our Platinum Plus fuel-borne catalyst), technology licensing fees and royalties, and consulting and other (primarily, engineering and development consulting services). The following table sets forth the percentage contribution of our revenue sources in relation to total revenue for the years ended December 31, 2006, 2005 and 2004.
(in thousands) FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- 2006 2005 2004 ---------------------------- ---------------------------- ---------------------------- Additive revenue $ 591 52.6% $ 411 50.6% $ 299 41.4% Hardware revenue 269 24.0% 349 43.0% 360 49.9% License and royalty revenue 74 6.6% 47 5.8% 54 7.5% Consulting and other 189 16.8% 5 0.6% 9 1.2% ------------- ------------- ------------- ------------- ------------- ------------- Total $ 1,123 100.0% $ 812 100.0% $ 722 100.0% ============= ============= ============= ============= ============= =============
The mix of our revenue sources during any reporting period may have a material impact on our operating results. In particular, our execution of technology licensing agreements, and the timing of the revenue recognized from these agreements, has not been predictable. To date, we have been dependent on a few customers for a significant portion of our revenue (see "Significant Customers" in Note 2 of Notes to Consolidated Financial Statements). The geographic areas from which our revenue was recognized for the years ended December 31, 2006, 2005 and 2004 are outlined in Note 12 of Notes to Consolidated Financial Statements. Our Platinum Plus fuel-borne catalyst concentrate and finished product are sold to distributors, resellers and vehicle fleets in various industries, including beverage, grocery, shipping, fuel delivery and marine, among other end users. We license the ARIS nitrogen oxides reduction system to others, generally with an up-front fee for the technology and know-how and an on-going royalty per unit. We also sell finished ARIS-based selective catalytic reduction systems to potential ARIS licensees and end users. We believe that the ARIS system can most effectively be commercialized through licensing several companies with a related business in these markets. We are actively seeking additional ARIS licensees for both mobile and stationary applications in the U.S., Europe and Asia. We offer rights to the catalyzed wire mesh technology through license agreements as well as selling finished filters for use with our Platinum Plus fuel-borne catalyst. SOURCES OF SUPPLY Platinum and cerium are the principal raw materials used in the production of the Platinum Plus fuel-borne catalyst. These metals are generally available from multiple sources. We do not anticipate a shortage in the supply of the raw materials used in the production of the fuel-borne catalyst in the foreseeable future. While we have outsourcing arrangements with two companies in the precious metal refining industry to procure platinum, there are no fixed commitments with these parties to provide supplies, and we may make procurement arrangements with others to fulfill our raw materials requirements. RESEARCH AND DEVELOPMENT We anticipate that we will continue to make significant research and development expenditures to maintain and expand our competitive position. This includes improving our current technologies and products and developing and acquiring newer technologies and products. Our research and development costs include test programs, salary and benefits, consulting fees, materials and certain testing equipment and are charged to operations as they are incurred. Our research and development expenses, exclusive of patent costs, totaled approximately $510,000, $439,000 and $506,000, respectively, for the years ended December 31, 2006, 2005 and 2004. 12 INSURANCE We maintain coverage for the customary risks inherent in our operations. Although we believe our insurance policies to be adequate in amount and coverage for current operations, no assurance can be given that this coverage will be, or continue to be, available in adequate amounts or at a reasonable cost, or that such insurance will be adequate to cover any future claims. EMPLOYEES As of February 28, 2007, we had thirteen full-time employees and two part-time employees. In addition, one executive officer of Fuel Tech provides management and legal services to us as needed pursuant to a Management and Services Agreement with Fuel Tech. We also retain outside technical consultants and sales and marketing consultants and agents. We enjoy good relations with our employees and are not a party to any labor management agreements. AVAILABLE INFORMATION We file reports, proxy statements and other documents with the Securities and Exchange Commission ("SEC"). You may read and copy any document we file at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. You should call 1-800-SEC-0330 for more information on the public reference room. Our SEC filings are also available to you on the SEC's Internet site at http://www.sec.gov. We maintain an Internet site at http://www.cdti.com/. The information posted on our website is not incorporated into this Annual Report on Form 10-K. ITEM 1A. RISK FACTORS Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements set forth at the beginning of Item 1 of this Annual Report. RISKS RELATED TO REGULATORY MATTERS WE FACE CONSTANT CHANGES IN GOVERNMENTAL STANDARDS BY WHICH OUR PRODUCTS ARE EVALUATED. We believe that, due to the constant focus on the environment and clean air standards throughout the world, a requirement in the future to adhere to new and more stringent regulations both domestically and abroad is possible as governmental agencies seek to improve standards required for certification of products intended to promote clean air. In the event our products fail to meet these ever-changing standards, some or all of our products may become obsolete. FUTURE GROWTH OF OUR BUSINESS DEPENDS, IN PART, ON ENFORCEMENT OF EXISTING EMISSIONS-RELATED ENVIRONMENTAL REGULATIONS AND FURTHER TIGHTENING OF EMISSION STANDARDS WORLDWIDE. We expect that the future business growth will be driven, in part, by the enforcement of existing emissions-related environmental regulations and tightening of emissions standards worldwide. If such standards do not continue to become stricter or are loosened or are not enforced by governmental authorities, it could have a material adverse effect on our business, operating results, financial condition and long-term prospects. NEW METAL STANDARDS, LOWER ENVIRONMENTAL LIMITS OR STRICTER REGULATION FOR HEALTH REASONS OF PLATINUM OR CERIUM COULD BE ADOPTED AND AFFECT USE OF OUR PRODUCTS. New standards or environmental limits on the use of platinum or cerium metal by a governmental agency could adversely affect our ability to use our Platinum Plus fuel-borne catalyst in some applications. In addition, California Air Resources Board requires "multimedia" assessment (air, water, soil) of the fuel-borne catalyst. The Environmental Protection Agency could require a "Tier III" test of the Platinum Plus fuel-borne catalyst at any time to determine additional health effects of platinum or cerium which tests may involve additional costs beyond our current resources. 13 RISKS RELATED TO OUR BUSINESS AND INDUSTRY WE FACE COMPETITION AND TECHNOLOGICAL ADVANCES BY COMPETITORS. There is significant competition among companies that provide solutions for pollutant emissions from diesel engines. Several companies market products that compete directly with our products. Other companies offer products that potential customers may consider to be acceptable alternatives to our products and services. We face direct competition from companies with far greater financial, technological, manufacturing and personnel resources, including BASF (formerly Engelhard), Donaldson, Cummins Filtration, Innospec (formerly Octel), Rhodia, Bosch, Hilite International, Johnson Matthey, Argillon and KleenAir Systems. Newly developed products could be more effective and cost efficient than our current or future products. Many of the current and potential future competitors have substantially more engineering, sales and marketing capabilities and broader product lines than we have. We also face indirect competition from vehicles using alternative fuels, such as methanol, hydrogen, ethanol and electricity. WE DEPEND ON INTELLECTUAL PROPERTY AND THE FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR FUTURE GROWTH AND SUCCESS. We rely on patent, trademark and copyright law, trade secret protection, and confidentiality and other agreements with employees, customers, partners and others to protect our intellectual property. However, some of our intellectual property is not covered by any patent or patent application, and, despite precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. We do not know whether any patents will be issued from pending or future patent applications or whether the scope of the issued patents is sufficiently broad to protect our technologies or processes. Moreover, patent applications and issued patents may be challenged or invalidated. We could incur substantial costs in prosecuting or defending patent infringement suits. Furthermore, the laws of some foreign countries may not protect intellectual property rights to the same extent as do the laws of the U.S. Some of our patents, including a platinum fuel-borne patent, will expire in 2008. However, we believe that other longer lived patents, including those for platinum and other fuel-borne catalyst materials in combination with after-treatment devices, will provide adequate protection of our proprietary technology, but there can be no assurances we will be successful in protecting our proprietary technology. As part of our confidentiality procedures, we generally have entered into nondisclosure agreements with employees, consultants and corporate partners. We also have attempted to control access to and distribution of our technologies, documentation and other proprietary information. We plan to continue these procedures. Despite these procedures, third parties could copy or otherwise obtain and make unauthorized use of our technologies or independently develop similar technologies. The steps that we have taken and that may occur in the future might not prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect the proprietary rights as fully as in the U.S. There can be no assurance that we will be successful in protecting our proprietary rights. Any infringement upon our intellectual property rights could have an adverse effect on our ability to develop and sell commercially competitive systems and components. OUR RESULTS MAY FLUCTUATE DUE TO CERTAIN REGULATORY, MARKETING AND COMPETITIVE FACTORS OVER WHICH WE HAVE LITTLE OR NO CONTROL. The factors listed below, some of which we cannot control, may cause our revenue and results of operations to fluctuate significantly: - Actions taken by regulatory bodies relating to the verification, registration or health effects of our products. - The extent to which our Platinum Plus fuel-borne catalyst and ARIS nitrogen oxides reduction products obtain market acceptance. - The timing and size of customer purchases. - Customer concerns about the stability of our business which could cause them to seek alternatives to our solutions and products. 14 AN EXTENDED INTERRUPTION OF THE SUPPLY OR A SUBSTANTIAL INCREASE IN THE PRICE OF PLATINUM COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. The cost of platinum or the processing cost associated with converting the metal may have a direct impact on the future pricing and profitability of our Platinum Plus fuel-borne catalyst. Although we intend to minimize this risk through various purchasing and hedging strategies, there can be no assurance that this will be successful. A shortage in the supply of platinum or a significant, prolonged increase in the price of platinum, in each case, could have a material adverse effect on our business, operating results and financial condition. FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FUTURE SUCCESS. Our success will depend, in large part, on our ability to retain current key personnel, attract and retain current key personnel, additional qualified management, marketing, scientific, and manufacturing personnel, and develop and maintain relationships with research institutions and other outside consultants. The loss of key personnel or the inability to hire or retain qualified personnel, or the failure to assimilate effectively such personnel could have a material adverse effect on our business, operating results and financial condition. WE CURRENTLY DEPEND ON THE MARKETABILITY OF THREE PRIMARY PRODUCTS - PLATINUM PLUS FUEL-BORNE CATALYST, ARIS ADVANCED REAGENT INJECTION SYSTEM FOR SELECTIVE CATALYTIC REDUCTION AND CATALYZED WIRE MESH FILTERS. Our Platinum Plus fuel-borne catalyst, ARIS advanced reagent injection system for selective catalytic reduction and our catalyzed wire mesh filter are currently our three primary products. Failure of any of our products to achieve market acceptance may limit our growth potential. We may have to cease operations if all of our primary products fail to achieve market acceptance or fail to generate significant revenue. Additionally, the marketability of our products may be dependent upon obtaining verifications from regulatory agencies such as the Environmental Protection Agency, California Air Resources Board, or similar European agencies, as well as the effectiveness of our products in relation to various environmental regulations in the many jurisdictions in which we market and sell our products. WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET NEW PRODUCTS THAT ARE DEVELOPED OR OBTAIN DIRECT OR INDIRECT VERIFICATION OR APPROVAL OF OUR NEW PRODUCTS. We plan to market other emissions reduction devices used in combination with the Platinum Plus fuel-borne catalyst and ARIS injector. There are numerous development and verification issues that may preclude the introduction of these products for commercial sale. If we are unable to demonstrate the feasibility of these products or obtain verification or approval for the products from regulatory agencies, we may have to abandon the products or alter our business plan. Such modifications to our business plan will likely delay achievement of revenue milestones and profitability. RISKS RELATED TO OUR FINANCIAL CONDITION WE HAVE INCURRED LOSSES IN THE PAST AND EXPECT TO INCUR LOSSES IN THE FUTURE. We have incurred losses since inception totaling $44,977,000 which amount includes $4,752,000 of non-cash preferred stock dividends. At the date of this report, our cash resources, including additional cash to be collected from subscriptions receivable, are estimated to be sufficient for our needs into the first quarter of 2008. We have recognized limited revenues through December 31, 2006 and expect to continue to incur operating losses at least through 2007. There can be no assurance that we will achieve or sustain significant revenues or profitability in the future. See the discussion below under the caption "Liquidity and Sources of Capital" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE HAVE NO ASSURANCES OF ADDITIONAL FUNDING. We may seek additional funding in the form of a private or public offering of equity securities. Debt financing would be difficult to obtain because of limited assets and cash flows. Any equity funding may depend on prior stockholder approval of an amendment to our certificate of incorporation authorizing additional capital. Any offering of shares of our common stock may result in dilution to our existing stockholders. Our ability to consummate financing will depend on the status of our marketing programs and commercialization progress, as well as conditions then 15 prevailing in the relevant capital markets. There can be no assurance that such funding will be available if needed, or on acceptable terms. In the event that we need additional funds and are unable to raise such funds, we may be required to delay, reduce or severely curtail our operations or otherwise impede our on-going commercialization, which could have a material adverse effect on our business, operating results, financial condition and long-term prospects. See the discussion below under the caption "Liquidity and Sources of Capital" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." IF THIRD PARTIES CLAIM THAT OUR PRODUCTS INFRINGE UPON THEIR INTELLECTUAL PROPERTY RIGHTS, WE MAY BE FORCED TO EXPEND SIGNIFICANT FINANCIAL RESOURCES AND MANAGEMENT TIME LITIGATING SUCH CLAIMS AND OUR OPERATING RESULTS COULD SUFFER. Third parties may claim that our products and systems infringe upon third-party patents and other intellectual property rights. Identifying third-party patent rights can be particularly difficult, especially since patent applications are not published until up to 18 months after their filing dates. If a competitor were to challenge our patents, or assert that our products or processes infringe its patent or other intellectual property rights, we could incur substantial litigation costs, be forced to make expensive product modifications, pay substantial damages or even be forced to cease some operations. Third-party infringement claims, regardless of their outcome, would not only drain financial resources but also divert the time and effort of management and could result in customers or potential customers deferring or limiting their purchase or use of the affected products or services until resolution of the litigation. WE ARE CURRENTLY DEPENDENT ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUE AND OUR REVENUE COULD DECLINE IF WE ARE UNABLE TO MAINTAIN OR DEVELOP RELATIONSHIPS WITH CURRENT OR POTENTIAL CUSTOMERS. A few customers currently account for a significant portion of our revenues. For the years ended December 31, 2006, 2005 and 2004, two customers accounted for approximately 42%, 36% and 51%, respectively, of our revenue, primarily attributable to license fees and royalties, ARIS hardware revenue and consulting fees. We intend to establish long-term relationships with existing customers and continue to expand our customer base. While we diligently seek to become less dependent on any single customer, it is likely that certain contractual relationships may result in one or more customers contributing to a significant portion of our revenue in any given year for the foreseeable future. The loss of one or more of our significant customers may result in a material adverse effect on our revenue, our ability to become profitable or our ability to continue our business operations. FOREIGN CURRENCY FLUCTUATIONS COULD IMPACT FINANCIAL PERFORMANCE. Our recent operating activities have primarily been in the U.S. However, we have increased our activities in Europe and Asia, and consequently, are exposed to fluctuations in foreign currency rates. We may manage the risk to such exposure by entering into foreign currency futures and option contracts. There can be no assurance that foreign currency fluctuations will not have a significant effect on our operations in the future. WE HAVE NOT AND DO NOT INTEND TO PAY DIVIDENDS ON OUR SHARES OF COMMON STOCK. We have not paid dividends on our common stock since inception, and do not intend to pay any dividends to our stockholders in the foreseeable future. We intend to reinvest earnings, if any, in the development and expansion of our business. THE PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY THE SALE OF A SIGNIFICANT NUMBER OF NEW COMMON SHARES. The sale, or availability for sale, of substantial amounts of our common stock, including shares issued upon exercise of outstanding options and warrants or shares of common stock that may be issued in the public market or a private placement to fund our operations or the perception by the market that these sales could occur, could adversely affect the market price of our common stock and could impair our ability to raise additional working capital through the sale of equity securities. The perceived risk of dilution may cause existing stockholders to sell their shares of stock, which would contribute to a decrease in the stock price. In that regard, downward pressure on the trading price of our common stock may also cause investors to engage in short sales, which would further contribute to downward pressure on the trading price of our stock. 16 OUR COMMON STOCK IS CURRENTLY TRADED ON THE U.S. OVER THE COUNTER MARKET (OTC-BB), THE ALTERNATIVE INVESTMENT MARKET OF THE LONDON STOCK EXCHANGE AND IN GERMANY ON VARIOUS REGIONAL STOCK EXCHANGES AND THE NATIONAL ELECTRONIC EXCHANGE (XETRA), AND AN INVESTOR'S ABILITY TO TRADE THE STOCK MAY BE LIMITED BY TRADING VOLUME AND PRICE VOLATILITY. The trading volume in our common stock has been relatively limited and a consistently active trading market for our common stock may not develop. The average daily trading volume in our common stock on the OTC market in 2006 was approximately 7,065 shares. The average daily trading volume in our common stock on Alternative Investment Market of the London Stock Exchange in 2006 was approximately 2,230 shares. In February 2006, our stock began trading in Germany. There has been significant volatility in the market prices of publicly traded shares of emerging growth technology companies, including our shares. Factors such as announcements of technical developments, verifications, establishment of distribution agreements, significant sales orders, changes in governmental regulation and developments in patent or proprietary rights may have a significant effect on the market price of our common stock. As outlined above, there has been a low average daily trading volume of our common stock. To the extent this trading pattern continues, the price of our common stock may fluctuate significantly as a result of relatively minor changes in demand for our shares and sales of our stock by holders. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We have a five-year lease expiring in March 2009 for 3,925 square feet of administrative office space at 300 Atlantic Street, Stamford, Connecticut. The annual cost of the lease including rent, utilities and parking is approximately $125,000. We have a lease for 400 square feet of office space outside London, U.K. through September 2007 at an annual cost of approximately $33,000. We also lease 2,750 square feet of warehouse space in Milford, Connecticut at an annual cost of approximately $20,000 (excluding utilities) through July 2008. ITEM 3. LEGAL PROCEEDINGS We are not involved in any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders in the fourth quarter of 2006. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded in the U.S. on the over-the-counter (OTC) market, on the London Stock Exchange through the Alternative Investment Market (AIM) and in Germany on various regional stock exchanges, including Frankfurt, as well as on the national electronic exchange Xetra. Reports of transactions of our shares are available on the OTC Electronic Bulletin Board under the trading symbol "CDTI", on the AIM under the symbols "CDT" and "CDTS" (this latter symbol denotes restricted shares that have been issued in private placements), and on the Frankfurt exchange under the symbol "CDI". At February 28, 2007, there were 373 holders of record of the common stock representing approximately 750 beneficial holders. No dividends have been paid on our common stock and we do not anticipate paying cash dividends in the foreseeable future. Prices indicated below with respect to our share price include inter-dealer prices, without retail mark up, mark down or commission and may not necessarily represent actual transactions.
OTC LONDON STOCK EXCHANGE BULLETIN BOARD AIM 2005 (IN U.S. $) (IN GBP) ------------ ---------------------------- -------------------------- HIGH LOW HIGH LOW ------------- ------------- ------------ ------------ 1st Quarter $1.90 $1.15 0.90 0.48 2nd Quarter $2.30 $1.01 0.97 0.33 3rd Quarter $1.95 $1.20 0.92 0.50 4th Quarter $1.80 $1.00 0.55 0.41
OTC LONDON STOCK EXCHANGE BULLETIN BOARD AIM 2006 (IN U.S. $) (IN GBP) ------------ ---------------------------- -------------------------- HIGH LOW HIGH LOW ------------- ------------- ------------ ------------ 1st Quarter $1.16 $0.80 0.65 0.45 2nd Quarter $1.95 $1.06 1.00 0.58 3rd Quarter $1.95 $1.40 1.00 0.72 4th Quarter $1.80 $1.45 0.97 0.78
SALES AND USES OF UNREGISTERED SECURITIES DURING THE PERIOD On December 29, 2006, we entered into definitive agreements with 36 investors (32 non-U.S. investors and four U.S. investors) for the purchase in private placements by these investors of 7,000,000 shares of our common stock, par value $0.05, and warrants for the purchase of an additional 7,000,000 shares of our common stock (3.5 million Class A Warrants exercisable at $2.00 per share and 3.5 million Class B Warrants exercisable at $2.50 per share), all for the total gross sales price of $9.5 million. The net proceeds will be used for general corporate purposes. These private placements qualified for the exemptions from registration afforded by Regulation S for off-shore investors and Regulation D for U.S. accredited investors under the Securities Act of 1933, as amended. The material terms of the agreements are that: (i) We sold and the investors bought units of one share of common stock and warrants (effectively, one-half of each of Class A and B Warrants) to buy one share of common stock for the consideration of $1.35 per unit; (ii) The investors represented that they were acquiring the shares, the warrants and the shares of common stock underlying the warrants for their own accounts as an investment, and undertook with respect to these securities to comply with the transfer restrictions of Regulation S or Regulation D, as the case may be; (iii) We undertook to apply for the listing of our outstanding shares on the American Stock Exchange or another recognized U.S. stock exchange at such time as the Company should satisfy the applicable listing requirements; and 18 (iv) We undertook to file a registration statement under the Act covering the shares and the shares of common stock underlying the warrants following completion of the audit of our financial statements for the year 2006. The agreements do not contain a penalty provision for the Company's failure to file this registration statement. EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2006 The following table represents options and warrants outstanding as of December 31 2006:
NUMBER OF SHARES TO BE WEIGHTED AVERAGE NUMBER OF SHARES ISSUED UPON EXERCISE OF EXERCISE PRICE OF NUMBER OF SECURITIES OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REMAINING AVAILABLE FOR PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FUTURE ISSUANCE - -------------------------- ------------------------ --------------------- ----------------------- OPTIONS: Equity compensation plans approved by security holders 3,240,437(1) $ 2.016 - (1) Equity compensation plans not approved by security holders - - - ------------------------ --------------------- -------------------------- Total Options 3,240,437 $ 2.016 - ======================== ===================== ========================== WARRANTS: Equity compensation plans approved by shareholders - - - Equity compensation plans not approved by shareholders 7,787,120(2) $ 2.196 - ------------------------ --------------------- -------------------------- Total Warrants 7,787,120 $ 2.196 - ======================== ===================== ==========================
(1) Represents awards issued under the 1994 Incentive Plan. The maximum number of awards allowed under the 1994 Incentive Plan is 17.5% of our issued and outstanding common stock less the outstanding options, and is subject to a sufficient number of shares of authorized capital. (2) Included in this number are 7,000,000 warrants to be issued as a result of the December 29, 2006 private placement and 332,000 warrants to be issued as partial consideration to the placement agent. 19 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data is qualified by reference to and should be read in conjunction with the Consolidated Financial Statements, including the Notes thereto in Item 8, "Consolidated Financial Statements and Supplementary Data" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 --------------- --------------- --------------- --------------- --------------- (in thousands, except per share amounts) STATEMENTS OF OPERATIONS DATA Additive revenue $ 591 $ 411 $ 299 $ 212 $ 40 Hardware revenue 269 349 360 161 102 License and royalty revenue 74 47 54 194 299 Consulting and other 189 5 9 - - --------------- --------------- --------------- --------------- --------------- Total revenue 1,123 812 722 567 441 OPERATING COSTS AND EXPENSES: Cost of revenue 658 471 455 219 86 Selling, general and administrative 5,278 4,963 3,962 2,695 2,291 Research and development 510 439 506 855 693 Patent amortization and other expense 235 170 90 58 43 --------------- --------------- --------------- --------------- --------------- Loss from operations (5,558) (5,231) (4,291) (3,260) (2,672) Foreign currency exchange gain (loss) 104 (221) 101 - - Interest income/(expense), net 58 26 47 15 30 Consulting and other 12 - - - - --------------- --------------- --------------- --------------- --------------- Net loss $ (5,384) $ (5,426) $ (4,143) $ (3,245) $ (2,642) =============== =============== ================ =============== =============== Basic and diluted loss per common share $ (0.21) $ (0.30) $ (0.26) $ (0.26) $ (0.23) =============== =============== ================ =============== =============== Basic and diluted weighted-average shares outstanding 26,059 18,389 16,071 12,721 11,419 =============== =============== ================ =============== ===============
AS OF DECEMBER 31, ----------------------------------------------------- 2006 2005 2004 2003 2002 --------- --------- --------- --------- --------- (in thousands) BALANCE SHEET DATA Current assets $ 8,287 $ 5,505 $ 4,868 $ 7,023 $ 2,757 Total assets 9,018 6,274 5,513 7,441 2,979 Current liabilities 1,070 496 391 868 223 Long-term liabilities - - - - 418 Working capital 7,217 5,009 4,477 6,155 2,534 Stockholders' equity 7,948 5,778 5,122 6,573 2,338
20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We design products and license environmentally-proven technologies and solutions for the global emission reduction market based upon our portfolio of patents and extensive library of performance data and know-how. We believe our core competence is the innovation, application, development and marketing of technological products and solutions to enable emission control. Our suite of technologies offers a broad range of market-ready solutions to reduce emissions while saving costs through fuel economy improvement and reduction of engine wear. We use our innovative solutions and know-how to bring these technologies to market through our licensees. We believe that clean air, energy efficiency and sustainability continue to attract increasing attention around the world, as does the need to develop alternative energy sources. Increasingly, combustion engine development is influenced by concern over global warming caused by carbon dioxide emissions from fossil fuels and toxic exhaust emissions. Because carbon dioxide results from the combustion of fossil fuels, reducing fuel consumption is often cited as the primary way to reduce carbon dioxide emissions. Further, because diesel engines are as much as 40% more fuel-efficient than gasoline engines, the increased use of diesel engines relative to gasoline engines is one way to reduce overall fuel consumption, and thereby, significantly reduce carbon dioxide emissions. We believe the diesel engine is and will remain a strategic and economic source of motive power. However, diesel engines emit higher levels of two toxic pollutants - particulate matter and nitrogen oxides - than gasoline engines fitted with catalytic converters. Both of these pollutants affect human health and damage the environment. These factors, among others, have led to legislation and standards that may drive demand for our products and solutions. Our operating revenue consists of fuel additives (primarily, our patented Platinum Plus fuel-borne catalyst products and concentrate), hardware (primarily, our patented ARIS advanced reagent injector and dosing systems for selective catalytic reduction of nitrogen oxides, our Environmental Protection Agency verified Platinum Plus Purifier System, our fuel-borne catalyst and a diesel-oxidation catalyst, and catalyzed wire mesh filters), technology licensing fees and royalties and other (primarily, engineering and development consulting services). Our Platinum Plus fuel-borne catalyst is registered with the Environmental Protection Agency. We received Environmental Protection Agency verification of our Purifier System (fuel-borne catalyst and diesel oxidation catalyst) in October 2003 and a verification of our catalyzed wire mesh filter system (fuel-borne catalyst and catalyzed wire mesh filter) in June 2004. Operating revenue for the year ended December 31, 2006 consisted of approximately 52.6% in additive sales, 24.0% in hardware sales, 6.6% in technology licensing fees and royalties and 16.8% in other revenue. Operating revenue for the year ended December 31, 2005 consisted of approximately 50.6% in additive sales, 43.0% in hardware sales, 5.8% in technology licensing fees and royalties and 0.6% in other revenue. The mix of our revenue sources during any reporting period may have a material impact on our operating results. In particular, our execution of technology licensing agreements, and the timing of the revenue recognized from these agreements, has not been predictable. Our Platinum Plus fuel-borne catalyst concentrate and finished product are sold to distributors, resellers and vehicle fleets in various industries, including beverage, grocery, shipping, fuel delivery and marine, among other end users. We license the ARIS nitrogen oxides reduction system to others, generally with an up-front fee for the technology and know-how and an on-going royalty per unit. We also sell finished ARIS-based selective catalytic reduction systems to potential ARIS licensees and end users. We believe that the ARIS system can most effectively be commercialized through licensing several companies with a related business in these markets. We are actively seeking additional ARIS licensees for both mobile and stationary applications in the U.S., Europe and Asia. We acquired the rights to proprietary technology for catalyzed wire mesh filters from Mitsui Co., Ltd. in 2005 and offer rights to the catalyzed wire mesh technology through license agreements as well as selling finished filters for use with our Platinum Plus fuel-borne catalyst. Our efforts since our inception in 1994 have been devoted to the research and development of technologies and products in various areas, including platinum fuel-borne catalysts for emission control and fuel economy improvement and nitrogen oxides reduction systems to control emissions from diesel engines. We received Environmental Protection Agency registration for our platinum-cerium fuel-borne catalyst (Platinum Plus) in December 1999. Although we believe we have made progress in commercializing our technologies, we have experienced recurring losses from our operations. Our accumulated deficit amounted to approximately $45.0 million as of December 31, 2006. The internally generated funds from our revenue sources have not been sufficient to cover our operating costs. The ability of our revenue sources, especially additive, hardware and technology license fees 21 and royalties, to generate significant cash for our operations is critical to our long-term success. We cannot predict whether we will be successful in obtaining market acceptance of our products or technologies or in completing our current licensing agreement negotiations. To the extent our internally generated funds are inadequate, we believe that we will need to obtain additional working capital through equity financings. However, we can give no assurance that any additional financing will be available to us on acceptable terms or at all. CRITICAL ACCOUNTING POLICIES The preparation of our financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the amounts reported in our financial statements and the accompanying notes to the consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based upon assumptions about matters that are uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes that of our significant accounting policies (see Note 2 of Notes to Consolidated Financial Statements), the following critical accounting policies involve a higher degree of judgment and complexity used in the preparation of the consolidated financial statements. REVENUE RECOGNITION Revenue is recognized when earned. Technology licensing fees are generally recognized upon execution of the license agreement but are deferred if subject to completion of any performance criteria and later recognized once the performance criteria have been met. Revenue from royalties is recognized ratably over the royalty period based upon periodic reports submitted by the royalty obligor or based on minimum royalty requirements. Revenue from product sales is recognized when title has passed and our products are shipped to our customer, unless the purchase order or contract specifically requires us to provide installation for hardware purchases. For hardware projects in which we are responsible for installation (either directly or indirectly by third-party contractors), revenue is recognized when the hardware is installed and/or accepted, if the project requires inspection and/or acceptance. Revenue from engineering and development consulting services is generally recognized and billed as the services are performed. At December 31, 2006 and 2005, our deferred revenue was zero and $9,000, respectively. RESEARCH AND DEVELOPMENT COSTS Costs relating to the research, development and testing of our technologies and products are charged to operations as they are incurred. These costs include test programs, salary and benefits, consulting fees, materials and certain testing equipment. Our research and development expenses totaled approximately $510,000, $439,000 and $506,000 for the years ended December 31, 2006, 2005 and 2004, respectively. PATENTS AND PATENT EXPENSE Patents, which include all direct incremental costs associated with initial patent filings and costs to acquire rights to patents under licenses, are stated at cost and amortized using the straight-line method over the remaining useful lives, ranging from one to seventeen years. Indirect and other patent-related costs are expensed as incurred. Patent amortization expense for the years ended December 31, 2006, 2005 and 2004 was $44,000, $53,000 and $42,000, respectively. We evaluate the remaining useful life of our patents each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the evaluation determines that the 22 patent's remaining useful life has changed, the remaining carrying amount of the patent is amortized prospectively over that revised remaining useful life. We also evaluate our patents for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. The testing for impairment includes evaluating the undiscounted cash flows of the asset and the remaining period of amortization or useful life. The factors used in evaluating the undiscounted cash flows include current operating results, projected future operating results and cash flows and any other material factors that may affect the continuity or the usefulness of the asset. If impairment exists or if we decide to abandon a patent, the patent is written down to its fair value based upon discounted cash flows. At December 31, 2006 and 2005, the Company's patents, net were $603,000 and $567,000, respectively. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN 48)." FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of evaluating the impact FIN 48 will have on its results of operations and financial position but does not expect its adoption will have a material impact on the Company's financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Specifically, this Statement sets forth a definition of fair value, and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The provisions of SFAS No. 157 are generally required to be applied on a prospective basis, except to certain financial instruments accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, for which the provisions of SFAS No. 157 should be applied retrospectively. The Company will adopt SFAS No. 157 in the first quarter of 2008 and is still evaluating the effect, if any, on its financial position or results of operations. In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify financial statement misstatements. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial condition or results of operations. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115." SFAS No. 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. SFAS No. 159 is effective for the Company's fiscal year 2008. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. We are currently evaluating the impact, if any, of SFAS No. 159 on the Company's consolidated financial statements. RESULTS OF OPERATIONS Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Revenue was $1,123,000 in 2006 compared to $812,000 in 2005, an increase of $311,000, or 38.3%, reflecting increases in all of our revenue sources, except hardware. Operating revenue for the year ended December 31, 2006 consisted of approximately 52.6% in additive sales, 24.0% in hardware sales, 6.6% in technology licensing fees and 23 royalties and 16.8% in consulting and other revenue. Operating revenue for the year ended December 31, 2005 consisted of approximately 50.6% in additive sales, 43.0% in hardware sales, 5.8% in technology licensing fees and royalties and 0.6% in consulting and other revenue. Additive revenue increased $180,000, or 43.8%, to $591,000 in 2006 from to $411,000 in 2005 due to higher demand for our Platinum Plus fuel-borne catalyst attributable to the benefits of cleaner burning engines, along with improved fuel economy, sought by end users. Hardware revenue declined $80,000, or 22.9%, to $269,000 in 2006 from $349,000 in 2005 due to a decline in installations of our Platinum Plus Purifier Systems, partially offset by an increase in our ARIS advanced reagent injector and dosing systems for selective catalytic reduction. License fees and royalty revenue was $74,000 in 2006 compared to $47,000 in 2005, an increase of $27,000, or 57.4%, primarily due to minimum royalty payments related to our ARIS technology. Consulting and other revenue was $189,000 in 2006 compared to $5,000 in 2005, an increase of $184,000. The increase in consulting and other revenue is attributable to consulting projects we completed in 2006. From time to time, we complete technical consulting projects on behalf of existing and prospective customers. Cost of revenue was $658,000 for the year ended December 31, 2006 compared to $471,000 for the year ended December 31, 2005, an increase of $187,000, or 39.7%. The increase is attributable to higher sales volume in 2006 compared to 2005. Gross profit as a percentage of revenue was 41.4% and 42.0% for the years ended December 31, 2006 and 2005, respectively. Selling, general and administrative expenses were $5,278,000 for the year ended December 31, 2006 compared to $4,963,000 in 2005, an increase of $315,000, or 6.3%. Selling, general and administrative expenses are summarized below:
(in thousands) YEARS ENDED DECEMBER 31, ---------------------------- 2006 2005 ------------- ------------- Compensation and benefits $ 3,061 $ 2,771 Professional services 792 834 Travel 538 546 Occupancy 406 475 Sales and marketing expenses 279 161 Depreciation and all other 202 176 ------------- ------------- Total selling, general and administrative expense $ 5,278 $ 4,963 ============= =============
Compensation and benefit expense for the year ended December 31, 2006 includes $304,000 of non-cash charges for the fair value of stock options granted in accordance with SFAS No. 123R, which we adopted in January 2006. Also included are $357,475 of severance charges related to the departure of CDT's former president and chief operating officer who had been released from employment in January 2006. In addition, compensation and benefit expense for the year ended December 31, 2006 reflects the full year effect of our executive vice president, chief operations officer, North America and chief technology officer who was hired in August 2005. Professional fees include public relations, investor relations and financial advisory fees. Occupancy costs include office rents, insurance and related costs. We increased our investment in sales and marketing in 2006 with the objective of laying the groundwork for sales growth and licensing of our core technologies in 2007. Research and development expenses were $510,000 for the year ended December 31, 2006 compared to $439,000 in 2005, an increase of $71,000, or 16.2%. The increase in research and development was primarily due to additional testing costs incurred in the U.K. Patent amortization and other patent costs increased to $235,000 in 2006 from $170,000 in 2005. Included are $17,000 and $32,000 in 2006 and 2005, respectively, related to abandonment of some patents. Patent amortization expense for the years ended December 31, 2006 and 2005 was $44,000 and $53,000, respectively. 24 Interest income was $58,000 for the year ended December 31, 2006 compared to $26,000 in 2005, an increase of $32,000 due to the higher average balance of invested funds in 2006 because of private placement funding received at the end of 2005. Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Revenue and cost of revenue were $812,000 and $471,000, respectively, in 2005 versus $722,000 and $455,000, respectively, in 2004. Revenue was comprised of the following:
(in thousands) YEARS ENDED DECEMBER 31, ---------------------------- 2005 2004 ------------- ------------- Additive $ 411 $ 299 Hardware 349 360 License and royalty 47 54 Consulting and other 5 9 ------------- ------------- Total revenue $ 812 $ 722 ============= =============
Additive revenue increased as a result of successful demonstration programs and sales of the verified Purifier System which requires the use of Platinum Plus fuel-borne catalyst. Both further penetration of the European market and increased sales to key beverage delivery and waste hauling customers relating to a grant from the State of Pennsylvania, increased Clean Diesel's additive revenue. Hardware and license and royalty revenues remained relatively constant. Selling, general and administrative expenses increased to $4,963,000 in 2005 from $3,962,000 in 2004 as summarized in the following table:
(in thousands) YEARS ENDED DECEMBER 31, ---------------------------- 2005 2004 ------------- ------------- Compensation and benefits $ 2,771 $ 2,128 Professional services 834 744 Travel 546 407 Occupancy 475 423 Sales and marketing expenses 161 115 Depreciation and all other 176 145 ------------- ------------- Total selling, general and administrative expense $ 4,963 $ 3,962 ============= =============
Compensation and benefit expense increased as a result of increases in management salaries and related expenses. CDT hired a chief technology officer in August 2005. An additional director was added to the board of directors in 2005. Occupancy increased in 2005 as a result of additional rent and related expenses in the U.S. and Europe. Professional fees including financial advisory fees increased in 2005 along with marketing activities in Europe and Asia. Research and development expenses decreased to $439,000 in 2005 from $506,000 in 2004. The decrease in research and development related to the transition to commercial selling efforts in 2004, partially offset by additional costs incurred for testing required by the Environmental Protection Agency and additional hardware systems testing. Patent amortization and other costs increased to $170,000 in 2005 versus $90,000 in 2004. The 2005 increase is related to writing off of some patents in 2005, offset by additional patent applications including the acquisition of additional patents from the Mitsui Company of Japan relating to catalyzed wire mesh filter technology and the higher amortization related to prior years' capitalized costs. Interest income decreased to $26,000 in 2005 from $47,000 in 2004 due to the lower amount of invested funds prior to the private placement funding received at the end of 2005. 25 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents amounted to $5,314,000 at December 31, 2006 and our working capital was $7,217,000. We have been able to continue our operations by raising additional capital. We have been primarily dependent upon funding from new and existing stockholders during the last three years (see Note 6 of Notes to Consolidated Financial Statements). In December 2006, we entered into definitive agreements with investors for the purchase by these investors of 7.0 million shares of our common stock and warrants for the right to acquire an additional 7.0 million shares of our common stock, for the total gross sales price of $9.5 million (proceeds, net of $410,000 in expenses, amount to approximately $9.0 million) of which $2.4 million, net of expenses, is classified in current assets as subscriptions receivable and $1.9 million, net of expenses, representing unpaid subscriptions receivable that remain unpaid as of March 23, 2007 are included as a reduction of stockholders' equity at December 31, 2006. Each investment unit was sold for $1.35 and was comprised of one share of our common stock, one Class A Warrant and one Class B Warrant, each warrant entitling the holder to acquire one additional share of common stock for every two shares purchased in the offering. In the aggregate, the warrants comprise 3.5 million Class A Warrants and 3.5 million Class B Warrants. The Class A Warrants are exercisable at a per share price of $2.00 and expire on July 2, 2007. The Class B Warrants are exercisable at a per share price of $2.50 and expire on December 29, 2007. We will use the proceeds from this private placement for general working capital purposes, including the protection of our intellectual property. Of the total shares sold, 6,690,689 were sold to off-shore investors, primarily in the U.K., and the Company claims the exemption from registration provided by Regulation S under the 1933 Securities Act. Of the total shares sold, 309,312 were sold to investors in the U.S., and the Company claims the exemption from registration provided by Regulation D under the Act. In connection with this private placement, we undertook to apply for the listing of our outstanding shares on the American Stock Exchange or another recognized U.S. stock exchange at such time as we should satisfy the applicable listing requirements. We also undertook to file a registration statement under the Securities Act of 1933 covering the shares of common stock and the shares of common stock underlying the warrants following completion of the audit of our financial statements for the year 2006. The costs to apply for listing on a national stock exchange and to prepare a registration statement for filing with the SEC could be significant. Our management believes that our available funds at December 31, 2006 and the funds to be collected from subscriptions receivable will be sufficient to sustain our operations at current levels into 2008. These funds consist of available cash and the funding derived from our revenue sources. We expect an infusion of cash of $4.3 million, net of expenses, upon settlement of stock subscriptions receivable that were committed in conjunction with our December 2006 private placement. Of that $4.3 million, we had received $2.4 million, net, as of March 23, 2007. There is also the possibility that some or all of the 7.0 million warrants issued in connection with the December 2006 private placement may be exercised which could generate additional cash. In the event that our business does not generate sufficient cash and external financing is not available or timely, we would be required to substantially reduce our level of operations and capital expenditures in order to conserve cash and possibly seek joint ventures or other transactions, including the sale of assets. These reductions could have an adverse effect on our relationships with our customers and suppliers. Our long-term continuation is dependent upon the achievement of profitable operations and the ability to generate sufficient cash from operations, equity financings and other funding sources to meet our obligations. We have incurred losses since inception aggregating $44,977,000 which amount includes $4,752,000 of non-cash preferred stock dividends. We expect to incur losses through the foreseeable future until our products and technological solutions achieve greater awareness. Although we have generated revenue from sales of our Platinum Plus fuel-borne catalyst, Purifier Systems, ARIS advanced reagent injector and dosing systems for selective catalytic reduction, catalyzed wire mesh filters and from ARIS license fees and royalties, revenue to date has been insufficient to cover our operating expenses, and we continue to be dependent upon sources other than operations to finance our working capital requirements. At December 31, 2006 and 2005, we had cash and cash equivalents of $5,314,000 and $4,513,000, respectively, an increase of $801,000. This increase was due to the timing of private placements of our common stock in 2006 and 2005. In 2006, we had an infusion of $4.9 million in cash at the end of December 2006 and did 26 not pay the related placement fee expenses until January 2007 (we paid placement fees aggregating approximately $230,000 in January 2007). Our 2005 private placement resulted in an infusion of $5.5 million, net of $232,000 in expenses paid in 2005. Our working capital increased to $7,217,000 at December 31, 2006 from $5,009,000 at December 31, 2005, an increase of $2,208,000 primarily attributable to the increased cash balance and higher subscriptions receivable, net of expenses, classified as current assets of $2,412,000 at December 31, 2006 compared to $488,000 at December 31, 2005. The subscriptions receivable, net, of $2,412,000 were paid before March 23, 2007 and we expect $1,901,000, net of expenses, will be paid to us after March 23, 2007. For the year ended December 31, 2006, we used $4,317,000 of cash for operating activities primarily to fund the 2006 net loss of $5,384,000, adjusted for non-cash items. The 2006 non-cash items included $138,000 of depreciation and amortization expense and $304,000 stock option compensation expense accounted for in accordance with SFAS No. 123R, which we adopted in January 1, 2006. Our accounts payable and accrued expenses contributed $678,000 to our operating cash flow, reflecting increases attributable to delaying cash disbursements until after receipt of funds from the 2006 private placement. Our December 31, 2006 accrued expenses include $410,000, the total cash portion of the placement fee due to the placement agent for the 2006 private placement, compared to $13,000 placement fee included in accrued expenses at December 31, 2005. Cash used for investing activities was $114,000 for the year ended December 31, 2006 and was attributable to capital expenditures for fixed assets and patent costs. We expect to continue to invest in our patents. Cash provided by financing activities was $5,228,000 for the year ended December 31, 2006 and is attributable to the 2006 private placement, net of the related placement fee that is included in accrued expenses, and receipt of funds to settle subscriptions receivable from the 2005 private placement. No dividends have been paid on our common stock and we do not anticipate paying cash dividends in the foreseeable future. We have no indebtedness, nor any standby credit arrangements. CAPITAL EXPENDITURES As of December 31, 2006, we had no commitments for capital expenditures and no material commitments are anticipated in the near future. CONTRACTUAL OBLIGATIONS The following is a summary of our contractual obligations as of December 31, 2006:
(in thousands) LESS THAN 1 TO 3 4 TO 5 OVER 5 TOTAL 1 YEAR YEARS YEARS YEARS ---------- ---------- ---------- ---------- ---------- Operating Leases $ 351 $ 174 $ 177 $ - $ - Other 355 71 142 142 - ---------- ---------- ---------- ---------- ---------- Total $ 706 $ 245 $ 319 $ 142 $ - ========== ========== ========== ========== ==========
The operating leases include our facilities in the U.S. and U.K. and consist of leases with the following original terms: a five-year lease for our executive offices, a four-year lease for warehouse space and a 27-month lease for administrative offices. Other represents our approximate costs for legal services and certain administrative costs under a management services agreement with Fuel Tech, which we expect to continue. OFF-BALANCE SHEET ARRANGEMENTS As part of our on-going business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2006, we are not involved in any material unconsolidated transactions. 27 FACTORS AFFECTING OUR BUSINESS AND PROSPECTS See Item 1A. "Risk Factors." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the opinion of management, with the exception of exposure to fluctuations in the cost of platinum and the U.K. exchange rate, we are not subject to any significant market risk exposure. We monitor the price of platinum and exchange rates and adjust our procurement strategies as needed. See Item 1A. "Risk Factors-Platinum Price." Our transactions are primarily denominated in U.S. dollars. We typically make certain payments in various foreign currencies for salary expense, patent annuities and maintenance, product tests and registration, local marketing and promotion and consultants. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Clean Diesel Technologies, Inc. We have audited the accompanying consolidated balance sheets of Clean Diesel Technologies, Inc. and subsidiary (the "Company") as of December 31, 2006 and 2005 and the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Clean Diesel Technologies, Inc. and subsidiary as of December 31, 2006 and 2005 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, "Share-Based Payment." /s/ Eisner LLP New York, New York March 23, 2007 29
CLEAN DIESEL TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) DECEMBER 31, -------------------- 2006 2005 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,314 $ 4,513 Accounts receivable, net of allowance of $34 and $11, respectively 100 125 Inventories, net 365 285 Other current assets 96 94 Subscriptions receivable, net 2,412 488 --------- --------- TOTAL CURRENT ASSETS 8,287 5,505 Patents, net 603 567 Fixed assets, net of accumulated depreciation of $350 and $259, respectively 91 175 Other assets 37 27 --------- --------- TOTAL ASSETS $ 9,018 $ 6,274 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 330 $ 170 Accrued expenses 740 317 Deferred revenue - 9 --------- --------- TOTAL CURRENT LIABILITIES 1,070 496 Commitments (Note 8) STOCKHOLDERS' EQUITY: Preferred stock, par value $0.05 per share, authorized 100,000; no shares issued and outstanding - - Common stock, par value $0.05 per share: authorized 45,000,000 and 30,000,000 shares, respectively; issued and outstanding 29,822,468 and 25,369,358 shares, respectively 1,491 1,268 subscribed and to be issued 3,339,994 and 705,113 shares, respectively 167 35 Additional paid-in capital, net of subscriptions receivable of $1,901 at December 31, 2006 51,263 44,068 Accumulated other comprehensive income 4 - Accumulated deficit (44,977) (39,593) --------- --------- TOTAL STOCKHOLDERS' EQUITY 7,948 5,778 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,018 $ 6,274 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 30
CLEAN DIESEL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- Revenue: 2006 2005 2004 -------------- -------------- -------------- Additive revenue $ 591 $ 411 $ 299 Hardware revenue 269 349 360 License and royalty revenue 74 47 54 Consulting and other 189 5 9 -------------- -------------- -------------- Total revenue 1,123 812 722 -------------- -------------- -------------- Costs and expenses: Cost of revenue 658 471 455 Selling, general and administrative 5,278 4,963 3,962 Research and development 510 439 506 Patent amortization and other expense 235 170 90 -------------- -------------- -------------- Operating costs and expenses 6,681 6,043 5,013 -------------- -------------- -------------- Loss from operations (5,558) (5,231) (4,291) Other income (expense): Foreign currency exchange gain (loss) 104 (221) 101 Interest income 58 26 47 Other 12 - - -------------- -------------- -------------- Net loss $ (5,384) $ (5,426) $ (4,143) ============== ============== ============== Basic and diluted loss per common share $ (0.21) $ (0.30) $ (0.26) ============== ============== ============== Basic and diluted weighted-average number of common shares outstanding 26,059 18,389 16,071 ============== ============== ==============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- 2006 2005 2004 -------------- -------------- -------------- Net loss $ (5,384) $ (5,426) $ (4,143) Other comprehensive income: Foreign currency translation adjustment 4 - - -------------- -------------- -------------- Comprehensive loss $ (5,380) $ (5,426) $ (4,143) ============== ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. 31
CLEAN DIESEL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) COMMON STOCK ACCUMULATED COMMON STOCK TO BE ISSUED ADDITIONAL OTHER TOTAL --------------- ----------------- PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT EQUITY ------ ------- ------ ------- ----------- --------------- ------------ --------------- BALANCE AT DECEMBER 31, 2003 15,679 $ 784 - $ - $ 35,813 $ - $ (30,024) $ 6,573 Net loss - - - - - - (4,143) (4,143) Options exercised 34 2 - - 87 - - 89 Issuance of common stock 1,427 71 - - 2,472 - - 2,543 Payment of directors' fees in common stock 26 1 - - 56 - - 57 Broker fee credit from 2003 - - - - 3 - - 3 ------ ------- ------ ------- ----------- --------------- ------------ --------------- BALANCE AT DECEMBER 31, 2004 17,166 $ 858 - $ - $ 38,431 $ - $ (34,167) $ 5,122 Net loss - - - - - - (5,426) (5,426) Options exercised 2 - - - 2 - - 2 Issuance of common stock 8,174 409 5,113 - - 5,522 Common stock subscribed and to be issued - - 705 35 453 - - 488 Payment of directors' fees in common stock 27 1 - - 69 - - 70 ------ ------- ------ ------- ----------- --------------- ------------ --------------- BALANCE AT DECEMBER 31, 2005 25,369 $ 1,268 705 $ 35 $ 44,068 $ - $ (39,593) $ 5,778 Net loss - - - - - - (5,384) (5,384) Options exercised 15 1 - - 13 - - 14 Compensation expense for stock options - - - - 304 - - 304 Issuance of common stock 4,376 219 (705) (35) 4,542 - - 4,726 Common stock subscribed and to be issued - - 3,340 167 4,146 - - 4,313 Subscriptions receivable, net (unpaid as of March 23, 2007) - - - - (1,901) - - (1,901) Foreign currency translation - - - - - 4 - 4 Payment of directors' fees in common stock 62 3 - - 91 - - 94 ------ ------- ------ ------- ----------- --------------- ------------ --------------- BALANCE AT DECEMBER 31, 2006 29,822 $ 1,491 3,340 $ 167 $ 51,263 $ 4 $ (44,977) $ 7,948 ====== ======= ====== ======= ============ =============== ============= ===============
The accompanying notes are an integral part of the consolidated financial statements. 32
CLEAN DIESEL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- 2006 2005 2004 -------------- -------------- -------------- OPERATING ACTIVITIES Net loss $ (5,384) $ (5,426) $ (4,143) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 138 163 132 Provision for inventory 27 43 - Provision for doubtful accounts, net 23 12 - Compensation expense for stock options 304 - 88 Loss on disposition/abandonment of fixed assets/patents 23 33 19 Changes in operating assets and liabilities: Accounts receivable 2 7 (40) Inventories (107) 59 (76) Other current assets and other assets (12) (23) (7) Deferred compensation and pension benefits - - (306) Accounts payable and accrued expense 678 167 21 Deferred revenue (9) 9 - -------------- -------------- -------------- Net cash used for operating activities (4,317) (4,956) (4,312) -------------- -------------- -------------- INVESTING ACTIVITIES Patent costs (94) (235) (186) Purchase of fixed assets (20) (85) (164) -------------- -------------- -------------- Net cash used for investing activities (114) (320) (350) -------------- -------------- -------------- FINANCING ACTIVITIES Proceeds from issuance of common stock, net 5,214 5,522 2,408 Proceeds from exercise of stock options 14 2 1 Proceeds from broker fee credit - - 3 ---------------------------------------------- Net cash provided by financing activities 5,228 5,524 2,412 -------------- -------------- -------------- Effect of exchange rate changes on cash 4 - - NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH EQUIVALENTS $ 801 $ 248 $ (2,250) Cash and cash equivalents at beginning of the year 4,513 4,265 6,515 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 5,314 $ 4,513 $ 4,265 ============== ============== ============== SUPPLEMENTAL NON-CASH ACTIVITIES: Common stock subscribed, net $ 4,313 $ 488 $ - Payment of accrued directors' fees in common stock 94 70 57 Stock issued as payment for deferred compensation - - 135
The accompanying notes are an integral part of the consolidated financial statements. 33 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS Clean Diesel Technologies, Inc. ("CDT" or the "Company") is a developer of technological solutions to reduce harmful emissions from internal combustion engines while improving fuel economy. The Company's products include Platinum Plus, a fuel-borne catalyst; the Purifier System, which combines its fuel-borne catalyst with a diesel oxidation catalyst; the fuel-borne catalyst/catalyzed wire mesh filter system; and the ARIS nitrogen oxides reduction system. CDT is establishing a network of licensed distributors to sell and market its patented Platinum Plus fuel-borne catalyst, verified Purifier System and verified fuel-borne catalyst/catalyzed wire mesh filter system. CDT also directly markets and sells the Platinum Plus fuel-borne catalyst, Purifier System and catalyzed wire mesh filter systems to key corporate fleets to generate demand for its technologies. CDT's strategy for the ARIS nitrogen oxides reduction system is to license the patented technology to engineering and automotive companies for an up-front license fee and an on-going royalty. The success of the Company's technologies will depend upon the commercialization opportunities of the technologies, governmental regulations and corresponding requirements of foreign and state agencies to drive demand. During 2006, 2005 and 2004, the Company incurred net losses of approximately $5.4 million, $5.4 million and $4.1 million, respectively, and at December 31, 2006, has an accumulated deficit of approximately $45.0 million. Net cash used for operating activities for the year ended December 31, 2006 was approximately $4.3 million. In 2006, the Company initiated a plan to reduce administrative costs, primarily through the reduction of compensation to certain employees and the reduction in the number of outside consultants. As of December 31, 2006, the Company's cash and cash equivalents were $5.3 million and working capital was $7.2 million. In December 2006, the Company completed a private placement of its common stock to raise funds for its operations that resulted in aggregate net proceeds of approximately $9.0 million of which $4.7 million, net, was received in the fourth quarter of 2006, $2.4 million, net, was received by March 23, 2007 and $1.9 million, net, is expected to be received after March 23, 2007. Based upon the Company's operating and cash plan for 2007 which takes into consideration the cash on hand at December 31, 2006 and the additional infusion of cash from subscriptions receivable, management believes that the Company will have sufficient working capital to fund its operations into the first quarter of 2008. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The consolidated financial statements include the accounts of CDT and Clean Diesel International, LLC ("CDTI"), its wholly-owned subsidiary, after elimination of all significant intercompany transactions and accounts. USE OF ESTIMATES: The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the period reported. These estimates include assessing the collectibility of accounts receivable, the use and realizability of inventories, useful lives for depreciation and amortization periods of intangible assets. The markets for our products and services are characterized by rapid technological development and evolving standards, all of which could impact the future realizability of our assets. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. Actual results could differ from those estimates. RECLASSIFICATIONS: Some amounts in prior years' financial statements have been reclassified to conform to the current year's presentation. 34 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH AND CASH EQUIVALENTS: Cash and cash equivalents include all highly liquid investments with original maturities of three months or less at date of acquisition. REVENUE RECOGNITION: The Company generates revenue from the sale of fuel-borne catalysts (classified as additives), including the Platinum Plus fuel-borne catalyst products and concentrate; hardware including the U.S. Environmental Protection Agency verified Purifier System, ARIS advanced reagent injection system injectors and dosing systems; license and royalty fees from the ARIS System and other technology; and consulting fees. Revenue is recognized when earned. For technology licensing fees paid by licensees that are fixed and determinable, accepted by the customer and nonrefundable, revenue is recognized upon execution of the license agreement unless it is subject to completion of any performance criteria specified within the agreement, in which case it is deferred until such performance criteria are met. Royalties are frequently required pursuant to license agreements or may be the subject of separately executed royalty agreements. Revenue from royalties is recognized ratably over the royalty period based upon periodic reports submitted by the royalty obligor or based on minimum royalty requirements. Revenue from product sales is recognized when title has passed and our products are shipped to our customer, unless the purchase order or contract specifically requires us to provide installation for hardware purchases. For hardware projects in which we are responsible for installation (either directly or indirectly by third-party contractors), revenue is recognized when the hardware is installed and/or accepted, if the project requires inspection and/or acceptance. Other revenue primarily consists of engineering and development consulting services. Revenue from technical consulting services is generally recognized and billed as the services are performed. At December 31, 2006 and 2005, our deferred revenue was zero and $9,000, respectively. INVENTORIES: Inventories are stated at the lower of cost or market with cost determined using the average cost method. We assess the realizability of inventories by periodically conducting a physical inventory and reviewing the movement of inventory to determine the value of items that are slow moving and obsolete. The potential for near-term product engineering changes and/or technological obsolescence and current realizability are considered in determining the adequacy of inventory reserves. At December 31, 2006 and 2005, our inventory reserves were $27,000 and zero, respectively. FIXED ASSETS: Our fixed assets, comprised of furniture and fixtures, purchased software and computer equipment, are stated at cost. Depreciation is computed over the estimated useful lives of the depreciable assets ranging from three to five years using the straight-line method. Depreciation expense was $94,000, $112,000 and $90,000 for the years ended December 31, 2006, 2005 and 2004, respectively. PATENTS: Patents, which include all direct incremental costs associated with initial patent filings and costs to acquire rights to patents under licenses, are stated at cost and amortized using the straight-line method over the remaining useful lives, ranging from one to seventeen years. Indirect and other patent-related costs are expensed as incurred. We evaluate the remaining useful life of our patents at each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the evaluation determines that the patent's remaining useful life has changed, the remaining carrying amount of the patent is amortized prospectively over that revised remaining useful life. We also evaluate our patents for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. The testing for impairment includes evaluating the undiscounted cash flows of the asset and the remaining period of amortization or useful life. The factors used in evaluating the undiscounted cash flows include current operating results, projected future 35 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS operating results and cash flows and any other material factors that may affect the continuity or the usefulness of the asset. If impairment exists or if we decide to abandon a patent, the patent is written down to its fair value based upon discounted cash flows. At December 31, 2006 and 2005, the Company's patents, net were $603,000 and $567,000, respectively. COMPREHENSIVE LOSS: We report comprehensive loss in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The provisions of SFAS No. 130 require that the Company report the changes in stockholders' equity from all sources during the period other than those resulting from investments by and distributions to stockholders. Accordingly, the consolidated statements of comprehensive loss are presented, while the caption "accumulated other comprehensive income" is included on the consolidated balance sheets as a component of stockholders' equity. Due to availability of net operating losses and the resultant deferred tax benefit being fully reserved, there is no tax effect associated with any component of other comprehensive loss. Comprehensive loss is comprised of net loss and other comprehensive income. Other comprehensive income includes certain changes in stockholders' equity that are excluded from net loss, including foreign currency translation adjustments. FOREIGN CURRENCY TRANSLATION: Prior to 2006, the U.S. dollar was considered the functional currency for CDTI, the Company's U.K. branch. During 2006, the activities of CDTI increased, including transacting business in local currency. Accordingly, commencing in 2006, the functional currency changed to the pound and thereafter assets and liabilities of CDTI are translated at the exchange rates in effect at the balance sheet date, and revenue and expenses are translated at the average exchange rates for the period. The resulting foreign currency translation adjustment of $4,000 is included in accumulated other comprehensive income as a component of stockholders' equity. The resulting effect of remeasurement of CDTI's accounts into its functional currency as a result of the change was not significant. Foreign currency transaction gains and losses are included in other income/(expenses) in the consolidated statements of operations and aggregated gains in 2006 and 2004 of $104,000 and $101,000, respectively, and a loss in 2005 of $221,000. BASIC AND DILUTED LOSS PER COMMON SHARE: Basic and diluted loss per share is calculated in accordance with SFAS No. 128, "Earnings Per Share." Basic loss per share is computed by dividing net loss by the weighted-average shares outstanding during the reporting period. Diluted loss per share is computed in a manner similar to basic earnings per share except that the weighted-average shares outstanding are increased to include additional shares from the assumed exercise of stock options and warrants, if dilutive, using the treasury stock method. The Company's computation of diluted net loss per share for 2006, 2005 and 2004 does not include common share equivalents associated with 3,240,000, 3,246,000 and 2,668,000 options, respectively, and 7,787,000, 507,000 and 532,000 warrants, respectively, as the result would be anti-dilutive. Further, the per share effects of the common stock subscribed and to be issued have not been included as the effect would be anti-dilutive. CONCENTRATIONS OF CREDIT RISK: Financial instruments, which potentially subject us to concentration of credit risk, consist of cash and cash equivalents and accounts receivables. We maintain cash and cash equivalents in accounts with various financial institutions in amounts which, at times, may be in excess of the FDIC insurance limit. We have not experienced any losses on such accounts and do not believe we are exposed to any significant risk with respect to cash and cash equivalents. We sell our products and services to distributors and end users in various industries worldwide. We regularly assess the realizability of accounts receivable and also take into consideration the value of past due accounts receivable and the collectibility of such receivables based upon credit worthiness and historic collections from past due accounts. We do not require collateral or other security to support customer receivables. 36 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIGNIFICANT CUSTOMERS: In each of the years ended December 31, 2006, 2005 and 2004, revenue derived from certain customers comprised 10% or more of our consolidated revenue ("significant customers") as set forth in the table below:
As a percentage of consolidated revenue: YEARS ENDED DECEMBER 31, ------------------------------- 2006 2005 2004 --------- --------- --------- Customer A 29% 11% 35% Customer B 13% 12% * Customer C * * 16% Customer D * 24% * Customer E * 10% *
* Less than 10% for this customer in the applicable year. In addition, at December 31, 2006 and 2005, the Company had two customers that represent 46% and 29%, respectively, of its gross accounts receivable balance (Customers A and E at December 31, 2006 and Customer A and another customer at December 31, 2005). FAIR VALUE OF FINANCIAL INSTRUMENTS: Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. At December 31, 2006 and 2005, the fair value of these instruments approximated their carrying value (carried at cost). STOCK-BASED COMPENSATION: Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), "Share Based Payment," which requires public companies to measure the cost of employee, officer and director services received in exchange for stock-based awards at the fair value of the award on the date of grant. SFAS No. 123R supersedes the Company's previous accounting under SFAS No. 123, "Accounting for Stock-Based Compensation," which permitted the Company to account for such compensation under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with APB No. 25 and related interpretations, no compensation cost had been recognized in connection with the issuance of stock options, as all options granted under the Company's stock option plan had an exercise price equal to or greater than the market value of the underlying common stock on the date of the grant. The Company applied the modified prospective transition method upon adoption of SFAS No. 123R. Under the modified prospective transition method, compensation cost is required to be recorded as earned for all unvested stock options outstanding at the beginning of the first year of adoption of SFAS No. 123R based upon the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and for compensation cost for all share-based payments granted or modified subsequently based on fair value estimated in accordance with the provisions of SFAS No. 123R. The Company's financial statements as of and for the year ended December 31, 2006 reflect the impact of SFAS No. 123R but, in accordance with the modified prospective transition method, the Company's financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. For the year ended December 31, 2006, share-based compensation for options attributable to employees and officers was $304,000, or $0.01 per share, and has been included in the Company's 2006 statement of operations. Compensation costs for stock options which vest over time are recognized over the vesting period. As of December 31, 2006, the Company had $158,000 of unrecognized compensation cost related to granted stock options that remained to be recognized over vesting periods. These costs are expected to be recognized over a weighted average period of one year. 37 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In March 2005, the Company's board of directors accelerated the vesting of all employee outstanding, unvested 2003 option grants and up to 25,000 options per employee of unvested 2004 option grants for a total of 363,000 options with fair value of $498,000. This action was taken by the Company's board of directors to avoid compensation charges under SFAS No. 123R. Since the market price of the Company's common stock at the time of the acceleration of vesting was below the option exercise price, no additional expense was recognized on the Company's statement of operations. If compensation expense had been determined based on the fair value at the date of grant for awards under the stock option plan, consistent with the method described in SFAS No. 123, as amended, the Company's net loss and basic and diluted loss per common share, on a pro forma basis, would have been as follows:
(in thousands, except per share amounts) YEARS ENDED DECEMBER 31, ---------------------------- 2005 2004 ------------- ------------- Net loss attributable to common stock holders as reported $ (5,426) $ (4,143) Add: Stock-based compensation expense included in reported net loss, net of related tax effects - 88 Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects (875) (826) ------------- ------------- Pro forma net loss attributable to common stockholders $ (6,301) $ (4,881) ============= ============= Net loss per share attributable to common stockholders: Basic and diluted net loss per common share - as reported $ (0.30) $ (0.26) ============= ============= Basic and diluted per common share - pro forma $ (0.34) $ (0.30) ============= =============
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses are comprised of the following:
(in thousands) YEARS ENDED DECEMBER 31, ------------------------------- 2006 2005 2004 --------- --------- --------- Compensation and benefits $ 3,061 $ 2,771 $ 2,128 Professional services 792 834 744 Travel 538 546 407 Occupancy 406 475 423 Sales and marketing expenses 279 161 115 Depreciation and all other 202 176 145 --------- --------- --------- Total selling, general and administrative expense $ 5,278 $ 4,963 $ 3,962 ========= ========= =========
RESEARCH AND DEVELOPMENT COSTS: Costs relating to the research, development and testing of our technologies and products are charged to operations as they are incurred. These costs include test programs, salary and benefits, consulting fees, materials and certain testing equipment. INCOME TAXES: Deferred income taxes are provided for the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. 38 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RECENT ACCOUNTING PRONOUNCEMENTS: In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN 48)." FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of evaluating the impact FIN 48 will have on its results of operations and financial position but does not expect its adoption will have a material impact on the Company's consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Specifically, this Statement sets forth a definition of fair value, and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The provisions of SFAS No. 157 are generally required to be applied on a prospective basis, except to certain financial instruments accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, for which the provisions of SFAS No. 157 should be applied retrospectively. The Company will adopt SFAS No. 157 in the first quarter of 2008 and is still evaluating the effect, if any, on its financial position or results of operations. In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify financial statement misstatements. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial condition or results of operations. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115." SFAS No. 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. SFAS No. 159 is effective for the Company's fiscal year 2008. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. We are currently evaluating the impact, if any, of SFAS No. 159 on the Company's consolidated financial statements. 3. INVENTORIES Inventories are comprised of the following:
(in thousands) DECEMBER 31, --------------------- 2006 2005 ---------- --------- Finished Platinum Plus fuel-borne catalyst $ 144 $ 59 Platinum concentrate/metal 103 119 Hardware 119 55 Other 26 52 ---------- --------- $ 392 $ 285 Less: inventory reserves (27) - ---------- --------- Inventories, net $ 365 $ 285 ========== =========
39 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. PATENTS Patents held by the Company consist of capitalized patent costs net of accumulated amortization and are as follows:
(in thousands) DECEMBER 31, ---------------------- 2006 2005 ---------- ---------- Patents $ 742 $ 665 Less: accumulated amortization (139) (98) ---------- ---------- Patents, net $ 603 $ 567 ========== ==========
Patent amortization expense for the years ended December 31, 2006, 2005 and 2004 was $44,000, $53,000 and $42,000, respectively. Patent amortization expense for each of the five succeeding years based upon patents as of December 31, 2006 is estimated to be approximately $45,000 annually. 5. ACCRUED EXPENSES Accrued expenses are comprised of the following:
(in thousands) DECEMBER 31, -------------------- 2006 2005 --------- --------- Accrued placement agent fees $ 410 $ 13 Accrued directors' fees 144 94 Accrued compensation 122 - Professional fees and other 64 210 --------- --------- Accrued expenses $ 740 $ 317 ========= =========
6. STOCKHOLDERS' EQUITY Authorized Capital Stock The Company has 45.1 million shares authorized, 45 million shares of which are $0.05 par value common stock and 100,000 of which are $0.05 par value preferred stock. At the Company's annual meeting of shareholders held on June 15, 2006, the stockholders approved an amendment to increase the number of shares of common stock the Company is authorized to issue from 30 million to 45 million. Such amendment became effective on June 21, 2006 when the Company filed a Certificate of Amendment to its Restated Certificate of Incorporation with the Secretary of State of Delaware. Issuance of Common Shares On December 29, 2006, the Company secured commitments for the purchase of 7,000,000 shares of its common stock, par value $0.05, and warrants for the purchase of an additional 7,000,000 shares of common stock for aggregate gross cash proceeds of $9.5 million (net proceeds of approximately $9.0 million). Of such total, $5.0 million ($4.7 million, net) had been received by December 31, 2006 and comprised 3,660,006 shares of our common stock. Of the remaining balance of $4.5 million ($4.3 million, net), $2.5 million was paid by subscribers by March 23, 2007. This amount, net of the related placement fee of approximately $0.1 million, was classified in current assets as subscriptions receivable on the December 31, 2006 balance sheet and represented 1,867,772 shares of our common stock. Net subscriptions receivable of $1.9 million (net of the related placement fees of approximately $0.1 million) that had not paid as of March 23, 2007 have been classified as a reduction of stockholders equity as of December 31, 2006 and represented 1,472,221 shares of our common stock. The securities were sold in investment units consisting of one share of common stock, one Class A Warrant and one Class B Warrant, each warrant entitling the holder to purchase one additional share of common stock for every two shares of common stock acquired in the 40 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS offering at a purchase price of $1.35 per unit (see Note 7). The material terms of the agreements between the Company and the investors are as follows: (i) The Company sold and the investors bought units of one share of common stock and warrants (effectively, one-half of each of Class A and B Warrants) to buy one share of common stock for the consideration of $1.35 per unit; (ii) The investors represented that they were acquiring the shares, the warrants and the shares of common stock underlying the warrants for their own accounts as an investment, and undertook with respect to these securities to comply with the transfer restrictions of Regulation S or Regulation D under the Securities Act of 1933, as the case may be; (iii) The Company undertook to apply for the listing of its outstanding shares on the American Stock Exchange or another recognized U.S. stock exchange at such time as the Company should satisfy the applicable listing requirements; and (iv) The Company undertook to file a registration statement under the Securities Act of 1933 covering the shares and the shares of common stock underlying the warrants following completion of the audit of its financial statements for the year 2006. The agreements do not contain a penalty provision for the Company's failure to file this registration statement. In connection with this offering, the Company incurred expenses including commissions to the placement agent of approximately $410,000. In addition, the Company will issue warrants to purchase 837,994 shares of the Company's common stock, at an exercise price of $1.6875 per share expiring on December 29, 2011, to the placement agent as additional compensation for its services, subject to the availability of authorized shares of common stock not otherwise committed. During 2005, Clean Diesel received proceeds of $5.5 million (net of $232,000 in expenses) through a private placement of 8.174 million shares of its common stock. The price of the common stock was 40 pence (GBP) per share (approximately $0.704 per share). In addition, Clean Diesel received subscriptions for an additional $487,500 (net of $12,500 in expenses) related to the above transaction for 0.7 million shares of its common stock of which all $487,500 was received by March 3, 2006. In 2004, Clean Diesel received cash proceeds of $2.4 million (net of expenses) through two private placements totaling approximately 1.4 million shares of its common stock. In June 2006, June 2005 and July 2004, the Company issued 62,194, 27,179 and 26,031 shares of its common stock, respectively, to non-executive members of its board of directors in lieu of approximately $94,000, $70,000 and $56,500 of directors' fees earned for services provided during the years ended December 31, 2005, 2004 and 2003. The share price used represented the average of CDT's quarter-end high and low trading prices. These directors' fees had been accrued and charged to expense ratably during the respective years. 7. STOCK OPTIONS AND WARRANTS Stock Options The Company maintains a stock award plan approved by its stockholders, the 1994 Incentive Plan (the "Plan"). Under the Plan, awards may be granted to participants in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance awards, bonuses or other forms of share-based awards or cash, or combinations of these as determined by the board of directors. Awards are granted at fair market value on the date of grant and typically expire 10 years after date of grant. Participants in the Plan may include the Company's directors, officers, employees, consultants and advisors (except consultants or advisors in capital-raising transactions) as the board of directors may determine. The maximum number of awards allowed under the Plan is 17.5% of the Company's outstanding common stock less the then outstanding awards, subject to sufficient authorized shares. In general, the policy of the board of directors is to grant stock options that vest in equal amounts on the date 41 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of grant and the first and second anniversaries of the date of grant, except that awards to non-executive members of the board of directors typically vest immediately. The Company estimates the fair value of stock options using a Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the expected term, expected volatility of the Company's stock, the risk free interest rate, option forfeiture rates, and dividends, if any. The expected term of the options is based upon the historical term until exercise or expiration of all granted options. The expected volatility is derived from the historical volatility of the Company's stock on the U.S. Over the Counter market and the U.K. AIM of the London Stock Exchange for a period that matches the expected term of the option. The risk-free interest rate is the constant maturity rate published by the U.S. Federal Reserve Board that corresponds to the expected term of the option. SFAS No. 123R requires forfeitures to be estimated at the time of grant in order to estimate the amount of share based awards that will ultimately vest. The estimate is based on the Company's historical rates of forfeitures. Share based compensation expense recognized by the Company in 2006 includes (i) compensation expense for share based awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123 and (ii) compensation expense for the share based payment awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. This is based on awards ultimately expected to vest. In the Company's pro forma information required under SFAS No. 123 for the periods prior to 2006 (see Note 2), the Company accounted for forfeitures as they occurred. SFAS No. 123R also requires estimated forfeitures to be revised, if necessary in subsequent periods if actual forfeitures differ from those estimates. The dividend yield is assumed as 0% because the Company has not paid dividends and does not expect to pay dividends in the future. The weighted-average fair values at the date of grant for options granted during the years ended December 31, 2006, 2005 and 2004 were $1.493, $0.860 and $1.390, respectively, and were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
YEARS ENDED DECEMBER 31, ------------------------------- 2006 2005 2004 --------- --------- --------- Expected term in years 8.64 4.0 4.0 Risk-free interest rate 4.56% 4.2% 4.2% Expected volatility 104.7% 106.9% 99.4% Dividend yield 0% 0% 0%
42 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the Company's stock option activity and related information for the years ended December 31:
2006 2005 2004 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- --------- ---------- --------- ---------- --------- Outstanding at beginning of year 3,245,937 $ 2.061 2,668,387 $ 2.394 2,247,950 $ 2.450 Options granted 105,000 $ 1.663 674,000 $ 1.145 469,000 $ 1.980 Options exercised (15,000) $ 0.900 (2,000) $ 0.900 (48,563) $ 1.216 Options expired (48,333) $ 4.616 (40,000) $ 2.346 - $ - Options forfeited (47,167) $ 1.999 (54,450) $ 6.820 - $ - ---------- ---------- ---------- Outstanding at end of year 3,240,437 $ 2.016 3,245,937 $ 2.061 2,668,387 $ 2.394 ========== ========== ========== Options exercisable at year-end 2,989,659 $ 2.082 2,8337 $ 2.186 2,197,050 $ 2.470 ========== ========== ========== Options available for grant at year-end 724,268 - - Weighted-average fair value of options granted during the year $ 1.493 $ 0.860 $ 1.390 ========= ========= ========= Aggregate intrinsic value - options exercised $ 3,000 $ 200 $ 75,605 ========= ========= ========= Aggregate intrinsic value - options outstanding $ 566,729 ========= Aggregate intrinsic value - options exercisable $ 556,605 =========
The following table summarizes information about stock options outstanding at December 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------- ------------------------- WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED CONTRACTUAL AVERAGE AVERAGE RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE - ---------------- ----------- ------------ ------------ ----------- ------------ $ 0.720 - 1.020 687,218 6.73 $ 0.975 559,773 $ 0.965 $ 1.391 - 1.675 619,552 4.82 $ 1.590 496,219 $ 1.620 $ 1.840 - 2.375 923,500 6.05 $ 1.967 923,500 $ 1.967 $ 2.500 - 4.625 1,010,167 4.60 $ 3.032 1,010,167 $ 3.032 ----------- ----------- $ 0.720 - 4.625 3,240,437 6.05 $ 2.016 2,989,659 $ 2.082 =========== ===========
Warrants As outlined in Note 6, the December 2006 private placement was comprised of investment units that consisted of one share of common stock, one Class A Warrant and one Class B Warrant. These warrants are immediately exercisable. The Class A Warrants entitle the holder until July 2, 2007 to purchase, at a price of $2.00 per share, one share of common stock for every two shares of common stock acquired in the offering. The Class B Warrants entitle the holder until December 29, 2007 to purchase, at a price of $2.50 per share, one share of common stock for every two shares of common stock acquired in the offering. Based upon 7,000,000 investment units sold and subscribed, an aggregate of 3.5 million of each of Class A and Class B Warrants are issuable. In addition, the Company will issue five-year warrants to purchase 837,994 shares of the Company's common stock, at an exercise price of $1.6875 per share, to the placement agent as additional compensation for its services, subject to the availability of authorized capital not otherwise committed (the initial number of warrants agreed to be issued is 43 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 332,000). The Company's warrant activity for the year December 31, 2006 includes warrants to be issued comprised of 3.5 million Class A Warrants, 3.5 million Class B Warrants and 332,000 of the warrants due to the placement agent. Warrant activity for the years ended December 31 is summarized as follows:
2006 2005 2004 ---------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ----------- --------- -------- --------- -------- --------- Outstanding at beginning of year 506,733 $ 1.767 531,733 $ 1.825 556,733 $ 2.192 Warrants to be issued 7,332,000 $ 2.225 - $ - - $ - Warrants exercised - $ - - $ - - $ - Warrants expired or forfeited (51,613) $ 2.000 (25,000) $ 3.000 (25,000) $ 10.000 ----------- -------- -------- Outstanding and to be issued at end of year 7,787,120 $ 2.196 506,733 $ 1.767 531,733 $ 1.825 =========== ======== ======== Warrants exercisable at year-end 7,787,120 $ 2.196 506,733 $ 1.767 531,733 $ 1.825 =========== ======== ======== Aggregate intrinsic value $ 102,325 ===========
The following table summarizes information about warrants outstanding as of December 31, 2006:
WARRANTS OUTSTANDING AND EXERCISABLE --------------------------------------------------- WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED OUTSTANDING CONTRACTUAL AVERAGE RANGE OF AND LIFE EXERCISE EXERCISE PRICES EXERCISABLE (IN YEARS) PRICE ---------------- --------------- ---------------- ---------------- $1.50 - $1.6875 647,295 3.02 $ 1.642 $2.00 - $2.25 3,639,825 0.63 $ 2.003 $2.50 3,500,000 0.99 $ 2.500 --------------- $1.50 - $2.50 7,787,120 1.18 $ 2.196 ===============
8. COMMITMENTS The Company is obligated under a five-year sublease agreement through March 2009 for its principal office (3,925 square feet) at an annual cost of approximately $125,000, including rent, utilities and parking. The Company is obligated under a four-year lease through July 2008 for 2,750 square feet of warehouse space at an annual cost of approximately $21,000, including utilities. In addition, the Company is obligated under a two and one-half-year lease through September 2007 for 400 square feet of administrative space in the U.K. at an annual cost of approximately $33,000, including utilities and communication services. For the years ended December 31, 2006, 2005 and 2004, rental expense approximated $181,000, $162,000 and $128,000, respectively. Effective October 28, 1994, Fuel-Tech N.V., the company that spun CDT off in a rights offering in December 1995, granted two licenses to the Company for all patents and rights associated with its platinum fuel-based catalyst technology. Effective November 24, 1997, the licenses were canceled and Fuel Tech assigned to CDT all such patents and rights on terms substantially similar to the licenses. In exchange for the assignment commencing in 1998, the Company is obligated to pay Fuel Tech a royalty of 2.5% of its annual gross revenue attributable to sales of the platinum fuel catalysts. The royalty obligation expires in 2008. CDT may terminate the royalty obligation to Fuel Tech by payment of $2.2 million in 2007 or $1.1 million in 2008. CDT, as assignee and owner, maintains the technology at its expense. Royalty expense incurred under this obligation in 2006, 2005 and 2004 amounted to $14,500, $10,300 and $7,450, respectively. Royalties payable to Fuel Tech at December 31, 2006 and 2005 were $14,500 and $10,300, respectively. 44 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. RELATED PARTY TRANSACTIONS The Company has a Management and Services Agreement with Fuel Tech that requires the Company to reimburse Fuel Tech for management, services and administrative expenses incurred on its behalf at a rate equal to an additional 3 to 10% of the costs paid on the Company's behalf, dependent upon the nature of the costs incurred. Currently, and for the last three years, the Company has reimbursed Fuel Tech for the expenses associated with one Fuel Tech officer/director who also serves as an officer/director of CDT. The Company's financial statements include charges from Fuel Tech of certain management and administrative costs of approximately $70,000, $71,000 and $69,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The Company believes the charges under this Management and Services Agreement are reasonable and fair. The Management and Services Agreement is for an indefinite term but may be cancelled by either party by notifying the other in writing of the cancellation on or before May 15 in any year. The Company had a deferred salary agreement with its former chief executive officer under which the former executive deferred $62,500 of his annual salary until the Company reached $5 million in revenue. This agreement was terminated in March 2001 and the former executive's salary was returned to full pay. In October 2004, in conjunction with the Company's private placement, the former executive exchanged all of his outstanding $135,400 of deferred salary for 73,587 shares of the Company's common stock. Further, on behalf of this former executive, the Company made annual pension payments or accruals pursuant to a deferred compensation plan. The former executive agreed to defer payment from the deferred compensation plan until the Company reached $5 million in revenue or he retired. In June 2003, the former executive elected to discontinue this deferred compensation plan. In September 2004, the former chief executive officer retired. In October 2004 the Company paid the accumulated $305,600 deferred compensation to the former executive. As outlined in Note 6, we issued 62,194, 27,179 and 26,031 shares of our common stock in 2006, 2005 and 2004, respectively, to non-executive members of our board of directors in lieu of approximately $94,000, $70,000 and $56,500 of directors' fees earned in the years ended December 31, 2005, 2004 and 2003, respectively, based upon the average of CDT's quarter-end high and low trading prices. Such directors' fees had been accrued and charged to expense during the respective years. In conjunction with the December 2006 private placement outlined in Note 6, directors and management invested $106,321 for a total of 78,756 common shares and 78,756 warrants. 10. LICENSE, MARKETING AND JOINT DEVELOPMENT AGREEMENTS MITSUI CO., LTD. The Company completed an exclusive license agreement with Mitsui Co., Ltd. in August 2001 for CDT's ARIS nitrogen oxides control system for all stationary diesel power generators in Japan for the remaining life of the patents, through 2018. Under the agreement, CDT received a nonrefundable up-front license payment of $495,000, and receives on-going standard royalties on each system sold by Mitsui. The Company completed an additional exclusive license agreement with Mitsui in December 2002 for the mobile ARIS technology for Japan for the remaining life of the patents, through 2018. Under the terms of the agreement, Mitsui paid CDT a $250,000 license fee in 2002 and Mitsui committed to spend an additional $200,000 in developing, testing and demonstrating ARIS mobile prototypes. In May 2005, CDT and Mitsui mutually agreed to transfer both Mitsui's exclusive ARIS mobile and stationary licenses to DENOX Inc. of Japan. DENOX is a former joint venture of Mitsui. No additional license fees or payments were required and DENOX agreed to the same per unit royalties and terms of the original license agreements. COMBUSTION COMPONENT ASSOCIATES, INC. The Company completed a nonexclusive license agreement with Combustion Component Associates in April 2003 for the mobile ARIS technology in the U.S. for the remaining life of the patents, through 2018. Under 45 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS terms of the agreement, Combustion Component Associates agreed to pay CDT a $150,000 nonrefundable license fee and committed to spend an additional $100,000 in developing, testing and demonstrating ARIS mobile prototypes. Pursuant to the license agreement, CDT receives royalty payments on a per unit basis with a minimum royalty requirement of $50,000 per annum after the first two years to keep the license in effect. CDT recognized the $150,000 license revenue upon payment of the required fee in the second quarter of 2003, as there were no significant on-going services required to be performed by CDT. Combustion Components Associates was granted a limited two-year nonexclusive ARIS stationary license for the U.S. market in September 2004. The license fee of $150,000, net of a requirement to spend $100,000 in developing, testing and demonstrating the technology, was due at the end of a two-year period. Similar to the other ARIS license agreements for stationary applications, a per unit royalty, based upon a percentage of sales price, is due for each ARIS system sold and a minimum royalty requirement after the first two years is required to keep the license in effect. CDT did not recognize any license fee revenue from this license in 2004, 2005 or 2006, because the license fee has not been paid. The Company and Combustion Component Associates have agreed upon payment terms for this past due license fee to be paid in full before December 31, 2007. 11. INCOME TAXES The Company follows the liability method of accounting for income taxes. Such method requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. At December 31, 2006, the Company had tax losses available for offset against future years' taxable income of approximately $37.5 million, expiring between 2009 and 2026. At December 31, 2006, the Company had research and development tax credit carryforwards of approximately $1.7 million, expiring between 2011 and 2026. The Company has provided a full valuation allowance to reduce the related deferred tax asset to zero because of the uncertainty relating to realizing such tax benefits in the future. The total valuation allowance increased by $2.2 million during the year ended December 31, 2006. Deferred tax assets and valuation allowance at December 31, 2006 and 2005 are as follows:
(in thousands) December 31, 2006 2005 ----------- --------- Research and development $ 1,680 $ 1,629 Net operating loss carryforwards 14,991 12,981 Options 122 - ----------- --------- Deferred tax assets 16,793 14,610 Less: valuation allowance (16,793) (14,610) ----------- --------- Deferred tax assets, net $ - $ - ----------- ---------
Utilization of CDT'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% attributable to the 1995 Fuel Tech rights offering. Utilization of CDT's tax losses subsequent to December 12, 1995 may be limited due to cumulative ownership changes in any three-year period. Reconciliations of the differences between income taxes computed at federal statutory rates (34%) and consolidated provisions (benefits) for income taxes for the years ended December 31, 2006, 2005 and 2004 are as follows: 46 CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, ------------------------------- 2006 2005 2004 --------- --------- --------- Income taxes (benefits) at statutory rates (34%) (34%) (34%) Change in valuation allowance 34% 34% 34% --------- --------- --------- Income taxes (benefits) -% -% -% ========= ========= =========
12. GEOGRAPHIC INFORMATION CDT sells its products and licenses its technologies throughout the world. A geographic distribution of revenue consists of the following:
(in thousands) YEARS ENDED DECEMBER 31, ------------------------------- 2006 2005 2004 --------- --------- --------- U.S. $ 684 $ 675 $ 468 Europe 117 48 2 Asia 322 89 252 --------- --------- --------- Total revenue $ 1,123 $ 812 $ 722 ========= ========= =========
The Company has patent coverage in North America, Europe, Asia and South America. As of December 31, 2006 and 2005, approximately 24% and 76% of our patents, net of accumulated amortization, are attributable to the U.S. patents and corresponding foreign patents, respectively. 13. SUBSEQUENT EVENTS On January 4, 2007, the board of directors granted 625,000 option shares to employees, directors and consultants at an exercise price of $1.82 per share. The directors' options are exercisable immediately. The other options vest as to one-third, immediately upon grant and as to one-third, upon each of the first and second anniversaries of grant. On January 12, 2007, the Company issued 85,714 shares of its common stock to three non-executive directors of the board of directors as payment (or partial payment in the case of one director) in lieu of cash for directors' fees earned in 2006. 14. QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share amounts)
THREE MONTHS ENDED ----------------------------------------------------------- 2006 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------- ------------- -------------- ------------- Total revenue $ 269 $ 279 $ 339 $ 236 Gross profit * 153 123 133 56 Net loss attributable to common stockholders (1,584) (1,190) (1,114) (1,496) Basic and diluted net loss per common share (0.06) (0.05) (0.04) (0.06)
THREE MONTHS ENDED ----------------------------------------------------------- 2005 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------- ------------- -------------- ------------- Total revenue $ 192 $ 268 $ 166 $ 186 Gross profit * 82 107 64 88 Net loss attributable to common stockholders (1,191) (1,286) (1,489) (1,460) Basic and diluted net loss per common share (0.07) (0.07) (0.09) (0.07)
* Gross profit is defined as total revenue less cost of revenue. 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES As of the date of this filing, an evaluation was performed under the supervision and with the participation of the Company's management, including its CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including its CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 31, 2006. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2006. As a result of Section 404 of the Sarbanes-Oxley Act of 2002, and the rules issued thereunder, as a non-accelerated filer, beginning with our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, we will be required to annually include management's report regarding internal control over financial reporting. Our independent registered public accounting firm will also be required to annually attest to the effectiveness of our internal control over financial reporting, but under the rules of the SEC, this attestation is not required until our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item regarding directors and executive officers of the Company will be set forth under the captions "Election of Directors," "Directors and Executive Officers of Clean Diesel Technologies," "Section 16(a) Beneficial Ownership Reporting Compliance," "Committees of the Board," "Audit Committee" and "Audit Committee Financial Export" in the Company's proxy statement related to the 2007 annual meeting of stockholders and is incorporated by reference. Information regarding our directors is available on our Internet site under "Investors" as follows: http://www.cdti.com/corporate.html. The Company has adopted a code of Ethics and Business Conduct (the "Code") that applies to all employees, officers and Directors, including the Chief Executive Officer and Chief Financial Officer. A copy of the code is available free of charge on written or telephone request to the secretary of the company at the address or telephone number of the Company set out in the Company's annual report to stockholders. The Code may also be viewed on our website under "Investors" as follows: http://www.cdti.com/corporate.html. ITEM 11. EXECUTIVE COMPENSATION Information required by this item will be set forth under the caption "Executive Compensation," "Directors' Compensation," "Report of Compensation and Nominating Committee on Executive Compensation" and "Compensation and Nominating Committee Interlocks and Insider Participation" in the proxy statement related to the 2007 annual meeting of stockholders and is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS Information required by this item will be set forth under the caption "Principal Stockholders and Stock Ownership of Management" in the proxy statement related to the 2007 annual meeting of stockholders and is incorporated by reference. 48 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item will be set forth under the captions "Compensation and Nominating Committee Interlocks and Insider Participation," "Certain Relationships and Related Transactions" and "Director Independence" in the proxy statement related to the 2007 annual meeting of stockholders and is incorporated by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by this item will be set forth under the caption "Audit Fees" in the proxy statement related to the 2007 annual meeting of stockholders and is incorporated by reference herein. 49 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (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 Registered Public Accounting Firm Balance Sheets as of December 31, 2006 and 2005 Statements of Operations and Comprehensive Loss for the years ended December 31, 2006, 2005 and 2004 Statements of Changes in Stockholders' Equity for the years ended December 31, 2006, 2005 and 2004 Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 (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. (B) EXHIBITS The following exhibits are, as indicated by reference symbol, filed herewith or incorporated by reference. Portions of Exhibits 10(o) and 10(p) have been omitted pursuant to a request for confidential treatment. #3(i) (a) Restated Certificate of Incorporation dated as of March 21, 2007. 3(i)(b) Certificate of Elimination of Series A Convertible Preferred Stock dated June 18, 2004 (incorporated by reference to Exhibit to Registration Statement on Form S-8 [No. 333-117057] dated July 1, 2004). #3(ii) By-Laws as amended through December 20, 2005. 4 Specimen Stock Certificate, Common Stock (incorporated by reference to Exhibit to Registration Statement on Form S-1 (No. 33-95840) dated as of August 16, 1995). 10(a) Assignment of Intellectual Property Rights Fuel-Tech N.V. to Platinum Plus, Inc. as of November 5, 1997 (incorporated by reference to Exhibit to Form 10-K for the year ended December 31, 1997). 10(b) Assignment of Intellectual Property Rights by Fuel Tech, Inc. to Clean Diesel Technologies, Inc. as of November 5, 1997 (incorporated by reference to Exhibit to Form 10-K for the year ended December 31, 1997). 10(c) Assignment Agreement as of November 5, 1997 among Platinum Plus, Inc., Fuel-Tech N.V. and Clean Diesel Technologies, Inc. (incorporated by reference to Exhibit to Form 10-K for the year ended December 31, 1997). #10(d) 1994 Incentive Plan as amended through August 8, 1996. #10(g) Form of Incentive Stock Option Agreement. #10(h) Form of Non-Qualified Stock Option Agreement. 50 10(i) Form of Non-Executive Director Stock Option Agreement (incorporated by reference to Exhibit to Registration Statement on Form S-8 [No. 333-117057] dated July 1, 2004). 10(j) Management Services Agreement between Clean Diesel Technologies, Inc., Fuel Tech, Inc. and Fuel-Tech N.V. as of June 1, 1996 (incorporated by reference to Exhibit to Form 10-Q for the quarter ended September 30, 1996). 10(k) Office Lease dated as of January 29, 2004 (incorporated by reference to Exhibit to Form 10-Q for quarter ended June 30, 2004). 10(l) Registration Rights Agreement between Clean Diesel Technologies, Inc. and Fuel-Tech N.V. of November 5, 1997 (incorporated by reference to Exhibit to Form 10-K for the year ended December 31, 1997). 10(m) Registration Rights Agreement between Clean Diesel Technologies, Inc. and Fuel-Tech N.V. of March 24, 1997 (incorporated by reference to Exhibit to Registration Statement on Form S-1 dated as of August 7, 1998). 10(n) Registration Rights Agreement between Clean Diesel Technologies, Inc. and the holders of Series A Convertible Preferred Stock as of November 11, 1998 (incorporated as reference to Exhibit to Form 10-Q for the period ended September 30, 1998). 10(o) License Agreement of July 13, 2001 between Clean Diesel Technologies, Inc. and Mitsui Co., Ltd as amended by Amendment No. 1 of December 18, 2002 (incorporated as reference to Exhibit to Form 10-Q for quarter ended June 30, 2004). 10(p) License Agreement of March 31, 2003 between Clean Diesel Technologies, Inc. and Combustion Components Associates, Inc. (incorporated by reference to Exhibit to Exhibit to Form 10-Q for quarter ended June 30, 2004). 10(u) Agreement by and between R. Glen Reid and Clean Diesel Technologies, Inc. dated as of April 1, 2002 (incorporated by reference to Exhibit to Form 10-Q for quarter ended June 30, 2004). 10(s) Agreement by and between Bernhard Steiner and Clean Diesel Technologies, Inc., dated as of September 13, 2004 (incorporated by reference to Exhibit to Form 8-K dated as of July 30, 2004). 10(v) Amendment No. 1 dated 1 March 2006 to agreement dated September 13, 2004 between Bernhard Steiner and Clean Diesel Technologies, Inc. (incorporated by reference to Exhibit 10(v) to Form 10-K for the year ended December 31, 2005). 10(w) Separation Agreement of January 19, 2006 between James M. Valentine and Clean Diesel Technologies, Inc. (incorporated by reference to Exhibit to Form 8-K dated as of January 19, 2006). #10(x) Employment Agreement dated September 23, 2003 between Tim Rogers and the Company. 10(y) Employment Agreement dated June 14, 2005 between Walter Copan and the Company (incorporated by reference to Exhibit to Form 8-K dated as of August 3, 2005). #10(z) Employment Agreement dated November 29, 2006 between Ann B. Ruple and the Company. 10(aa) Form of Commitment Letter by and between the Company and Non-U.S. Purchasers of Units consisting of shares of common stock and warrants (incorporated by reference to Exhibit 10.1 to Form 8-K dated as of December 29, 2006). 10(ab) Form of Commitment Letter by and between the Company and U.S. Purchasers of Units consisting of shares of common stock and warrants (incorporated by reference to Exhibit 10.2 to Form 8-K dated as of December 29, 2006). 51 14 Code of Ethics and Business Conduct (incorporated by reference to Exhibit to Form 10-K for the year ended December 31, 2004). #21 Subsidiaries. #23(a) Consent of Eisner LLP. #31(a) CEO Certification statement. #31(b) CFO Certification statement. #32 Certification by CEO and CFO. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - # Filed herewith. 52 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 30, 2007 By: /s/ Bernhard Steiner - -------------- ------------------------------------- Date Bernhard Steiner Chief Executive Officer, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of Clean Diesel Technologies, Inc. and in the capacities and on the date indicated have duly signed this report below.
/s/ Bernhard Steiner Chief Executive Officer, President and Director ------------------------- (principal executive officer) Bernhard Steiner /s/ Ann B. Ruple Chief Financial Officer, Vice President and Treasurer ------------------------- (principal financial and accounting officer) Ann B. Ruple /s/ John A. de Havilland Director ------------------------- John A. de Havilland /s/ Derek R. Gray Director, Non-Executive Chairman of the Board of Directors ------------------------- Derek R. Gray /s/ Charles W. Grinnell Director, Vice President and Corporate Secretary ------------------------- Charles W. Grinnell /s/ John J. McCloy Director ------------------------- John J. McCloy /s/ David F. Merrion Director ------------------------- David F. Merrion
Dated: March 30, 2007 53 EX-3.(I)(A) 2 ex3_ia.txt EXHIBIT 3(I)(A) Exhibit 3(i)(a) Restated Certificate of Incorporation of Clean Diesel Technologies, Inc. The original certificate of incorporation of Clean Diesel Technologies, Inc. (the "corporation") was filed with the Secretary of State of Delaware on January 19, 1994. This restated certificate of incorporation of the corporation was duly adopted by the vote of the Board of Directors of the corporation in accordance with Section 245 of the Delaware General Corporation Law on March 21, 2007 without a vote of shareholders. This restated certificate of incorporation only restates and integrates and does not further amend the provisions of the corporation's certificate of incorporation as theretofore amended and supplemented and there is no discrepancy between those provisions and the provisions of this restated certificate. 1. The name of the corporation is Clean Diesel Technologies, Inc. 2. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the city of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 3. The nature of the business or purpose to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation law of Delaware. 4. The corporation shall have authority to issue the total number of Forty Five Million One Hundred Thousand (45,100,000) shares of the par value of $0.05 per share, amounting in the aggregate to Two Million Two Hundred Fifty Five Thousand Dollars ($2,255,000), and of such shares Forty Five Million (45,000,000) shall be designated as common stock and One Hundred Thousand (100,000) shall be designated as preferred stock. The preferred stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions set forth in this Certificate, to issue the preferred stock in one or more series and, in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including without limitation, dividend rights, dividend rates, conversion rights, rights and terms of redemption (including sinking fund provisions), and the liquidation preferences of any unissued series of preferred stock and the number of shares constituting any such series; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not above the total number of authorized shares of the class and not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. In no event, however, may the Board of Directors issue preferred stock which has the effect of voting as a class during the pendency of a tender offer to purchase more than 50% of the common stock of the Company, unless the tender offeror(s) consent to such issuance. 5. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the by-laws of the corporation. 6. Elections of Directors need not be by written ballot unless the by-laws of the corporation shall so provide. 7. Meetings of stockholders may be held within or without the state of Delaware, as the by-laws may provide. The books of the corporation may be kept outside of the State of Delaware at such place or places as may be designed from time to time by the board of directors or in the by-laws of the corporation. 8. (a) A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director except that this Article 9 shall not eliminate or limit a director's liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation law, or (iv) for any transaction from which the director derived an improper personal benefit. (b) If the Delaware General Corporation Law is amended after approval by the stockholders of this Article 8 to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended from time to time. (c) Any repeal or modification of this Article 8 shall not increase the personal liability of any director of this corporation for any act or occurrence taking place prior to such repeal or modification, or otherwise adversely affecting any right or protection of a director of the corporation existing at the time of such repeal or modification. 9. (a) Except as otherwise provided below, the corporation, shall, to the fullest extent indemnify each person who is, or shall have been, a director, officer, employee or agent of the corporation or who is or was a director, officer, employee or agent of the corporation and is serving, or shall have served, at the request of the corporation, as a director, officer, employee or agent of another organization or in any capacity with respect to any employee benefit plan of the corporation, against all liabilities and expenses (including judgments, fines, penalties, amounts paid or to be paid in settlement, and reasonable attorneys fees) imposed upon or incurred by any such person (the "Indemnitee") in connection with, or arising out of, the defense of disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be a defendant or with which he may be threatened or otherwise involved, directly or indirectly, by reason of his being or having been such a director, officer, employee or agent or as a result of his serving or having served with respect to any such employee benefit plan; provided, however, that the corporation shall provide no indemnification with respect to any matter as to which any such Indemnitee shall be finally adjudicated in such action suit or proceeding not to have acted in good faith in the reasonable belief that his action was (i) in the best interests of the corporation or (ii) to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. (b) The right to indemnification conferred in this Article 9 shall include the right to be paid by the corporation for liabilities and expenses incurred in connection with the settlement of compromise of any such action, suite or proceeding, pursuant to a consent decree or otherwise, unless a determination is made, within forty-five (45) days after receipt by the corporation of a written request by the Indemnitee for indemnification, that such settlement or compromise is not in the best interests of the corporation or, to the extent such matter related to service with respect to an employee benefit plan, that such settlement or compromise is not in the best interests of the participants or beneficiaries of such plan. Any such determination shall be made (i) by the board of directors of the corporation by a majority vote of a quorum consisting of disinterested directors, or (ii) if such quorum is not obtainable, by a majority of the disinterested directors then in office. Notwithstanding the foregoing, if there are less than two disinterested directors of the corporation then in office, the board of directors shall promptly direct that independent legal counsel (who may be regular legal counsel to the corporation) determine, based on facts know to such counsel at such time, whether such Indemnitee acted in good faith in the reasonable belief that this action was in the best interests of the corporation or the participants or beneficiaries of any such employee benefit plan, as the case may be; and, in such event, indemnification shall be made to such Indemnitee unless, within forty-five (45) days after receipt by the corporation of the request by such Indemnitee for indemnification, such independent legal counsel in a written opinion to the corporation determines that such Indemnitee did not act in good faith in the reasonable belief that his action was in the best interests of the corporation or the participants or beneficiaries of any such employee benefit plan, as the case may be. (c) As a condition precedent to his right to be indemnified, the Indemnitee must give the corporation notice in writing as soon as practicable of any action, suit or proceeding involving him for which indemnity will or could be sought. With respect to any action, suit or proceeding of which the corporation is notified, the corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to such Indemnitee. After notice from the corporation to the Indemnitee of its election so to assume such defense, the corporation shall not be liable to such Indemnitee for any legal or other expenses subsequently incurred by such Indemnitee in connection with such claim, but the fees and expense of such counsel incurred after notice from the corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the corporation and the Indemnitee in the conduct of the defense of such action or (iii) the corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases, the fees and expenses of counsel for the Indemnitee shall be at the expense of the corporation, except as otherwise expressly provided by this Article. The corporation shall not be entitled to assume the defense of any claim brought by or on behalf of the corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in (ii) above. (d) Subject to paragraph 4(c) above, the right to indemnification referred to in this Article shall include the right to be paid by the corporation for expenses (including reasonable attorneys' fees) incurred in defending a civil or criminal action, suit or proceeding in advance of its final disposition, subject to receipt of an undertaking by the Indemnitee to repay such payment if it is ultimately determined that the Indemnitee is not entitled to indemnification under this Article. Such undertaking may be accepted without reference to the financial ability of such Indemnitee to make such repayment. Notwithstanding the foregoing, no advance shall be made by the corporation under this paragraph (d) if a determination is reasonably and promptly made by the board of directors by a majority vote of a quorum consisting of disinterested directors or, if such quorum is not obtainable, by a majority of the disinterested directors of the corporation then in office or, if there are not at least two disinterested directors then in office, by independent legal counsel (who may be regular legal counsel to the corporation) in written opinion that, based on facts known to the board of directors or counsel at such time, such Indemnitee did not act in good faith in the reasonable belief that his action was in the best interests of the corporation or the participants or beneficiaries of an employee benefit plan of the corporation, as the case my be. (e) If an Indemnitee is entitled under any provision of this Article to indemnification by the corporation of some or a portion of the liabilities or expenses imposed upon or incurred by such Indemnitee in the investigation, defense, appeal or settlement of any action, suite or proceeding but not, however, for the total amount thereof, the corporation shall nevertheless indemnify the Indemnitee for the portion of such liabilities or expenses to which such Indemnitee is entitled. (f) The right to indemnification and the payment of expenses incurred in defending any action, suit or proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or thereafter acquire under any statute, provision of the articles of incorporation, by-laws, agreement, vote of stockholders of managing directors or otherwise. Without limiting the generality of the foregoing, the corporation, acting through its board of directors, may enter into agreements with any director or employee of the corporation providing for indemnification rights equivalent to or greater than the indemnification rights set forth in this Article. (g) The corporation may purchase and maintain insurance, at its expense, to protect itself and any director or employee of the corporation or another organization or employee benefit plan against any expense or liability incurred by him in any such capacity, or arising out of the status as such. (h) The corporation's obligation to provide indemnification under this Article shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the corporation or any other person. (i) Without the consent of a person entitled to the indemnification and other rights provided in this Article, no amendment modifying or terminating such rights shall adversely affect such person's rights under this Article with respect to the period prior to such amendment. (j) If this Article or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Indemnitee as to any liabilities and expenses with respect to any action, suit or proceedings to the full extent permitted by any applicable portion of this Article that shall not have been invalidated and to the full extent permitted by applicable law. (k) As used in this Article, the term "director" "officer" "employee" "agent" and "person" include their respective heirs, executors, administrators and legal representatives and an "interested" director is one against whom in such capacity the proceedings in question or another proceeding on the same or similar grounds is then pending. 10. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. THE UNDERSIGNED duly authorized officer of the corporation does hereby set his hand this 21st day of March, 2007. /s/ C. W. Grinnell ------------------------------- Charles W. Grinnell Vice President and Secretary EX-3.(II) 3 ex3_ii.txt EXHIBIT 3(II) Exhibit 3(ii) Clean Diesel Technologies, Inc. A Delaware Corporation BY-LAWS As amended through December 20, 2005 ARTICLE I OFFICES ------- Section 1.1. Registered Office. The Corporation's registered ----------------- office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 1.2. Other Offices. The Corporation may also have offices ------------- at such other places within or without the State of Delaware as the Board of Directors shall determine. ARTICLE II STOCKHOLDERS ------------ Section 2.1. Place of Meeting. Meetings of stockholders may be ---------------- held at such places within or without the State of Delaware as the Board of Directors shall determine. Section 2.2. Annual and Special Meetings. Annual meetings of --------------------------- stockholders shall be held (at dates, times, and places fixed by the Board of Directors and stated in the notice of meeting) to elect Directors and to transact such other business as may properly come before the meeting; provided, -------- however, that the date of each such annual meeting shall be within thirteen - ------- months subsequent to the later of the date of the Corporation's incorporation or the date of the last annual meeting of stockholders. Special meetings of stockholders may be called by the Chief Executive Officer for any purpose. If directed by the Board of Directors or requested in writing by the holders of not less than 25% of the aggregate of the _1_ Corporation's then outstanding capital stock, special meetings of stockholders shall be called by the Chief Executive Officer or the Secretary. Each such stockholder request shall state the purpose of the proposed meeting. Section 2.3. The Secretary of the Corporation shall or shall cause the Corporation's Transfer Agent to prepare, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting. Such list shall be arranged in alphabetical order and shall show each stockholder's address and the number of shares registered in such stockholder's name. Such list shall be open to examination by any stockholder for any purpose germane to the meeting during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting (or, if not so specified, at the place where the meeting is to be held). The list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.4. Organization. The person designated by the Board of ------------ Directors (or, in the absence of such designation, the highest ranking officer of the Corporation who is present at the meeting) shall call to order meetings of stockholders and shall act as chairman of such meetings. The Secretary of the Corporation shall act as secretary of meetings of stockholders. If the Secretary of the Corporation is absent from the meeting, the secretary of the meeting shall be such person as the chairman of the meeting shall appoint. Section 2.5. Conduct of Business. The chairman of any meeting of ------------------- stockholders shall determine the order of business and the _2_ procedures to be followed at the meeting, including regulation of the manner of voting and of the conduct of discussion. Section 2.6. Notice. Except as otherwise provided by law, written ------ notice of the time, date, and place of meeting (and, in the case of a special meeting, the purpose thereof) shall be given to each stockholder not less than 10 days and not more than 60 days before the date on which the meeting is to be held. Section 2.7. Quorum. At any meeting of stockholders, the holders ------ of record (present in person or by proxy) of one third of the shares of capital stock entitled to vote at the meeting shall constitute a quorum for the transaction of business, except as otherwise required by law. In the absence of a quorum, the chairman or secretary of the meeting may adjourn the meeting in the manner provided in Section 2.8 hereof until a quorum is present. Section 2.8. Adjournment. Any meeting of stockholders, annual or ----------- special, may be adjourned from time to time to reconvene at the same place or another place. A determination in accordance with Article V hereof of stockholders of record with respect to a meeting of stockholders shall apply to any adjournment of such meeting; provided, however, that the Board of Directors -------- ------- shall have authority to fix a new record date for the adjourned meeting. Notice need not be given of any such adjourned meeting if the date, time, and place thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than thirty days or if a - -------- ------- new record date is fixed for the adjourned meeting, written notice of the date, time, and place of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. At the adjourned meeting, any business may be transacted which might have been transacted at the original meeting. _3_ Section 2.9. Proxies and Voting. At any meeting of stockholders, ------------------ each stockholder entitled to vote may vote in person or by proxy. Each stockholder shall have one vote for each share of capital stock entitled to vote which is registered in his name on the record date for the meeting, except as otherwise provided in these By-Laws or as otherwise required by law. All voting by stockholders, except on the election of directors and except as otherwise required by law, may be by voice vote; provided, however, that upon demand -------- ------- therefor by a stockholder (or by his proxy) entitled to vote, a stock vote shall be taken. Each stock vote shall be taken by written ballots, each of which shall state the name of the stockholder (or proxy) voting. Each vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. Elections of Directors shall be determined by a plurality of the votes cast; except as otherwise required by law, all other matters shall be determined by a majority of votes cast. ARTICLE III DIRECTORS --------- Section 3.1. Number, Election, Term, and Removal of Directors. ------------------------------------------------ Each Director shall be elected for a term of one year and until his successor is elected and qualified, except as otherwise provided in these By-Laws or as otherwise required by law. The first Board of Directors shall consist of one Director. Thereafter, the number of Directors shall be determined by the Board of Directors or by the stockholders. The Directors shall all be elected by the stockholders in accordance with Section 2.9 hereof at the annual meeting of stockholders. Vacancies and newly created directorships resulting from an increase in the number of Directors may be filled (for the unexpired term and until a successor Director is elected) by a majority of the Directors then in office (although less than a quorum), by _4_ the sole remaining Director, or by the stockholders. Any Director may be removed with or without cause by the stockholders. Section 3.2. Chairman of the Board. The Directors may elect one --------------------- of their members to be Chairman of the Board of Directors. The Chairman of the Board of Directors shall be subject to the control of, and may be removed with or without cause by, the Board of Directors. The Chairman of the Board of Directors shall perform such duties as may from time to time be assigned to him by the Board of Directors. Section 3.3. Meetings. Regular meetings of the Board of Directors -------- shall be held at such dates, times, and places as may from time to time be fixed by the Board of Directors. Notice need not be given of regular meetings of the Board of Directors. Special meetings of the Board of Directors may be held at any date, time, and place upon the call of the Chairman of the Board or the President, and shall be called by the Secretary if and as directed by one-third of the Directors then in office. Telegraphic or other written notice of the place, date, and time of each special meeting of the Board of Directors shall be given not less than two days before such meeting to each Director who shall not waive such notice. Meetings of the Board of Directors may be held without notice immediately after annual meetings of stockholders. Section 3.4. Action Without Meeting. Nothing contained in these ---------------------- By-Laws shall be deemed to restrict the power of the Board of Directors or of any committee of the Board of Directors to take any action without a meeting. Section 3.5. Telephonic Meetings. Nothing contained in these ------------------- By-Laws shall be deemed to restrict the power of members of the Board of Directors, or of any committee of the Board of Directors to participate in meetings of the Board of Directors (or of such committees) by means of _5_ conference telephone or similar communications equipment by means of which all persons participating in such meeting can hear each other. Section 3.6. Quorum; Act of the Board of Directors. One-half of ------------------------------------- the total number of Directors shall constitute a quorum for the transaction of business. If a quorum is not present at any meeting of the Board of Directors, a majority of the Directors present may adjourn the meeting to another place, date, and time without further notice or waiver. Except as otherwise provided by law, by the Certificate of Incorporation, by these By-Laws, or by any binding contract or agreement to which the Corporation is a party, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. Section 3.7. Committees of the Board of Directors. The Board of ------------------------------------ Directors, by resolution adopted by a majority of the whole Board of Directors, may designate one or more committees (including, without limitation, an Executive Committee) to have and to exercise such power and authority as the Board of Directors shall specify. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting may (whether or not he or they constitute a quorum) unanimously appoint another Director to act at the meeting in place of the absent or disqualified committee member. Each committee may fix procedural rules for meeting and for conducting its business and shall act in accordance therewith, except as other wise provided in these By-Laws or as otherwise required by law. Adequate provision shall be made for notice to committee members of all committee meetings. One-half of the members of each committee shall constitute a quorum (unless the committee shall consist of one member, in which event one member shall _6_ constitute a quorum). All matters shall be determined by a majority vote of the committee members present at the committee meeting. Section 3.8. Minutes of Meetings of Committees. Each committee of --------------------------------- the Board of Directors shall keep minutes of its meetings and shall report the same when and as required by the Board of directors. Section 3.9. Compensation of Directors. Pursuant to resolution of ------------------------- the Board of Directors, Directors may be paid their expenses of attendance at meetings on the Board of Directors and may also be paid either a fixed sum for attendance at each meeting of the Board of Directors or a stated salary for service as a Director. Pursuant to resolution of the Board of Directors, members of committees of the Board of Directors may be allowed like compensation for attending meetings of committees of the Board of Directors. No payment referred to in this Section 3.9 shall preclude any Director from serving the Corporation in any other capacity or from receiving compensation therefor. ARTICLE IV OFFICERS -------- Section 4.1. General. The Corporation's officers shall consist of ------- a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, and such other officers (which may include one or more Assistant Secretaries and Assistant Treasurers) with such titles and duties as the Board of Directors shall determine. Any number of offices may be held by the same person. Each officer shall be elected by the Board of Directors, shall be subject to supervision and direction by the Board of Directors, shall serve at the pleasure of the Board of directors, and shall hold office for the term prescribed by the Board of Directors. The salaries of all officers shall be fixed by the Board of Directors. The _7_ authority, duties, or responsibilities of any officer may be suspended by the Board of Directors with or without cause. Any officer may be removed at any time by the Board of Directors with or without cause. Section 4.2. The Chief Executive Officer. The Chief Executive --------------------------- Officer shall be the Corporation's chief executive officer. Subject to the provisions of these By-Laws and to the direction of the Board of Directors, the Chief Executive Officer shall have responsibility for general management and control of the Corporation's affairs and business and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him by the Board of Directors. The Chief Executive Officer shall have power to sign all stock certificates, contracts, and other authorized instruments of the Corporation. The Chief Executive Officer shall have general supervision and direction of the Corporation's other officers and agents. Section 4.3. The President. The President shall be responsible for ------------- the day to day operations of the Corporation as may be delegated to the President by the Chief Executive Officer from time to time and, if the Chief Executive Officer shall be absent or unable to act, the President shall act in the stead of the Chief Executive Officer. Section 4.4. The Vice Presidents. In the President's absence (or ------------------- in the event of his inability or refusal to act), the Vice President (or if there be more than one Vice President, the Vice Presidents in the order designated by the Board of Directors, or in the absence of such designation, then in the order of their election, starting with the first to be elected), shall perform all duties of the President. When so acting, such Vice President shall have all powers of, and be subject to all restrictions _8_ upon, the President. The Vice President(s) shall perform such other duties, and shall have such other powers, as the Board of Directors shall prescribe. Section 4.5. The Secretary; Assistant Secretaries. The Secretary ------------------------------------ shall attend all meetings of the Board of Directors and all meetings of stockholders, and shall record the proceedings of such meetings in a book or books to be kept for that purpose. If so directed by the Board of Directors, the Secretary shall perform similar duties with respect to meetings of committees of the Board of Directors. The Secretary shall give (or cause to be given) notice of all meetings of stockholders and of all special meetings of the board of directors. The Secretary shall have custody of the Corporation's seal and he (or any Assistant Secretary) shall have authority to affix such seal to any appropriate instrument. When so affixed, such seal may be attested by the Secretary's (or such Assistant Secretary's) signature. The Board of Directors may give general authority to any other officer to affix the Corporation's seal and to attest such affixation by such other officer's signature. In the Secretary's absence (or in the event of his inability or refusal to act), the Assistant Secretary (or if there shall be more than one Assistant Secretary, the Assistant Secretaries in the order designated by the Board of Directors, or in the absence of such designation, then in the order of their election, starting with the first to be elected) shall have all powers of, and be subject to all restrictions upon, the Secretary. The Secretary and the Assistant Secretary (or Assistant Secretaries) shall perform such other duties, and shall have such other powers, as the Board of Directors shall prescribe with respect to each such office. Section 4.6. The Treasurer; Assistant Treasurers. The Treasurer ----------------------------------- shall have custody of the Corporation's monies and securities, shall keep regular books of account, and shall deposit all of the _9_ Corporation's monies and other valuable effects in the name of (and to the credit of) the corporation in one or more depositories designated by the Board of Directors. The Treasurer shall disburse the Corporation's funds as directed by the Board of Directors and shall take vouchers for such disbursements. The Treasurer shall render to the Board of Directors at its regular meetings (or when otherwise directed by the Board of Directors) an account of his transactions as Treasurer and of the Corporation's financial condition. In the absence of the Treasurer (or in the event of his inability or refusal to act), the Assistant Treasurer (or if there shall be more than one Assistant Treasurer, the Assistant Treasurers in the order designated by the Board of Directors, or in the absence of such designation, then in the order of their election, starting with the first to be elected) shall have all powers of, and be subject to all restrictions upon, the Treasurer. The Treasurer and the Assistant Treasurer (or Assistant Treasurers) shall perform such other duties, and shall have such other powers, as the Board of Directors shall prescribe with respect to each such office. Section 4.7. Delegation of Authority. The Board of Directors may ----------------------- from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any other provision of these By-Laws. Section 4.8. Facsimile Signatures of Officers. Facsimile -------------------------------- signatures of any officer may be used whenever authorized by these By-Laws or by the Board of Directors. Section 4.9. Action with Respect to Securities of Other Entities. --------------------------------------------------- Unless otherwise prescribed by the Board of Directors, the Chief Executive Officer, the President or Secretary (or any other officer designated by the Chief Executive Officer to act in their stead) shall have power and authority on the Corporation's behalf to attend (and to act and _10_ vote at) meetings of holders of securities of any entity in which the Corporation shall own or hold securities. At such meetings, the Chief Executive Officer, the President, Secretary or Chief Executive Officer's designee, as the case may be, shall possess (and may exercise) all rights and powers incident to the ownership or holding of such securities which the Corporation might have possessed and exercised. The Chief Executive Officer, the President, the Secretary or the Chief Executive Officer's designee may execute and deliver on the Corporation's behalf powers of attorney, proxies, consents, waivers, and other instruments relating to the securities owned or held by the Corporation. ARTICLE V CAPITAL STOCK ------------- Section 5.1. Stock Certificates. Certificates for shares of the ------------------ Corporation's capital stock shall be in such form as shall be permitted by law and approved by the Board of Directors. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation by the Chairman of the Board of Directors if one shall be incumbent) or the President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying the number of shares owned by him in the corporation. If such certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or (2) by a registrar other than the Corporation or its employee, any other signatures on the certificate may be facsimile. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. _11_ If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificates which the Corporation shall issue to represent such class or series of stock or there shall be set forth on the face or back of the certificates which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish, without charge to each stockholder who so requests, the designations, references and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Any restriction imposed upon the transfer of shares or registration of transfer of shares shall be noted conspicuously on the certificate representing the shares subject to such restriction. Section 5.2. Transfer of Shares. Shares of the Corporation's ------------------ capital stock may be transferred on the Corporation's books only by the holder of such shares (or by such holder's authorized attorney) upon surrender to the Corporation or to the Corporation's transfer agent of the properly endorsed certificate(s) representing such shares. Section 5.3. Lost, Stolen, or Destroyed Certificates. The Board --------------------------------------- of Directors (or the Corporation's transfer agent) may authorize the issuance of a new share certificate to replace any certificate theretofore issued by the Corporation which is alleged to have been lost, stolen, or destroyed. The Board of Directors, as a condition to such issuance, may require that the owner of such lost, stolen, or destroyed certificate, or his legal representative, (i) submit to the Corporation an affidavit stating that _12_ such certificate has been lost, stolen, or destroyed, (ii) advertise the same in such manner as the Board of Directors shall require, and/or (iii) give the Corporation a bond in such sum as the Board of Directors shall require to indemnify the Corporation against any claim that may be made against the Corporation in respect of the certificate alleged to have been lost, stolen, destroyed or the certificate to be issued. Section 5.4. Record Date. In order that the Corporation may ----------- determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed: (1) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to a vote at a meeting of stockholders shall apply _13_ to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (2) The record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in this State, its principal place of business, or an officer of agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. (3) The record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when prior action by the Board of Directors is required, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (4) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 5.5. Registered Stockholders. The Corporation shall be ----------------------- entitled to recognize the exclusive right of a person registered on the Corporation's books as the owner of shares of capital stock to receive dividends on such shares and to vote as owner of such shares. The Corporation need not recognize any claim to (or interest in) such shares by any other person, whether or not the Corporation shall have notice thereof, except as otherwise required by law. _14_ Section 5.6. Regulations. The Board of Directors shall have power ----------- and authority to make all rules and regulations which it deems expedient concerning the issuance, transfer, registration, cancellation, and replacement of certificates representing the Corporation's capital stock. Section 5.7. United Kingdom Stock Exchanges. In connection with ------------------------------ the trading of Shares of the Company's common stock on exchanges in the United Kingdom, the officers, agents and other person's acting on behalf of the Company shall be guided by the regulations set forth on Schedule A to these By-Laws. ARTICLE VI GENERAL PROVISIONS ------------------ Section 6.1. Checks, etc. All checks, other drafts, and notes of ------------ the Corporation shall be signed by at least two of such persons as the Board of Directors shall designate. Any two of those persons designated by the Board of Directors to sign checks, other drafts and notes of the Corporation are authorized to open and jointly use such accounts with such banks or trust companies as may from time to time be required for the purposes of the Corporation. Section 6.2. Contracts. All contracts, agreements, indentures or --------- other written commitments intended to bind the Corporation shall be signed by an officer. Section 6.3. Pro-Forma Banking and Qualification Resolutions. ----------------------------------------------- Resolutions from time to time necessary or appropriate for the opening or maintenance by the Corporation of any account with any bank or trust company or for the qualification of the Corporation to do business under the laws of any state shall be effective and shall be adopted in haec verba as of the date of ------------- certification thereof so long as such resolutions _15_ shall be certified by the Secretary or an Assistant Secretary of the Corporation and filed with the permanent records of the resolutions of the Directors of the Corporation. Section 6.4. Fiscal Year. The Corporation's fiscal year shall be ----------- the twelve calendar months ending December 31 in each year unless otherwise fixed by the Board of Directors. Section 6.5. Corporate Seal. The Corporation's corporate seal -------------- shall have inscribed thereon the Corporation's name, the year of its incorporation, and the words "Corporate Seal" and "Delaware". Section 6.6. Notices. Whenever any law, the Certificate of ------- Incorporation, or these By-Laws requires that notice be given to any Director, officer, or stockholder, such notice may be given personally or in writing by mail, addressed to such Director, officer, or stockholder at his address which appears on the Corporation's records. Any notice given by mail shall be deemed to have been given when deposited in the United States mail, with postage thereon prepaid. Notice to Directors or officers may be given by telegram, cable, radiogram, or facsimile, addressed to such Director or officer at his address which appears on the Corporation's records, in which case notice shall be deemed to have been given when delivered for transmission. Section 6.7. Time Periods. Whenever these By-Laws require that an ------------ act be done or not be done a specified number of days prior to or after the occurrence of any event (or require that an act be done or not be done within a period of days prior to or after the occurrence of an event), calendar days shall be used, with the day of the doing of such act excluded and the day of the occurrence of such event included. _16_ ARTICLE VII AMENDMENTS ---------- The holders of shares of capital stock entitled at the time to vote for the election of Directors shall have power to amend or repeal these By-Laws by vote of not less than a majority of such shares. Except as otherwise provided by law, the Board of Directors shall have power to amend or repeal these By-Laws by vote of not less than a majority of the entire Board of Directors. Any by-law adopted by the Board of Directors, however, may be amended or repealed by vote of the holders of a majority of the shares of capital stock entitled at the time to vote for the election of Directors. _17_ Schedule A to the By-Laws of Clean Diesel Technologies, Inc. (a) In the event that the Company receives a Transfer Form in relation to any shares in respect of which a valid Stock Deposit Transaction has been entered into the CREST system, the officers of the Company are authorized to interpret, and are authorized to instruct any transfer agent of the Company to interpret, such a Transfer Form as an instruction to transfer the shares which are the subject of the Transfer Form not to the transferee named in the Transfer Form, but rather to the Depository, who shall, in accordance with the Deed Poll, interpret such a transfer as an instruction to issue an equivalent number of CDTI Depository Interests to the transferee specified in the Transfer Form; (b) In the event that the Company receives a Demat Form in relation to any shares in respect of which a valid Stock Deposit Transaction has been entered into the CREST system, the officers of the Company are authorized to interpret, and are authorized to instruct any transfer agent of the Company to interpret, such a Demat Form as an instruction to transfer the shares which are the subject of the Demat Form to the Depository, who shall, in accordance with the Deed Poll, interpret such a transfer as an instruction to issue an equivalent number of CDTI Depository Interests to the holder(s) of shares named in the Demat Form; (c) In the event that the Depository receives a Stock Withdrawal Instruction in relation to any CDTI Depository Interests and the Depository, by virtue of the Deed Poll, treats such stock withdrawal instruction as an instruction (without the need for any further transfer documentation to be issued) to cancel the relevant Depository Interests, the officers of the Company are authorized to interpret and are authorized to instruct any transfer agent of the Company to interpret such an instruction as an instruction to transfer the shares, to which such CDTI Depository Interests relate, to the transferee (if any) named in the Stock Withdrawal Instruction or, if no transferee is named, to the person by whom the relevant CDTI Depository Interests were held immediately prior to their cancellation; provided, in each case, that any such officer, agent or other person shall reasonably believe that the transaction so effectuated accurately reflects the intent of the holder of such securities (or beneficial interests of depository interests therein). (d) For purposes of this Schedule A, the terms identified below shall have the meaning set forth opposite each respective term.
- --------------------------------------------------------------------------------------------------------- CDTI Depository Interests depository interests of a particular series issued in uncertificated form from time to time by the Depository on the terms and conditions of the Deed Poll and in accordance with the Regulations (as defined in the Deed Poll), title to which is evidenced by entry on the Clean Diesel Depository Interest Register (as defined in the Deed Poll) and which represent a particular class of Company securities. - --------------------------------------------------------------------------------------------------------- CREST member a person who has been admitted by CRESTCo Limited or such other person, who is for the time being the Operator of the CREST system for the purposes of the Regulations (as defined in the Deed Poll), as a system member. - --------------------------------------------------------------------------------------------------------- CREST system the systems and procedures relating to the two CREST Applications Hosts at two physically remote locations; the leased line communications between the two Applications Hosts and the System Controller's room at CRESTCo offices; the CREST Courier & Sorting Service; and the System Controller's room at CRESTCo offices. - --------------------------------------------------------------------------------------------------------- _18_ - --------------------------------------------------------------------------------------------------------- Demat Form the CREST Dematerialisation Request Form, in use from time to time within the CREST system for conversion of a certificated unit of a participating security held by a CREST member into uncertificated form, which has been completed with a specified number of Company securities and executed by or on behalf of the holder of such Company securities. - --------------------------------------------------------------------------------------------------------- Deed Poll that certain deed poll made by the Depository on January 29, 2002 in relation to the constitution and issue of CDTI Depository Interests by the Depository. - --------------------------------------------------------------------------------------------------------- Depository Capita IRG Trustees Limited and any successor depository appointed from time to time in accordance with the Deed Poll. - --------------------------------------------------------------------------------------------------------- Stock Deposit Transaction a properly authenticated dematerialized instruction in respect of a transaction which enables a shareholder to change the form in which securities are held from certificated to uncertificated, either as a result of a transfer from a certificated investor to a CREST member or as a result of a member dematerializing part of his own certificated holding. - --------------------------------------------------------------------------------------------------------- Stock Withdrawal Transaction a properly authenticated instruction in respect of a transaction which enables a CREST member to change the form in which securities are held from uncertificated to certificated, either as a result of a transfer to an investor who is to hold the securities in certificated form or as a result of recertificating part of his own uncertificated holding. - --------------------------------------------------------------------------------------------------------- Transfer Form the CREST Transfer Form, in use from time to time within the CREST system for a transfer of a certificated unit of a participating security to a CREST member to be held by that CREST member in uncertificated form, which has been completed with a specified number of Company securities and executed by or on behalf of the holder of such Company securities. - ---------------------------------------------------------------------------------------------------------
EX-10.(D) 4 ex10_d.txt EXHIBIT 10(D) Exhibit 10(d) Clean Diesel Technologies, Inc. 1994 INCENTIVE PLAN (as amended through June 11, 2002)
The 1994 Incentive Plan of Clean Diesel Technologies, Inc. Index Page 1. Purpose and Effective Date 1 2. Definitions 1 3. Administration 3 3.1 Committee 3 3.2 Effect of Determinations 4 4. Eligibility 4 5. Shares Subject to This Plan 4 5.1 Maximum Number of Shares 4 5.2 Share Accounting 4 6. Awards 5 6.1 Options 5 6.2 Stock Appreciation Rights 7 6.3 Restricted Shares 8 6.4 Performance Awards 9 6.5 Bonuses 10 6.6 Other Awards 12 7. Adjustments Upon Changes in Capitalization 12 8. Change in Control 13 8.1 Definition of Change in Control 13 8.2 Effect of Change in Control 14 9. Relationship of the Plan to Benefit Plans 14 10. Effect of the Plan on Right to Continued Employment and Interest In Particular Property 15 11. Withholding Taxes and Deferrals 15 11.1 Cash Withholding 15 11.2 Share Withholding 15 11.3 Deferrals 16 12. Compliance With Applicable Legal Requirements 16 13. Amendments 16 13.1 Plan Amendments 16 13.2 Award Amendments 16 13.3 Rights of Participants 16 13.4 Rule 16b-3 17 14. Miscellaneous Provisions 17 14.1 Awards in Various Countries 17 14.2 Transferability 17 14.3 Cancellation of Awards 17 14.4 Arbitration; Governing Law 17
CLEAN DIESEL TECHNOLOGIES, INC. 1994 INCENTIVE PLAN 1. Purpose and Effective Date -------------------------- The purpose of this 1994 Incentive Plan of Clean Diesel Technologies, Inc., a Delaware corporation ("the Corporation") is to further the interests of the Corporation and its shareholders by providing incentives in the form of awards to such directors, officers, employees, consultants or advisors to the Corporation as the directors shall determine are key to the continued success and profitability of the Corporation. The Plan is intended to retain Participants with significant training, experience and ability; to attract new Participants whose services are considered valuable; and to encourage such Participants to acquire a proprietary interest in the Corporation. So that the maximum incentive can be provided each Participant in the Plan by granting to such participant an Award best suited to the circumstances, the Plan provides for granting, Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Shares, Performance Awards, Bonuses, Other Awards, or any combination of the foregoing. This Plan shall become effective upon its adoption by the Board, subject to approval within one (1) year of such adoption by the Corporation's shareholders, and shall remain effective until terminated by resolution of the Board. 2. Definitions ----------- As used in this Plan: (1) "Award" means the grant hereunder, and by consent of the Participant, awards or options granted previously by the Corporation of any form of Option, Stock Appreciation Right, Restricted Share, Performance Award, Other Award, Bonus, or any other form of Share based or non-Share based Award. (2) "Award Agreement" means a written agreement between the Corporation and the Participant that sets forth the terms, conditions and limitations applicable to an Award. (3) "Beneficiary" means, where a Participant is within respect to any Award not forfeitable by its terms on the death of the Participant entitled to any unpaid portion thereof, such person or persons entitled thereto under the Participant's will or under the laws of descent and distribution; (4) "Board" means the Board of Directors of the Corporation. (5) "Bonus" means any payment under Sec. 6.5. 1 (6) "Change in Control" has the meaning set forth in Sec. 8. (7) "Code" means the United States Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor statute. (8) "Committee" means the Committee of the Board or any successor committee as described in Section 3.1, or, if there shall be no such Committee, the Board. (9) "Corporation" means Clean Diesel Technologies, Inc., a Delaware corporation, or any successor corporation, and its subsidiaries and affiliates, incorporated or otherwise, in which the Corporation shall own directly or indirectly at least fifty percent (50%) of the interests. (10) "Employee" means any individual who is a salaried employee on the payroll of the Corporation. (11) "Exchange Act" means the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. (12) "Fair Market Value Per Share" in reference to the common stock of the Corporation means such value as shall be determined by the Board or a Committee thereof, as the case may be, responsible from time to time for the administration of the Plan. (13) "Non-Qualified Stock Option" shall mean a stock option which is not an Incentive Stock Option within the meaning of Section 422 of the Code. (14) "Option" means an Award to purchase Shares granted pursuant to Sec. 6.1. (15) "Participant" means any director, officer, employee, consultant or advisor who is granted an Award under this Plan. Except that consultants and advisors shall not include those rendering services in connection with the offer or sale of the Corporation's securities in a capital raising transaction. (16) "Performance Award" has the meaning described in Sec. 6.4. (17) "Plan" means this 1994 Incentive Plan of Clean Diesel Technologies, Inc., as amended from time to time. (18) "Restricted Shares" means Shares which have certain restrictions attached to the ownership thereof, which may be issued under Sec. 6.3. (19) "Retirement" means termination of a Participant's employment with the Corporation by retirement under the normal, mandatory, early and applicable age plus service or other provision of the applicable retirement plan of the Corporation or a subsidiary or affiliate of the Corporation, or, if there shall be no such plan or plans, then 2 under such procedures as the Company or its subsidiaries and affiliates may from time to time establish. (20) "Rule 16b-3" means such rule as promulgated by the Securities and Exchange Commission under the Exchange Act as now in force or as such regulation or successor regulation shall be hereafter amended. (21) "Share" means shares of common stock of the Corporation. (22) "Share Unit" means the right to receive a payment equivalent in value to one Share on the date of payment. (23) "Stock Appreciation Right" means a right which may be issued under Sec. 602, the value of which is determined relative to the appreciation in value of Shares. (24) "Totally Disabled" means a condition of a Participant found by a qualified physician selected by the Corporation to be that as described in Sec. 22(e)(3) of the Code or as such Section or successor section shall be hereafter amended. (25) "Non-Employee Director" means a director as defined in Rule 16b-3 of the Securities and Exchange Commission. (26) "Incentive Stock Option" means a stock option satisfying the requirements of Section 422 of the Code." 3. Administration -------------- 3.1 Committee --------- (a) This Plan shall be administered by the Board. The Board may, however, appoint a Committee to administer the Plan which shall consist of not less than a sufficient number of disinterested members of the Board so as to qualify the Committee to administer this Plan as contemplated by Rule 16b-3 and to that end the Board may limit the participation of Committee members in the Plan to formula based or other awards. The Board may remove members from or add members to the Committee. Vacancies on the Committee shall be filled by the Board. (b) To the extent permitted by Sec. 13.3, the Board or Committee is authorized to (i) determine the persons who shall be Participants in the Plan and which Awards shall be granted to Participants, (ii) establish, amend and rescind rules, regulations and guidelines relating to the Plan as it deems appropriate, (iii) interpret and administer the Plan, Awards and Award Agreements, (iv) establish, modify and terminate terms and conditions of Award Agreements, (v) grant waivers and accelerations of Plan, Award and Award Agreements restrictions and 3 (vi) take any other action necessary for the proper administration and operation of the Plan. (c) The Board or Committee may designate persons and entities other than its members, including but not limited to, and successor committee, the Chief Executive Officer, and the Corporate Secretary, to carry out any of its responsibilities under and described in this Plan, under such conditions or limitations as the Board or Committee may establish, other than its authority with regard to participants, if any, who are subject to Sec. 16 of the Exchange Act. 3.2 Effect of Determination ----------------------- Determination of the Board or Committee and its designee shall be final, binding and conclusive on the Corporation, its stockholders, Employees and Participants. No member of the Board or Committee or any of its designee shall be personally liable for any action or determination made in good faith with respect to this Plan, any award, or any Award Agreement. 4. Eligibility ----------- Persons eligible for Awards under this Plan shall consist of key managerial and other directors, officers, employees, consultants or agents who possess valuable experience and skills and have contributed, or can be expected to contribute, materially to the success and profitability of the Corporation. The Board or Committee shall determine which persons shall be Participants, the types of Awards to be made to Participants and the terms, conditions and limitations applicable to the Awards. 5. Shares Subject to This Plan --------------------------- 5.1 Maximum Number of Shares ------------------------ The maximum number of Shares available for Awards under this Plan in each calendar year during which any part of this Plan shall be in effect shall be such fixed amount of Shares as the Board shall from time to time determine but not more than seventeen and one-half percent (17 %) of the issued and outstanding Shares of the Corporation. Treasury stock shall not be deemed to be issued and outstanding. Any and all such Shares may be issued in respect of any of the types of Awards. However, the maximum number of Shares that may be issued subject to Incentive Stock Options under the Plan shall not exceed two million (2,000,000) Shares." 5.2 Share Accounting ---------------- Shares related to Awards that are forfeited, terminate, expire unexercised, exchanged, settled in cash in lieu of Shares or settled in such other manner so that a portion or all of the Shares included in an Award are not issued to a Participant shall be 4 available for other Awards. Any Shares not so used shall be available for further Awards; provided, however, that in any calendar year no more than the amount determined under Sec. 5.1 above, shall be available for Awards. Shares issued under this Plan shall be authorized and unissued Shares or Shares reacquired by the Corporation, as determined by the Committee. No fractional Shares shall be issued under this Plan. 6. Awards ------ (a) Awards may include, but are not limited to, those described in this Sec. 6. Awards may be granted singly, in combination, or in tandem with other Awards. Subject to the other provisions of this Plan, Awards may also be made in combination or in tandem with, in replacement of, or as alternatives to, grants or rights under this Plan and any other plan of the Corporation, including any plan of any acquired entity and for the benefit of any present or former director, officer, consultant or agent of such acquired entity. Subject to the terms of the Awards described in this Sec. 6 and the related Award Agreement, the form of payment for Awards may be in cash, in Shares, in Share Units, or such other form as determined by the Board of the Committee, and may be made partly in one form or partly in one or more other forms, all as determined by the Committee. Except as otherwise provided in this Plan, Awards shall be evidenced by Award Agreements, the terms of which may be amended or accelerated by the Board or Committee following the grant of any Award and need not be uniform among Participants. Except as otherwise provided in this Plan, Awards shall be granted for such minimum consideration as is required by applicable law, rules and regulations, including without limitation, the then applicable Rule 16b-3, and such additional consideration, if any, as may be determined by the Committee. (b) Notwithstanding anything contained in this Plan, if required by the ten applicable Rule 16b-3 or any successor provision, any "equity security" awarded pursuant to this Plan to any participant who is subject to Section 16 of the Exchange Act must be held by the Participant for at least six (6) months after the award thereof. In addition, if required by the then applicable Rule 16b-3 or any successor provision, with respect to any Participant who is subject to Section 16 of the Exchange Act, at least six (6) months must elapse from the date of acquisition of a "derivative security" hereunder to the date of disposition of such security. The terms "equity security" and "derivative security" shall have the meanings described in the then applicable Rule 16b-3. 6.1 Options ------- Options may be granted under this Plan from time to time. If Options are granted they shall be upon the following terms and conditions with such additional terms and conditions, not inconsistent with the provisions of this Plan, as the Board or Committee in its discretion shall deem desirable: (a) Options shall be Non-Qualified Stock Options or Incentive Stock Options. 5 (b) The option price per Share for all Options shall be not less than one hundred per cent (100%) of the Fair Market Value Per Share on the date the Option is granted. (c) Award Agreements for Options shall conform to the requirements of this Plan, and may contain such other provisions as the Committee shall deem advisable. (d) Award Agreements for Options shall specify when an Option may be exercisable. An option may be exercised, in whole or in part, by giving written notice of exercise to the corporation specifying the number of Shares to be purchased. Shares purchased upon exercise of an Option shall be paid for in full at the time the Option is exercised in cash or, with the consent of the Board or Committee, consistent with applicable law, regulations and rules. (e) A holder of an Option shall have no rights as a stockholder with respect to any Shares covered by such Option unless and until the date of the issuance of the stock certificate for such Shares. (f) (i) If, after completion of any required period of continuous employment or affiliation in order to exercise an Option as provided in an Award Agreement, a Participant dies while employed by the Corporation, such Option shall be exercisable by the Beneficiary thereof, but after the date of death of the Participant only within the period specified in the Award Agreement which shall not be later than the expiration date of the Option. (ii) Following the death of a Participant, the Board or Committee may at its discretion, upon the request of and in consideration of the surrender of such Option, pay the amount by which the Fair Market Value per Share on the date of such request shall exceed the Option price per Share multiplied by the number of Shares as to which the request was made. (g) If, after completion of any required period of continuous employment in order to exercise an Option as provided in an Award Agreement, a Participant is Totally Disabled or retires, such Option shall be exercisable by the Participant, but only within the period specified in the Award Agreement. (h) Incentive Stock Options (i) Each Incentive Stock Option shall not have an aggregate Fair Market Value Per Share (determined for each Incentive Stock Option at its grant date) of Shares with respect to which Incentive Options are exercisable for the first time by a Participant during any calendar year (under the Plan and any other stock option plan of the Corporation or its subsidiaries ("Other Plans"), determined in accordance with the provisions of Section 422 of the Code, which exceeds $100,000; 6 (ii) To the extent that the aggregate Fair Market Value Per Share of stock with respect to which Incentive Stock Options granted under the Plan and any Other Plans are exercisable by a Participant for the first time during any calendar year exceeds $100,000, such Incentive Stock Options shall be treated as Non-Qualified Stock Options to the extent necessary so that such aggregate Fair Market Value per Share of Stock does not exceed $100,000. For purposes of the foregoing sentence, Incentive Stock Options shall be treated as Non-Qualified Stock Options according to the order in which they were granted such that the most recently granted Incentive Stock Options are first treated as Non-Qualified Stock Options; and (iii) Each Incentive Stock Option shall require the Participant to notify the Board or the Committee of any disposition of any Shares issued pursuant to the exercise of the Incentive Stock Option under the circumstances described in Section 421 of the Code (relating to certain disqualifying dispositions) within ten (10) days of such disposition. 6.2 Stock Appreciation Rights ------------------------- Stock Appreciation Rights may be granted under this Plan from time to time. If Stock Appreciation Rights are granted they shall be upon the following terms and conditions, and such additional terms and conditions, not inconsistent with the provisions of this Plan, as the Board or Committee in its discretion shall deem desirable: (a) A Stock Appreciation Right may be granted in tandem with part of all of, in addition to, or completely independent of, an Option or any other Award under this Plan. A Stock Appreciation Right issued in tandem with an Option may be granted at the time of grant of the related Option or at any time thereafter during the term of the Option. (b) Award Agreements for Stock Appreciation Rights shall conform to the requirements of this Plan and may contain such other provisions (including but not limited to, the permitted form of payment for the exercise of the Stock Appreciation Right, the requirement of employment for designated periods of time prior to exercise and the ability of the Board or Committee to revoke Stock Appreciation Rights which are issued in tandem with options without compensation to the Participant) as the Board or Committee shall deem advisable. (c) Stock Appreciation Rights issued in tandem with Options shall be subject to the following: (i) Stock Appreciation Rights shall be exercisable at such time or times and to the extent, but only to the extent, that the Option to which they relate shall be exercisable. 7 (ii) Upon exercise of Stock Appreciation Rights the holder thereof shall be entitled to receive a number of Shares equal in aggregate value to the amount by which the Fair Market Value Per Share on the date of such exercise shall exceed the option price per Share of the related Option, multiplied by the number of Shares in respect of which the Stock Appreciation Right shall have been exercised. (iii) All or any part of the obligation arising out of an exercise of Stock Appreciation Rights may, at the discretion of the Board or Committee, be settled by the payment of cash equal to the aggregate value of the Shares (or a fraction of a Share) that would otherwise be delivered under Sec. 6.2(c)(ii). (iv) Upon exercise of Stock Appreciation Rights the unexercised tandem options of the Participant shall automatically terminate upon the exercise of such Stock Appreciation Rights. (v) Stock Appreciation Rights issued in tandem with Options shall automatically terminate upon the exercise of such Options. 6.3 Restricted Shares ----------------- Awards of Restricted Shares may be granted under this Plan from time to time. If Awards of Restricted Shares are granted they shall be upon the following terms and conditions and such additional terms and conditions, not inconsistent with the express provisions of this Plan, as the Committee in its discretion shall deem desirable: (a) Restricted Shares are Shares which are subject to such terms, conditions and restrictions as the Board or Committee deems appropriate, which may include restrictions upon the sale, assignment, transfer or other disposition of the Restricted Shares and the requirement of forfeiture of the Restricted Shares upon termination of employment under certain specified conditions. The Board or Committee may condition the lapsing of restrictions on part or all of an Award of Restricted Shares upon the attainment of specific performance goals or such other factors as the Board or committee may determine. Awards of Restricted Shares may be granted for no cash consideration or for such minimum consideration as may be required by applicable law. (b) Award Agreements for Restricted Shares shall conform to the requirements of this Plan, and may contain such other terms and conditions (including but not limited to, a description of a period during which the Participant may not transfer the Restricted Shares and limits on encumbering the Restricted Shares during such period) as the Board or Committee shall deem desirable. To the extent permitted by Sec. 13.3 hereof, the Board or Committee may provide for the lapse of any such term or condition in installments and may accelerate or waive any such term or condition in whole or in part, based on 8 service, performance and/or such other factors or criteria as the Board or Committee may determine. (c) Award Agreements for Restricted Shares shall provide that the stock certificates representing Restricted Shares shall be legended, that such certificates be held by a custodian or the Corporation, or that there be other mechanisms for maintaining control by the corporation of the Restricted Shares until the restrictions theron are no longer in effect. After the lapse, waiver or release of the restrictions imposed pursuant to the Award Agreement on any Restricted Shares, the corporation shall cause to be issued in the Participant's name a stock certificate evidencing the Restricted Shares with respect to which they restrictions have lapsed or been waived or released, free of any legend, and shall cause such stock certificate to be delivered to the Participant. (d) Except as otherwise provided in this Plan or in the Award Agreement, the participant shall have, with respect to Awards or Restricted Shares because the Participant dies, becomes Totally Disabled or retires involuntarily the restrictions on all Restricted Shares awarded to a participant shall lapse on the date of such termination. 6.4 Performance Awards ------------------ Performance Awards may be granted under this Plan from time to time. If Performance Awards are granted they shall be upon the following terms and conditions and such additional terms and conditions, not inconsistent with the express provisions of this Plan, as the Board or Committee in its discretion shall deem advisable: (a) Performance Awards are Awards which are based upon the long-term performance of all or a portion of the Corporation or which are based upon the long-term individual performance of a Participant. Performance Awards may be in the form of performance units, performance shares and such other forms of Performance Awards which the Board or Committee shall determine to be desirable. Performance Awards are Awards which are granted to participants contingent upon (i) the future performance of all or a portion of the Corporation which may include, without limitation, performance relative to a group of companies in the same or relative industries, achievement of specific business objectives, attainment of certain growth rates, profitability goals and such other measurements as the Board or Committee determines to be appropriate, (ii) the future performance of a Participant, which may include, without limitation, attainment of specified goals and objectives and such other measurements as the Board or Committee determines to be appropriate, (iii) the future performance of a combination of all or a portion of the Corporation and a participant, or (iv) such other measurements and criteria as may be considered appropriate by the Board or Committee. Performance Awards may contain multiple performance measurements. 9 (b) Award Agreements for Performance Awards shall conform to the requirements of this Plan and may contain such other terms and conditions as the Board or Committee shall deem desirable, including but not limited to, applicable performance measurements are to be used singly or in combination, a description of whether different performance periods, the length of performance periods, the ability of the Board or Committee to amend and adjust measurements, payouts and performance periods of performance Awards and any requirements of employment during performance periods. (c) Award Agreements for Performance Awards shall provide for a required minimum period of continuous employment during a performance period of a Performance Award. If such minimum period of continuous employment shall have elapsed, the Award Agreement may provide, or the Board or Committee may determine, the portion of the payment of the Performance Award which participant or the Participant's beneficiary, as applicable, is to receive at the end of the performance period. 6.5 Bonuses ------- Bonuses may be granted under this Plan from time to time on an annual or one-time basis. The amount of Bonuses which may be awarded shall be as determined by the Board or Committee. The Board or Committee may establish a basis upon which aggregate Bonus expenditures for any year shall be determined, which may include measurements of financial performance of the Corporation or of a unit or department thereof, relative performance of the Corporation or of a department thereof within the same or related industries, competitive considerations and other measurements and criteria. (a) Each Bonus may be made at the discretion of the Board or Committee either in cash, in Shares, in Share Units, or in another form as determined by the Board or Committee and may be made partly in one form and partly in one or more other forms. In the case of an Award of a Bonus in Shares or Share Units, the number shall be determined by using the Fair Market Value Per Share on the date of the Award of the Bonus. (b) The payment of any Bonus shall be subject to such obligations or conditions as the Board or Committee may specify in making or recommending the Award of the Bonus, but Bonuses need not be evidenced by Award Agreements. (c) When payment of all or part of a Bonus is deterred in the form of Shares or Share Units, the account of the Participant to whom the Bonus was made will be credited with an amount per Share equal to the dividends payable on each issued and outstanding Share ("dividend equivalents"). Amounts thus credited shall, in the discretion of the Board or Committee, either: 10 (i) be paid in cash as and when each such credit shall be made, or (ii) be credited in Shares or Share Units, with the number determined by using the Fair Market Value Per Share on the date of the dividend payment and delivered in such form and at such time or times as may be determined by the Committee. (d) When payment of all or part of a bonus is deferred in cash, the Committee may provide that the account of the Participant to whom the Bonus was made shall be credited with amounts equivalent to interest ("interest equivalents"). Amounts thus credited shall be at the rate determined by the Committee. (e) Any Bonus payable in Shares may, in the discretion of the Board or Committee, be paid in cash, on each date on which payment in Shares would otherwise have been made, in an amount equal to the Fair Market Value Per Share on each such date, multiplied by the number of Shares which would otherwise have been paid on such date. (f) Bonuses may be awarded in Share Units in accordance with the following terms and conditions and such other terms and conditions as the Board or Committee may impose: (i) The number of Share Units awarded with respect to any Bonus shall be the number determined by using the Fair Market Value Per share on the date of the Award of the Bonus. (ii) Any Bonus made in Share Units may, in the discretion or on the recommendation of the Board or Committee, be paid in Shares on each date on which payment in cash would otherwise be made. (g) In lieu of the foregoing forms of payment of Bonuses, the Board or Committee may specify or recommend any other form of payment which it determines to be of substantially equivalent economic value to the cash value of the Bonus including, without limitation, forms involving payments to a trust or trusts for the benefit of one or more Participants. (h) Each payment of a Bonus that is to be made in cash shall be from the general funds of the corporation or its respective subsidiary or affiliate, as the case may be. (i) In the event of the death of a Participant to whom a Bonus is to be or shall have been made, the Bonus or any portion thereof remaining unpaid shall be paid to such Participant's Beneficiary under the Participant's will or pursuant to the relevant laws of descent and distribution. 11 6.6 Other Awards ------------ (a) The Board or Committee may grant other Share based Awards under this Plan, including without limitation, those Awards pursuant to which Share are or may in the future be acquired, Awards denominated in Share Units, securities convertible into Shares and dividend equivalents. The Board or Committee shall determine the terms and conditions of such other Share based Awards. Shares issued in connection with such other Share based Awards shall be issued for such minimum considerations as shall be required by applicable Rule 16b-3, and such additional consideration, if any, as may be determined by the Board or Committee. (b) The Board or Committee may also grant other non-Share based Awards under this Plan and shall determine the terms and conditions of such other non-share based Awards in tandem or combination with other Awards or each other, in exchange of other Awards, or in tandem or combination with, or as alternatives to grants or rights under any other employee plan of the Corporation, including any plan of any acquired entity. The Board or committee shall have the authority to determine the Participants for such Awards and all other terms and conditions of such other Awards. No amendment of this Plan is required for the creation of another type of Award. 7. Adjustments Upon Changes in Capitalization ------------------------------------------ (a) Subject to any required action by the Corporation's stockholders, in the event of a reorganization, stock split, stock dividend, exchange of Shares, combination of Shares, merger, consolidation or any other change in corporate structure of the Corporation affecting the Shares, or in the event of a sale by the Corporation of all or a significant part of its assets, or any distribution to its shareholders other than a normal cash dividend, the Board or Committee may make appropriate adjustment in the number, kind, price and value of Shares authorized by this Plan and any adjustments to outstanding Awards as it determines appropriate so as to prevent dilution or enlargement of rights. (b) The existence of an Award under this Plan shall not affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stocks, ahead of or affecting the Stock or rights thereunder or convertible thereto, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business or any other corporate act or proceeding, whether of a similar character or otherwise. (c) Awards granted hereunder during the calendar year 1994 with respect to Shares shall be adjusted as to the number thereof, in the event of the issuance or reacquisition of Shares for any reason by the Corporation, so as to maintain the ration of 12 the number of Shares with respect to Awards outstanding on December 31, 1994 to the number of the Corporation's issued and outstanding Shares on such date; provided, however, that (i) where options or warrants for purchase of Shares, no such adjustments shall be required until the conversion of securities into or the purchase of Shares and (ii) upon any such adjustment the exercise price of additional Shares upon a Participant's Award shall be the purchase price (or fair market value of consideration therefore) of Shares issued which initiated the adjustment and the Shares originally granted by the Award shall carry the original exercise price thereof. 8. Change in Control ----------------- 8.1 Definition of Change in Control ------------------------------- A "Change in Control" shall be deemed to have occurred if any one or more of the events described in paragraphs (a), (b) or (c) below occurs. (a) Any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (including any group of persons with which any person or its affiliates or associates, as such terms are defined in Rule 12b-2 under the Exchange Act has any agreement, arrangement or understanding, oral or written, regarding the acquiring, holding, voting or disposing of any of the Corporation's securities, but excluding a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation) (i) becomes the "beneficial owner: (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing fifty one percent (51%) or more of the combined voting power of the Corporation's then outstanding securities (hereinafter referred to as an "Acquiring Person"); or (b) In any two year period persons being a majority of the Board shall cease to be so unless the nomination of the new directors during such period was approved by at least a majority of the directors then still in office who were directors at the beginning of the period; or (c) A consolidation or merger or "Business Combination," as that term is defined as of the effective date of this Plan in Section 203(c)(3) of the General Corporation law of Delaware, of the Corporation shall occur (with the term "interested shareholder" as used in that Section being deemed to refer to an Acquiring Person) in which the Corporation is not the surviving Corporation and pursuant to which the Corporation's shares are converted to cash, securities or other property, but not a business combination where shareholders of the Corporation prior to the business combination have substantially the same proportionate ownership in a business entity after the merger; or (d) The Shareholders of the Corporation shall approve any plan for liquidation or dissolution of the Corporation not otherwise involving a transaction 13 where shareholders of the Corporation prior to the transaction have substantially the same proportionate ownership of a business entity after the transaction. (e) In no event, however, shall a Change in Control be deemed to have occurred with respect to a Participant, if that Participant is part of an Acquiring Person which consummates the change in Control transaction. A Participant shall be deemed "part of an Acquiring Person" for purposes of the preceding sentence if the Participant is an equity participant or has agreed to become an equity participant in the Acquiring Person (except for (i) passive ownership of less than three percent of the securities of the Acquiring Person; or (ii) ownership of equity participation in the Acquiring Person which is otherwise not deemed to be significant, as determined prior to the Change in Control by a majority of the disinterested Continuing Directors). 8.2 Effect of Change in Control --------------------------- Upon the occurrence of an event of Change in Control, unless otherwise with respect to any Award specifically prohibited by the terms of the second paragraph of Section 6: (a) Any and all Options and Stock Appreciation Rights shall become immediately exercisable. (b) Any restriction periods and restrictions imposed on Restricted Shares (except such as may be required by relevant securities laws) shall lapse, and within ten (10) business days after the occurrence of a Change in Control, the stock certificates representing Restricted Shares, without any restrictions or legend thereon (except a legend as may be required by relevant securities laws), shall be delivered to the applicable Participants; (c) The goal, objective, target value or the like, attainable under all performance Awards shall be deemed to have been fully earned for the entire performance period as of the effective date of the Change in Control, except that all performance Awards which shall have been outstanding less than six (6) months on the effective date of the Change in Control shall not be deemed to have earned the goal, objective, target value, or the like; and (d) Subject to Sec. 14.3 hereof, all such other actions and modifications to the Awards as determined by the Board or Committee to be appropriate before the Change in Control of the Corporation shall become effective. 9. Relationship of the Plan to Benefit Plans ----------------------------------------- The amount of Bonuses to any Participant under this Plan shall be eligible for inclusion in the Participant's earnings based for the purpose of determining the benefits to which the Participant is entitled under retirement, pension, excess benefit, thrift, 14 savings, profit-sharing, insurance, long-term disability and other benefit plans, if any, of the Corporation as determined by the Board or Committee. No other income of a Participant attributable to this Plan shall be included in the Participant's earning for purposes of any benefit plan in which the Participant may be eligible to participate. 10. Effect of the Plan on Right to Continued Employment and Interest in ------------------------------------------------------------------- Particular Property ------------------- (a) None of the existence of this Plan, any Awards granted pursuant hereto or any Awards granted pursuant hereto or any Award Agreement shall create any right to continued employment of any Participant by the Corporation. No Participant shall have, under any circumstances, any interest whatsoever, vested or contingent, in any particular property or asset of the Corporation or in any particular Share or Shares of Restricted Shares of the Corporation that may be held by the Corporation (other than Restricted Shares held by a custodian) by virtue of any Award. A Participant may be granted additional Awards under this Plan under such circumstances and at such times as the Board or Committee may determine; provided, however, that no Participant shall be entitled to any Award in the absence of a specific grant by the Board or Committee of an Award, notwithstanding the prior grant of an Award to such Participant. (b) This Plan shall not be deemed a substitute for, and shall not preclude the establishment or continuation of any other plan, practice or arrangement that may now or hereafter be provided for the payment of compensation, special awards or benefits to directors, officer, employees, consultants and agents of the corporation and its subsidiaries generally, or to any class or group of employees, including without limitation, any retirement, pension, excess benefit, thrift, savings, profit-sharing, insurance, long-term disability, health care plans or other employee benefit plans. Any such arrangements may be authorized by the Corporation and payment thereunder made independently of this Plan. 11. Withholding Taxes and Deferrals ------------------------------- 11.1 Cash Withholding ---------------- The Corporation and its participating subsidiaries shall have the right to deduct from any cash payment made under Awards under this Plan any federal, state, provincial or local income, or other taxes required by law to be withheld with respect to such payment or to take such other action as may be necessary in the opinion of the Corporation to satisfy all obligations for the payment of such taxes. 11.2 Share Withholding ----------------- Any Share based Award may provide by the grant thereof that the recipient of such Award may elect, in accordance with any applicable law, rules and regulations, to pay a portion or all of the amount of such minimum required withholding taxes in Shares. In such event, the Participant shall authorize the Corporation to withhold, or shall agree to 15 deliver to the Corporation, Shares owned by such Participant or a portion of the Shares that otherwise would be distributed to such Participant, having a Fair Market Value equal to the amount of withholding tax liability. 11.3 Deferrals --------- The Board or Committee may require or permit a Participant to defer such Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise, the satisfaction of any requirements or goals or lapse or waiver of restrictions of an Award made under this Plan. If any such deferment election is required or permitted, the Board or Committee shall establish rules and procedures for such payment deferrals. 12. Compliance With Applicable Legal Requirements --------------------------------------------- No certificate for Shares distributable pursuant to this Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended from time to time or any successor statute, the Exchange Act and the requirements of the exchanges on which Shares may, at the time, be listed, and the provisions of any foreign securities laws or the rules of foreign securities exchanges, where applicable. 13. Amendments ---------- 13.1 Plan Amendments --------------- The Board may, insofar as permitted by law, form time to time, with respect to any Shares at the time not subject to Awards, suspend or discontinue this Plan or revise or mend it in any respect whatsoever, provided, however, unless the Committee or the Board, as appropriate, specifically otherwise provides, any revision or amendment that would cause this Plan to fail to comply with any requirement of applicable law, regulation or rule if such amendment were not approved by the stockholders of the Corporation shall not be effective unless and until the approval of the stockholders of the Corporation is obtained. 13.2 Award Amendments ---------------- Subject to the terms and conditions and within the limitations of this Plan, the Board or Committee may amend, cancel, modify, or extend outstanding Awards granted under this Plan. 13.3 Rights of Participants ---------------------- No amendment, suspension or termination of this Plan nor any amendment, cancellation or modification of any outstanding Award or Award Agreement that would 16 adversely affect the right of any Participant with respect to an Award previously granted under this Plan will be effective without the written consent of the affected participant. Such written consent may be obtained simultaneously with the grant of any Award. 13.4 Rule 16b-3 ---------- This Plan is intended to comply with Rule 16b-3 with respect to Participants, if any, who are subject to Sec. 16 of the Exchange Act and in the event that the Corporation shall become subject to said Sec. 16. Should the requirements of Rule 16b-3 change, the Board or the Committee, as appropriate, may amend the Plan to comply with the requirements of the amended Rule 16b-3 or its successor provision or provisions. 14. Miscellaneous Provisions ------------------------ 14.1 Awards in Various Countries --------------------------- The Board or Committee shall have the authority to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with provisions of the laws of various countries in which the Corporation or its subsidiaries may operate to assure the viability of the benefits of Awards made to participants employed in such countries and to meet the objectives of this Plan. 14.2 Transferability --------------- (a) Awards may not be pledged or assigned and may otherwise be transferred only to the extent provided herein or in an Award Agreement not inconsistent herewith, provided, however, that an Option or Stock Appreciation Right or any other benefit or Award hereunder deemed to be a derivative security shall not be transferable other than by will or the laws of descent and distribution and shall be exercisable during a Participant's lifetime only by him or by his guardian or legal representative or pursuant to a "qualified domestic relations order" as defined by the Code, or such order under the laws of other jurisdictions as shall be similar in effect to a qualified domestic relations order. (b) Notwithstanding the foregoing, however, the Participant may, with the consent of the Board or Committee and subject to such terms and conditions as they may impose, assign or transfer an Award to or among immediate family members, their issue or spouses or to a trust or family partnership of which such immediate family members, their issue or spouses, are beneficiaries or partners, as the case may be. 14.3 Arbitration; Governing Law -------------------------- (a) The Shares are registered in the United States under the Exchange Act and are listed for trading on the United States stock exchange known as The NASDAQ Stock Market, Inc. Any and all disputes whatsoever between a Participant and the Corporation concerning the administration of this Plan, the interpretation and effect of an Award 17 Agreement or of this Plan or the rights of a Participant under an Award Agreement shall be finally determined before one neutral arbitrator in the City of Stamford, Connecticut. U.S.A. under the rules of commercial arbitration of the American Arbitration Association then in effect and judgment upon any award by such arbitrator may be entered in any Court having jurisdiction or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be. The arbitrator hereunder shall have no power or authority to award consequential, punitive or statutory damages. (b) This Plan, its administration and all Awards granted hereunder, the terms and provisions of any related Award Agreements and the rights of all Participants shall be governed and interpreted in accordance with the laws of Connecticut U.S.A. 18 EX-10.(G) 5 ex10_g.txt EXHIBIT 10(G) Exhibit 10(g) CLEAN DIESEL TECHNOLOGIES, INC. 1994 INCENTIVE PLAN - - INCENTIVE STOCK OPTION AWARD AGREEMENT INCENTIVE STOCK OPTION AWARD AGREEMENT dated as of [DATE] between Clean Diesel Technologies, Inc., a Delaware corporation (the "Company")of 300 Atlantic Street, Stamford Connecticut 06902 U.S.A., and {NAME] (the "Participant"), an employee of the Company. WHEREAS, the Company desires to afford to the Participant an opportunity to purchase shares of the Company's Common Stock pursuant to the grant of an incentive stock option award under the Company's 1994 Incentive Plan (the "Plan") and the participant desires to obtain such opportunity; NOW THEREFORE, the parties agree, as follows: 1. Option Grant. The Company grants to the Participant as of the date ------------- first written above (the "Grant Date") the right and option pursuant to Section 422 of the Internal Revenue Code ("this Option"), to purchase XXX (XXX) shares of Common Stock of the Company, par value $0.05 per share ("the Stock") at the exercise price per share of U.S. $XX.XX, subject, in all respects, to the terms and conditions of the Plan and to the following terms and conditions. 2. Vesting. This Option shall only be first exercisable, in whole or in ------- part, with respect to the shares optioned, as to 33 1/3% thereof, immediately on the Grant Date, and, as to 66 2/3% and 100% thereof, after 5:00 p.m. on the day preceding the first and second anniversaries, respectively, of the Grant Date. Pursuant to and as defined in the Plan, however, this Option shall immediately vest upon a Change of Control of the Company. 3. Term and Termination. (a) The term of this Option shall be a period ---------------------- commencing on the Grant Date and ending at 5:00 p.m. on the date preceding the tenth anniversary thereof ("Expiration Date"). (b) Upon the termination of the Participant's status as an employee of the Company on account of: (i) reasons other than normal retirement, death, total disability and cause, such portion of this option that has not then vested shall terminate and become non-exercisable immediately but such portion of this option that has then vested shall continue and become non-exercisable immediately at 5:00 p.m. upon a date (in no event later than the Expiration Date) after such termination of the Participant's status which is determined under the following table and corresponds to the Participant's length of service with the Company:
Length of Service Time Within Which to Exercise ----------------- ----------------------------- Less than three (3) years One hundred eighty (180) days Between three (3) and five (5) years Two (2) years Between five (5) and seven (7) years Three (3) years More than seven (7) years Five (5) years
Notwithstanding the foregoing, however, if there shall be a change of control of the Company in which seventy five per cent (75%) or more of the capital stock or assets of the Company shall have been acquired by a single person or a control group, then the time within which to exercise this option shall be limited to one hundred eighty (180) days following the Participant's change in status. (ii) death, total disability or normal retirement, such portion of this option that has not then vested shall terminate immediately but such portion of this Option that has then vested may be exercised by the Participant or, pursuant to and as defined in the Plan, the Participant's Beneficiary, at any time during the period ending on the Expiration Date (provided that such option would have Stock Option Agreement, [DATE] been able to have been exercised according to its terms absent such death, total disability or normal retirement); or (iii) cause, in which case all options granted hereunder shall terminate and be immediately nonexercisable. (c) Notwithstanding the foregoing, where termination shall not have been for cause, of which the Board shall be the sole judge, the Board may in its sole discretion permit options hereunder to be exercised by the Participant at any time during the period ending not later than the Expiration Date as the Board shall agree, provided such option would have been able to have been exercised according to its terms absent termination. (d) "Normal Retirement" shall mean resignation of the Participant's status as an employee of the Company or a subsidiary thereof on or after attaining age sixty-five (65) or such earlier age as to which the Board shall consent. "Cause" shall mean, in the sole judgement of the Board, conviction of the Participant under, or a plea of guilty by the participant to any State or Federal felony charge (or the equivalent thereof outside of the United States); any instance of fraud, embezzlement, self-dealing, insider trading or similar malfeasance with respect to the Company regardless of amount; substance or alcohol abuse; or other conduct for which dismissal has been identified in any employee handbook, or other writing, as a potential disciplinary measure. 4. Method of Exercise. This Option may be exercised only by one or more -------------------- notices from time to time in writing of the Participant's intent to exercise this Award, or a portion thereof, delivered to the Secretary or the Chief Financial Officer of the Company, or their delegates, accompanied by the Participant's check or a bank check in the amount of the exercise price, or, in lieu thereof, by delivery to the Company of that number of shares of the Stock equal in value (determined on the same basis as for the grant of Awards under the Plan) to the exercise price and any required withholdings provided in Section 5 below, or by surrendering to the Company of the shares exercised so many as shall equal such value, unless the Participant has within a period of six months previously exercised a Company stock option by delivering or surrendering shares of the Stock. 5. Taxes. At the time of exercise of this Option, the Participant shall ----- deliver to the Company, if required by the Company, a check payable to the Company equal, in the sole opinion of the Company, to the applicable national, state, provincial and local income or other taxes and other payroll related items legally required to be withheld or stopped by reason of such exercise. 6. Securities Laws; Governing Law; Arbitration. The Stock may only be ----------------------------------------------- purchased if there is with respect to the Stock a registration statement or qualification in effect under applicable U.S. or State securities laws or an exemption therefrom. This Option is governed by Connecticut Law and any disputes relating to this Option shall be determined in arbitration as provided in the Plan. 7. Transferability; Disqualifying Dispositions. In order that this Option -------------------------------------------- shall continue as an Incentive Stock Option, this Option may not be transferred otherwise than by will or the laws of descent and distribution and may not be exercised by any person other than the Participant during the Participant's lifetime. In order that shares acquired by exercise hereunder shall not be the subject of a disqualifying disposition and ineligible for the tax treatment afforded under Section 421 of the Internal Revenue Code, the Participant shall have been an employee of the Company at all times during the period beginning on the Date of Grant and ending not later than the day three months before exercise, Stock Option Agreement [DATE] and, (ii) the Participant shall hold such shares for a period which is at least two years from the Date of Grant and one year from the transfer of such shares to the Participant. Any transfer of such shares whatsoever by the Participant to any person, including a nominee or a brokerage account for the benefit of the Participant in the name of the Broker, prior to the expiration of the foregoing two and one year periods may be treated by the Company as a disqualifying disposition. The Participant shall notify the Board through the Secretary of any disposition whatsoever of this option within ten (10) days of such disposition. IN WITNESS WHEREOF, the Company and the Participant have each executed this Agreement, all as of the day and year first above written. Clean Diesel Technologies, Inc. By: (Vice) President EX-10.(H) 6 ex10_h.txt EXHIBIT 10(H) Exhibit 10(h) CLEAN DIESEL TECHNOLOGIES, INC. 1994 INCENTIVE PLAN - - NON-QUALIFIED STOCK OPTION AWARD AGREEMENT NON-QUALIFIED STOCK OPTION AWARD AGREEMENT dated as of {DATE] between Clean Diesel Technologies, Inc., a Delaware corporation (the "Company") of 300 Atlantic Street, Stamford Connecticut 06901 U.S.A., and {NAME] (the "Participant"), an employee of the Company. WHEREAS, the Company desires to afford to the Participant an opportunity to purchase shares of the Company's Common Stock pursuant to the grant of a non-qualified stock option award under the Company's 1994 Incentive Plan (the "Plan"); and WHEREAS, the Participant desires to obtain such opportunity; NOW THEREFORE, the parties agree, as follows: 1. Option Grant. The Company grants to the Participant as of the date ------------- first written above (the "Grant Date") the right and non-qualified option ("this Option"), to purchase XXX (XXX) shares of Common Stock of the Company, par value $0.05 per share ("the Stock") at the exercise price per share of U.S. $XX.XX, subject, in all respects, to the terms and conditions of the Plan and to the following terms and conditions. 2. Vesting. This Option shall only be first exercisable, in whole or in ------- part, with respect to the shares optioned, as to 33 1/3% thereof, immediately on the Grant Date, and, as to 66 2/3% and 100% thereof, after 5:00 p.m. on the day preceding the first and second anniversaries, respectively, of the Grant Date. Pursuant to and as defined in the Plan, however, this Option shall immediately vest upon a Change of Control of the Company. 3. Term and Termination. (a) The term of this Option shall be a period ---------------------- commencing on the Grant Date and ending at 5:00 p.m. on the date preceding the tenth anniversary thereof ("Expiration Date"). Upon the termination of the Participant's status as an employee of the Company on account of: (i) reasons other than normal retirement, death, total disability and cause, such portion of this option that has not then vested shall terminate immediately but such portion of this option that has then vested shall continue and become non-exercisable immediately at 5:00 p.m. upon a date (in no event later than the Expiration Date) after such termination of the Participant's status which is determined under the following table and corresponds to the Participant's length of service with the Company:
Length of Service Time Within Which to Exercise ----------------- ----------------------------- Less than three (3) years One hundred eighty (180) days Between three (3) and five (5) years Two (2) years Between five (5) and seven (7) years Three (3) years More than seven (7) years Five (5) years
Notwithstanding the foregoing, however, if there shall be a change of control in which seventy five percent (75%) or more of the capital stock or assets of the Company shall have been acquired by a single person or a control group, then the time within which to exercise this option shall be limited to one hundred eighty (180) days following the Participant's change in status. (ii) death, total disability or normal retirement, such portion of this option that has not then vested shall terminate immediately but such portion of this Option that has then vested may be exercised by the Participant or, pursuant to and as defined in the Plan, the Participant's Beneficiary, at any Stock Option Agreement [DATE] time during the period ending on the Expiration Date (provided that such option would have been able to have been exercised according to its terms absent such death, total disability or normal retirement); or (iii) cause, in which case all options granted hereunder shall terminate and be immediately nonexercisable. (b) Notwithstanding the foregoing, where termination shall not have been for cause, of which the Board shall be the sole judge, the Board may in its sole discretion permit options hereunder to be exercised by the Participant at any time during the period ending not later than the Expiration Date as the Board shall agree, provided such option would have been able to have been exercised according to its terms absent termination. (c) "Normal Retirement" shall mean resignation of the Participant's status as an employee or officer of the Company or a subsidiary thereof on or after attaining age sixty-five (65) or such earlier age as to which the Board shall consent. "Cause" shall mean, in the sole judgement of the Board, conviction of the Participant under, or a plea of guilty by the participant to any State or Federal felony charge (or the equivalent thereof outside of the United States); any instance of fraud, embezzlement, self-dealing, insider trading or similar malfeasance with respect to the Company regardless of amount; substance or alcohol abuse; or other conduct for which dismissal has been identified in any written Company policy statement, as a potential disciplinary measure. "Company" shall mean a subsidiary of the Company. 4. Method of Exercise. This Option may be exercised only by one or more -------------------- notices from time to time in writing of the Participant's intent to exercise this Award, or a portion thereof, delivered to the Secretary or the Chief Financial Officer of the Company, or their delegates, accompanied by the Participant's check or a bank check in the amount of the exercise price, or, in lieu thereof, by delivery to the Company of that number of shares of the Stock equal in value (determined on the same basis as for the grant of Awards under the Plan) to the exercise price and any required withholdings provided in Section 5 below, or by surrendering to the Company of the shares exercised so many as shall equal such value, unless the Participant has within a period of six months previously exercised a Company stock option by delivering or surrendering shares of the Stock. 5. Taxes. At the time of exercise of this Option, the Participant shall ----- deliver to the Company, if required by the Company, a check payable to the Company equal, in the sole opinion of the Company, to the applicable national, state, provincial and local income or other taxes and other pay-roll related items legally required to be withheld by reason of such exercise. 6. Securities Laws; Transferability; Governing Law; Arbitration. The ----------------------------------------------------------------- Stock may only be purchased, if there is with respect to the Stock a registration statement or qualification in effect under applicable U.S. or State securities laws or an exemption therefrom. This Option may not be transferred, assigned or pledged except in accordance with the Plan. This Option is governed by Connecticut Law and any disputes relating to this Option shall be determined in arbitration as provided in the Plan. IN WITNESS WHEREOF, the Company and the Participant have each executed this Agreement, all as of the day and year first above written. Clean Diesel Technologies, Inc. By (Vice) President Participant EX-10.(X) 7 ex10_x.txt EXHIBIT 10(X) Exhibit 10(x) Please reply to: UK Office Tel: +44 1208 851213 Fax: +44 1208 851015 Tim Rogers Esq. 98 Sutherland Avenue Biggin Hill Kent TN16 3HH 23 September 2003 Dear Mr. Rogers: I write to offer you the appointment of Vice-President, International in this company. You will be based in the United Kingdom and may be required to travel extensively. Initially you would be based from your home. Your task in the initial phase is to review the Company's products and technologies, and develop a business plan for international operations in Europe and Asia. Once this plan is approved by the Board, you would be appointed as Managing Director of the subsidiary created to carry it out additionally to being Vice President-International. You will report directly to the Chief Executive Officer. Your salary will be $225,000 payable in dollars monthly or converted at the current exchange rate. Additionally, the Company will pay private health insurance (BUPA, PPP or equivalent). No car allowance is paid. No company pension scheme is currently in place. Holiday are four weeks annually. Your employment will be initially on the basis of three months notice either way. You will be granted employee stock options on 100,000 shares on the day of your starting with the Company. These options will be issued in accordance with the option scheme rules which allow that the options vest one third immediately, one third on the first anniversary, and one third on the second anniversary. From the grant date, the options have a life of ten years. The exercise price is the average middle market quoted on the issue date [being] your date of commencing employment. Office expenses including telephone and travel expenses are, of course, payable by the Company. Expenses should be submitted to the CFO and will be approved by the CFO and CEO. Your employment is subject to your agreement to the Company's confidentiality and intellectual property rules which are attached at Appendix A. I believe this letter covers the main items that need to be agreed at this stage. By the nature of the task in hand, many other details will need to be resolved as we progress. May I say how much we look forward to your joining Clean Diesel Technologies. I look forward to working with you. Yours sincerely, /s/ Jeremy Peter-Hoblyn Jeremy Peter-Hoblyn Chief Executive Officer Accepted: /s/ Tim Rogers ------------------------------- Tim Rogers Appendix A Clean Diesel Technologies, Inc. Terms and Conditions of Employment 1. Definitions: In this Appendix the following terms shall have the ----------- following meanings: (a) "Agreement" means the Agreement of September 23, 2003 between Company and Employee of which this Appendix is a part. (b) "Company" shall bean Clean Diesel Technologies, Inc. or any of its subsidiaries or affiliates. (c) "Employee" shall mean Tim Rogers. 2. Salary and Benefit Matters: Employment shall be paid a base salary -------------------------- according to Company's normal and customary procedures from time to time in effect but not less often than monthly. Employee shall be entitled to participate from time to time in such benefit programs as the Company may customarily extend to its officers and employees as a class in the jurisdiction where Employee is based. This agreement may not be construed to prevent the Company from rescinding any such benefit for Employee so long as such rescission applies to officers and employees as a class. 3. Nature of Employment: Subject to any required period of notice or salary -------------------- in lieu thereof as provided in this Agreement, the Employee's employment with the Company shall be at will. Employee's rights to notice or severance shall be limited to that provided in this Agreement. 4. Discoveries and Inventions: (a) All patentable and unpatentable -------------------------- inventions, discoveries and ideas which are made or conceived by Employee during the term of this Agreement, and which are based upon or arise out of Employee's services hereunder ("Developments") are or shall become the Company's property. Employee agrees to disclose promptly to the Company each such Development and, upon the Company's request and at the Company's expense, Employee, whether or not still employed by the Company or during the term of this agreement or not, will assist the Company, or its designee, in making application for Letters Patent in any country in the world. Employee further agrees to execute all papers and do all things which may be necessary or advisable to prosecute such applications, and to transfer to and vest in the Company, or its designee, all the right, title and interest in and to such Developments, and all applications for patents and Letters Patent issued thereon. If for any reason, Employee is unable to effectuate a full assignment of any such Development, Employee agrees to transfer to the Company, or it designee, Employee's transferable rights, whether they be exclusive or nonexclusive, or as a joint inventor or partial owner of the Development. No action or inaction by the Company shall in any event be construed as a waiver or abandonment of its rights to any such Development except an instrument in writing signed by an authorized official of the Company by which it specifically states it intends to be bound in such respect. 5. Proprietary Information: Employee will not at any time, either during ----------------------- the term of this Agreement or thereafter, disclose to others, or use for Employee's own benefit or the benefit of others, any of the Developments or any confidential, proprietary or secret information owned, possessed or used by the Company (collectively, "Proprietary Information"), which, by way of illustration, but not limitation, includes devices, structures, machines, processes, trade secrets, disclosures, data, know-how, business opportunities, marketing plans, forecasts, unpublished financial statements, budgets, and information concerning prices, costs, employees, customers and suppliers. Employee's undertakings and obligations under this Paragraph 5 will not apply to any Proprietary Information which: (a) is or becomes generally known to the public through no action on the part of Employee or (b) is generally disclosed to third parties by the Company without restriction on such third parties. Upon termination of this Agreement or at any other time upon request, Employee will promptly deliver to the Company all notes, memoranda, notebooks, drawings, designs, three dimensional figures, photographs, layouts, diagrams, records, reports, files and other documents (and all copies or reproductions of such materials) in his possession or under his control, whether prepared by him or others, which contain Proprietary Information. Employee acknowledges that Proprietary Information is the sole property of the Company. 6. Non-Competition: Following the termination of Employment for any reason, --------------- Employee agrees that Employee will not recruit, entice, induce or encourage any of the Company's other employees or consultants to engage in any activity which, were it done by Employee, would violate any provision of this Agreement. Employee shall not during the one year period following Employee's termination of employment with the Company undertake employment with a competitor of the Company with responsibilities in a line of business substantially similar to that in which Employee would make use of the Company's Proprietary Information. For such one year period and before performing any services for others, as employee or consultant or otherwise, in the actual lines of business in which Employee has performed services for the Company, Employee will notify the Company of the general nature of the services to be performed and the party for whom they will be performed and Employee will, also, prior to undertaking such service or employment inform the other party of the existence of this covenant in this Agreement. Employee admits that breach of his covenants hereunder regarding the Company's Proprietary Information is likely to cause serious economic injury to the Company. 7. Assignment: This Agreement may not be assigned by either party without ---------- the prior written consent of the other party; provided, however, that the Company may assign this agreement to Clean Diesel Europe, a Guernsey Partnership, an affiliate of the Company, so long as a term of such assignment is that the Company shall guarantee the performance and payment of the Company's obligations hereunder by Clean Diesel Europe. 8. Continuing Obligations: The Employee's covenants set forth in Paragraphs ---------------------- 4, 5 and 6 above shall continue according to their terms following the termination of this Agreement. 9. Governing Law; Waiver of Trial by Jury; Damages: This agreement, the ----------------------------------------------- interpretation hereof and any and all disputes between the Company sand the Employee shall be governed by and interpreted under the laws of the State of Delaware, U.S.A., applicable to contracts to be performed entirely within that state and without regard to any conflicts of laws rules. The parties waive trial by jury in any dispute between them. Damages being agreed to be probably insufficient to protect the Company's interests and not capable of precise estimation, the Company may, in any jurisdiction, seek a restraining order and/or injunctive relief, and related damages, in the enforcement of its rights under Sections 4, 5 and 6 above, without bond, including in any appeal therefrom. EX-10.(Z) 8 ex10_z.txt EXHIBIT 10(Z) Exhibit 10(z) EMPLOYMENT AGREEMENT CLEAN DIESEL TECHNOLOGIES, INC. - ANN B. RUPLE AGREEMENT made as of the date set forth below by and between Ann B. Ruple of 15 Algonquin Road, Fairfield, CT 06825 ("Employee") and Clean Diesel Technologies, Inc., a Delaware corporation (the "Company"), having a place of business at Suite 702, 300 Atlantic Street, Stamford, CT 06901. WHEREAS, the Company desires certain services for itself and Employee desires to contract with the Company to perform such services; NOW THEREFORE, in consideration of the mutual covenants hereinafter recited, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Term: This Agreement shall commence on December 13, 2006, and shall ---- continue thereafter until terminated by either party as provided below. 2. Scope of Work: Title: On the Commencement Date, Employee shall be ----------------------- the Chief Financial Officer and Vice President Administration of the Company. In such employment, Employee shall on a full-time basis direct all of Employee's efforts toward the performance of such duties as shall be assigned to Employee by the President and Chief Executive Officer. "Full time" shall mean no other substantial outside business activities. 3. Salary: (a) Benefits. The Company agrees to cause Employee to be ------ -------- paid for Employee's services hereunder at the rate of One Hundred Fifty Five Thousand Dollars (US $155,000) per year. Employee shall be paid such amounts by the Company according to its normal and customary procedures from time to time in effect but not less often than monthly. Employee shall be entitled to participate from time to time in such benefit programs as the Company may customarily extend to its officers as a class. Employee shall be entitled to three weeks vacation during the first year of employment and four weeks per year thereafter. This Agreement may not be construed to prevent the Company from rescinding any benefit programs for Employee so long as such rescission applies to officers as a class. After one year of employment the salary will be increased by 10 per cent to One Hundred Seventy Thousand Five Hundred Dollars (US $170,500). Also at that time the Company shall include the Employee in such incentive or bonus plan as shall be offered generally to the officers of the Company. The terms of the incentive or bonus will be discussed and agreed upon at the appropriate time. (b) Stock. Subject to the approval of the Board of Directors of the ----- Company, the Company will arrange for the Executive to receive a stock option award under its 1994 Incentive Plan (the "Plan") to purchase Fifty Thousand (50,000) shares of the Company's common stock, $.05 par value, at an exercise price which shall be the fair market value of the stock on the Award Date, as determined pursuant to 1 the terms of the Plan. The Award Date shall be the earlier of the next regularly scheduled meeting of the Board of Directors or such date promptly after the commencement of the Executive's employment as the Board shall act. Such option shall have a term of ten (10) years and shall vest in increments of 10,000 shares on the first through the fourth anniversaries of the Commencement Date. Such option, which shall otherwise include substantially the same terms and conditions as options awarded to other U.S. based officers of the Company shall, nevertheless, lapse and be forfeited in its entirety, if the Executive shall not be employed by the Company on the first anniversary of the Commencement Date. 4. Expenses: Employee shall be reimbursed by the Company for all -------- ordinary and necessary out-of-pocket expenses incurred by Employee in performing Employee's services hereunder. Such expenses to be reported from time-to-time by Employee on the Company's customary forms of expense report and submitted for approval to the Company pursuant to its policies from time to time in effect. 5. Termination of Employment: (a) Just Cause. The Company may at any -------------------------- ---------- time terminate this Agreement for Just Cause. "Just Cause" shall mean, as determined by the Board of Directors in its sole discretion, conviction of Employee under, or a plea of guilty by the Employee to, any charge which would constitute a felony under the laws of Connecticut, regardless of jurisdiction; any instance of fraud, embezzlement, self-dealing, insider trading or similar malfeasance with respect to the Company regardless of the amount involved; any instance of material disloyalty, insubordination, or disparagement of the Company to an outside party; or any instance of substance abuse of a controlled substance or, otherwise, a pattern of substance abuse which limits Employee's performance of Employee's duties. (b) Disability. The Company may terminate this Agreement at any time ----------- upon the physical disability of Employee, if the Directors in their sole discretion shall determine that, as a result of physical disability Employee has for a period of six months been substantially absent from Employee's customary place of work and unable to perform Employee's customary duties. (c) At Will. Either of Employee or Company may terminate this -------- Agreement at any time on written notice one to the other. Where Employee shall terminate this Agreement by resigning employment, Employee shall provide three (3) month's written notice thereof to Company. Where Company shall terminate this Agreement, Company shall provide salary and benefit continuation (in the amount and of the nature then enjoyed by Employee) to the Employee month-to-month for a period of six months, or until Employee shall earlier find other substantially comparable employment, under which circumstances the salary would be continued but CDT would be entitled to a dollar for dollar reduction compared to the salary of the new employment. Termination at will under this sub-section (c) shall also include constructive discharge. "Constructive Discharge" means that the responsibilities of Employee have been materially diminished or Employee's position is to be relocated more than sixty miles from the Employee's residence at the time of Change in Control. "Change in 2 Control" has the meaning for such phrase as is set out in the Company's 1994 Incentive Plan. 6. Discoveries and Inventions: (a) All patentable and unpatentable ---------------------------- inventions, discoveries and ideas which are made or conceived by Employee during the term of Employee's employment, and which are based upon or arise out of Employee's services hereunder ("Developments") are or shall become the Company's property. Employee agrees to disclose promptly to the Company each such Development and, upon the Company's request and at its expense, Employee will assist the Company, or its designee, in making application for Letters Patent in any country in the world. Employee further agrees, at no expense to Employee, to execute all papers and do all things which may be necessary or advisable to prosecute such applications, and to transfer to and vest in the Company, or its designee, all the right, title and interest in and to such Developments, and all applications for patents and Letters Patent issued thereon. If for any reason Employee is unable to effectuate a full assignment of any such Development, Employee agrees to transfer to the Company, or its designee, Employee's transferable rights, whether they be exclusive or non-exclusive, or as a joint inventor or partial owner of the Development. No action or inaction by the Company shall in any event be construed as a waiver or abandonment of its rights to any such Development except an instrument in writing assigned by an authorized official of the Company by which it specifically states it intends to be bound in such respect. 7. Proprietary Information: Employee will not at any time, either ------------------------ during the term of this Agreement or thereafter, disclose to others, or use for Employee's own benefit or the benefit of others, any of the Developments or any confidential, proprietary or secret information owned, possessed or used by the Company or any of its subsidiaries or affiliates (collectively, "Proprietary Information"), which, by way of illustration, but not limitation, includes devices, structures, machines, data, know-how, business opportunities, marketing plans, forecasts, unpublished financial statements, budgets, licenses and information concerning prices, costs, employees, customers and suppliers. Employee's undertakings and obligations under this Paragraph 7 will not apply to any Proprietary Information which: (a) is or becomes generally known to the public through no action on the part of the Employee or (b) is generally disclosed to third parties by the Company or any of its subsidiaries or affiliates without restriction on such third parties. Upon termination of this Agreement or at any other time upon request, Employee will promptly deliver to the Company all keys, notes, memoranda, notebooks, computers, computer disks, drawings, designs, three dimensional figures, photographs, layouts, diagrams, records, reports, files and other documents (and all copies or reproductions of such materials) in Employee's possession or under Employee's control, whether prepared by him or others, which contain Proprietary Information. Employee acknowledges that this material is the sole property of the Company or a subsidiary or an affiliate of the Company. 8. Non-Competition: Following the termination of Employment for any --------------- reason, Employee agrees that Employee will not recruit, entice, induce or encourage any of the Company's other employees or consultants 3 to engage in any activity which, were it done by Employee, would violate any provision of Employee's Agreement. For a two-year period after termination of employment and before performing any services for others, as employee or consultant or otherwise, in the actual lines of business in which Employee has performed services for the Company, its subsidiaries or affiliates, Employee will notify the Company of the general nature of the services to be performed and the party for whom they will be performed and Employee will, also, prior to undertaking such service or employment inform the other party of the existence of the covenants in Sections 6, 7 and 8 of this Agreement. Employee admits that breach of Employee's covenants hereunder regarding the Company's Proprietary information is likely to cause serious economic injury to the Company. 9. Assignment: This Agreement may not be assigned by either party ---------- without the prior written consent of the other party; provided, however, that the acquisition by any person of all or substantially all of the assets or capital stock of the Company shall not be considered an assignment of this Agreement by the Company. 10. Continuing Obligations: The Employee's covenants set forth in ----------------------- Sections 6, 7, and 8 above shall continue according to their terms following the termination of this Agreement. 11. Governing Law; Waiver of Trial by Jury; Equitable Remedies. This ------------------------------------------------------------- Agreement, the interpretation hereof and the resolution of any and all disputes between the Company and Employee shall be governed by and interpreted under the internal substantive and procedural laws of the State of Connecticut without any reference to conflicts of laws rules. In the resolution of any disputes the parties agree to submit to the exclusive jurisdiction of the Superior Court of Connecticut, Stamford/Norwalk District and waive any claims of forum non conveniens with respect to that jurisdiction and also waive any claim to trial by jury in any proceeding. The parties further agree that any violations of Employee's covenants set forth in Sections 6, 7 and 8 above may cause irreparable harm to the Company which harm is not capable of accurate determination and for which the remedy of damages may be insufficient. Accordingly, in any proceeding to enforce the Company's rights under such Sections 6,7 and 8, the Company may seek, in addition to damages, equitable remedies such as injunctions, temporary injunctions and restraining orders and the parties hereby waive any requirement of bond in any such proceeding or in any appeal therefrom. 12. Legal Advice; Rescission. Employee agrees that this Agreement -------------------------- involves Employee's waiver of certain legal rights. Employee may, if Employee so chooses, consult with an attorney about the terms of this Agreement before signing it. Employee further acknowledges that (a) the Company has given Employee a twenty-one (21) day period in which to consider the terms and binding effect of this Agreement, which twenty one (21) day period Employee way waive, and (b) that, if Employee does sign this Agreement, Employee shall have seven (7) days thereafter to change Employee's mind and revoke it. Employee agrees that if Employee decides to revoke this Agreement, Employee will inform the Company within that seven (7) day period and obtain a written 4 acknowledgment of the revocation which the Company agrees to provide. Employee understands that revocation of this Agreement will affect Employee's employment status. Employee states that Employee has carefully read this Agreement; that Employee understands its final and binding effect and agrees to be bound by its terms; and that Employee has signed this Agreement voluntarily. 13. Notices. All notices hereunder shall be in writing and shall be ------- deemed effective upon receipt, if hand delivered, or if sent by facsimile and acknowledged electronically, or by courier and receipted on delivery. Notices by mail shall be deemed received on receipt, if sent first class or priority mail postage prepaid return receipt requested and the sender shall have the signed receipt. Otherwise notices shall be deemed effective five (5) days after transmission. In each case notices shall be transmitted to the address first given above or such other address as may be given by notice as provided herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EMPLOYEE CLEAN DIESEL TECHNOLOGIES, INC. /s/ Ann B. Ruple /s/ B. Steiner - ----------------------------------- ---------------------------------- Name: Name: (Vice) President Date: 11/29/06 Date: 11/29/06 ---------------------------- ----------------------------- 5 EX-21 9 ex21.txt EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF REGISTRANT Clean Diesel Technologies, Inc.'s subsidiary as of December 31, 2006 is listed below. Common Jurisdiction of Equity Name Incorporation or Organization Ownership - ---- ----------------------------- --------- Clean Diesel International, LLC Connecticut 100% EX-23.(A) 10 ex23_a.txt EXHIBIT 23(A) Exhibit 23(a) CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the registration statement on Form S-8 (Registration Nos. 333-16939, 333-33276 and 333-117057) of our report dated March 23, 2007, relating to our audit of the consolidated financial statements as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006 of Clean Diesel Technologies, Inc. and subsidiary (the "Company"), which included an explanatory paragraph regarding the Company's change in accounting principle for its method of accounting for stock-based compensation, included in the 2006 Annual Report on Form 10-K. /s/ Eisner LLP New York, New York March 23, 2007 EX-31.(A) 11 ex31_a.txt EXHIBIT 31(A) Exhibit 31(a) SIGNATURES AND CERTIFICATES I, Bernhard Steiner, certify that: 1. I have reviewed this Annual Report on Form 10-K (the "report") of Clean Diesel Technologies, Inc.: 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15 (f)) for the registrant and have: a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter of 2006 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; Date: March 30, 2007 By: /s/ Bernhard Steiner Bernhard Steiner Director, President and Chief Executive Officer EX-31.(B) 12 ex31_b.txt EXHIBIT 31(B) Exhibit 31(b) SIGNATURES AND CERTIFICATES I, Ann B. Ruple, certify that: 1. I have reviewed this Annual Report on Form 10-K (the "report") of Clean Diesel Technologies, Inc.: 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15 (f)) for the registrant and have: a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; a) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and b) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter of 2006 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting, which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; Date: March 30, 2007 By: /s/ Ann B. Ruple Ann B. Ruple Chief Financial Officer, Vice President and Treasurer EX-32 13 ex32.txt EXHIBIT 32 Exhibit 32 Certification of CEO and CFO Pursuant to18 U.S.C. Section 1350 The undersigned, Bernhard Steiner and Ann B. Ruple, in their capacities as Chief Executive Officer and Chief Financial Officer of Clean Diesel Technologies, Inc. (the "Registrant") do each hereby certify with respect to the Annual Report on Form 10-K of the Registrant for the period ended December 31, 2006, as filed with the Securities and Exchange Commission on the date thereof (the "Report"), that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant as of, and for, the periods presented in this Report. /S/ BERNHARD STEINER ---------------------------------------- BERNHARD STEINER PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR March 30, 2007 /S/ ANN B. RUPLE ---------------------------------------- ANN B. RUPLE CHIEF FINANCIAL OFFICER, VICE PRESIDENT AND TREASURER March 30, 2007 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (the "Act"), this certification accompanies the Report and shall not, except to the extent required by the Act, be deemed filed by Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Clean Diesel Technologies, Inc. and will be retained by Clean Diesel Technologies, Inc. and will be furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----