sv4
As filed
with the Securities and Exchange Commission on May 14,
2010
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CLEAN DIESEL TECHNOLOGIES,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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2810
(Primary Standard
Industrial
Classification Code Number)
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06-1393453
(I.R.S. Employer
Identification No.)
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10 Middle Street, Suite 1100, Bridgeport, CT 06604
(203) 416-5290
(Address, Including Zip
Code, and Telephone Number, Including Area Code, of
Registrants Principal Executive Offices)
Charles W. Grinnell, Esq.
10 Middle Street, Suite 1100, Bridgeport, CT 06604
(203) 416-5290
(Name, Address, Including
Zip Code, and Telephone Number, Including Area Code, of Agent
for Service)
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement and the
satisfaction or waiver of all other conditions to the merger
described in the joint proxy statement/information statement and
prospectus.
If the securities being registered on this Form are to be
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check
the following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Title of Each Class of
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Amount to be
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Offering
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Aggregate
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Amount of
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Securities to be Registered(1)
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Registered(2)
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Price per Share
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Offering Price(3)
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Registration Fee
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Common Stock, $0.01 par value per share
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28,472,538
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N/A
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$
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790,113
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$
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56.34
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Warrants to purchase common stock
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1,000,000
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N/A
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N/A
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N/A
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(1) |
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This registration statement relates to common stock,
$0.01 par value per share, and warrants to purchase shares
of common stock, of Clean Diesel Technologies, Inc., a Delaware
corporation (Clean Diesel), issuable to holders of
shares of Catalytic Solutions, Inc., a California corporation
(CSI), in connection with the proposed acquisition
of CSI by Clean Diesel through a merger. |
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(2) |
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The amount of Clean Diesel common stock and warrants to be
registered has been determined based on the estimated maximum
number of shares and warrants to be issued in the merger,
calculated based upon the exchange of 263,101,684 shares of
CSI common stock (based on the number of issued and outstanding
shares of CSI common stock, warrants and options exercisable to
purchase shares of CSI common stock as of May 10, 2010 and
assuming CSI issues its convertible subordinated notes described
herein prior to the merger), for 28,472,538 shares of Clean
Diesel common stock and warrants to purchase up to one million
shares of Clean Diesel common stock assuming that the maximum
adjustment for the cash position of the companies described in
this registration statement takes place, and after giving effect
to the reverse stock split described in the next sentence. Clean
Diesel anticipates that before the completion of the
distribution of the securities covered by this registration
statement, all outstanding shares of Clean Diesel common stock
will be combined by a reverse stock split into a lesser number
of shares of Clean Diesel common stock in the ratio of 3 to 1.
The number of shares covered by this registration statement
reflects post-reverse stock split shares, although historical
disclosures for Clean Diesel and the description of the merger
in the registration statement, except where noted, are on a
pre-split basis. The actual number of shares issued pursuant to
the merger transaction may be less than the number of shares
being registered. |
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(3) |
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Estimated solely for purposes of calculation of the registration
fee in accordance with Rule 457(f) of the Securities Act of
1933, as amended, based upon the average of the bid and asked
price per share of CSI common stock as reported on the
Alternative Investment Market on May 10, 2010. |
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this proxy statement/information statement and
prospectus is not complete and may be changed. Clean Diesel may
not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
joint proxy statement/information statement and prospectus is
not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or
sale is not permitted.
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SUBJECT TO COMPLETION, DATED
MAY ,
2010
JOINT PROXY STATEMENT/INFORMATION STATEMENT AND PROSPECTUS
PROPOSED MERGER
To the Stockholders of Clean Diesel Technologies, Inc. and
Shareholders of Catalytic Solutions, Inc.:
The boards of directors of each of Clean Diesel Technologies,
Inc. (Clean Diesel) and Catalytic Solutions, Inc.
(CSI) have approved a merger transaction in which
the businesses of Clean Diesel and CSI will be combined. Clean
Diesel and CSI are sending the accompanying joint proxy
statement/information statement and prospectus to you to ask you
to vote in favor of this merger and the related transactions.
Clean Diesel is holding an annual meeting of its stockholders in
order to obtain the stockholder approval necessary to complete
the merger with CSI and certain related matters. At the Clean
Diesel annual meeting, which will be held at
[ ] a.m.,
local time, on
[ ],
2010, at the Holiday Inn Bridgeport, 1070 Main Street,
Bridgeport, CT 06604, unless postponed or adjourned to a
later date, Clean Diesel will ask its stockholders to approve,
among other items, the issuance of shares of Clean Diesel common
stock and warrants to purchase shares of Clean Diesel common
stock to the securityholders of CSI in connection with the
merger, as described in the accompanying joint proxy
statement/information statement and prospectus.
After careful consideration, Clean Diesels board of
directors has approved the merger and the related issuance of
14,236,269 shares of its common stock and up to
85,417,613 shares of its common stock, par value $0.01, and
warrants to purchase up to 3,000,000 shares of Clean Diesel
common stock, in each case calculated before taking into account
a three to one reverse stock split and has determined that
the merger and such issuance of shares and warrants is in the
best interests of Clean Diesel and its stockholders.
Accordingly, Clean Diesels board of directors
unanimously recommends that the Clean Diesel stockholders vote
FOR each of the proposals put to the Clean Diesel stockholders
at the Clean Diesel annual meeting.
CSI is holding a special meeting of its shareholders in order to
obtain the shareholder approval necessary to complete the merger
with Clean Diesel. At the CSI special meeting, which will be
held at [ ] a.m., local time, on
[ ],
2010, at CSIs Oxnard facility located at 1621 Fiske Place,
Oxnard, CA 93033, unless postponed or adjourned to a later date,
CSI will ask its shareholders to approve, among other items, the
merger, as described in the accompanying joint proxy
statement/information statement and prospectus. After careful
consideration, CSIs board of directors has approved the
merger and has determined that the merger is in the best
interests of CSI and its shareholders. Accordingly,
CSIs board of directors unanimously recommends that the
CSI shareholders vote FOR each of the proposals put to the CSI
shareholders at the CSI special meeting.
Clean Diesels common stock is currently listed on the
NASDAQ Stock Markets Capital Market under the symbol
CDTI.
On ,
2010, the last trading day before the date of this proxy
statement/information statement and prospectus, the closing sale
price of Clean Diesel common stock was
$ per share. CSIs common
stock is currently listed on the AIM of the London Stock
Exchange under the symbols CTS and CTSU.
On ,
2010, the last trading day before the date of this proxy
statement/information statement and prospectus, the closing
prices of CSI common stock were GBX (pence
sterling)
per share ($ per share) and
GBX
per share ($ per share),
respectively.
More information about Clean Diesel, CSI and the proposed merger
is contained in the accompanying joint proxy
statement/information statement and prospectus. Clean
Diesel and CSI urge you to read the accompanying joint proxy
statement/information statement and prospectus carefully and in
its entirety. In particular, you should carefully consider the
matters discussed in the section entitled Risk
Factors, beginning on page 13 of the accompanying
joint proxy statement/information statement and
prospectus.
Your vote is very important, regardless of the number of
shares you own of Clean Diesel or CSI. Please read the
accompanying joint proxy statement/information statement and
prospectus carefully and cast your proxy vote as promptly as
possible.
Clean Diesel and CSI are excited about the opportunities the
proposed merger may bring to Clean Diesel stockholders and CSI
shareholders, and thank you for your consideration and continued
support.
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Michael L. Asmussen
President
Clean Diesel Technologies, Inc.
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Charles F. Call
Chief Executive Officer
Catalytic Solutions, Inc.
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved the merger or
the securities of Clean Diesel to be issued in connection with
the merger, or determined if this joint proxy
statement/information statement and prospectus is truthful and
complete. Any representation to the contrary is a criminal
offense.
The accompanying joint proxy statement/information statement and
prospectus is dated
[ ],
2010, and is first being mailed to Clean Diesel stockholders and
CSI shareholders on or about
[ ],
2010.
Clean
Diesel Technologies, Inc.
10 Middle Street,
Suite 1100
Bridgeport, CT 06604
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
To Be Held On
[ ],
2010
To Clean Diesel Technologies, Inc. Stockholders:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders
of Clean Diesel Technologies, Inc., a Delaware corporation, will
be held at the Holiday Inn Bridgeport, 1070 Main Street,
Bridgeport, CT 06604, on
[ ],
2010 at [ ] a.m., local time for the following
purposes:
1. To elect five (5) directors;
2. To ratify the appointment of Eisner LLP as Clean
Diesels independent auditors for 2010;
3. To consider and vote upon (i) a proposal to approve
an amendment to Clean Diesels certificate of incorporation
to increase the authorized capital of Clean Diesel to
35,100,000 shares, and effect a reverse split of the issued
and outstanding shares of Clean Diesel common stock, to occur
immediately before the closing of the proposed merger
transaction with CSI, at an exchange ratio of 3 to 1, and
(ii) a proposal to approve the issuance of new shares of
Clean Diesel common stock, par value $0.01 per share, and
warrants to purchase shares of Clean Diesel common stock to
securityholders of CSI, in connection with the merger proposed
under the Agreement and Plan of Merger, dated as of May 13,
2010, by and among Clean Diesel, Catalytic Solutions, Inc., a
California corporation, and a wholly-owned subsidiary of Clean
Diesel, pursuant to which CSI will become a wholly-owned
subsidiary of Clean Diesel through a merger (subject to possible
future dilution);
4. To consider and vote upon an adjournment of the Clean
Diesel annual meeting, if necessary, to solicit additional
proxies if there are not sufficient votes in favor of the
proposal described immediately above; and
5. To transact such other business that properly comes
before the Clean Diesel annual meeting or any adjournment or
postponement thereof.
The foregoing proposals and the Agreement and Plan of Merger are
more fully described in the joint proxy statement/information
statement and prospectus accompanying this Notice. Only Clean
Diesel stockholders of record at the close of business on
[ ],
2010 will be entitled to notice of, and a vote at, the Clean
Diesel annual meeting. At the close of business on
[ ],
2010, Clean Diesel had
[ ] shares
of stock outstanding and entitled to vote. A list of Clean
Diesel stockholders entitled to vote at the Clean Diesel annual
meeting will be available for inspection at Clean Diesels
principal executive offices in Bridgeport, CT, and at the annual
meeting.
All Clean Diesel stockholders are cordially invited to attend
the Clean Diesel annual meeting in person. Whether or not you
plan to attend the Clean Diesel annual meeting in person, please
sign and return the enclosed proxy card to ensure that your
Clean Diesel shares will be represented at the Clean Diesel
annual meeting. Voting instructions are included with your
Clean Diesel proxy card. You may revoke your Clean Diesel proxy
card at any time prior to the Clean Diesel annual meeting by
following the instructions in the accompanying joint proxy
statement/information statement and prospectus. If you attend
the Clean Diesel annual meeting and vote by ballot, then your
proxy vote will be revoked automatically and only your vote by
ballot at the Clean Diesel annual meeting will be counted.
Regardless of the number shares of Clean Diesel that you own
or whether or not you plan to attend the Clean Diesel annual
meeting, it is important that
your Clean Diesel shares be represented and voted. No postage
need be affixed if your proxy card is mailed in the United
States.
By Order of the Clean Diesel Board of Directors,
Charles W. Grinnell
Secretary
Bridgeport, Connecticut
[ ],
2010
CLEAN
DIESELS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
YOU
VOTE FOR PROPOSALS 1, 2, 3 and 4
CATALYTIC
SOLUTIONS, INC.
4567 Telephone Road,
Suite 206
VENTURA, CALIFORNIA 93003
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS
To Be Held On
[ ],
2010
Dear Catalytic Solutions, Inc. Shareholders:
You are cordially invited to attend a special meeting of the
shareholders of Catalytic Solutions, Inc., a California
corporation (CSI). The meeting will be held at
CSIs Oxnard facility located at 1621 Fiske Place, Oxnard,
CA 93003 on
[ ],
2010 at
[ ]
local time for the following purposes:
1. To consider and vote upon a proposal to adopt the
Agreement and Plan of Merger, dated May 13, 2010, by and
among CSI, Clean Diesel Technologies, Inc., a Delaware
corporation, and CDTI Merger Sub, Inc., a California corporation
and a wholly-owned subsidiary of Clean Diesel, pursuant to which
CSI will become a wholly-owned subsidiary of Clean Diesel
through a merger;
2. To consider and vote upon a proposal to amend CSIs
articles of incorporation to designate CSIs current
outstanding shares of common stock as Class A
common stock, to create a new class of common stock to be
designated as Class B common stock, and to
increase CSIs authorized shares of common stock from
148,500,000 shares to
[ ] shares,
such that the total number of shares of all classes of capital
stock that CSI shall have authority to issue is
148,500,000 shares of Class A common stock having no
par value and
[ ] shares
of Class B common stock having no par value;
3. To consider and vote upon a proposal to disapply the
pre-emptive rights provided in Article IV of CSIs
articles of incorporation with respect to the issuance of equity
securities for cash without the requirement that such securities
first be offered to existing shareholders in proportion to their
respective shareholdings in order to permit the conversion of
outstanding convertible securities into up to
[ ] shares
of CSI common stock (to be designated Class B common stock
if Proposal No. 2 is approved); and
4. To consider and vote upon an adjournment of the CSI
special meeting, if necessary, if a quorum is present, to
solicit additional proxies if there are not sufficient votes in
favor of the proposals described immediately above.
These proposals are more fully described in the accompanying
joint proxy statement/information statement and prospectus,
which we urge you to read very carefully. A copy of the
Agreement and Plan of Merger is included as Annex A
to the accompanying joint proxy statement/information
statement and prospectus. A copy of the proposed amendment to
the articles of incorporation is included as Annex H
to the accompanying joint proxy statement/information
statement and prospectus. Only CSI shareholders of record at the
close of business on
[ ],
the record date for the CSI special meeting, are entitled to
notice of and to vote at the CSI special meeting or any
adjournment or postponement of the CSI special meeting.
The CSI board of directors unanimously recommends that CSI
shareholders vote FOR Proposal No. 1 to adopt the
Merger Agreement and FOR Proposal No. 2 to amend
CSIs articles of incorporation to designate CSIs
current outstanding shares of common stock as
Class A common stock, to create a new class of
common stock to be designated as Class B common
stock, and to increase its authorized share capital and FOR
Proposal No. 3 to disapply shareholder pre-emption
rights and FOR Proposal No. 4 to adjourn the special
meeting, if necessary, if a quorum is present, to solicit
additional proxies if there are not sufficient votes in favor of
Proposals No. 1, No. 2 and No. 3.
Even if you plan to attend the CSI special meeting in person,
CSI requests that you sign and return the enclosed CSI proxy
card to ensure that your CSI shares will be represented at the
CSI special meeting if you are unable to attend.
By Order of the CSI Board of Directors,
Charles F. Call
Chief Executive Officer
Ventura, California
[ ],
2010
PLEASE DO
NOT SEND IN ANY CSI STOCK CERTIFICATES AT THIS TIME; FURTHER
DOCUMENTATION FOR SUCH PURPOSE WILL BE SENT TO CSI SHAREHOLDERS
AFTER APPROVAL AND COMPLETION OF THE MERGER
REFERENCE
TO ADDITIONAL INFORMATION
This joint proxy statement/information statement and prospectus
incorporates important business and financial information about
Clean Diesel from documents that Clean Diesel files with the SEC
and that are not included in or delivered with this joint proxy
statement/information statement and prospectus. You can obtain
such documents, by requesting them in writing or by telephone
from Clean Diesel at the following address:
In the
United States:
Clean
Diesel Technologies, Inc.
10 Middle Street, Suite 1100
Bridgeport, CT 06604
(203) 416-5290
In
Europe:
Capital
IRG
Foreign Department
The Registry
34 Beckenham Road
Beckenham, Kent BR3 4TU
(0) 208639 2236
You will not be charged for any documents that you request.
If you would like to request documents, please do so by
[five days before meeting]
,
2010 in order to receive timely delivery of the documents in
advance of the Clean Diesel annual meeting. See the section
entitled Where You Can Find More Information for a
detailed description of the documents incorporated by reference
into this joint proxy statement/information statement and
prospectus.
CSI is not subject to the reporting requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the Exchange Act). Accordingly,
CSI does not file documents with the SEC.
Information contained on the websites of Clean Diesel and CSI
are expressly not incorporated by reference into this joint
proxy statement/information statement and prospectus.
ABOUT
THIS DOCUMENT
This joint proxy statement/information statement and prospectus
forms a part of a registration statement on
Form S-4
(Registration
No. 333-
), filed by Clean Diesel Technologies, Inc. with the
U.S. Securities and Exchange Commission, and constitutes a
prospectus of Clean Diesel under Section 5 of the
Securities Act of 1933, as amended (the Securities
Act), and the rules thereunder, with respect to the shares
of Clean Diesel common stock and warrants to purchase shares of
Clean Diesel common stock to be issued to securityholders of CSI
in connection with the proposed merger and the related
transactions.
In addition, this joint proxy statement/information statement
and prospectus constitutes:
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A notice of meeting with respect to the Clean Diesel annual
meeting at which Clean Diesels stockholders will consider
and vote on certain proposals, including the proposal regarding
the issuance of Clean Diesel common stock and warrants to
purchase shares of Clean Diesel common stock in connection with
the merger, and a reverse stock split;
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A proxy statement under Section 14(a) of the Exchange Act
and the rules thereunder, with respect to the Clean Diesel
annual meeting;
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A notice of meeting with respect to the CSI special meeting at
which CSIs shareholders will consider a proposal regarding
the merger; and
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An information statement with respect to the CSI special meeting.
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NOTE REGARDING
TRADEMARKS
The Clean Diesel Technologies, Inc. name and logo, Platinum
Plus®,
ARIS®
and Biodiesel
Plustm
are either registered trademarks or trademarks of Clean Diesel
Technologies, Inc. in the United States
and/or other
countries.
The CSI logo,
CSI®,
CATALYTIC
SOLUTIONS®,
MPC®,
BARETRAP®,
CATTRAP®,
COMBICLEAN®,
COMBIFILTER®,
PURIFILTER®,
PURIMUFFLER®,
TERMINOX®
and
UNIKAT®
are registered trademarks of CSI.
This joint proxy statement/information statement and prospectus
may also include trademarks and trade names owned by other
parties, and all other such trademarks and trade names mentioned
in this joint proxy statement/information statement and
prospectus are the property of their respective owners.
QUESTIONS
AND ANSWERS ABOUT THE MERGER,
THE CLEAN DIESEL ANNUAL MEETING AND THE CSI SPECIAL
MEETING
The following section provides answers to certain frequently
asked questions about the proposed merger, the Clean Diesel
annual meeting of stockholders and the CSI special meeting of
shareholders. Please note that this section may not address all
issues that may be important to you as a Clean Diesel
stockholder or a CSI shareholder. Accordingly, you should
carefully read this entire joint proxy statement/information
statement and prospectus, including each of the annexes.
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Q. |
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Why am I receiving this joint proxy statement/information
statement and prospectus? |
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A. |
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Clean Diesel Technologies, Inc., which is referred to as Clean
Diesel, and Catalytic Solutions, Inc., which is referred to as
CSI, have entered into an Agreement and Plan of Merger, dated as
of May 13, 2010, which (as it may be amended from time to
time) is referred to as the Merger Agreement. You are receiving
this joint proxy statement/information statement and prospectus
because you are either a stockholder of Clean Diesel or a
shareholder of CSI as of the respective record date of Clean
Diesels annual meeting of its stockholders or CSIs
special meeting of its shareholders. This joint proxy
statement/information statement and prospectus is being used by
the boards of directors of each of Clean Diesel and CSI to
solicit your proxy for use at the Clean Diesel annual meeting
and to solicit your proxy for use at the CSI special meeting,
respectively. This joint proxy statement/information statement
and prospectus also serves as the prospectus for shares of Clean
Diesel common stock and warrants to purchase shares of Clean
Diesel common stock to be issued in exchange for shares of CSI
common stock and warrants to purchase CSI common stock in
connection with the merger. |
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This joint proxy statement/information statement and prospectus
contains important information about the merger, the Merger
Agreement, the Clean Diesel annual meeting and the CSI special
meeting, which you should read carefully before voting. The
enclosed voting materials allow you to cause your shares of
Clean Diesel common stock or CSI common stock, as the case may
be, to be voted, without attending the Clean Diesel annual
meeting and the CSI special meeting in person. |
About the
Merger
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Q. |
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What is the merger? |
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A. |
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The proposed merger is a transaction that will result in the
combination of the businesses of Clean Diesel and CSI, whereby
CSI will become a wholly-owned subsidiary of Clean Diesel,
subject to possible future dilution as described below. |
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In exchange for their shares of CSI common stock and warrants to
purchase shares of CSI common stock, the securityholders of CSI
will receive shares of Clean Diesel common stock and warrants to
purchase Clean Diesel common stock. |
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More specifically, Clean Diesel, CDTI Merger Sub, Inc., a
California corporation and wholly-owned subsidiary of Clean
Diesel (Merger Sub), and CSI have entered into the
Merger Agreement. The Merger Agreement contains the terms and
conditions of the proposed combination of the businesses of
Clean Diesel and CSI. As contemplated by the terms of the Merger
Agreement: |
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Clean Diesels certificate of incorporation
will be amended to increase its authorized capital stock to
35,100,000 shares;
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Each three shares of Clean Diesels outstanding
common stock will be combined into one share of common stock;
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Merger Sub will merge with and into CSI and CSI will
be the surviving corporation; and
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as a result of the merger the business and assets of
CSI will be held by a wholly-owned subsidiary of Clean Diesel.
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The transactions described above are referred to as the
Merger in this joint proxy statement/information
statement and prospectus. |
ii
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Q. |
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What will CSI shareholders receive in the Merger? |
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A. |
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CSI shareholders will receive shares of Clean Diesel common
stock and warrants to purchase shares of Clean Diesel common
stock. The precise numbers of shares and warrants CSI
shareholders will receive cannot be determined now, and depends
on a formula set out in the Merger Agreement. In general, CSI
shareholders will receive such numbers of Clean Diesel common
stock so that after the Merger they will own 60% of the
outstanding shares of Clean Diesel common stock, subject to
adjustment for the cash position of each of CSI and Clean
Diesel, as defined in the Merger Agreement, at the earlier of
closing or June 30, 2010, and warrants to purchase up to
three million shares of Clean Diesel common stock. |
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Both CSI and Clean Diesel intend to issue additional shares of
common stock prior to the Merger in order that they can finance
current operations and have a cash position at the earlier of
the effective time of the merger or June 30, 2010, of at
least $2,000,000 in the case of CSI, and at least $4,500,000 in
the case of Clean Diesel, as defined in the Merger Agreement. As
a result, neither the number of outstanding shares of CSI common
stock immediately prior to the effective time of the Merger nor
the number of outstanding shares of Clean Diesel common stock
immediately prior to the effective time of the Merger can be
known. |
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Although the interim capital raise is still subject to
definitive agreement between CSI and its accredited investors,
it is currently anticipated that CSI will sell an aggregate
$4,000,000 of convertible subordinated notes at par to a group
of accredited investors, $2,000,000 of which is expected to be
sold by CSI in four equal installments prior to the CSI special
meeting of shareholders, and the remaining $2,000,000 of which
is expected to be sold after shareholder approval of the merger
and necessary approvals under CSIs articles of
incorporation but prior to the effective time of the Merger. An
aggregate of approximately 137,887,188 shares of CSI common
stock is potentially issuable upon conversion of these notes,
which would be newly created Class B common stock. Clean
Diesel currently expects that its interim capital raise will
take the form of a sale of approximately 650,197 shares of
its common stock and warrants to purchase up to
1,000,000 shares of its common stock in a Regulation S
offering to raise approximately $1 million. If these
financing activities are completed in this form, after the
effective date of the Merger, and without taking into account
the further adjustment described in the next paragraph,
ownership of Clean Diesel would be distributed approximately as
follows: |
|
|
|
|
|
Existing CSI Shareholders
|
|
|
16
|
%*
|
CSIs financial advisor
|
|
|
4
|
%*
|
Purchasers of CSI convertible subordinated notes
|
|
|
40
|
%
|
Existing Clean Diesel Shareholders
|
|
|
37
|
%
|
Purchasers of newly issued Clean Diesel shares
|
|
|
3
|
%**
|
|
|
|
|
*
|
Does not give effect to warrants to purchase four million shares
of Clean Diesel common stock (up to three million of which are
part of the merger consideration and one million of which will
be issued to CSIs financial advisor).
|
|
|
**
|
Does not give effect to warrants to purchase one million shares
of Clean Diesel common stock.
|
|
|
|
|
|
In addition, for every $166,666.66 by which CSIs cash
position at the earlier of the effective time of the Merger or
June 30, 2010 is less than $2,000,000, the percentage of
post-closing outstanding common stock of Clean Diesel to be held
by CSI shareholders will be reduced by 1%, but not below 48%
(and the percentage of post-closing outstanding common stock of
Clean Diesel to be held by existing Clean Diesel stockholders
will be increased by 1%, but not above 52%). For every
$116,666.66 by which Clean Diesels cash position at the
earlier of the effective time of the Merger or June 30,
2010 is less than $4,500,000, the percentage of post-closing
outstanding common stock of Clean Diesel to be held by CSI
shareholders will be increased by 1%, but not above 90% (and the
percentage of post-closing outstanding common stock of Clean
Diesel to be held by existing Clean Diesel stockholders will be
reduced by 1%, but not below 10%). |
iii
|
|
|
Q. |
|
What if the merger is not completed? |
|
A. |
|
It is possible that the Merger and the other transactions
contemplated by the Merger Agreement will not be completed. This
might happen if, for example, Clean Diesels stockholders
do not approve the issuance of the Clean Diesel shares and
warrants in connection with the Merger, or if CSIs
shareholders do not approve the Merger. |
|
|
|
Should that occur, neither Clean Diesel nor CSI will be under
any obligation to make or consider any alternative proposal
regarding the combination of Clean Diesel and CSI. In certain
circumstances, however, Clean Diesel or CSI may be obligated to
pay to the other party a termination fee and reimburse the other
party for certain expenses, as further described in the section
entitled The Merger Agreement
Termination in this joint proxy statement/information
statement and prospectus. |
|
Q. |
|
Why are Clean Diesel and CSI proposing to merge? |
|
A. |
|
The board of directors of Clean Diesel has determined that the
Merger and the related transactions are in the best interests of
Clean Diesel and its stockholders in part because it presents a
compelling strategic opportunity for Clean Diesel to strengthen
its position in the emissions control industry, expand its
product offerings and customer base, and increase its
operational scale, among other reasons. The board of directors
of CSI has determined that the Merger and the related
transactions are in the best interests of CSI and its
shareholders in part because it allows CSI to access the cash
available to Clean Diesel to support its operations and to
refinance its outstanding long-term debt, allows CSI
shareholders to gain access to an equity interest in Clean
Diesel and to participate both in the future performance not
only of CSI but of Clean Diesel, and positions the combined
company to pursue a combined strategy. For a complete discussion
of Clean Diesels and CSIs reasons for the Merger,
see the sections entitled The Merger Clean
Diesels Reasons for the Merger; Recommendation of Clean
Diesels Board of Directors and The
Merger The CSI Reasons for the Merger in this
joint proxy statement/information statement and prospectus. |
|
Q. |
|
What vote is required by the Clean Diesel stockholders to
consummate the Merger? |
|
A. |
|
To consummate the Merger, Clean Diesel stockholders must approve
the increase in authorized capital stock, the reverse split, and
the issuance of shares of Clean Diesel common stock and warrants
to purchase Clean Diesel common stock in the Merger. The
approvals require the affirmative vote of a majority of the
shares of Clean Diesel common stock present in person or
represented by proxy and entitled to vote at the Clean Diesel
annual meeting at which a quorum is present, whether voting in
person or represented by proxy at the Clean Diesel annual
meeting. |
|
Q. |
|
What is the reverse stock split and why is it necessary? |
|
A. |
|
The reverse stock split is the combination of the outstanding
shares of Clean Diesel common stock into a lesser number of
shares immediately prior to the effective time of the Merger.
Every three shares of Clean Diesel common stock outstanding
prior to the reverse split will be combined into one share of
Clean Diesel common stock outstanding post-split. The reverse
stock split only affects the Clean Diesel stockholders and is
necessary to adjust the trading range of shares owned by Clean
Diesel stockholders so that the shares to be issued and issuable
in connection with the Merger can be listed on the NASDAQ Stock
Market. |
|
Q. |
|
How many shares of common stock of the combined company would
I own assuming that I currently own 100 shares of Clean
Diesel common stock and Clean Diesel effects a 3 to 1 reverse
stock split? |
|
A. |
|
As a result of the proposed reverse stock split, immediately
prior to the effective time of the merger, your 100 shares
of Clean Diesel common stock would be reduced to 33 shares
of common stock of the combined company, and you would receive a
cash payment in lieu of 1/3 of a share. After your shares are
subject to this reverse stock split, Clean Diesel will then
issue new post-reverse split shares of Clean Diesel common stock
to holders of CSI common stock on a formula basis in connection
with the Merger. |
iv
|
|
|
Q. |
|
How many shares of common stock of the combined company would
I own assuming that I currently own 100 shares of CSI
common stock and Clean Diesel effects a 3 to 1 reverse stock
split? |
|
A. |
|
It is not possible to determine this at this time, for two
reasons. First, because both CSI and Clean Diesel intend to
issue additional shares of common stock to raise additional cash
prior to the effective time of the merger, the number of shares
of outstanding common stock each of CSI and Clean Diesel will
have immediately prior to the effective time of the merger is
not yet determinable. Second, if either CSI or Clean Diesel, or
both, have cash positions at the earlier of the effective time
of the merger or June 30, 2010 that is less than their
respective targets ($2,000,000 in the case of CSI and $4,500,000
in the case of Clean Diesel), the percentage of the outstanding
common stock of Clean Diesel issued in the Merger to the CSI
shareholders will be adjusted. |
|
|
|
It is estimated that after each of CSI and Clean Diesel complete
their issuance of additional shares, and assuming that each has
a cash position at or above their respective targets, CSI will
have outstanding approximately 208,899,091 shares, and
Clean Diesel will have outstanding approximately
9,490,846 shares (pre-reverse split) or
3,163,615 shares (post-reverse split). Assuming this is the
case, as a result of the merger, immediately after the effective
time of the merger, your 100 shares of CSI common stock
will be converted into approximately 2.27 shares of Clean
Diesel common stock (post-reverse stock split) and a warrant to
purchase 1.408 shares of Clean Diesel common stock. This is
only an estimate. No fractional shares will be issued. The
reverse stock split will have no impact on CSI shareholders. |
|
Q. |
|
Are there other conditions that need to be satisfied to
consummate the Merger? |
|
A. |
|
In addition to the requirement of obtaining Clean Diesel
stockholder and CSI shareholder approvals, each of the other
closing conditions set forth in the Merger Agreement must be
satisfied or waived by the appropriate party. For a summary of
the conditions that need to be satisfied to consummate the
Merger, see the section entitled The Merger
Agreement Conditions to Each Partys Obligation
to Effect the Merger in this joint proxy
statement/information statement and prospectus. |
|
Q. |
|
Will the number of shares of Clean Diesel common stock or
number of warrants to purchase shares of Clean Diesel common
stock payable or issuable to CSI shareholders in connection with
the Merger be subject to any adjustment if Clean Diesels
stock price fluctuates? |
|
A. |
|
No. The number of shares of Clean Diesel common stock and
number of warrants to purchase shares of Clean Diesel common
stock to be paid or issued, or reserved for issuance, in
connection with the Merger for each share of CSI common stock,
is fixed by the formula set forth in the Merger Agreement based
on the number of shares of common stock each has outstanding, as
described below, and only adjusted based on the cash position of
each of CSI and Clean Diesel. |
|
Q. |
|
Will Clean Diesel common stock issued in connection with the
Merger be registered and listed on an exchange? |
|
A. |
|
Yes. The Clean Diesel common stock issued in connection with the
Merger will be registered under the Securities Act, and is
expected to be listed on the NASDAQ Stock Market under the
symbol CDTI. |
|
Q. |
|
Will there be any transfer restrictions affecting the shares
of Clean Diesel common stock or warrants to purchase shares of
Clean Diesel common stock issuable to CSI shareholders in
connection with the Merger? |
|
A. |
|
The shares of Clean Diesel common stock to be issued to CSI
shareholders in connection with the Merger will not be subject
to limitations on transfers. The warrants will not be
transferable. Shares of Clean Diesel common stock held by
persons deemed affiliates of Clean Diesel after the Merger may
be restricted by applicable securities laws. Subject to certain
limited exceptions, the warrants to purchase shares of Clean
Diesel common stock issuable to CSI shareholders in connection
with the Merger will not be transferable by the holder
without the prior written consent of Clean Diesel, and will not
be listed on the NASDAQ Stock Market or otherwise publicly
traded. |
v
|
|
|
|
|
In addition, if you will be an employee of Clean Diesel or CSI
after the Merger after the closing, your shares may be subject
to Clean Diesels insider trading policies. |
|
|
|
For more information regarding the transfer restrictions
affecting the shares of Clean Diesel common stock or warrants to
purchase shares of Clean Diesel common stock issuable to CSI
shareholders in connection with the Merger, see the section
entitled The Merger Agreement Warrants
in this joint proxy statement/information statement and
prospectus. |
|
Q. |
|
What will happen to the CSI options? |
|
A. |
|
All issued and outstanding options to purchase CSI common stock
are currently
out-of-the-money
(e.g., the exercise price exceeds the current trading
price of shares of CSI common stock). Prior to the effective
time of the Merger, the holder of each option to purchase shares
of CSI common stock issued under CSIs 1997 Stock Option
Plan, in accordance with the terms of such Plan, will be given a
window of time in which to exercise following which any options
issued under the 1997 Stock Option Plan that remain outstanding
will terminate at the effective time of the Merger. The terms of
outstanding options issued under CSIs 2006 Equity
Compensation Plan differ from the 1997 Stock Option Plan, and as
such, will not terminate at the effective time of the Merger but
will continue to be exercisable for shares of the Surviving
Subsidiary. However, CSI has undertaken in the Merger Agreement
to obtain the consent of each of CSIs directors and
executive officers who has options outstanding under CSIs
2006 Equity Compensation Plan and to use commercially reasonable
efforts to obtain the consent of the other holders of any
options, grant or other awards granted under CSIs 2006
Equity Compensation to terminate such awards at the effective
time of the Merger, and to terminate its 2006 Equity
Compensation Plan. For more information regarding the treatment
of the CSI Options, see the section entitled The Merger
Agreement Treatment of CSI Options, Restricted Stock
and Warrants in this joint proxy statement/information
statement and prospectus. |
|
Q. |
|
What will happen to the CSI warrants? |
|
A. |
|
At the effective time, certain warrants to purchase shares of
CSI common stock outstanding and not terminated or exercised
immediately prior to the effective time of the Merger are
expected to be assumed by Clean Diesel in accordance with their
terms and thus become exercisable for that number of shares of
Clean Diesel common stock and warrants to purchase Clean Diesel
common stock calculated according to the conversion ratio as
defined in the Merger Agreement and subject to the reverse stock
split. One of these warrants is
in-the-money
and two of these warrants are
out-of-the-money.
For one outstanding warrant that is
out-of-the-money
whose terms do not provide for assumption by Clean Diesel, CSI
has agreed in the Merger Agreement to use commercially
reasonable efforts to obtain the consent of the holder of such
warrants to a cancellation or an assumption of the CSIs
obligations thereunder by Clean Diesel similar to CSIs
other warrants. For more information regarding the treatment of
the CSI Warrants and the conversion ratio, see the section
entitled The Merger Agreement Treatment of CSI
Options, Restricted Stock and Warrants in this joint proxy
statement/information statement and prospectus. |
|
Q. |
|
Will CSI remain a wholly owned subsidiary after the
Merger? |
|
A. |
|
As described above, it is possible that certain options and
warrants may remain exercisable for shares of CSI, as the
Surviving Subsidiary after the Merger. If these options or
warrants are not terminated and are subsequently exercised, the
interest of Clean Diesel in the Surviving Subsidiary would be
diluted. |
|
Q. |
|
Will there be any change to the shares of Clean Diesel common
stock held by Clean Diesels stockholders as a result of
the Merger? |
|
A. |
|
No. The Merger does not result in any changes to the
existing shares of Clean Diesel common stock other than the
effects of the reverse split. The current stockholders of Clean
Diesel will continue to be stockholders of Clean Diesel after
the Merger. |
vi
|
|
|
Q. |
|
Who will be the directors of Clean Diesel following the
Merger? |
|
A. |
|
Immediately following the effective time of the Merger, the
board of directors of Clean Diesel is expected to be composed of
the following members: |
|
|
|
Name
|
|
Title
|
|
Charles F. Call
|
|
Director
|
Alexander (Hap) Ellis, III
|
|
Director
|
Charles R. Engles, Ph.D.
|
|
Director
|
Bernard H. Cherry
|
|
Director
|
Mungo Park
|
|
Director
|
Derek R. Gray
|
|
Director
|
Michael L. Asmussen
|
|
Director
|
|
|
|
Q. |
|
Why are Clean Diesel stockholders being asked to elect
directors at the annual meeting? |
|
A. |
|
Clean Diesel is required to hold an annual meeting for the
election of directors. If the Merger does not take place
immediately after the annual meeting, these directors will hold
their position as directors until the Merger does takes place.
If the Merger Agreement is terminated, these directors will
continue to hold their position as directors of Clean Diesel
until successors are elected. |
|
Q. |
|
Who will be the executive officers of Clean Diesel
immediately following the Merger? |
|
A. |
|
Immediately following the effective time of the Merger, the
executive officers of Clean Diesel are expected to be as follows: |
|
|
|
Name
|
|
Title
|
|
Charles F. Call
|
|
Chief Executive Officer
|
Nikhil A. Mehta
|
|
Chief Financial Officer
|
Stephen J. Golden, Ph.D.
|
|
Chief Technical Officer
|
Michael L. Asmussen
|
|
Chief Commercial Officer
|
|
|
|
Q. |
|
What are the material U.S. federal income tax consequences of
the Merger to CSI shareholders and warrant holders? |
|
A. |
|
Clean Diesel and CSI have structured the Merger with the intent
that it qualify as a reorganization under Section 368 of
the Internal Revenue Code of 1986 (the Code). If the
Merger qualifies as such a reorganization, CSI shareholders who
exchange CSI common shares for shares of Clean Diesel common
stock and warrants to purchase shares of Clean Diesel common
stock pursuant to the Merger will not recognize gain in respect
of the shares of Clean Diesel common stock and warrants to
purchase shares of Clean Diesel common stock received in the
exchange (but may recognize an immaterial gain in the amount of
any cash received in respect of fractional shares). If the
Merger qualifies as such a reorganization, CSI warrant holders
will not be subject to tax as a result of the Merger. The
qualification of the Merger as a reorganization depends on
numerous factors including whether CSI shareholders will receive
a sufficient amount of Clean Diesel common stock to satisfy the
continuity of interest and control tests
applicable to reorganizations under Section 368(a)(2)(E) of
the Code. Whether the Merger meets those tests depends in large
part on the value of the Clean Diesel common stock issued to CSI
shareholders as compared to the value of all consideration
issued to CSI shareholders. Based on an estimated valuation, the
Merger should satisfy the continuity of interest and control
tests. If, however, the Internal Revenue Service were to
challenge the valuation and successfully contend that the Merger
failed to qualify as a reorganization, the Merger would be a
fully taxable transaction to CSI shareholders and warrant
holders. In such case, CSI shareholders and warrant holders
would recognize gain or loss measured by the difference between
the value of all consideration received by them in the Merger
and their tax basis in the CSI common stock and the warrants, as
the case may be, surrendered in the Merger. For additional
discussion of the tax treatment of the Merger, see the section
entitled Material United States Federal Income Tax
Consequences of the Merger in this joint proxy
statement/information statement and prospectus. |
vii
|
|
|
Q. |
|
What are the material U.S. federal income tax consequences of
the Merger to Clean Diesel stockholders? |
|
A. |
|
Clean Diesel stockholders will not recognize a gain or loss as a
result of the Merger, whether or not the Merger qualifies as a
reorganization under Section 368 of the Code. |
|
Q. |
|
Do CSI shareholders have appraisal or dissenters rights
in connection with the Merger? |
|
A. |
|
Yes. CSI shareholders are entitled to exercise dissenters
rights in connection with the Merger by complying with all of
the California law procedures discussed in the section entitled
The Merger Appraisal Rights and
Dissenters Rights and in Annex E. To
exercise dissenters rights in connection with the Merger,
a CSI shareholder must not vote his or her shares of CSI common
stock in favor of the Merger and must make a written demand to
have CSI purchase the shares at their fair market value. Failure
to follow precisely any of the statutory procedures set forth in
Annex E may result in the loss or waiver of
dissenters rights under California law. |
|
Q. |
|
Do Clean Diesel stockholders have appraisal or
dissenters rights in connection with the Merger? |
|
A. |
|
No. Clean Diesel stockholders do not have appraisal or
dissenters rights in connection with the issuance of the
shares of Clean Diesel common stock or warrants to purchase
shares of Clean Diesel common stock in connection with the
Merger or the Merger. |
|
Q. |
|
As a Clean Diesel stockholder, how does the Clean Diesel
board of directors recommend that I vote? |
|
A. |
|
After careful consideration, the Clean Diesel board of directors
recommends that Clean Diesel stockholders vote: |
|
|
|
FOR Proposal No. 1 to elect five directors;
|
|
|
|
FOR Proposal No. 2 to ratify the
appointment of Eisner LLP to be Clean Diesels auditors for
2010;
|
|
|
|
FOR Proposal No. 3 to approve (i) the
amendment to increase the number of shares of authorized capital
stock and effect the reverse split and (ii) the issuance of
the shares of Clean Diesel common stock and the warrants to
purchase shares of Clean Diesel common stock in connection with
the Merger; and
|
|
|
|
FOR Proposal No. 4 to adjourn the Clean
Diesel annual meeting, if necessary, to solicit additional
proxies if there are not sufficient votes in favor of
Proposal No. 3.
|
|
Q. |
|
Why are Clean Diesel stockholders asked to vote on the
increase in the number of shares of capital stock, the reverse
split and the Merger as a single proposition? |
|
A. |
|
In order to complete the Merger, Clean Diesel needs to increase
the number of shares of its authorized capital stock and in
order to list the shares issuable to CSI shareholders on the
NASDAQ Stock Market, it needs to effect the reverse split.
However, it does not need to take these actions if the Merger is
not approved by its stockholders. Because these propositions are
interdependent, they are being presented to Clean Diesels
stockholders as a package. |
|
Q. |
|
As a CSI shareholder, how does the CSI board of directors
recommend that I vote? |
|
A. |
|
After careful consideration, the CSI board of directors
recommends that CSI shareholders vote: |
|
|
|
FOR Proposal No. 1 to approve and adopt
the Merger and the Merger Agreement;
|
|
|
|
FOR Proposal No. 2 to designate CSIs
current outstanding shares of common stock as
Class A common stock, to create a new class of
common stock to be designated as Class B common
stock, and to increase its authorized share capital;
|
|
|
|
FOR Proposal No. 3 to approve the
disapplication of the pre-emption rights; and
|
viii
|
|
|
|
|
FOR Proposal No. 4 to adjourn the CSI
special meeting, if necessary, to solicit additional proxies if
there are not sufficient votes in favor of
Proposals No. 1, No. 2 and No. 3.
|
|
Q. |
|
What risks should I consider in deciding how to vote? |
|
A. |
|
You should carefully read this entire joint proxy
statement/information statement and prospectus, including each
of the annexes, and pay specific attention to the section
entitled Risk Factors, which sets forth certain
risks and uncertainties related to the Merger and the businesses
of Clean Diesel and CSI. |
|
Q. |
|
When do you expect the Merger to be consummated? |
|
A. |
|
CSI and Clean Diesel cannot predict the exact timing of the
completion of the Merger and the related transactions. CSI and
Clean Diesel currently anticipate that the Merger will occur as
soon as reasonably practicable after the satisfaction or waiver
by the appropriate party of each of the closing conditions set
forth in the Merger Agreement. One of the closing conditions is
that the required approvals are obtained at the Clean Diesel
annual meeting to be held on
[ ],
2010 and the CSI special meeting to be held
[ ],
2010. For more information regarding timing, see the section
entitled The Merger Agreement Conditions to
Each Partys Obligation to Effect the Merger in this
joint proxy statement/information statement and prospectus. |
|
Q. |
|
What do Clean Diesel stockholders need to do now? |
|
A. |
|
Clean Diesel urges its stockholders to read this joint proxy
statement/information statement and prospectus carefully,
including its annexes, and to consider how the Merger affects
them. If you are a stockholder of Clean Diesel, you are further
urged to provide your proxy instructions by mailing your signed
Clean Diesel proxy card in the enclosed return envelope or by
voting by telephone or via the Internet following the
instructions on your proxy card. Please provide your proxy
instructions only once, unless you are revoking a previously
delivered proxy instruction, and as soon as possible so that
your shares can be voted at the Clean Diesel annual meeting. |
|
Q. |
|
What do CSI shareholders need to do now? |
|
A. |
|
CSI urges its shareholders to read this joint proxy
statement/information statement and prospectus carefully,
including its annexes, and to consider how the Merger affects
them. If you are a shareholder of CSI, you are further urged to
provide your proxy instructions by mailing your CSI signed proxy
in the enclosed return envelope. Please provide your proxy
instructions only once, unless you are revoking a previously
delivered proxy instruction, and as soon as possible so that
your shares can be voted at the CSI special meeting. |
About the
Clean Diesel Annual Meeting and the CSI Special
Meeting
|
|
|
Q. |
|
When and where is the Clean Diesel annual meeting of
stockholders? |
|
A. |
|
The Clean Diesel annual meeting will be held at the Holiday Inn
Bridgeport, 1070 Main Street, Bridgeport, CT 06604, at
[ ],
local time, on
[ ],
2010. All Clean Diesel stockholders as of the record date, or
their duly appointed proxies, may attend the Clean Diesel annual
meeting. |
|
Q. |
|
When and where is the CSI special meeting of shareholders? |
|
A. |
|
The CSI special meeting will be held at CSIs Oxnard
facility located at 1621 Fiske Place, Oxnard, CA 93033, at
[ ],
local time, on
[ ],
2010. Subject to space availability, all CSI shareholders as of
the record date, or their duly appointed proxies, may attend the
CSI special meeting. Because seating may be limited, admission
to the CSI special meeting will be on a first-come,
first-served
basis. Registration and seating will begin at
[ ],
local time. |
|
Q. |
|
Who can attend and vote at the Clean Diesel annual meeting of
stockholders? |
|
A. |
|
Only holders of record of Clean Diesel common stock at the close
of business on
[ ],
2010 (the Clean Diesel record date), are entitled to
notice of, and to vote at, the Clean Diesel annual meeting. As |
ix
|
|
|
|
|
of the Clean Diesel record date, there were
[ ] shares
of Clean Diesel common stock outstanding and entitled to vote at
the Clean Diesel annual meeting, held by approximately
[ ]
holders of record. Each holder of Clean Diesel common stock is
entitled to one vote for each share of Clean Diesel common stock
owned as of the Clean Diesel record date. |
|
Q. |
|
Who can attend and vote at the CSI special meeting of
shareholders? |
|
A. |
|
Only holders of record of CSI stock at the close of business on
[ ],
2010 (the CSI record date), are entitled to notice
of and to vote at the CSI special meeting. As of the CSI record
date, there were
[ ] shares
of CSI stock outstanding and entitled to vote at the CSI special
meeting, held by approximately
[ ]
holders of record. Each holder of CSI stock is entitled to one
vote for each share of CSI stock owned as of the CSI record date. |
|
Q. |
|
What happens if I do not return a proxy card or otherwise
provide proxy instructions, as applicable? |
|
A. |
|
If you are a Clean Diesel stockholder, the failure to return
your proxy card or otherwise provide proxy instructions or vote
your shares in person will result in your shares not being
counted for purposes of determining whether a quorum is present
at the Clean Diesel annual meeting. In the event that a quorum
is not reached or the necessary votes are not received, the
Clean Diesel annual meeting will have to be adjourned to provide
more time to obtain a quorum and the necessary votes. |
|
|
|
If you are a CSI shareholder, the failure to return your proxy
or otherwise provide proxy instructions or vote your shares in
person will have the same effect as voting against CSI
Proposals No. 1, No. 2 and No. 3 and your
shares will not be counted for purposes of determining whether a
quorum is present at the CSI special meeting. In the event that
a quorum is not reached or the necessary votes are not received,
the CSI special meeting will have to be adjourned and recalled
for another vote. |
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Q. |
|
May I vote in person at the Clean Diesel annual meeting of
stockholders? |
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A. |
|
If your shares of Clean Diesel common stock are registered
directly in your name with the Clean Diesel transfer agent, then
you are considered to be the stockholder of record with respect
to those shares, and the proxy materials and Clean Diesel proxy
card are being sent directly to you by Clean Diesel. If you are
a Clean Diesel stockholder of record, you may attend the Clean
Diesel annual meeting and vote your shares in person. However,
even if you plan to attend the Clean Diesel annual meeting in
person, Clean Diesel requests that you sign and return the
enclosed Clean Diesel proxy card or vote your shares by
telephone or via the Internet to ensure that your shares will be
represented at the Clean Diesel annual meeting, if you are
unable to attend. If your shares of Clean Diesel common stock
are held in a brokerage account or by another nominee, then you
are considered the beneficial owner of shares held in
street name, and the proxy materials are being
forwarded to you by your broker or other nominee together with a
voting instruction card to return to your broker or other
nominee to direct them to vote on your behalf. As the beneficial
owner, you are also invited to attend the Clean Diesel annual
meeting. Because a beneficial owner is not the stockholder of
record, however, you may not vote these shares in person at the
Clean Diesel annual meeting unless you obtain a proxy from the
broker, trustee or nominee that holds your shares, giving you
the right to vote the shares at the meeting. |
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Q. |
|
May I vote in person at the CSI special meeting of
shareholders? |
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A. |
|
If your shares of CSI common stock are registered directly in
your name with CSIs transfer agent, then you are
considered to be the shareholder of record with respect to those
shares, and the proxy materials and CSI proxy are being sent
directly to you by CSI. If you are a CSI shareholder of record,
you may attend the CSI special meeting and vote your shares in
person. However, even if you plan to attend the CSI special
meeting in person, CSI requests that you sign and return the
enclosed CSI proxy card or vote your shares by telephone or via
the Internet to ensure that your shares will be represented at
the CSI special meeting, if you are unable to attend. If your
shares of CSI common stock are held in a brokerage account or by
another nominee, then you are considered the beneficial owner of
shares held in street name, and the proxy materials
are being forwarded to you by your broker or other nominee
together |
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with a voting instruction card to return to your broker or other
nominee to direct them to vote on your behalf. As the beneficial
owner, you are also invited to attend the CSI special meeting.
Because a beneficial owner is not the stockholder of record,
however, you may not vote these shares in person at the CSI
special meeting unless you obtain a proxy from the broker,
trustee or nominee that holds your shares, giving you the right
to vote the shares at the meeting. |
|
Q. |
|
If my shares are held in street name by my
broker, will my broker vote my shares for me? |
|
A. |
|
Unless your broker has discretionary authority to vote on
certain matters, your broker will not be able to vote your
shares of Clean Diesel or CSI stock without instructions from
you. Brokers are not expected to have discretionary authority to
vote for the Clean Diesel or CSI proposals, respectively.
Therefore, in order to make sure that your vote is counted, you
should instruct your broker to vote your shares following the
procedures provided by your broker. |
|
Q. |
|
May I change my vote after I have submitted a proxy or
provided proxy instructions? |
|
A. |
|
Clean Diesel stockholders of record may change their vote at any
time before their proxy is voted at the Clean Diesel annual
meeting in either of the following manners: First, a stockholder
of record of Clean Diesel can send a written notice to the
Secretary of Clean Diesel stating that he or she would like to
revoke his or her prior proxy submission. Second, a stockholder
of record of Clean Diesel can attend the Clean Diesel annual
meeting and vote in person. Attendance alone will not revoke a
proxy. If a Clean Diesel stockholder who owns Clean Diesel
shares in street name has instructed a broker to
vote his or her shares of Clean Diesel common stock, the
stockholder must follow directions received from his or her
broker to change those instructions. |
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CSI shareholders of record may change their vote at any time
before their proxy is voted at the CSI special meeting in either
of the following manners: First, a shareholder of record of CSI
can send a written notice to the Secretary of CSI stating that
he or she would like to revoke his or her proxy. Second, a
shareholder of record of CSI can attend the CSI special meeting
and vote in person. Attendance alone will not revoke a proxy. If
a CSI shareholder who owns CSI shares in street name
has instructed a broker to vote his or her shares of CSI common
stock, the shareholder must follow directions received from his
or her broker to change those instructions. |
|
Q. |
|
What should a Clean Diesel stockholder do if he or she
receives more than one set of voting materials? |
|
A. |
|
As a Clean Diesel stockholder, you may receive more than one set
of voting materials, including multiple copies of this joint
proxy statement/information statement and prospectus and
multiple Clean Diesel proxy cards or voting instruction cards.
For example, if you hold your Clean Diesel shares in more than
one brokerage account, you will receive a separate voting
instruction card for each brokerage account in which you hold
Clean Diesel shares. If you are a holder of record and your
Clean Diesel shares are registered in more than one name, you
will receive more than one proxy card. In addition, if you are a
holder of both Clean Diesel common stock and CSI common stock,
you will receive one or more separate proxy cards or voting
instruction cards for each company. Please complete, sign, date
and return each proxy card and voting instruction card that you
receive or otherwise follow the voting instructions set forth in
this joint proxy statement/information statement and prospectus
in the sections entitled The Clean Diesel Annual Meeting
of Stockholders and The CSI Special Meeting of
Shareholders. |
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Q. |
|
What should a CSI shareholder do if he or she receives more
than one set of voting materials? |
|
A. |
|
As a CSI shareholder, you may receive more than one set of
voting materials, including multiple copies of this joint proxy
statement/information statement and prospectus and multiple
proxy cards or voting instruction cards. For example, if you
hold your CSI shares in more than one brokerage account, you
will receive a separate voting instruction card for each
brokerage account in which you hold CSI shares. If you are a
holder of record and your CSI shares are registered in more than
one name, you will receive more than one proxy card. In
addition, if you are a holder of both Clean Diesel common stock
and CSI common stock, you will receive one or more separate
proxy cards or voting instruction cards for each |
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company. Please complete, sign, date and return each proxy card
and voting instruction card that you receive or otherwise follow
the voting instructions set forth in this joint proxy
statement/information statement and prospectus in the sections
entitled The Clean Diesel Annual Meeting of
Stockholders and The CSI Special Meeting of
Shareholders. |
|
Q. |
|
Should CSI shareholders send in their CSI stock certificates
now? |
|
A. |
|
No. After the Merger is completed, CSI shareholders will be
sent written instructions for exchanging their CSI stock
certificates for the merger consideration. PLEASE DO NOT SEND
IN YOUR CSI SHARE CERTIFICATES NOW OR WITH YOUR CSI PROXY
CARD. |
|
Q. |
|
Who can help answer my questions? |
|
A. |
|
If you are a Clean Diesel stockholder and would like additional
copies, without charge, of this joint proxy
statement/information statement and prospectus, or if you have
questions about the Merger, including the procedures for voting
your shares, you should contact: |
In the United States:
Clean Diesel Technologies, Inc.
10 Middle Street, Suite 1100
Bridgeport, CT 06604
(203) 416-5290
In Europe:
Capital IRG
Foreign Department
The Registry
34 Beckenham Road
Beckenham, Kent, BR3 4TU
(0) 208639 2236
If you are a CSI shareholder, and would like additional copies,
without charge, of this proxy statement/information statement
and prospectus, or if you have questions about the Merger,
including the procedures for voting your shares, you should
contact:
Catalytic Solutions, Inc.
Investor Relations
4567 Telephone Road, Suite 206
Ventura, CA 93003
(805) 639-9458
xii
SUMMARY
This summary highlights selected information from this joint
proxy statement/information statement and prospectus. It does
not contain all of the information that may be important to you.
Clean Diesel and CSI encourage you to carefully read this entire
joint proxy statement/information statement and prospectus,
including annexes, and the other documents to which this joint
proxy statement/information statement and prospectus refers, to
fully understand the merger proposals to be considered at the
Clean Diesel annual meeting and the CSI special meeting.
Information
About Clean Diesel and CSI
Clean
Diesel Technologies, Inc.
Clean Diesel develops, designs, markets and licenses patented
technologies and solutions that reduce harmful emissions from
internal combustion engines while improving fuel economy and
engine power. It is 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).
Clean Diesel was spun-off by Fuel Tech in a rights offering in
December 1995. Since inception, Clean Diesel has developed a
substantial portfolio of patents and related proprietary rights
and extensive technological know-how.
Catalytic
Solutions, Inc.
Catalytic Solutions, Inc. is a global manufacturer and
distributor of emissions control systems and products, focused
in the heavy duty diesel and light duty vehicle markets. Since
being founded in 1996, CSI has grown from not only a provider of
unique catalysts to the automotive industry (gasoline and diesel
engines) but also to a provider of both catalysts and systems in
growing clean technology markets, including heavy duty diesel
systems and catalysts for energy systems. CSIs emissions
control systems and products are designed to deliver high value
to its customers while benefiting the global environment through
air quality improvement, sustainability and energy efficiency.
Merger
Sub
CDTI Merger Sub, Inc. is a California corporation and
wholly-owned subsidiary of Clean Diesel. Merger Sub was formed
solely for the purposes of carrying out the Merger and it has
not conducted any business operations.
The
Merger (see page 37)
Through a merger, CSI will become a wholly-owned subsidiary of
Clean Diesel, subject to possible future dilution. The business
of CSI and Clean Diesel will be combined and Merger Sub will
merge with and into CSI, with CSI as the surviving corporation.
In exchange for their shares of CSI common stock, all CSI
shareholders will receive shares of Clean Diesel common stock
and each holder of shares designated as Class A common
stock will also receive a warrant to purchase shares of Clean
Diesel common stock at an exercise price to be set pursuant to a
formula at the effective time of the Merger. Each warrant to
purchase CSI common stock outstanding and not terminated or
exercised immediately prior to the effective time of the Merger
is expected to be converted into a warrant to purchase shares of
Clean Diesel common stock, except for warrants held by Silicon
Valley Bank, which could remain outstanding after the effective
time of the Merger. All options to purchase shares of CSI common
stock issued under CSIs 1997 Stock Option Plan that are
outstanding and unexercised immediately prior to the effective
time of the Merger will be terminated and cancelled. Options
issued under the 2006 Equity Compensation Plan will not
terminate, but will continue to be exercisable for shares of the
Surviving Subsidiary. However, CSI has undertaken to obtain the
consent of each current executive officer and director of CSI to
agree that options under the 2006 Equity Compensation Plan will
expire at the effective time of the Merger. CSI has undertaken
to use commercially reasonable efforts to obtain similar
agreements from each
1
other holder. Options to purchase only 686,000 shares under
the 2006 Equity Compensation Plan are not subject to such
agreements and could remain exercisable after the effective time
of the Merger.
The precise numbers of shares and warrants CSI shareholders will
receive cannot be determined now, and depend on a formula set
out in the Merger Agreement. In general, CSI shareholders will
receive such numbers of Clean Diesel common stock so that after
the Merger they will own 60% of the outstanding shares of Clean
Diesel common stock, subject to adjustment for the cash position
of each of CSI and Clean Diesel at closing. Each share of CSI
common stock to be designated Class A will also
be converted into the right to receive a ratable portion (based
on the number of shares of CSI Class A common stock
outstanding and in-the-money warrants) of warrants
to purchase up to 3,000,000 shares of Clean Diesel common
stock. A number of warrants will be reserved for possible
issuance to holders of warrants to purchase CSI common stock
that are
in-the-money.
Both CSI and Clean Diesel intend to issue additional shares of
common stock prior to the Merger in order that they can finance
current operations and have, at the earlier of the effective
time of the Merger or June 30, 2010, a cash position of at
least $2,000,000 in the case of CSI, and at least $4,500,000 in
the case of Clean Diesel. As a result, neither the number of
outstanding shares of CSI common stock immediately prior to the
effective time of the Merger nor the number of outstanding
shares of Clean Diesel common stock immediately prior to the
effective time of the Merger can be known.
Although the interim capital raise is still subject to
definitive agreement between CSI and its accredited investors,
it is currently anticipated that CSI will sell an aggregate
$4,000,000 of convertible subordinated notes at par to a group
of accredited investors, $2,000,000 of which is expected to be
sold by CSI in four equal installments prior to the CSI special
meeting of shareholders, and the remaining $2,000,000 of which
is expected to be sold after shareholder approval of the merger
and necessary approvals under CSIs articles of
incorporation but prior to the effective time of the Merger. An
aggregate of approximately 137,887,188 shares of CSI common
stock is potentially issuable upon conversion of these notes.
Clean Diesel currently expects that its interim capital raise
will take the form of a sale of approximately
650,197 shares of its common stock and warrants to purchase
up to 1,000,000 shares of its common stock in a
Regulation S offering to raise approximately
$1 million. If these financing activities are completed in
this form, after the effective date of the Merger, and without
taking into account the further adjustment described in the next
paragraph, ownership of Clean Diesel would be distributed
approximately as follows:
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Existing CSI Shareholders
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|
16
|
%*
|
CSIs financial advisor
|
|
|
4
|
%*
|
Purchasers of CSI convertible subordinated notes
|
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40
|
%
|
Existing Clean Diesel Shareholders
|
|
|
37
|
%
|
Purchasers of newly issued Clean Diesel shares
|
|
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3
|
%**
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* |
|
Does not give effect to warrants to purchase four million shares
of Clean Diesel common stock (up to three million of which are
part of the merger consideration and one million of which will
be issued to CSIs financial advisor). |
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** |
|
Does not give effect to warrants to purchase one million shares
of Clean Diesel common stock. |
In addition, for every $166,666.66 by which CSIs cash
position at the earlier of the effective time of the Merger or
June 30, 2010 is less than $2,000,000, the percentage of
post-closing outstanding common stock of Clean Diesel to be held
by CSI shareholders will be reduced by 1%, but not below 48%
(and the percentage of post-closing outstanding common stock of
Clean Diesel to be held by Clean Diesel stockholders will be
increased by 1%, but not above 52%). For every $116,666.66 by
which Clean Diesels cash position at the earlier of the
effective time of the Merger or June 30, 2010 is less than
$4,500,000, the percentage of post-closing outstanding common
stock of Clean Diesel to be held by CSI shareholders will be
increased by 1%, but not above 90% (and the percentage of
post-closing outstanding common stock of Clean Diesel to be held
by Clean Diesel stockholders will be reduced by 1%, but not
below 10%).
2
Reasons
for the Merger (see page 40)
Clean
Diesels Reasons for the Merger
In reaching its unanimous decision to approve the Merger, the
Clean Diesel board of directors considered a number of factors
including, among other factors:
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the belief of the Clean Diesel board of directors that Clean
Diesel after the Merger will be better positioned to pursue and
implement its business strategy thereby increasing revenues, net
income and internal resources;
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|
the belief that the complementary nature of the two companies
creates financial solidity and strong growth prospects driven by
the possibility of operational efficiencies and additional
revenue opportunities;
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the belief that the combination of entities helps to mitigate
operating risks through the diversification and stabilization of
revenues, the broadening of the product portfolio and improved
OEM channel access for Clean Diesels intellectual property;
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the belief that the resulting companys large number of
verified products and greater global scale provides operating
flexibility and market credibility critical to future success;
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the belief that the combination of strong technical capability
with an extensive and relevant IP portfolio would create a world
class, diversified, emission control company operating in both
the OEM and retrofit sectors
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the belief that Clean Diesel would be able to sell to its
customers CSIs verified retrofit products while it was in
the process of undergoing testing required for its own
proprietary products;
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the belief that the significant disparity in the relative market
capitalizations of Clean Diesel and CSI, compared to the
relative percentage that each of Clean Diesels
stockholders and CSIs shareholders will own in the
combined company, is not reflective of the actual values of the
two companies;
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the belief that the merger with CSI represents the strategic
option most likely to maximize stockholder value after
consideration of prominent risk factors associated with
strategic alternatives;
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|
the belief that the significant disparities in implied
valuations of Clean Diesel and CSI represented by the terms of
the interim capital raise by Clean Diesel, the interim capital
raise by CSI, the basic merger terms, and the cash adjustments,
were the result of the circumstances of each transaction in
isolation and not fundamentally inconsistent;
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the results of Clean Diesels due diligence review of
CSIs business, finances and operations and its evaluation
of CSIs management, competitive positions and prospects;
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the likelihood in the judgment of the board of directors of
Clean Diesel that the conditions to be satisfied prior to
consummation of the Merger transaction will be satisfied or
waived;
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|
under the terms of the Merger Agreement, another party could
make a superior acquisition proposal that could be accepted by
the board of directors of Clean Diesel, and that the termination
fee, payable to CSI in such situation, would not be a
significant impediment to accepting such proposal;
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the judgment that the shares of CSI as the Surviving Subsidiary
issuable pursuant to the terms of the CSI 2006 Equity
Compensation Plan after the Merger, if any, would not be
material, and that the costs associated with dealing on an
arms length basis with the Surviving Subsidiary after the
Merger would not be material;
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the judgment that the shares of CSI as the Surviving Subsidiary
issuable pursuant to the terms of the Silicon Valley Bank
warrants after the Merger, if any, would not be material, and
that the costs associated with dealing on an arms length
basis with the Surviving Subsidiary after the Merger would not
be material; and
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3
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The belief that the tax benefits associated with Clean
Diesels tax loss carryforwards were unlikely to be
realized, and that the likely limitation on the use of those tax
loss carryforwards resulting from the Merger would not be
material.
|
For a complete list of Clean Diesels reasons for approving
the Merger, see the section entitled The
Merger Clean Diesels Reasons for the Merger;
Recommendation of Clean Diesels Board of Directors.
CSIs
Reasons for the Merger
In reaching its unanimous decision to approve the Merger, the
CSI board of directors considered a number of factors including,
among other factors:
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the fact that the Merger will allow the CSI shareholders to gain
an equity interest in Clean Diesel, thus providing a vehicle for
continued participation by the CSI shareholders in the future
performance of not only the Surviving Subsidiary, but also of
Clean Diesel;
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the Merger will allow CSI shareholders to participate in a
better capitalized business, with operations of the enlarged
group having improved access to development capital;
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the judgment that CSI would be able to continue to sell its
verified heavy duty diesel systems while engaging in the process
of obtaining verification for Clean Diesels products and
systems, which CSI judges will be complementary to its own and
enable an expanded product portfolio;
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the increased liquidity available to CSI shareholders on a
U.S. securities exchange through receipt of the registered
shares of Clean Diesel;
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the belief of the CSI board of directors that the combined
company after the Merger will be better positioned to pursue and
implement its business strategy;
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the likelihood in the judgment of the board of directors of CSI
that the conditions to be satisfied prior to consummation of the
Merger transaction will be satisfied or waived;
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the belief that the tax benefits associated with CSIs tax
loss carryforwards were unlikely to be realized, and that the
likely limitation on the use of those tax loss carryforwards
resulting from the Merger would not be material; and
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under the terms of the Merger Agreement, another party could
make a superior acquisition proposal that could be accepted by
the board of directors of CSI, and that the termination fee,
payable to Clean Diesel in such situation, would not be a
significant impediment to accepting such proposal.
|
For a complete list of CSIs reasons for approving the
Merger, see the section entitled The Merger
The CSI Reasons for the Merger.
Both Clean Diesel and CSI believe that the Merger will be in the
best interests of their respective stockholders and
shareholders. However, achieving these anticipated benefits of
the Merger is subject to risk and uncertainty, including those
risks discussed in the section entitled Risk Factors.
Risk
Factors (see page 13)
Clean Diesel and CSI are subject to numerous risks associated
with their businesses and their industries. In addition, the
Merger, including the possibility that the closing of the Merger
may be delayed or not be completed at all, poses a number of
unique risks to both Clean Diesel stockholders and the CSI
shareholders, including the following risks:
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Clean Diesel and CSI may not realize all of the anticipated
benefits of the transactions;
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Clean Diesel may pay a higher price for CSI common stock if the
value of Clean Diesel common stock increases, because the value
of the Clean Diesel common stock issued in connection with the
Merger will depend on its market price at the time of the Merger
and the exchange ratio for the CSI shares of
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4
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common stock at the closing of the Merger is fixed by a formula
that only adjusts the exchange ratio for changes in each
companys outstanding shares and closing cash position;
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the Merger may not qualify as a reorganization under
Section 368 of the Internal Revenue Code, as amended, in
which case the Merger may be a fully-taxable transaction to CSI
shareholders;
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provisions of the Merger Agreement may deter alternative
business combinations;
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CSIs current shareholders will own a large percentage of
the Clean Diesel common stock after consummation of the Merger,
and will have significant influence over the outcome of
corporate actions requiring stockholder approval; and such
shareholders priorities for Clean Diesels business
may be different from Clean Diesels priorities or those of
its other stockholders;
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The forbearance agreement with respect to CSIs credit
agreement, which is in default, expired on April 30, 2010
and CSI may not reach agreement with the lender to further
extend through the effective time of the Merger, and as a result
CSI may be forced into bankruptcy prior to the time of the
Merger;
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CSI may not be able to refinance its existing indebtedness on
satisfactory terms in a manner that would allow the combined
company to continue operations for the foreseeable future;
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Neither Clean Diesel nor CSI have experienced positive cash flow
from their operations, and the ability of the combined company
to achieve positive cash flow from operations, or finance
negative cash flow from operations, will depend on reductions in
their operating costs which may not be achievable;
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Clean Diesel and CSI will incur significant transaction and
merger-related costs in connection with the Merger;
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if Clean Diesel or CSI has to pay the termination fee, it could
negatively affect CSIs business operations or Clean
Diesels business operations, as the case may be;
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the market price of Clean Diesel common stock could decline as a
result of the large number of shares that will become eligible
for sale after consummation of the Merger;
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Clean Diesel may not have uncovered all the risks associated
with the acquisition of CSI and a significant liability may be
discovered after closing of the Merger, and the Merger Agreement
does not provide for Clean Diesels indemnification by the
former CSI shareholders against any of CSIs liabilities,
should they arise or become known after the closing of the
Merger;
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directors of CSI have interests in the transaction that may be
different from, or in addition to, the interests of other CSI
shareholders, which may influence their recommendation and vote;
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there has been no U.S. public market for the CSI common
stock and warrants to purchase CSI common stock, and the lack of
a liquid public market in the U.K. makes it extremely difficult
to determine the fair market value of CSI; and
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if the conditions to the Merger are not met or waived, the
Merger will not occur.
|
These risks and other risks are discussed in greater detail in
the section entitled Risk Factors in this joint
proxy statement/information statement and prospectus. Clean
Diesel and CSI encourage Clean Diesel stockholders and CSI
shareholders to read and consider all of these risks carefully.
Market
Price And Dividend Information (see page 39)
The closing sale price per share of Clean Diesel common stock as
reported on the NASDAQ Stock Market on May 13, 2010, the
last full trading day prior to the public announcement of entry
into the Merger Agreement, was $1.57, and the closing sale price
per share of Clean Diesel common stock
on ,
2010 (the last practicable date before the date of this joint
proxy statement/information statement and prospectus) as
reported on the NASDAQ Stock Market was
$ per share. Following the
consummation of the Merger, Clean Diesels common stock,
including the shares of Clean Diesel common stock issued in
5
connection with the Merger, are expected to continue to trade on
the NASDAQ Stock Market under the symbol CDTI.
Clean Diesel has never declared nor paid cash dividends on its
capital stock. Clean Diesel currently intends to retain
earnings, if any, to finance the growth and development of its
business, and does not expect to pay any cash dividends to its
stockholders in the foreseeable future.
The closing price per share of CSI common stock as reported on
the AIM of the London Stock Exchange on May ,
2010, the last full trading day prior to the public announcement
of entry into the Merger Agreement was GPX (pence
sterling)
(U.S.$ ), and the closing price per
share of CSI common stock
on ,
2010 (the last practicable date before the filing of this joint
proxy statement/information statement and prospectus) as
reported on AIM was
GBX (U.S.$ ).
The exchange rate at the close of business on
May , 2010
and ,
2010
was
and ,
respectively. At the effective time of the Merger, CSI will
cease trading on AIM. As of May , 2010, CSI had
approximately shareholders
of record. CSI has never declared or paid any cash dividends on
its capital stock, nor does it intend to do so in the
foreseeable future.
For more information, see the section entitled Market
Price and Dividend Information.
Opinion
of the Financial Advisor to the Board of Directors of Clean
Diesel (see page 50)
In deciding to recommend the merger, Clean Diesels board
of directors considered an opinion from its financial advisor,
Ardour Capital Investments, LLC, or Ardour Capital. Ardour
Capital rendered its opinion to Clean Diesels board of
directors that, as of May 11, 2010, based upon and subject
to the qualifications, limitations and assumptions stated in its
opinion, the merger consideration to be paid to the shareholders
of CSI was fair, from a financial point of view, to the Clean
Diesel stockholders.
The full text of the written opinion of Ardour Capital, dated
May 11, 2010, which sets forth assumptions made, procedures
followed, matters considered and limitations on the review
undertaken in connection with the opinion, is attached as
Annex C to this joint proxy/information statement
and prospectus. Ardour Capital provided its opinion for the
information and assistance of Clean Diesels board of
directors in connection with its consideration of the merger.
The Ardour Capital opinion is not a recommendation as to how any
holder of Clean Diesel common stock should vote with respect to
the adoption of the merger agreement or any other matter.
Pursuant to a letter agreement dated March 8, 2010, Clean
Diesel engaged Ardour Capital to render an opinion to the Clean
Diesel board of directors as to the fairness, from a financial
point of view, of the consideration to be paid to the CSI common
shareholders in connection with the merger. As compensation for
its services in connection with the merger, Clean Diesel paid
Ardour Capital $85,000 upon the delivery of Ardour
Capitals fairness opinion. In addition, Clean Diesel has
agreed to reimburse Ardour Capital for reasonable
out-of-pocket
expenses, including attorneys fees and disbursement, and
to indemnify Ardour Capital and related persons against various
liabilities.
Opinion
of the Financial Advisor to the Board of Directors of CSI (see
page 54)
In deciding to recommend the merger, CSIs board of
directors considered an opinion from one of its financial
advisors, Marshall & Stevens, Inc., or
Marshall & Stevens. Marshall & Stevens
rendered its opinion to CSIs board of directors that, as
of May 11, 2010, based upon and subject to the
qualifications, limitations and assumptions stated in its
opinion, the merger consideration to be paid to the shareholders
of CSI was fair, from a financial point of view, to the CSI
shareholders. The full text of the written opinion of
Marshall & Stevens, dated May 11, 2010, which
sets forth assumptions made, procedures followed, matters
considered and limitations on the review undertaken in
connection with the opinion, is attached as Annex D
to this joint proxy/information statement and prospectus.
Marshall & Stevens provided its opinion for the
information and assistance of CSIs board of directors in
connection with its consideration of the merger. The
Marshall & Stevens opinion is not a recommendation as
to how any holder of CSI common stock should vote with respect
to the adoption of the merger agreement or any other matter.
6
Pursuant to a letter agreement dated March 11, 2010, CSI
engaged Marshall & Stevens to render an opinion to the
CSI board of directors as to the fairness, from a financial
point of view, of the consideration to be paid to the CSI common
shareholders in connection with the merger. As compensation for
its services in connection with the merger, CSI agreed to pay
Marshall & Stevens a fee of $65,000, of which $22,000
was payable upon execution of the letter agreement, $22,000 upon
the delivery of Marshall & Stevens fairness
opinion and $21,000 on June 30, 2010 or any earlier date on
which the merger may occur, plus negotiated fees for services
beyond those contemplated. In addition, CSI has agreed to
reimburse Marshall & Stevens for reasonable
out-of-pocket
expenses, including attorneys fees and disbursement, and
to indemnify Marshall & Stevens and related persons
against various liabilities.
Overview
of the Merger Agreement (see page 68)
The Merger Agreement contains the terms and conditions of the
proposed combination of the businesses of Clean Diesel and CSI.
You are encouraged to read it carefully.
Merger
Consideration
At the effective time of the Merger, each share of issued and
outstanding CSI common stock existing immediately prior to the
effective time of the Merger will, without any action on the
part of the shareholder thereof, automatically be retired and
cease to exist, and be converted into the right to receive a
number of shares of Clean Diesel common stock to be determined,
and, in the case of shares to be designated as
Class A, a warrant to purchase shares of Clean
Diesel common stock pursuant to a formula set out in the Merger
Agreement; provided that the following shares will not be
so converted:
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shares owned by Clean Diesel or Merger Sub;
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shares held by CSI; and
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shares that are held by shareholders properly demanding and
perfecting dissenters rights pursuant to
Sections 1300 through 1313 of the California Corporations
Code.
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The number of shares of Clean Diesel common stock into which
each share of CSI common stock will be converted will be that
number of shares that will result in the holders of CSI common
stock holding 60% of the outstanding Clean Diesel common stock
after the merger, subject to adjustment for each of CSIs
and Clean Diesels cash position at the earlier of
June 30, 2010 or the effective time of the merger, but not
more than 90% and not less than 48%. The fractional share of
Clean Diesel common stock represented by a warrant issuable in
respect of each share of CSI common stock (to be designated as
Class A) will be a ratable portion of up to
3,000,000 shares of Clean Diesel common stock.
All issued and outstanding options to purchase CSI common stock
are currently
out-of-the-money
(e.g., the exercise price exceeds the current trading
price of shares of CSI common stock). Prior to the effective
time of the Merger, each option to purchase shares of CSI common
stock issued under CSIs 1997 Stock Option Plan, in
accordance with the terms of such Plan, will be given a window
of time in which to exercise following which any options issued
under the 1997 Stock Option Plan that remain outstanding will
terminate at the effective time of the Merger. The terms of
outstanding options issued under CSIs 2006 Equity
Compensation Plan differ from the 1997 Stock Option Plan, and as
such, will not terminate at the effective time of the Merger but
will continue to be exercisable for shares of the Surviving
Subsidiary. However, CSI has undertaken in the Merger Agreement
to obtain the consent of each of CSIs directors and
executive officers who has options outstanding under CSIs
2006 Equity Compensation Plan and to use commercially reasonable
efforts to obtain the consent of the other holders of any
options, grant or other awards granted under CSIs 2006
Equity Compensation to terminate such awards at the effective
time of the Merger, and to terminate its 2006 Equity
Compensation Plan.
At the effective time, certain warrants to purchase shares of
CSI common stock outstanding and not terminated or exercised
immediately prior to the effective time of the Merger are
expected to be assumed by Clean Diesel in accordance with their
terms and thus become exercisable for that number of shares of
Clean Diesel common stock and warrants to purchase Clean Diesel
common stock calculated according to the conversion ratio as
defined in the Merger Agreement. One of these warrants is
in-the-money
and two of
7
these warrants are
out-of-the-money.
For one outstanding warrant that is
out-of-the-money
whose terms do not provide for assumption by Clean Diesel, CSI
has agreed in the Merger Agreement to use commercially
reasonable efforts to obtain the consent of the holder of such
warrants to a cancellation or an assumption of the CSIs
obligations thereunder by Clean Diesel similar to CSIs
other warrants. For a more complete description of the merger
consideration, see the section entitled The Merger
Agreement Merger Consideration in this joint
proxy statement/information statement and prospectus.
For a more complete description of the merger consideration, see
the section entitled The Merger Agreement
Merger Consideration in this joint proxy
statement/information statement and prospectus.
The merger consideration will be appropriately and
proportionately adjusted to reflect any stock dividend,
subdivision, reclassification, recapitalization, split,
combination, or exchange of shares with respect to CSI common
stock and Clean Diesel common stock between the date of the
Merger Agreement and the effective time of the Merger.
Acquisition
Proposals
CSI and Clean Diesel agreed that immediately following the
execution and delivery of the Merger Agreement, each of Clean
Diesel and CSI will not and, will cause its subsidiaries not to
and will use commercially reasonable efforts to cause its
representatives not to, directly or indirectly:
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solicit, initiate, facilitate or knowingly encourage any
Acquisition Proposal (as defined in the Merger Agreement);
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enter into any letter of intent, memorandum of understanding or
other agreement or agreement in principle with respect to any
Acquisition Proposal;
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participate in any way in any negotiations or discussions
regarding, or furnish or disclose to any third party any
information with respect to an Acquisition Proposal; or
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withdraw, modify or qualify (or propose to withdraw, modify or
qualify) in any manner adverse to the other party the
recommendation by such partys Board of Directors of the
Merger Agreement to its stockholders.
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For a more complete discussion of the restrictions described
above, see the section entitled The Merger
Agreement Certain Covenants of both Clean Diesel and
CSI.
Conditions
to Completion of the Merger
In addition to the requirement of obtaining Clean Diesel
stockholder approval and CSI shareholder approval, each of the
other closing conditions set forth in the Merger Agreement must
be satisfied or waived by the appropriate party, including in
particular minimum cash positions. For a summary of the
conditions that need to be satisfied to consummate the Merger,
see the section entitled The Merger Agreement
Conditions to Each Partys Obligation to Effect the
Merger in this joint proxy statement/information statement
and prospectus.
Termination
of the Merger Agreement
It is possible that the Merger and the other transactions
contemplated by the Merger Agreement will not be completed. This
might happen if, for example, Clean Diesels stockholders
do not approve the issuance of the Clean Diesel shares and
warrants in connection with the Merger, or if CSIs
shareholders do not approve the Merger or if other conditions to
the Merger are not satisfied. Should that occur, neither Clean
Diesel nor CSI will be under any obligation to make or consider
any alternative proposal regarding the combination of Clean
Diesel and CSI. For a more complete discussion of the manners in
which the Merger Agreement may terminate, see the section
entitled The Merger Agreement
Termination in this joint proxy statement/information
statement and prospectus.
Termination
Fee
In certain circumstances, Clean Diesel or CSI may be obligated
to pay the other party a termination fee of $300,000, plus an
amount equal to all
out-of-pocket
expenses (excluding the cost of employee time), up to
8
a maximum of $350,000, incurred by the recipient party in
connection with the Merger Agreement, the ancillary agreements,
and the transactions contemplated thereby. For a more complete
discussion of the termination fee, see the section entitled
The Merger Agreement Termination Fees in
this joint proxy statement/information statement and prospectus.
Interests
of Directors, Executive Officers and Affiliates of
CSI & Clean Diesel (see pages 57-58)
CSI
Certain directors and executive officers of CSI have interests
in the Merger that differ from, or are in addition to, their
interests as CSI stockholders. Specifically:
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Four of the directors of CSI, Mr. Call, Mr. Cherry,
Mr. Ellis and Dr. Engles, are expected to continue as
directors of Clean Diesel after the merger.
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CSIs three executive officers, Mr. Call, Chief
Executive Officer, Mr. Mehta, Chief Financial Officer and
Dr. Golden, Chief Technical Officer, are expected to
continue with Clean Diesel after the Merger pursuant to the
terms of their existing employment agreements that will be
assumed by Clean Diesel at the effective time of the Merger.
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As of the record date for the CSI special shareholder meeting,
the directors and executive officers of CSI, together with their
affiliates, owned in the aggregate approximately
[ ] shares
of CSI common stock, entitling them to exercise approximately
[ ]% of the voting power of the CSI
common stock at the CSI annual meeting.
Clean
Diesel
Certain directors and executive officers of Clean Diesel have
interests in the Merger that differ from, or are in addition to,
their interests as Clean Diesel stockholders. Specifically:
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Innovator Capital, an investment banking firm of which Clean
Diesels non-executive Chairman is chairman and principal,
is advising Clean Diesel with respect to its capital raising and
the merger, and will receive a fee in respect of those
activities.
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Three of the directors of Clean Diesel, Mr. Park,
Mr. Gray and Mr. Asmussen, are expected to continue as
directors of Clean Diesel after the merger. Two of the directors
of Clean Diesel, Mr. Grinnell and Mr. Merrion are
expected to resign at the effective time of the Merger and be
replaced by former directors of CSI.
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Clean Diesels President, Mr. Asmussen, has indicated
his intention to continue with Clean Diesel as its President
through the consummation of the Merger. CSI has indicated its
desire that Mr. Asmussen continue to serve Clean Diesel as
its Chief Commercial Officer subsequent to the effective time of
the Merger. It is expected that Clean Diesel and
Mr. Asmussen will discuss a mutually acceptable employment
agreement to this effect, but no assurances can be given that
these discussions will be successfully concluded. Any such
employment agreement entered into prior to the effective time of
the Merger would have to be approved by CSI as well.
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As of the record date for the Clean Diesel annual meeting, the
directors and executive officers of Clean Diesel, together with
their affiliates, owned in the aggregate approximately
[ ] shares
of Clean Diesel common stock, entitling them to exercise
approximately [ ]% of the voting
power of the Clean Diesel common stock at the Clean Diesel
annual meeting. Clean Diesel cannot complete the Merger unless
the issuance of the shares of Clean Diesel common stock and
warrants to purchase shares of Clean Diesel common stock in
connection with the Merger is approved by the affirmative vote
of the holders of a majority of the shares of Clean Diesel
common stock voting at the Clean Diesel annual meeting.
Ownership
of Clean Diesel Following the Merger (see
page 64)
After the Merger, CSI will be a wholly-owned subsidiary of Clean
Diesel subject to possible future dilution, and CSI shareholders
will no longer have any direct interest in CSI, but will have an
equity stake in Clean Diesel. Immediately after the Merger,
Clean Diesel stockholders are expected to own approximately 40%
of the outstanding shares of Clean Diesel common stock and the
former CSI shareholders are expected to
9
own approximately 60% of the outstanding shares of Clean Diesel
common stock, in each case assuming that no adjustment is made
for the cash position of each of CSI and Clean Diesel at the
effective time of the Merger. For a more complete discussion of
ownership of Clean Diesel after the Merger, see the section
entitled The Merger Ownership of Clean Diesel
Following the Merger.
Material
U.S. Federal Income Tax Consequences of the Merger (see
page 65)
Clean Diesel and CSI have structured the Merger with the intent
that it qualify as a reorganization under Section 368 of
the Internal Revenue Code of 1986 (the Code). If the
Merger qualifies as such a reorganization, CSI shareholders who
exchange CSI common shares for shares of Clean Diesel common
stock and warrants to purchase shares of Clean Diesel common
stock pursuant to the Merger will not recognize gain in respect
of the shares of Clean Diesel common stock and warrants to
purchase shares of Clean Diesel common stock received in the
exchange (but may recognize an immaterial gain in the amount of
any cash received in respect of fractional shares). If the
Merger qualifies as such a reorganization, CSI warrant holders
will not be subject to tax as a result of the Merger. The
qualification of the Merger as a reorganization depends on
numerous factors including whether CSI shareholders will receive
a sufficient amount of Clean Diesel common stock to satisfy the
continuity of interest and control tests
applicable to reorganizations under Section 368(a)(2)(E) of
the Code. Whether the Merger meets those tests depends in large
part on the value of the Clean Diesel common stock issued to CSI
shareholders as compared to the value of all consideration
issued to CSI shareholders. Based on an estimated valuation, the
Merger should satisfy the continuity of interest and control
tests. If, however, the Internal Revenue Service were to
challenge the valuation and successfully contend that the Merger
failed to qualify as a reorganization, the Merger would be a
fully taxable transaction to CSI shareholders and warrant
holders. In such case, CSI shareholders and warrant holders
would recognize gain or loss measured by the difference between
the value of all consideration received by them in the Merger
and their tax basis in the CSI common stock and the warrants, as
the case may be, surrendered in the Merger. For additional
discussion of the tax treatment of the Merger, see the section
entitled Material United States Federal Income Tax
Consequences of the Merger in this joint proxy
statement/information statement and prospectus.
CSI had approximately $89.8 million and $70.5 million
of federal and state income tax net operating loss carry
forwards at December 31, 2009, respectively and Clean
Diesel had approximately $53.7 million and $39.9 million of
federal and state income tax net operating loss carry forwards
at December 31, 2009, respectively. The federal and state
income tax net operating loss carry forwards for CSI expire
starting in 2017 and 2012, respectively and those of Clean
Diesel expire starting in 2010.
Future utilization of the net operating losses and credit carry
forwards are subject to a substantial annual limitation due to
ownership change limitations as required by Sections 382
and 383 of the Code, as well as similar state limitations. Due
to previous share ownership changes and the substantial change
in capitalization and share ownership caused by this merger,
both companies are expected to be subjected to such limitations.
As such, tax loss carryforwards will be limited if the Merger is
completed.
Tax matters are very complicated, and the tax consequences of
the Merger to a particular CSI shareholder or warrant holder
will depend in part on such shareholders or warrant
holders circumstances and jurisdiction. Accordingly, CSI
shareholders and warrant holders should consult their tax
advisors for a full understanding of the tax consequences of the
Merger, including the applicability and effect of federal,
state, local and foreign income and other tax laws. For
additional discussion of the tax treatment of the Merger, see
the section entitled Material United States Federal Income
Tax Consequences of the Merger in this joint proxy
statement/information statement and prospectus.
NASDAQ
Stock Market Listing (see page 63)
Prior to consummation of the Merger, Clean Diesel intends to
cause all shares of Clean Diesel common stock to be issued in
connection with the Merger and all shares of Clean Diesel common
stock to be issued upon exercise of the warrants to purchase
shares of Clean Diesel common stock to be approved for listing
(subject to notice of issuance) on the NASDAQ Stock Market as of
the effective time of the Merger, including filing any required
additional listing applications or notices with the NASDAQ Stock
Market pursuant to NASDAQ Stock Market LLC rules.
10
Anticipated
Accounting Treatment (see page 65)
For accounting purposes, CSI will be acquiring Clean Diesel,
which means that the assets and liabilities of Clean Diesel will
be recorded at their fair value and the results of operations of
Clean Diesel will be included in CSIs results from the
effective date of the Merger in accordance with Statement of
Financial Accounting Standards Board Accounting Standards
Codification (ASC) Topic 805, Business Combinations.
Appraisal
Rights and Dissenters Rights (see page 61)
Clean Diesel stockholders are not entitled to appraisal rights
in connection with the Merger under Delaware General Corporation
Law. CSI shareholders are entitled to appraisal rights in
connection with the Merger under California law. For more
information about such rights, see the provisions of
Sections 1300 through 1313 of Chapter 13 of the
California Corporations Code, attached hereto as
Annex E, and the section entitled The
Merger Appraisal Rights and Dissenters
Rights in this joint proxy statement/information statement
and prospectus.
Failure to follow precisely any of the statutory procedures set
forth in Annex E may result in the loss or waiver of
dissenters rights under California law.
Directors
and Executive Compensation (see page 110)
Clean Diesel currently anticipates that Charles F. Call,
Alexander (Hap) Ellis, III, Charles R.
Engles, Ph.D., Bernard H. Cherry, Mungo Park, Derek R. Gray
and Michael L. Asmussen will serve as its board of directors
following completion of the Merger. For a complete discussion of
the expected board of directors following the Merger,
compensation of directors, and compensation of executives, see
the section entitled Management Following the Merger.
Comparison
of Stockholder Rights (see page 122)
The rights of CSI shareholders are currently governed by the
California Corporations Code, CSIs articles of
incorporation, as amended, and the bylaws of CSI. The rights of
Clean Diesel stockholders are currently governed by the Delaware
General Corporation Law, the restated certificate of
incorporation of Clean Diesel, as amended, and the bylaws of
Clean Diesel. If the Merger is completed, CSI shareholders will
become stockholders of Clean Diesel, and their rights will be
governed by the Delaware General Corporation Law, and the
restated certificate of incorporation, as amended, of Clean
Diesel and bylaws of Clean Diesel. The rights of CSI
shareholders contained in the articles of incorporation and
bylaws of CSI differ from the rights of Clean Diesel
stockholders under the certificate of incorporation of Clean
Diesel and bylaws of Clean Diesel, as more fully described under
the section entitled Comparison of Clean Diesel
Stockholders and CSI Shareholders Rights and Corporate
Governance Matters in this joint proxy
statement/information statement and prospectus.
The Clean
Diesel Annual Meeting Of Stockholders (see
page 130)
The Clean Diesel annual meeting will be held at the Holiday Inn
Bridgeport, 1070 Main Street, Bridgeport, CT 06604, at
[ ],
local time, on
[ ],
2010. Only holders of record of Clean Diesel common stock at the
close of business on
[ ],
2010 (the Clean Diesel record date) are entitled to
notice of, attendance at and to vote at, the Clean Diesel annual
meeting. As of the record date for the Clean Diesel annual
meeting, there were
[ ] shares
of Clean Diesel common stock outstanding and entitled to vote at
the Clean Diesel annual meeting, held by approximately
[ ]
holders of record. Each holder of Clean Diesel common stock is
entitled to one vote for each share of Clean Diesel common stock
owned as of the Clean Diesel record date.
Clean Diesel stockholders will vote on four proposals at the
Clean Diesel annual meeting. The first proposal at the Clean
Diesel annual meeting is a proposal to elect five directors.
These directors will be the directors of Clean Diesel in the
event the Merger does not become effective. If the Merger is
effective, two of these directors are expected to resign and
will be replaced by four former directors of CSI. The second
proposal is to ratify the selection of Eisner LLP to be Clean
Diesels independent public accountants for 2010. The third
proposal is to (i) approve an amendment to Clean
Diesels certificate of incorporation to increase the
authorized capital of Clean Diesel to 35,100,000 shares,
and effect a reverse split of the issued and outstanding shares
of Clean Diesel common stock, to occur immediately before the
closing of the proposed Merger, at an exchange ratio of 3 to 1
and (ii) approve the issuance of new shares of Clean Diesel
common stock, par value $0.01 per share, and warrants to
purchase shares of Clean Diesel common stock to securityholders
of CSI, in connection with Merger.
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The fourth proposal at the Clean Diesel annual meeting is a
proposal to consider and vote upon an adjournment of the Clean
Diesel annual meeting, if necessary, to solicit additional
proxies if there are not sufficient votes in favor of the first
proposal described immediately above. If you are a Clean Diesel
stockholder and fail to return your proxy card or otherwise
provide proxy instructions or vote your shares in person will
result in your shares not being counted for purposes of
determining whether a quorum is present at the Clean Diesel
annual meeting. In the event that a quorum is not reached or the
necessary votes are not received, the Clean Diesel annual
meeting will have to be adjourned and recalled to obtain a
quorum and the necessary votes.
The CSI
Special Meeting Of Shareholders (see page 139)
The CSI special meeting will be held at CSIs Oxnard
facility located at 1621 Fiske Place, Oxnard, CA 93003, at
[ ],
local time, on
[ ],
2010. Only holders of record of CSI stock at the close of
business on
[ ],
2010 are entitled to notice of, attendance at and to vote at the
CSI special meeting. As of the record date for the CSI special
meeting, there were
[ ] shares
of CSI stock outstanding and entitled to vote at the CSI special
meeting, held by approximately
[ ]
holders of record. Each holder of CSI stock is entitled to one
vote for each share of CSI stock owned as of the CSI record date.
There are four proposals at the CSI special meeting. The first
proposal at the CSI special meeting is a proposal to adopt the
Merger Agreement. The second proposal at the CSI special meeting
is a proposal to approve an amendment to CSIs articles of
incorporation to designate CSIs current outstanding shares
of common stock as Class A common stock, to
create a new class of common stock to be designated as
Class B common stock, and to increase its
authorized share capital. The third proposal at the CSI special
meeting is a proposal to disapply the pre-emption rights
provided in CSIs articles of incorporation. The fourth
proposal at the CSI special meeting is a proposal to consider
and vote upon an adjournment of the CSI special meeting, if
necessary, if a quorum is present, to solicit additional proxies
if there are not sufficient votes in favor of the proposals
described immediately above to satisfy each of the conditions to
closing concerning the vote set forth in the Merger Agreement.
If you are a CSI shareholder, the failure to return your proxy
or otherwise provide proxy instructions or vote your shares in
person will have the same effect as voting against CSI
Proposals No. 1, No. 2 and No. 3 and your
shares will not be counted for purposes of determining whether a
quorum is present at the CSI special meeting. In the event that
a quorum is not reached or the necessary votes are not received,
the CSI special meeting will have to be adjourned and recalled
for another vote.
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RISK
FACTORS
The Merger involves risks for Clean Diesel stockholders and
CSI shareholders. Clean Diesel stockholders will be choosing to
permit significant dilution of their percentage ownership of
Clean Diesel by voting in favor of the issuance of additional
shares of Clean Diesel Common Stock and warrants to purchase
shares of Clean Diesel common stock in order to complete the
Merger. CSI shareholders will be choosing to no longer control
100% of CSI and to become stockholders of Clean Diesel by voting
in favor of the Merger. In addition to the risks that their
respective businesses currently face, after the Merger, Clean
Diesel and the Surviving Subsidiary will be faced with a market
environment that cannot be predicted and that involves
significant risks, many of which will be beyond their control.
These risk factors are not intended to represent a complete list
of the general or specific risk factors that may affect Clean
Diesel, CSI and the combined business, and these risk factors
may not be exhaustive. You should carefully consider the risks
described below and the other information contained in this
joint proxy statement/information statement and prospectus,
including the matters addressed in the section entitled
Cautionary Statement Concerning Forward-Looking
Statements, before deciding how to vote your shares of
common stock.
Risks
Relating to the Merger
Clean
Diesel and CSI may not realize all of the anticipated benefits
of the transactions.
To be successful after the Merger, Clean Diesel and CSI will
need to combine and integrate the businesses and operations of
their separate companies. The combination of two independent
companies is a complex, costly and time-consuming process. As a
result, after the Merger, the combined company will be required
to devote significant management attention and resources to
integrating the diverse business practices and operations of
Clean Diesel and CSI. The integration process may divert the
attention of the combined companys executive officers and
management from
day-to-day
operations and disrupt the business of either or both of the
companies and, if implemented ineffectively, preclude
realization of the full benefits of the transaction expected by
Clean Diesel and CSI. Clean Diesel has not completed a merger or
acquisition comparable in size or scope to the transaction. The
failure of the combined company, after the Merger, to meet the
challenges involved in successfully integrating the operations
of Clean Diesel and CSI or otherwise to realize any of the
anticipated benefits of the Merger could cause an interruption
of, or a loss of momentum in, the activities of the combined
company and could adversely affect its results of operations. In
addition, the overall integration of the two companies may
result in unanticipated problems, expenses, liabilities,
competitive responses and loss of customer relationships, and
may cause Clean Diesels stock price to decline. The
difficulties of combining the operations of the companies
include, among others:
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maintaining employee morale and retaining key employees;
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preserving important strategic and customer relationships;
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the diversion of managements attention from ongoing
business concerns;
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coordinating geographically separate organizations;
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unanticipated issues in integrating information, communications
and other systems;
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coordinating marketing functions;
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consolidating corporate and administrative infrastructures and
eliminating duplicative operations; and
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integrating the cultures of Clean Diesel and CSI.
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In addition, even if the businesses and operations of Clean
Diesel and CSI are integrated successfully, the combined company
may not fully realize the expected benefits of the Merger,
including sales or growth opportunities that were anticipated,
within the intended time frame, or at all. Further, because the
businesses of Clean Diesel and CSI differ, the results of
operations of the combined company and the market price of Clean
Diesel common stock after the Merger may be affected by factors
different from those existing prior to the Merger and may suffer
as a result of the Merger. As a result, Clean Diesel and CSI
cannot assure you that
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the combination of the businesses and operations of Clean Diesel
with CSI will result in the realization of the full benefits
anticipated from the Merger.
Provisions
of the Merger Agreement may deter alternative business
combinations.
Restrictions in the Merger Agreement prohibit, in certain
contexts, Clean Diesel and CSI from soliciting any acquisition
proposal or offer for a merger or business combination with any
other party, including a proposal that could be advantageous to
the stockholders of Clean Diesel or shareholders of CSI
respectively when compared to the terms and conditions of the
Merger described in this joint proxy statement/information
statement and prospectus. In addition, if the Merger Agreement
is terminated under certain specified circumstances relating to
effecting a business combination with a different party, Clean
Diesel or CSI may be required to pay the other a termination fee
of $300,000, plus an amount equal to reasonable costs and
expenses incurred by the recipient party in connection with the
Merger Agreement and the transactions contemplated thereby, not
to exceed $350,000 in the aggregate. These provisions may deter
third parties from proposing or pursuing alternative business
combinations that could result in greater value to Clean Diesel
stockholders or CSI shareholders than the Merger.
There
has been only a limited public market for the CSI common stock,
and the limited public market makes it extremely difficult to
determine the fair market value of CSI.
The outstanding capital stock of CSI has been listed on the AIM
of the London Stock Exchange. It has traded there with very
limited volume. The lack of a robust public market makes it
extremely difficult to determine the fair market value of CSI.
The number of shares of Clean Diesel common stock and warrants
to purchase Clean Diesel common stock to be issued to CSI
shareholders was determined based on negotiations between the
parties, and it may not be indicative of the price of the CSI
common stock and warrants to purchase CSI common stock may have
traded at if they were traded in a more extensive public market.
The
amount of merger consideration is fixed and not subject to
adjustment based on the market price of Clean Diesel common
stock.
The merger consideration to be received by the holders of the
shares of CSI common stock in the Merger consists of shares of
Clean Diesel common stock and warrants to purchase shares of
Clean Diesel common stock. The Merger Agreement does not include
an exchange ratio or adjustment mechanism based on the market
price of Clean Diesel common stock for the determination of the
amount of merger consideration that will be paid.
The
value of the Clean Diesel common stock issued in the Merger will
depend on its market price at the time of the Merger, as the
exchange ratio for the CSI shares of common stock at the closing
of the Merger is fixed, subject to adjustments for CSIs
and Clean Diesels cash positions.
Pursuant to the Merger Agreement, the exchange ratio used to
determine the number of shares of Clean Diesels common
stock that CSI shareholders will receive is unaffected by the
share price of Clean Diesels common stock, as reflected on
the NASDAQ Stock Market. Increases in the value of Clean Diesel
common stock will result in a higher price being paid by Clean
Diesel for CSI common stock and more value received by CSI
shareholders in the Merger. Pursuant to the Merger Agreement,
Clean Diesel will not have the right to terminate or renegotiate
the Merger Agreement or to re-solicit proxies as a result of any
increase in the value of Clean Diesels outstanding common
stock.
The
market price of Clean Diesel common stock could decline as a
result of the large number of shares that will become eligible
for sale after consummation of the Merger.
If the Merger is consummated, the new shares of Clean Diesel
common stock issued as merger consideration will become saleable
beginning after the closing of the Merger and the warrants to
purchase shares of Clean Diesel common stock will be exercisable
for three years following the effective time of the Merger.
Consequently, after such periods, a substantial number of
additional shares of Clean Diesel common stock will be eligible
for resale in the public market. Current stockholders of Clean
Diesel and former shareholders of CSI may not wish to continue
to invest in the operations of the combined company after the
14
Merger, or for other reasons, may wish to dispose of some or all
of their interests in Clean Diesel after the Merger. Sales of
substantial numbers of shares of both the newly issued and the
existing Clean Diesel common stock in the public market
following the Merger could adversely affect the market price of
such shares.
CSI is
under default on its line of credit with Fifth Third Bank.
Although the bank gave CSI forbearance subject to the company
successfully recapitalizing, this agreement expired
April 30, 2010. There can be no certainty that the bank
will agree to an extension of such forbearance period or that
the bank will not demand repayment prior to the time CSI is able
to establish a new line of credit.
On March 31, 2009, CSI failed to achieve two of the
covenants under its Fifth Third credit facility. Although Fifth
Third has periodically agreed to temporarily suspend its rights
with respect to the breach of these two covenants, there is no
guarantee that it will continue to do so, and the current
forbearance period, which required, CSI, amongst other terms, to
successfully recapitalize, expired on April 30, 2010.
Although CSI is currently in discussions with its lender to
extend such forbearance agreement and no demand for repayment
has been made, CSI cannot guarantee that the bank will further
extend its forbearance or that the bank will not demand
repayment prior to the time CSI is able to establish a new line
of credit.
The
combined company will need to have an adequate credit facility
in place in order to conduct its operations for any reasonable
length of time, and no such facility is yet in place or
committed.
Management of Clean Diesel and CSI, in considering the
advantages of the Merger and the future operations of the
combined company, have assumed that the combined company, after
the effective time of the Merger, will have in place an adequate
credit facility or an adequate forbearance agreement with
CSIs current lender. No such facility is presently in
place, and neither Clean Diesel nor CSI have a commitment from a
financial institution offering such a facility. Neither Clean
Diesel nor CSI can offer any assurances that any such facility
can be put in place on commercially reasonable terms.
Clean
Diesel and CSI may be required to effect the Merger even though
the combined company will not have cash resources sufficient for
its needs.
Management of Clean Diesel and CSI, in considering the
advantages of the Merger and the future operations of the
combined company, have assumed that the combined company, after
the effective time of the Merger, will have approximately a
$6.5 million cash position, $4.5 million of which will
come from Clean Diesel and $2.0 million of which will come
from CSI. However, it is a condition to closing only that each
have at least a $1.0 million cash position immediately
prior to the effective time of the Merger, and this condition
may be waived. If each party has at least this amount at the
earlier of the effective time of the Merger or June 30,
2010, the consideration to be given in the Merger may be
adjusted, but neither Clean Diesel nor CSI will have the ability
to refuse to close, in the absence of another reason not to do
so. As a result, both Clean Diesel and CSI may be required to
consummate the Merger, even though the cash resources that will
be available to the combined company are less than that
contemplated by management. In addition, CSI has had liquidity
issues in recent years and received a qualification in its
auditor report for the year ended December 31, 2009 that
expresses substantial doubt about CSIs ability to continue
as a going concern. There can be no guarantee that
the combined company will not continue to face these issues.
If the
effective time of the Merger is later than June 30, 2010,
the adjustments made with respect to the cash position of each
company, if any, may not reflect the actual cash positions of
the two companies at the effective time of the
Merger.
Adjustments called for in the Merger Agreement in the merger
consideration are determined at the earlier of June 30,
2010 or the effective time of the Merger. If the Merger is later
than June 30, 2010, the expenditures of cash by each
company may not bear the same relationship to each other after
that date as they did before that date.
15
CSI
may be required to pay cash to its shareholders who elect
appraisal rights, and this amount may not be known at the
effective time of the Merger.
Under the California appraisal rights provisions applicable to
CSI, the number of holders of CSI who elect appraisal rights may
not be known until 40 days after the CSI special meeting of
shareholders. If Clean Diesel and CSI have satisfied the other
conditions to closing, they may elect to cause the Merger to
become effective prior to knowing how many holders have elected
appraisal rights, or how much cash CSI may have to pay to these
holders.
Neither
Clean Diesel nor CSI have experienced positive cash flow from
their operations, and the ability of the combined company to
achieve positive cash flow from operations, or finance negative
cash flow from operations, will depend on reductions in their
operating costs, which may not be achievable.
Both Clean Diesel and CSI have historically operated with
negative cash flow from their operations. Management of Clean
Diesel and CSI, in considering the advantages of the Merger and
the future operations of the combined company, have identified
areas where economies can be effected, as the combined companies
will be able to avoid duplicative functions, such as human
resources, public company compliance, accounting functions and
other similar areas. Whether these economies can be effected,
the timing of effecting these economies, and the restructuring
costs that will be incurred, will be important factors in
determining whether the combined company will have sufficient
cash resources available to it to maintain its operations for
any appreciable length of time. As noted above, management has
made assumptions about the cash resources available to the
combined company following the effective time of the Merger, and
no assurances can be given that the actual resources available
will be sufficient for the combined company to achieve success.
The
issuance of shares of Clean Diesel common stock to CSI
shareholders in connection with the Merger will substantially
reduce the percentage ownership of current Clean Diesel
stockholders.
If the transaction is completed, Clean Diesel and CSI expect
that, based on shares of CSI common stock outstanding as of
May 10, 2010, and assuming no options or warrants are
exercised prior to close, and adjustment for the cash position
of either company, Clean Diesel will issue, in the aggregate,
approximately 14,236,269 (pre-reverse split) shares of Clean
Diesel common stock, and warrants to purchase up to an
additional 3,000,000 shares of Clean Diesel common stock,
as consideration for the outstanding shares of CSI common stock,
and CSIs financial advisor will receive warrants to
purchase 1,000,000 shares of Clean Diesel common stock.
Following the Merger, holders of CSI stock are expected to own
approximately 60% of the shares of Clean Diesel common stock
outstanding after the Merger and holders of Clean Diesel stock
are expected to own approximately 40% of the shares of Clean
Diesel common stock outstanding after the Merger. Clean Diesel
stockholders will continue to own their existing shares of Clean
Diesel common stock, which will not be affected by the Merger,
other than by the dilution resulting from the issuance of the
merger consideration described above. The issuance of the shares
of Clean Diesel common stock and warrants to purchase Clean
Diesel common stock described above will cause a significant
reduction in the relative percentage interests of current Clean
Diesel stockholders in earnings, voting, and liquidation, book
and market value.
CSIs
current shareholders will own a large percentage of the Clean
Diesel common stock after consummation of the Merger, and will
have significant influence over the outcome of corporate actions
requiring stockholder approval; such shareholders
priorities for Clean Diesels business may be different
from Clean Diesels or its other
stockholders.
After completion of the Merger, and assuming adjustment for the
cash position of either company, the former CSI shareholders
will beneficially own approximately 60% of the outstanding Clean
Diesel common stock and the current Clean Diesel stockholders
will beneficially own approximately 40% of the Clean Diesel
common stock. Accordingly, such former CSI shareholders will be
able to significantly influence the outcome of any corporate
transaction or other matter submitted to the Clean Diesel
stockholders for approval, including the election of directors,
any merger, consolidation or sale of all or substantially all of
Clean Diesels assets or any other significant corporate
transaction, such that such former shareholders of CSI could
delay or prevent a change of control of Clean Diesel, even if
such a change of control would benefit Clean Diesels other
16
stockholders. The interests of such former CSI shareholders may
differ from the interests of Clean Diesels other
stockholders.
The
shares of Clean Diesel common stock to be received by CSI
shareholders as a result of the Merger will have different
rights from the shares of CSI common stock.
Upon completion of the Merger, CSI shareholders will become
Clean Diesel stockholders and their rights as stockholders will
be governed by Clean Diesels certificate of incorporation
and Clean Diesels bylaws and Delaware law. The rights
associated with CSI common stock are different from the rights
associated with Clean Diesel common stock. Furthermore, the
rights of Clean Diesel stockholders are governed by Delaware
law, rather than California law. Delaware law differs from
California law, including, among other things, the laws
regarding appraisal rights and shareholder voting requirements.
After the Merger, CSI shareholders will become Clean Diesel
stockholders and will have rights that are different from those
they have now as CSI shareholders. See the section entitled
Comparison of Clean Diesel Stockholders and CSI
Shareholders Rights and Corporate Governance Matters for a
discussion of the different rights associated with Clean Diesel
common stock and CSI common stock.
The
Clean Diesel warrants to be issued in connection with the Merger
will not be transferable and will only be exercisable for a
period of three years following the closing, and may terminate
before then.
The warrants to purchase shares of Clean Diesel common stock to
be issued in connection with the Merger will not be freely
transferable and will not be listed on the NASDAQ Stock Market
or otherwise publicly traded. Further, the warrants only have a
three year term. There is no guarantee that the warrants will be
in-the-money
at any point during the three-year period of exercisability.
Consequently, the CSI shareholders will have to bear the
economic risk of holding the warrants to purchase shares of
Clean Diesel common stock during the three year period following
the closing of the Merger. In addition, if Clean Diesel common
stock trades above a certain level for a period of time, the
exercise period may terminate before then.
The
conditions to closing of the Merger may be waived by Clean
Diesel or CSI without re-soliciting Clean Diesel stockholder or
CSI shareholder approval of the Merger Agreement.
The Merger is subject to the satisfaction of the closing
conditions set forth in the Merger Agreement. These conditions
may be waived by Clean Diesel or CSI, subject to the agreement
of the other party in specific cases. See The Merger
Agreement Conditions to Each Partys Obligation
to Effect the Merger. In the event of a waiver of any
condition, Clean Diesel and CSI will not be required to
re-solicit the Clean Diesel stockholders or CSI shareholders,
and may complete the transaction without seeking further
stockholder or shareholder approval.
The
date on which the Merger will close is uncertain.
The date on which the Merger will close depends on the
satisfaction of the closing conditions set forth in the Merger
Agreement, or the waiver of those conditions by the parties
thereto. While Clean Diesel and CSI expect to complete the
Merger in the third quarter of 2010, the completion date of the
Merger might be later than expected because of unforeseen
events. Either Clean Diesel or CSI may terminate the Merger
Agreement if the Merger has not taken place on or before
September 6, 2010.
Options
granted by CSI pursuant to its 2006 Equity Compensation Plan may
continue to be exercisable for shares of the Surviving
Subsidiary after the Merger.
Options granted by CSI pursuant to its 2006 Equity Compensation
Plan do not provide that, upon the Merger, the shares issuable
upon exercise will be changed into the shares of Clean Diesel
and will continue to be exercisable for shares of CSI, the
Surviving Subsidiary after the effective time of the Merger. As
a result, if CSI is not able to cancel all of these options
prior to the Merger, Clean Diesel may only receive part of the
benefit of the Merger if these options remain outstanding and
are exercised, as the Surviving Subsidiary may be only partly
owned. This may require Clean Diesel to conduct its operations
with respect to the Surviving
17
Subsidiary in a way different than a parent corporation might,
and incur additional legal, accounting and management expense.
As a
result of the proposed Merger, Clean Diesel will be required to
submit an initial listing application and meet all initial
NASDAQ Stock Market inclusion criteria.
In connection with the proposed terms of the Merger, a
change of control will be deemed to occur under the
NASDAQ rules. As such, Clean Diesel will be required to submit
an initial listing application and meet all initial NASDAQ Stock
Market inclusion criteria as set forth in the Marketplace Rules
of the NASDAQ Stock Market, including the minimum bid price
requirement, and pay all applicable fees, before consummation of
the Merger. If Clean Diesels stockholders do not approve
the reverse stock split, there is no guarantee that Clean Diesel
will be able to meet the NASDAQ requirements. In addition, even
if approved, there is no guarantee that NASDAQ will consider
such price sufficient. There is also a risk that NASDAQ may not
approve the initial listing application without substantial
revision or delay, or at all.
If the
conditions to the Merger are not met or waived, the Merger will
not occur.
Even if the Merger is approved by the stockholders of Clean
Diesel and the shareholders of CSI, specified conditions must be
satisfied or waived to complete the Merger. These conditions are
described in the section entitled The Merger
Agreement Conditions to Each Partys Obligation
to Effect the Merger of the joint proxy
statement/information statement and prospectus and in the Merger
Agreement attached hereto as Annex A. Clean Diesel
and CSI cannot assure you that all of the conditions will be
satisfied. If the conditions are not satisfied or waived, the
Merger will not occur or will be delayed, which would result in
the loss of some or all of the expected benefits of the Merger.
CSI
has not been subject to the public reporting obligations of a
U.S. public company such as Clean Diesel.
While CSI has been subject to the disclosure and other
requirements of the AIM of the London Stock Exchange, including
the preparation of periodic financial statements prepared in
accordance with U.S. GAAP, it has not been subject to other
requirements that are applicable to Clean Diesel, such as the
requirements of the Sarbanes-Oxley Act of 2002. The timing and
expense of bringing CSI into conformity with these requirements
has not yet been ascertained.
CSIs
business may be negatively affected if the Merger is not
consummated and CSI remains a
stand-alone
entity.
If the Merger is not completed for any reason, the consequences
could adversely affect CSIs business and results of
operations, including the following:
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CSI would not realize the benefits expected from becoming part
of Clean Diesel, including the potentially enhanced financial
and competitive position;
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CSI would not have access to Clean Diesels cash resources;
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CSI may fail to recapitalize and may face a demand for repayment
of its credit line with Fifth Third Bank or other creditors, and
may be forced to liquidate its assets or declare bankruptcy;
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CSI may be required to pay Clean Diesel a termination fee of
$300,000, plus an amount equal to all
out-of-pocket
expenses (excluding the cost of employee time) incurred by Clean
Diesel in connection with the Merger Agreement, the ancillary
agreements, and the Merger;
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some costs related to the transaction, such as legal, accounting
and financial advisor fees, must be paid even if the transaction
is not completed;
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activities relating to the transaction and related uncertainties
may divert CSI managements attention away from the
day-to-day
business and cause substantial disruptions among its employees
and relationships with customers and business partners, thus
detracting from its ability to grow revenue and
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minimize costs and possibly leading to a loss of revenue and
market position that it may not be able to regain if the Merger
does not occur; and
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CSI may be unable to locate another entity to merge with at a
later date, or under terms as favorable as those in the Merger
Agreement.
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The
Merger may not qualify as a reorganization, in which case the
Merger may be a fully taxable transaction to CSI shareholders
and warrant holders.
Clean Diesel and CSI have structured the Merger with the intent
that it qualify as a reorganization under Section 368 of
the Internal Revenue Code of 1986 (the Code). If the
Merger qualifies as such a reorganization, CSI shareholders who
exchange CSI common shares for shares of Clean Diesel common
stock and warrants to purchase shares of Clean Diesel common
stock pursuant to the Merger will not recognize gain in respect
of the shares of Clean Diesel common stock and warrants to
purchase shares of Clean Diesel common stock received in the
exchange (but may recognize an immaterial gain in the amount of
any cash received in respect of fractional shares). If the
Merger qualifies as such a reorganization, CSI warrant holders
will not be subject to tax as a result of the Merger. The
qualification of the Merger as a reorganization depends on
numerous factors including whether CSI shareholders will receive
a sufficient amount of Clean Diesel common stock to satisfy the
continuity of interest and control tests
applicable to reorganizations under Section 368(a)(2)(E) of
the Code. Whether the Merger meets those tests depends in large
part on the value of the Clean Diesel common stock issued to CSI
shareholders as compared to the value of all consideration
issued to CSI shareholders. Based on an estimated valuation, the
Merger should satisfy the continuity of interest and control
tests. If, however, the Internal Revenue Service were to
challenge the valuation and successfully contend that the Merger
failed to qualify as a reorganization, the Merger would be a
fully taxable transaction to CSI shareholders and warrant
holders. In such case, CSI shareholders and warrant holders
would recognize gain or loss measured by the difference between
the value of all consideration received by them in the Merger
and their tax basis in the CSI common stock and the warrants, as
the case may be, surrendered in the Merger. For additional
discussion of the tax treatment of the Merger, see the section
entitled Material United States Federal Income Tax
Consequences of the Merger in this joint proxy
statement/information statement and prospectus.
The
Merger will likely adversely affect the ability of Clean Diesel
and CSI to take advantage of the significant U.S. Federal tax
loss carryforwards each has accumulated.
Clean Diesel has approximately $53.7 million and
$39.9 million of federal and state income tax net loss
carryforwards, which could be used to reduce its
U.S. Federal and state tax liability in future years. CSI
had approximately $89.8 million and $70.5 million of
federal and state income tax net operating loss carry forwards
at December 31, 2009 which could be used to reduce its
Federal and State tax liabilities in future years. The result of
the Merger, and the changes in share ownership that result from
the Merger, is likely to significantly limit the ability of
these tax loss carryforwards to be utilized in the future.
Directors
and executive officers of CSI and Clean Diesel have interests in
the transaction that may be different from, or in addition to,
the interests of other Clean Diesels stockholders and CSI
shareholders, which may influence their
recommendation.
In considering the recommendation of Clean Diesels and
CSIs board of directors, Clean Diesels stockholders
and CSI shareholders should be aware that Clean Diesels
and CSIs directors and executive officers have interests
in the Merger and have arrangements that are different from, or
in addition to, those of Clean Diesels stockholders and
CSI shareholders generally. These interests and arrangements may
create potential conflicts of interest. As a result of these
interests, directors of Clean Diesel or CSI could be more likely
to vote, and recommend to shareholders that they vote, to adopt
the Merger Agreement and approve the Merger than if they did not
hold these interests, and may have reasons for doing so that are
not the same as the interests of other Clean Diesel or CSI
shareholders. For a full description of the interests of
directors and executive officers of Clean Diesel and CSI in the
Merger, see The Merger Interests of CSI
Directors and
19
Executive Officers in the Merger and The
Merger Interests of Clean Diesel Directors and
Executive Officers in the Merger.
Clean
Diesel and CSI both have incurred and will incur significant
expenses as a result of the Merger, which will reduce the amount
of capital available to fund the business after the
Merger.
Clean Diesel and CSI have incurred, and will continue to incur,
significant expenses related to the Merger. These expenses
include investment banking fees, legal fees, accounting fees,
and printing and other costs. There may also be unanticipated
costs related to the Merger. As a result, the combined company
will have less capital available to fund its activities after
the Merger.
After
the Merger, Clean Diesel will continue to incur significant
costs as a result of operating as a public company, and its
management may be required to devote substantial time to
compliance initiatives.
As a public company, Clean Diesel currently incurs significant
legal, accounting and other expenses. In addition, the
Sarbanes-Oxley Act, as well as rules subsequently implemented by
the SEC and the NASDAQ Stock Market, have imposed various
requirements on public companies, including requiring
establishment and maintenance of effective disclosure and
financial controls and changes in corporate governance
practices. Clean Diesels management and other personnel
devote a substantial amount of time and financial resources to
these compliance initiatives.
After the Merger, Clean Diesel will remain subject to all of the
obligations of the Sarbanes-Oxley Act, and bringing CSI into
compliance with the Sarbanes-Oxley Act will require significant
expenditures. Complying with the Sarbanes-Oxley Act will require
significant additional expenditures, place additional demands on
Clean Diesels management and may divert managements
time and attention away from the
day-to-day
operations of the business. These additional obligations may
also require Clean Diesel to hire additional personnel after the
Merger. CSI is currently evaluating its internal controls
systems in order to enable Clean Diesel to report on, and Clean
Diesels independent registered public accounting firm
after the Merger to attest to, internal controls, as required by
Section 404 of the Sarbanes-Oxley Act. CSI cannot be
certain as to the timing of completion of the evaluation,
testing and remediation actions or the impact of the same on the
operations of Clean Diesel after the Merger. If, after the
Merger, Clean Diesel fails to staff its accounting and finance
function adequately, or maintain internal controls adequate to
meet the demands that are placed upon it as a public company,
including the requirements of the Sarbanes-Oxley Act, it may be
unable to report its financial results accurately or in a timely
manner and its business and stock price may suffer. The costs of
being a public company, as well as diversion of
managements time and attention, may have a material
adverse effect on Clean Diesels future business, financial
condition and results of operations.
Qualified
management, marketing, and sales personnel are difficult to
locate, hire and train, and if Clean Diesel cannot attract and
retain qualified personnel after the Merger, it will harm the
ability of the business to grow.
Clean Diesel and CSI have each grown their businesses through
the services of many people. The success of the combined company
after the Merger depends, in part, on the continued employment
of key managerial, marketing and sales personnel. Competition
for qualified management, technical, sales and marketing
employees is intense. In addition, the personnel policies and
practices of Clean Diesel and CSI may be less compatible than
anticipated and some employees might leave the combined company
after the Merger and go to work for competitors. Clean Diesel
cannot assure you that it will be able to attract, retain and
integrate employees to develop and continue its business and
strategies after the Merger.
Completion
of the Merger will require a significant amount of attention
from both Clean Diesel and CSI management and this diversion of
management attention away from ongoing operations could
adversely affect ongoing operations and business
relationships.
Because completing the Merger requires a significant amount of
attention from both Clean Diesel and CSI management, both Clean
Diesel and CSI management will divert a significant amount of
its attention
20
away from the
day-to-day
operations of the business. As a result, both Clean
Diesels and CSIs business relationships and ongoing
operations may suffer during this period.
Clean
Diesel may not have uncovered all the risks associated with the
acquisition of CSI and a significant liability may be discovered
after closing of the Merger.
There may be risks that Clean Diesel failed to discover in the
course of performing its due diligence investigations related to
the acquisition of CSI, which could result in significant
liabilities arising after the consummation of the Merger. In
connection with the acquisition of CSI, Clean Diesel will assume
all of CSIs liabilities, both pre-existing and contingent,
as a matter of law upon the exchange of all CSI shares of common
stock. The Merger Agreement does not provide for Clean
Diesels indemnification by the former CSI shareholders
against any of CSIs liabilities, should they arise or
become known after the closing of the Merger. Furthermore, there
is no escrow account or indemnity agreement protecting Clean
Diesel in the event of any breach of CSIs representations
and warranties in the Merger Agreement. While Clean Diesel tried
to minimize risks by conducting due diligence that Clean Diesel
deemed appropriate under the circumstances, Clean Diesel may not
have identified all existing or potential risks. Any significant
liability that may arise may harm Clean Diesels business,
financial condition, results of operations and prospects by
requiring Clean Diesel to expend significant funds to satisfy
such liability.
The
representations and warranties contained in the Merger Agreement
were made solely for purposes of the contract among Clean
Diesel, CSI, and Merger Sub, and used as a tool for allocating
risk among the parties, and therefore they may not accurately
characterize the actual state of facts or conditions of Clean
Diesel or CSI.
The representations and warranties contained in the Merger
Agreement were made solely for purposes of the contract among
Clean Diesel, CSI, and Merger Sub, and are used for the purpose
of allocating risk among the parties, rather than establishing
matters of facts. Because the representations and warranties may
not accurately characterize the actual state of facts or
conditions of Clean Diesel or CSI, no third party should rely
upon the representations and warranties in the Merger Agreement
as statements of factual information.
Provisions
of the Merger Agreement regarding the payment of a termination
fee by Clean Diesel to CSI or by CSI to Clean Diesel could
negatively affect CSIs business operations or Clean
Diesels business operations if the Merger Agreement is
terminated.
In the event the Merger is terminated by Clean Diesel or CSI in
circumstances that obligate either of Clean Diesel or CSI, as
the case may be, to pay the termination fee of $300,000, plus an
amount equal to all
out-of-pocket
expenses (excluding the cost of employee time) not to exceed
$350,000 in the aggregate incurred by either of Clean Diesel or
CSI in connection with the Merger Agreement, the ancillary
agreements, and the transactions contemplated thereby to the
other party, the results of either of Clean Diesels
business operations or CSIs business operations, as the
case may be, may be adversely impacted.
Clean
Diesels and CSIs customers may seek to change the
existing business relationship with Clean Diesel and CSI in
reaction to the announcement of the Merger.
In response to the announcement of the Merger, customers or
prospective customers of Clean Diesel and CSI may delay or defer
their purchase of products or services or other decisions
concerning Clean Diesel and CSI, or they may seek to change
their existing business relationship. Any delay or deferral in
product purchase or other decisions by customers could have a
material adverse effect on Clean Diesels and CSIs
respective business, regardless of whether the transaction is
ultimately completed.
Risks
Relating to Clean Diesels Business
Clean Diesels business and results of operations are
subject to numerous risks, uncertainties and other factors that
you should be aware of, some of which are described below. The
risks, uncertainties and other factors described in the
following risk factors are not the only ones facing Clean
Diesel. Additional risks,
21
uncertainties and other factors not presently known to Clean
Diesel or that Clean Diesel currently deems immaterial may also
impair Clean Diesels business operations. Any of the
risks, uncertainties and other factors could have a materially
adverse effect on Clean Diesels business, financial
condition, results of operations, cash flows or product market
share and could cause the trading price of Clean Diesels
common stock to decline substantially.
Risks
Related to Regulatory Matters
Clean
Diesel faces constant changes in governmental standards by which
Clean Diesels products are evaluated.
Clean Diesel believes 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 Clean Diesels products fail to meet these
ever-changing standards, some or all of Clean Diesels
products may become obsolete.
Future
growth of Clean Diesels business depends, in part, on
successful verification of Clean Diesels products and
retention of Clean Diesels verifications.
Clean Diesel believes that it is an essential requirement of the
U.S. retrofit market that emissions control products and
systems are verified under the EPA
and/or
California Air Resources Board protocols to qualify for funding
from the EPA
and/or
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.
In 2010, Clean Diesel intends to verify Clean Diesels
Platinum Plus fuel-borne catalyst in combination with a high
performance diesel particulate filter with California Air
Resources Board. Clean Diesel has no assurance that Clean
Diesels product will be verified by California Air
Resources Board or that such a verification will be acceptable
to the EPA. Verification is also useful for commercial
acceptability.
EPA verifications were withdrawn on two of Clean Diesels
products in January 2009 because available test results were not
accepted by EPA as meeting new emissions testing requirements
for nitrogen dioxide (NO2) measurement. Although prior testing
indicates satisfactory performance can be achieved, Clean Diesel
has no assurance that the EPA will determine that the results of
the proposed evaluations will meet the new standards, nor
whether additional testing which may be required by EPA will be
adequate to remove any remaining concern the EPA may have
regarding use of Clean Diesels fuel-borne catalyst.
Future
growth of Clean Diesels business depends, in part, on
enforcement of existing emissions-related environmental
regulations and further tightening of emission standards
worldwide.
Clean Diesel expects that its 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 Clean Diesels 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 Clean Diesels
products.
New standards or environmental limits on the use of platinum or
cerium metal by a governmental agency could adversely affect
Clean Diesels ability to use Clean Diesels 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
EPA 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 Clean Diesels current
resources.
22
Clean
Diesel received a NASDAQ Staff Deficiency Letter and has not
cured the deficiencies.
On September 15, 2009, Clean Diesel received a NASDAQ Staff
Deficiency Letter indicating that it fails to comply with NASDAQ
Listing Rule 5605(c)(4)(A) because it does not have at
least three Audit Committee members and NASDAQ Listing
Rule 5605(b)(1) because its Board does not have a majority
of independent directors. These deficiencies occurred on
August 28, 2009 when Mr. John J. McCloy II, who had
been an Audit Committee member, resigned as a director of Clean
Diesel leaving the Audit Committee with two members and the
Board with three independent directors and three non-independent
directors. On May 10, 2010, Mr. John deHavilland
resigned as a director of Clean Diesel, as a result of which the
Audit Committee had a single member, and the Board had two
independent directors. Clean Diesels cure period to regain
compliance is until the earlier of the date of the next annual
meeting of stockholders or August 28, 2010. The directors
currently nominated for election at the next annual meeting of
stockholders will not bring Clean Diesel into compliance,
although the board of directors as it is expected to be
constituted after the effective time of the Merger is expected
to be in compliance.
Risks
Related to Clean Diesels Business and Industry
Clean
Diesel faces 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 Clean
Diesels products. Other companies offer products that
potential customers may consider to be acceptable alternatives
to Clean Diesels products and services, including products
that are verified by EPA
and/or CARB,
or other environmental authorities. Clean Diesel faces direct
competition from companies with greater financial,
technological, manufacturing and personnel resources. Newly
developed products could be more effective and cost efficient
than Clean Diesels current or future products. Clean
Diesel also faces indirect competition from vehicles using
alternative fuels, such as methanol, hydrogen, ethanol and
electricity.
Clean
Diesel depends on intellectual property and the failure to
protect Clean Diesels intellectual property could
adversely affect Clean Diesels future growth and
success.
Clean Diesel relies on patent, trademark and copyright law,
trade secret protection, and confidentiality and other
agreements with employees, customers, partners and others to
protect Clean Diesels intellectual property. However, some
of Clean Diesels 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 Clean
Diesels intellectual property without authorization.
Clean Diesel does 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 Clean
Diesels technologies or processes. Moreover, patent
applications and issued patents may be challenged or
invalidated. Clean Diesel 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 United
States.
Some of Clean Diesels patents, including a platinum
fuel-borne catalyst patent, expired in 2008 and thereafter.
However, Clean Diesel believes 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 Clean Diesels proprietary
technology, but there can be no assurance it will be successful
in protecting Clean Diesels proprietary technology.
As part of Clean Diesels confidentiality procedures, Clean
Diesel generally has entered into nondisclosure agreements with
employees, consultants and corporate partners. Clean Diesel also
has attempted to control access to and distribution of Clean
Diesels technologies, documentation and other proprietary
information. Clean Diesel plans to continue these procedures.
Despite these procedures, third parties could copy or otherwise
obtain and make unauthorized use of Clean Diesels
technologies or independently develop similar technologies. The
steps that Clean Diesel has taken and that may occur in the
future might not prevent
23
misappropriation of Clean Diesels solutions or
technologies, particularly in foreign countries where laws or
law enforcement practices may not protect the proprietary rights
as fully as in the United States.
There can be no assurance that Clean Diesel will be successful
in protecting Clean Diesels proprietary rights. Any
infringement upon Clean Diesels intellectual property
rights could have an adverse effect on Clean Diesels
ability to develop and sell commercially competitive systems and
components.
Clean
Diesels results may fluctuate due to certain regulatory,
marketing and competitive factors over which Clean Diesel has
little or no control.
The factors listed below, some of which Clean Diesel cannot
control, may cause Clean Diesels revenue and results of
operations to fluctuate significantly:
|
|
|
|
|
Actions taken by regulatory bodies relating to the verification,
registration or health effects of Clean Diesels products.
|
|
|
|
The extent to which Clean Diesels Platinum Plus fuel-borne
catalyst and ARIS nitrogen oxides reduction products obtain
market acceptance.
|
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The timing and size of customer purchases.
|
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Customer concerns about the stability of Clean Diesels
business which could cause them to seek alternatives to Clean
Diesels solutions and products.
|
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Increases in raw material costs, especially platinum.
|
An
extended interruption of the supply or a substantial increase in
the price of platinum could have an adverse effect on Clean
Diesels 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 Clean Diesels Platinum Plus
fuel-borne catalyst. The market price for platinum increased
from $480 per ounce in early 2002 to $965 per ounce at
December 31, 2005, $1,120 per ounce at December 31,
2006, $1,530 per ounce at December 31, 2007, decreased to
$922 per ounce at December 31, 2008, and increased to
$1,475 per ounce at December 31, 2009. On February 16,
2010, the London Metal Exchange afternoon fixing (pricing) for
platinum was $1,536 per ounce. Although Clean Diesel may
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 Clean
Diesels business, operating results and financial
condition.
Failure
to attract and retain key personnel could have a material
adverse effect on Clean Diesels future
success.
Clean Diesels success depends, in part, on Clean
Diesels ability to retain current key personnel, attract
and retain future key personnel, additional qualified
management, marketing, scientific, and engineering 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 Clean
Diesels business, operating results and financial
condition.
Clean
Diesel currently depends on the marketability of a limited
number of primary products and technologies, including Platinum
Plus fuel-borne catalyst, ARIS advanced reagent injection system
for selective catalytic reduction, Purifier Systems and
catalyzed wire mesh filters.
Clean Diesels Platinum Plus fuel-borne catalyst, ARIS
advanced reagent injection system for selective catalytic
reduction, Purifier Systems and Clean Diesels catalyzed
wire mesh filter are currently Clean Diesels primary
products and technologies. Failure of any of Clean Diesels
products or technologies to achieve market acceptance may limit
Clean Diesels growth potential. Further, Clean
Diesels gross profit may vary widely in
24
relation to the mix of products and technologies that Clean
Diesel sell during any reporting period. Clean Diesel may have
to cease operations if all of Clean Diesels primary
products fail to achieve market acceptance or fail to generate
significant revenue. Additionally, the marketability of Clean
Diesels products may be dependent upon obtaining
verifications from regulatory agencies such as the EPA,
California Air Resources Board, or similar European agencies, as
well as the effectiveness of Clean Diesels products in
relation to various environmental regulations in the many
jurisdictions in which Clean Diesel markets and sells Clean
Diesels products.
Clean
Diesel may not be able to successfully market new products that
are developed or obtain direct or indirect verification or
approval of Clean Diesels new products.
Clean Diesel plans to market other emissions reduction devices
used in combination with the Platinum Plus fuel-borne catalyst,
ARIS injector, EGR-SCR, catalyzed wire mesh filter and diesel
particulate filter regeneration. There are numerous development
and verification issues that may preclude the introduction of
these products for commercial sale. If Clean Diesel is unable to
demonstrate the feasibility of these products or obtain
verification or approval for the products from regulatory
agencies, Clean Diesel may have to abandon the products or alter
Clean Diesels business plan. Such modifications to Clean
Diesels business plan will likely delay achievement of
revenue milestones and profitability.
Risks
Related to Clean Diesels Financial Condition
Clean
Diesel has incurred losses in the past and expects to incur
losses in the near future.
Clean Diesel has incurred losses since inception totaling
$65.6 million as of December 31, 2009, which amount
includes approximately $4.8 million of non-cash preferred
stock dividends. At the date of Clean Diesels Annual
Report on
Form 10-K,
Clean Diesels cash and cash equivalents and investments
are estimated to be sufficient for Clean Diesels needs for
the next twelve months.
Clean Diesel has recognized limited revenues through
December 31, 2009 and expects to continue to incur
operating losses at least through 2010. There can be no
assurance that Clean Diesel will achieve or sustain significant
revenues, positive cash flows from operations or profitability
in the future. See the discussion under the caption
Liquidity and Capital Resources in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations of Clean Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated by reference
herein.
Clean
Diesel has no assurances of additional funding.
Clean Diesel 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 as well as current general economic conditions. Any equity
funding may depend on prior stockholder approval of an amendment
to Clean Diesels certificate of incorporation authorizing
additional capital. Any offering of shares of Clean
Diesels common stock may result in dilution to Clean
Diesels existing stockholders. Clean Diesels ability
to consummate financing will depend on the status of Clean
Diesels marketing programs and commercialization progress,
as well as conditions then 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
Clean Diesel needs additional funds and are unable to raise such
funds, Clean Diesel may be required to delay, reduce or severely
curtail Clean Diesels operations or otherwise impede Clean
Diesels on-going commercialization, which could have a
material adverse effect on Clean Diesels business,
operating results, financial condition and long-term prospects.
See the discussion below under the caption Liquidity and
Capital Resources in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations of Clean Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated by reference
herein.
25
If
third parties claim that Clean Diesels products infringe
upon their intellectual property rights, Clean Diesel may be
forced to expend significant financial resources and management
time litigating such claims and Clean Diesels operating
results could suffer.
Third parties may claim that Clean Diesels 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 Clean Diesels
patents, or assert that Clean Diesels products or
processes infringe Clean Diesels patent or other
intellectual property rights, Clean Diesel 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.
Clean
Diesel has been dependent on a few major customers for a
significant portion of Clean Diesels revenue and Clean
Diesels revenue could decline if Clean Diesel is unable to
maintain or develop relationships with current or potential
customers.
Historically, Clean Diesel has derived a significant portion of
its revenue from a limited number of customers. For the year
ended December 31, 2009, two customers accounted for
approximately 26% of Clean Diesels revenue. For the year
ended December 31, 2008, one customer accounted for
approximately 15% of Clean Diesels revenue and for the
year ended December 31, 2007, three customers accounted for
approximately 70% of Clean Diesels revenue. Clean Diesel
intends to establish long-term relationships with existing
customers and continue to expand its customer base. While Clean
Diesel diligently seeks 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 its revenue in any given year for the
foreseeable future. The loss of one or more of Clean
Diesels significant customers may result in a material
adverse effect on its revenue, Clean Diesels ability to
become profitable or its ability to continue its business
operations.
Foreign
currency fluctuations could impact financial
performance.
Because of Clean Diesels activities in the U.K., Europe
and Asia, Clean Diesel is exposed to fluctuations in foreign
currency rates. Clean Diesel may manage the risk to such
exposure by entering into foreign currency futures and option
contracts of which there were none in 2009. Foreign currency
fluctuations may have a significant effect on Clean
Diesels operations in the future.
An
inability to realize proceeds from Clean Diesels auction
rate securities right issued by UBS may significantly impact
Clean Diesels liquidity.
On November 6, 2008, Clean Diesel accepted from UBS an
offer to acquire a put right to sell to UBS
commencing June 30, 2010 Clean Diesels holdings of
$11.7 million par value in auction rate securities (ARS).
Also, UBS has established a loan facility whereby Clean Diesel
may borrow up to 75% of the UBS-determined value of these ARS
collateralized by the securities. There can be no assurance that
the financial position of UBS will be such as to afford Clean
Diesel the ability to receive the par value of ARS upon exercise
of the put right.
Clean
Diesel has not and does not intend to pay dividends on shares of
Clean Diesels common stock.
Clean Diesel has not paid dividends on Clean Diesels
common stock since inception, and does not intend to pay any
dividends to Clean Diesels stockholders in the foreseeable
future. Clean Diesel intends to reinvest earnings, if any, in
the development and expansion of Clean Diesels business.
26
The
price of Clean Diesels 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
Clean Diesels 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 Clean Diesels operations or the
perception by the market that these sales could occur, could
adversely affect the market price of Clean Diesels common
stock and could impair Clean Diesels 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 Clean Diesels
common stock may also cause investors to engage in short sales,
which would further contribute to downward pressure on the
trading price of Clean Diesels stock.
Clean
Diesels common stock is currently listed on The NASDAQ
Capital Market.
The trading volume in Clean Diesels common stock has been
relatively limited and a consistently active trading market for
Clean Diesels common stock may not develop. Clean
Diesels common stock began trading on The NASDAQ Capital
Market effective October 3, 2007. Prior to this date, Clean
Diesels common stock was traded on the OTC
Bulletin Board. The average daily trading volume in Clean
Diesels common stock on the NASDAQ Capital Market in 2009
was approximately 9,600 shares.
There has been significant volatility in the market prices of
publicly traded shares of emerging growth technology companies,
including Clean Diesels 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 Clean Diesels common stock. As
outlined above, there has been a low average daily trading
volume of Clean Diesels common stock. To the extent this
trading pattern continues, the price of Clean Diesels
common stock may fluctuate significantly as a result of
relatively minor changes in demand for Clean Diesels
shares and sales of Clean Diesels stock by holders.
Risks
Relating to CSIs Business
CSIs business and results of operations are subject to
numerous risks, uncertainties and other factors that you should
be aware of, some of which are described below. The risks,
uncertainties and other factors described in the following risk
factors are not the only ones facing CSI. Additional risks,
uncertainties and other factors not presently known to CSI or
that CSI currently deems immaterial may also impair its business
operations. Any of the risks, uncertainties and other factors
could have a materially adverse effect on CSIs business,
financial condition, results of operations, cash flows or
product market share.
Risk
Factors Relating to the Underlying Business of CSI
In addition to the risk factors described above relating to the
Merger, the underlying business of CSI is subject to the
following risks.
The
forbearance agreement in place with respect to CSIs
principal credit agreement expired on April 30, 2010, and
may not be renewed through the effective time of the Merger or
the time CSI is able to establish a new line of
credit.
CSIs principal credit agreement has been in default since
March 31, 2009. A forbearance agreement was in place that
expired on April 30, 2010. Although CSI is currently in
discussions with its lender to extend such forbearance agreement
and no demand for repayment has been made, CSI cannot guarantee
that its lender will further extend its forbearance. If the
forbearance agreement is not renewed through the effective time
of the Merger
and/or the
time CSI is able to establish a new line of credit, CSIs
bank lender may move to exercise remedies that would materially
adversely affect CSI and its business. These remedies would
include setting off against the outstanding bank debt proceeds
of its accounts receivable, the bank directing accounts
receivable to be paid to it, the inability to make further
borrowings under the credit agreement, and the seizure or sale
of
27
CSIs equipment, inventory and general intangibles. These
remedies would have a material adverse effect on CSI and it is
unlikely that the Merger could be effected, in which case the
effort and expense of the parties to effect the Merger would
have been wasted.
CSIs
auditors report for the fiscal year 2009 included a
going concern explanatory paragraph.
CSI has suffered recurring losses and negative cash flows from
operations since inception, and CSIs working capital is
severely limited. As of December 31, 2009, CSI had an
accumulated deficit of approximately $149.3 million and a
working capital deficit of $4.4 million. CSIs access
to working capital continues to be limited and its debt service
obligations and projected operating costs for 2010 exceed its
cash balance at December 31, 2009. Failure to recapitalize
or to renegotiate payment terms for debt due will result in CSI
not having sufficient cash to operate and may be forced to
liquidate or declare bankruptcy. As a result, CSIs
auditors report for fiscal year 2009 included an
explanatory paragraph that expresses substantial doubt about
CSIs ability to continue as a going concern.
CSI has $3.0 million consideration payable in
connection with its acquisition of the assets of Applied Utility
Systems in 2006. CSI has claimed a breach of the purchase
agreement and has not paid the amount due. The dispute is
subject to arbitration and there can be no certainty that the
arbitration will be decided in CSIs favor.
CSI has $3.0 million of consideration due to the seller
under the Applied Utility Systems Asset Purchase Agreement dated
August 28, 2006. The consideration was due August 28,
2009 and accrues interest at 5.36%. At December 31, 2009
CSI had accrued $538,000 of unpaid interest. CSI has not paid
the foregoing amount. CSI has certain claims against the seller
under the terms of the Asset Purchase Agreement. At this time,
CSI intends to vigorously assert its claims against seller under
the Asset Purchase Agreement and to defend against any action or
arbitration by seller to collect on the consideration. The
seller commenced an action in California Superior Court for
collection of the consideration. Such action was dismissed by
the court and the seller was directed to pursue any collection
action through arbitration. Seller has commenced arbitration
proceedings to collect the foregoing amount and the amount of
any earn-out amounts payable under the Asset Purchase Agreement.
The Asset Purchase Agreement provides that CSI would pay the
seller an earn-out amount based on the revenues and net profits
of Applied Utility Systems over a period of ten years beginning
January 1, 2009. In connection with the arbitration
proceedings, the seller is seeking a writ of attachment with
respect to the foregoing amounts. CSI intends to vigorously
oppose the granting of any writ of attachment. Arbitration dates
for this action have not been determined. This arbitration is in
the preliminary stages and it is impossible to predict the
outcome of the arbitration.
CSI faces constant changes in governmental standards by
which its products are evaluated.
CSI believes 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 CSIs products
fail to meet these ever-changing standards, some or all of these
products may become obsolete.
Future growth of CSIs business depends, in part, on
market acceptance of its catalyst products, successful
verification of its systems products and retention of its
verifications.
While CSI believes that there exists a viable market for its
developing catalyst products, there can be no assurance that
such technology will succeed as an alternative to
competitors existing and new products. The development of
a market for the products is affected by many factors, some of
which are beyond CSIs control. The adoption cycles of
CSIs key customers are lengthy and require extensive
interaction with the customer to develop an effective and
reliable catalyst for a particular application. While CSI
continues to develop and test products with key customers, there
can be no guarantee that all such products will be accepted and
commercialized. CSIs relationships with its customers are
based on purchase orders rather than long-term formal supply
agreements. Generally, once a catalyst has successfully
completed the testing and certification stage for a particular
application, it is generally the only catalyst used on that
application and
28
therefore highly unlikely that, unless there are any defects,
the customer will try to replace that catalyst with a competing
product. However, CSIs customers usually have alternate
suppliers for their products and there is no assurance that CSI
will continue to win the business.
If a market fails to develop or develops more slowly than
anticipated, CSI may be unable to recover the costs it will have
incurred in the development of its products and may never
achieve profitability. In addition, CSI cannot guarantee that it
will continue to develop, manufacture or market its products or
components if market conditions do not support the continuation
of the product or component.
CSI believes that it is an essential requirement of the
U.S. retrofit market that emissions control products and
systems are verified under the Environmental Protection Agency
(EPA) and/or
California Air Resources Board (CARB) protocols to qualify for
funding from the EPA
and/or CARB
programs. Funding for these emissions control products and
systems is generally limited to those products and technologies
that have already been verified. CSI has no assurance that its
product will be verified by CARB or that such a verification
will be acceptable to the EPA. Verification is also useful for
commercial acceptability.
CSI may not be able to successfully market new products
that are developed.
Some of CSIs catalyst products and heavy-duty diesel
systems are still in the development or testing stage with
targeted customers. CSI is developing technologies in these
areas that are intended to have a commercial application.
However, there is no guarantee that such technologies will
actually result in any commercial applications. CSIs
proposed operations are subject to all of the risks inherent in
a developing business enterprise, including the likelihood of
continued operating losses, although CSI has sought to mitigate
these risks by jointly developing its new products, where
possible, with respected partners. The likelihood of CSIs
business success must be considered in light of the problems,
expenses, difficulties, complications, and delays frequently
encountered in connection with the growth of an existing
business, the development of products and channels of
distribution, and current and future development in several key
technical fields, as well as the competitive and regulatory
environment in which CSI operates.
Future growth of CSIs business depends, in part, on
enforcement of existing emissions-related environmental
regulations and further tightening of emission standards
worldwide.
CSI expects that its 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 CSIs business,
operating results, financial condition and long-term prospects.
CSI faces 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 its
products. Other companies offer products that potential
customers may consider to be acceptable alternatives to CSI
products and services, including products that are verified by
EPA and/or
CARB, or other environmental authorities. CSI faces direct
competition from companies with greater financial,
technological, manufacturing and personnel resources. Newly
developed products could be more effective and cost efficient
than CSIs current or future products. CSI also faces
indirect competition from vehicles using alternative fuels, such
as methanol, hydrogen, ethanol and electricity.
CSI depends on intellectual property and the failure to
protect its intellectual property could adversely affect future
growth and success.
CSI relies on patent, trademark and copyright law, trade secret
protection, and confidentiality and other agreements with
employees, customers, partners and others to protect its
intellectual property. However, some of CSIs 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 its intellectual property without
authorization.
29
CSI does 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 its
technologies or processes. Moreover, patent applications and
issued patents may be challenged or invalidated. CSI 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 United States.
As part of its confidentiality procedures, CSI generally has
entered into nondisclosure agreements with employees,
consultants and corporate partners. CSI also has attempted to
control access to and distribution of its technologies,
documentation and other proprietary information. CSI plans to
continue these procedures. Despite these procedures, third
parties could copy or otherwise obtain and make unauthorized use
of CSIs technologies or independently develop similar
technologies. The steps that CSI has taken and that may occur in
the future might not prevent misappropriation of its solutions
or technologies, particularly in foreign countries where laws or
law enforcement practices may not protect the proprietary rights
as fully as in the United States.
There can be no assurance that CSI will be successful in
protecting its proprietary rights. Any infringement upon its
intellectual property rights could have an adverse effect on
CSIs ability to develop and sell commercially competitive
systems and components.
CSI results may fluctuate due to certain regulatory,
marketing and competitive factors over which it has little or no
control.
The factors listed below, some of which CSI cannot control, may
cause its revenue and results of operations to fluctuate
significantly:
|
|
|
|
|
Actions taken by regulatory bodies relating to the verification,
registration or health effects of its products.
|
|
|
|
The timing and size of customer purchases.
|
|
|
|
Customer concerns about the stability of CSIs business,
which could cause them to seek alternatives to its solutions and
products.
|
Failure of one or more key suppliers to timely deliver
could prevent, delay or limit CSI from supplying products.
Delays in delivery times for platinum group metal purchases
could also result in losses due to fluctuations in
prices.
Due to customer demands, CSI is required to source critical
materials and components such as ceramic substrates from single
suppliers. Failure of one or more of the key suppliers to timely
deliver could prevent, delay or limit CSI from supplying
products because CSI would be required to qualify an alternative
supplier. For certain products and customers, CSI is required to
purchase platinum group metal materials. As commodities,
platinum group metal materials are subject to daily price
fluctuations and significant volatility, based on global market
conditions. Historically, the cost of platinum group metals used
in the manufacturing process has been passed through to the
customer. This limits the economic risk of changes in market
prices to platinum group metal usage in excess of nominal
amounts allowed by the customer. However, going forward there
can be no assurance that CSI will continue to be successful
passing platinum group metal price risk onto its current and
future customers to minimize the risk of financial loss.
Additionally, platinum group metal material is accounted for as
inventory and therefore subject to lower of cost or market
adjustments on a regular basis at the end of accounting periods.
A drop in market prices relative to the purchase price of
platinum group metal could result in a write-down of inventory.
Due to the high value of platinum group metal materials, special
measures have been taken to secure and insure the inventory.
There is a risk that these measures may be inadequate and expose
CSI to financial loss.
Failure to attract and retain key personnel could have a
material adverse effect on CSIs future success.
CSIs success depends, in part, on its ability to retain
current key personnel, attract and retain future key personnel,
additional qualified management, marketing, scientific, and
engineering personnel, and develop and
30
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 CSIs business, operating results and
financial condition.
If third parties claim that CSI products infringe upon
their intellectual property rights, CSI may be forced to expend
significant financial resources and management time litigating
such claims and its operating results could suffer.
Third parties may claim that CSI 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 CSI patents, or assert that
CSI products or processes infringe their patent or other
intellectual property rights, CSI 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.
CSI has been dependent on a few major customers for a
significant portion of its revenue and revenue could decline if
it is unable to maintain or develop relationships with current
or potential customers.
Historically, CSI has derived a significant portion of its
revenue from a limited number of customers. For the year ended
December 31, 2009, two customers accounted for
approximately 46% of CSIs revenue. For the year ended
December 31, 2008, two customers accounted for
approximately 37% of CSIs revenue. CSI intends to
establish long-term relationships with existing customers and
continue to expand its customer base. While CSI diligently seeks
to become less dependent on any single customer, it is likely
that certain business relationships may result in one or more
customers contributing to a significant portion of its revenue
in any given year for the foreseeable future. The loss of one or
more significant customers may result in a material adverse
effect on CSI revenue, its ability to become profitable or its
ability to continue its business operations.
CSI has recently undertaken significant restructuring of
its operations and implemented cost savings initiatives to
improve its operating margins, if CSI were to experience
significant declines in revenues, its ability to implement
corresponding significant additional reductions in costs may be
limited.
CSI undertook a restructuring of its Catalyst division, divested
certain businesses and implemented a number of initiatives to
control its costs to improve its operating margins. As such,
although CSI is focused on controlling costs on an ongoing basis
and implementing further cost control measures as necessary, if
CSI were to experience significant declines in revenues, its
ability to implement corresponding significant reductions in
costs by making significant additional structural changes in it
operations in the future may be limited.
Foreign currency fluctuations could impact financial
performance.
Because of its activities in Canada, Europe, South Africa and
Asia, CSI is exposed to fluctuations in foreign currency rates.
CSI may manage the risk to such exposure by entering into
foreign currency futures and option contracts of which there was
one in 2009. Foreign currency fluctuations may have a
significant effect on its operations in the future.
Any liability for environmental harm or damages resulting
from technical faults or failures of CSI products could be
substantial and could materially adversely affect its business
and results of operations
Customers rely upon CSI products to meet emissions control
standards imposed upon them by government. Failure of its
products to meet such standards could expose CSI to claims from
its customers. CSIs products are also integrated into
goods used by consumers and therefore a malfunction or the
inadequate design of its products could result in product
liability claims. Any liability for environmental harm or
damages resulting from technical faults or failures could be
substantial and could materially adversely affect CSIs
business and results of operations. In addition, a
well-publicized actual or perceived problem could adversely
31
affect the markets perception of CSIs products,
which would materially impact CSIs financial condition and
operating results.
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This joint proxy statement/information statement and prospectus
and the documents incorporated by reference herein contain
forward-looking statements that involve risks and uncertainties,
as well as assumptions, that could cause the results of Clean
Diesel and CSI to differ materially from those expressed or
implied by such forward-looking statements. Forward-looking
statements generally are identified by the words
may, will, project,
might, expects, anticipates,
believes, intends,
estimates, should, could,
would, strategy, plan,
continue, pursue, or the negative of
these words or other words or expressions of similar meaning.
All statements, other than statements of historical fact, are
statements that could be deemed forward-looking statements. For
example, forward-looking statements include any statements of
the plans, strategies and objectives of management for future
operations, including the execution of integration and
restructuring plans and the anticipated timing of filings; any
statements concerning proposed new products, services or
developments; any statements regarding future economic
conditions or performance; statements of belief and any
statement of assumptions underlying any of the foregoing.
Forward-looking statements may also include any statements of
the plans, strategies and objectives of management with respect
to the approval and closing of the Merger, Clean Diesels
and CSIs ability to solicit a sufficient number of proxies
to approve the Merger and other matters related to the
consummation of the Merger.
For a discussion of risks associated with the ability of Clean
Diesel and CSI to complete the Merger and the effect of the
Merger on the present business of Clean Diesel, CSI and the
business of Clean Diesel after the Merger, see the section
entitled Risk Factors, beginning on page 13.
Additional factors that could cause actual results to differ
materially from those expressed in the forward-looking
statements are discussed in reports filed with the SEC by Clean
Diesel. See the section entitled Where You Can Find More
Information, beginning on page 145.
If any of these risks or uncertainties materializes or any of
these assumptions proves incorrect, the results of Clean Diesel
or CSI could differ materially from the forward-looking
statements. All forward-looking statements in this joint proxy
statement/information statement and prospectus are current only
as of the date on which the statements were made. Clean Diesel
and CSI do not undertake any obligation to publicly update any
forward-looking statement to reflect events or circumstances
after the date on which any statement is made or to reflect the
occurrence of unanticipated events.
32
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined financial
data gives effect to the proposed merger of Clean Diesel and
CSI. For accounting purposes, CSI is considered to be acquiring
Clean Diesel. Accordingly, the assets and liabilities of Clean
Diesel are recorded at fair value, while the assets and
liabilities of CSI are recorded at historical carrying values
for the combined company. The transaction will be accounted for
under the acquisition method of accounting in accordance with
FASB Accounting Standards Codification (ASC) Topic 805, Business
Combinations. Under the acquisition method of accounting, the
estimated purchase consideration is recorded at fair value as
described in Note 2 to this unaudited pro forma condensed
combined financial data and the tangible and intangible assets
acquired and liabilities of Clean Diesel assumed in connection
with the transaction are recorded at their estimated fair values
at the time the merger is consummated.
For purposes of this unaudited pro forma condensed combined
financial data, Clean Diesel has made preliminary estimates of
the purchase consideration and the values of the assets to be
acquired and liabilities to be assumed based on preliminary
estimates of their fair values. A final determination of the
estimated fair values, will be made subsequent to the completion
of the merger based on the actual purchase consideration and the
actual assets and liabilities of Clean Diesel that exist as of
the date of completion of the merger. The actual amounts
recorded at the completion of the merger may differ materially
from the information presented in this unaudited pro forma
condensed combined financial data as a result of:
|
|
|
|
|
net cash used in Clean Diesels and CSIs operations
between the dates of the pro forma financial statements and the
closing of the Merger;
|
|
|
|
the effect of Clean Diesels and CSIs interim capital
raise transactions;
|
|
|
|
other changes in Clean Diesels and CSIs assets and
liabilities that occur prior to completion of the Merger;
|
|
|
|
the timing of completion of the Merger; and
|
|
|
|
other changes in estimated costs and fair values, which could
cause material differences in the information presented.
|
The unaudited pro forma condensed combined financial data is
based on the historical financial statements of Clean Diesel and
CSI, adjusted to give effect to the acquisition of Clean Diesel
by CSI for accounting purposes. The pro forma adjustments are
described in the accompanying notes.
The unaudited pro forma condensed combined balance sheet as of
December 31, 2009 gives effect to the proposed merger as if
it occurred on December 31, 2009, and combines the
historical balance sheets of Clean Diesel and CSI as of
December 31, 2009, as included elsewhere in this joint
proxy statement/information statement and prospectus.
The unaudited pro forma condensed combined statement of
operations for the year ended December 31, 2009 is
presented as if the merger was consummated on January 1,
2009, and combines the historical results of Clean Diesel and
CSI for the twelve months ended December 31, 2009, included
elsewhere in this joint proxy statement/information statement
and prospectus.
This unaudited pro forma condensed combined financial data has
been prepared for illustrative purposes only and is not
indicative of the consolidated financial position or results of
operations in future periods or the results that actually would
have been realized had Clean Diesel and CSI been a combined
company during the periods presented. The pro forma adjustments
are based on the preliminary information available at the time
of the preparation of this joint proxy statement/information
statement and prospectus and are subject to change. This
unaudited pro forma condensed combined financial data, including
the notes thereto should be read in conjunction with, the
historical financial statements of Clean Diesel and CSI included
elsewhere in this joint proxy statement/information statement
and prospectus.
As required, the unaudited pro forma condensed combined
financial data includes adjustments that give effect to the
events that are (i) directly attributable to the merger
transaction; (ii) expected to have a continuing impact and
(iii) factually supportable. The unaudited pro forma
condensed combined statements of operations do not reflect any
adjustments for non-recurring items or anticipated synergies
resulting from the merger. Merger expenses will be expensed as
incurred in accordance with applicable accounting rules
regarding business combinations.
33
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Pro Forma Condensed Combined Balance Sheet
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clean Diesel
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
|
Technologies, Inc.
|
|
|
Solutions, Inc.
|
|
|
Pro Forma
|
|
|
Clean Diesel
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Technologies, Inc.
|
|
|
|
(Amounts in thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,772
|
|
|
|
2,336
|
|
|
|
|
|
|
|
5,108
|
|
Short-term investments
|
|
|
11,725
|
|
|
|
|
|
|
|
|
|
|
|
11,725
|
|
Trade accounts receivable, less allowance for doubtful accounts
at December 31, 2009
|
|
|
148
|
|
|
|
8,066
|
|
|
|
|
|
|
|
8,214
|
|
Inventories
|
|
|
1,059
|
|
|
|
6,184
|
|
|
|
|
|
|
|
7,243
|
|
Prepaid expenses and other current assets
|
|
|
294
|
|
|
|
2,010
|
|
|
|
|
|
|
|
2,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,998
|
|
|
|
18,596
|
|
|
|
|
|
|
|
34,594
|
|
Property and equipment, net
|
|
|
294
|
|
|
|
2,897
|
|
|
|
|
|
|
|
3,191
|
|
Intangible assets, net
|
|
|
1,083
|
|
|
|
4,445
|
|
|
|
2,667
|
(e)
|
|
|
8,195
|
|
Goodwill
|
|
|
|
|
|
|
4,223
|
|
|
|
2,066
|
(e)
|
|
|
6,289
|
|
Other assets
|
|
|
57
|
|
|
|
82
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,432
|
|
|
|
30,243
|
|
|
|
4,733
|
|
|
|
52,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
7,693
|
|
|
|
5,147
|
|
|
|
|
|
|
|
12,840
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
3,000
|
|
Accounts payable
|
|
|
301
|
|
|
|
4,967
|
|
|
|
(499
|
)(b)
|
|
|
4,769
|
|
Deferred revenue
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
195
|
|
Accrued salaries and benefits
|
|
|
25
|
|
|
|
1,294
|
|
|
|
|
|
|
|
1,319
|
|
Accrued expenses
|
|
|
650
|
|
|
|
2,990
|
|
|
|
1,440
|
(b)(e)
|
|
|
5,080
|
|
Deferred gain on sale of intellectual property
|
|
|
|
|
|
|
1,900
|
|
|
|
|
|
|
|
1,900
|
|
Accrued professional and consulting fees
|
|
|
|
|
|
|
2,375
|
|
|
|
|
|
|
|
2,375
|
|
Merger-related liabilities
|
|
|
|
|
|
|
|
|
|
|
1,501
|
(a)(d)
|
|
|
1,501
|
|
Income taxes payable
|
|
|
|
|
|
|
1,081
|
|
|
|
|
|
|
|
1,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,669
|
|
|
|
22,949
|
|
|
|
2,442
|
|
|
|
34,060
|
|
Long-term debt, excluding current portion
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
75
|
|
Deferred tax liability
|
|
|
|
|
|
|
1,336
|
|
|
|
|
|
|
|
1,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,669
|
|
|
|
24,360
|
|
|
|
2,442
|
|
|
|
35,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock
|
|
|
74,776
|
|
|
|
156,116
|
|
|
|
(61,546
|
)(b)(c)(d)
|
|
|
169,346
|
|
Accumulated other comprehensive income (loss)
|
|
|
(381
|
)
|
|
|
(889
|
)
|
|
|
381
|
(c)
|
|
|
(889
|
)
|
Accumulated deficit
|
|
|
(65,632
|
)
|
|
|
(149,344
|
)
|
|
|
63,456
|
(a)(b)(c)
|
|
|
(151,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
8,763
|
|
|
|
5,883
|
|
|
|
2,291
|
|
|
|
16,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
17,432
|
|
|
|
30,243
|
|
|
|
4,733
|
|
|
|
52,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Pro Forma Condensed Combined Statements of Operations
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clean Diesel
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
|
Technologies, Inc.
|
|
|
Solutions, Inc.
|
|
|
Pro Forma
|
|
|
Clean Diesel
|
|
|
|
Historical
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Technologies, Inc.
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
1,221
|
|
|
|
50,514
|
|
|
|
|
|
|
|
51,735
|
|
Cost of revenues
|
|
|
801
|
|
|
|
38,547
|
|
|
|
|
|
|
|
39,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
420
|
|
|
|
11,967
|
|
|
|
|
|
|
|
12,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
|
|
|
|
3,577
|
|
|
|
|
|
|
|
3,577
|
|
Research and development
|
|
|
386
|
|
|
|
7,257
|
|
|
|
|
|
|
|
7,643
|
|
General and administrative
|
|
|
6,073
|
|
|
|
8,903
|
|
|
|
310
|
(f)(g)
|
|
|
15,286
|
|
Severance expense
|
|
|
958
|
|
|
|
1,429
|
|
|
|
|
|
|
|
2,387
|
|
Recapitalization expense
|
|
|
|
|
|
|
1,258
|
|
|
|
|
|
|
|
1,258
|
|
Patent amortization and other patent expense
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
207
|
|
Gain on sale of intellectual property
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,624
|
|
|
|
19,924
|
|
|
|
310
|
|
|
|
27,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,204
|
)
|
|
|
(7,957
|
)
|
|
|
(310
|
)
|
|
|
(15,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
245
|
|
|
|
18
|
|
|
|
|
|
|
|
263
|
|
Interest expense
|
|
|
|
|
|
|
(2,304
|
)
|
|
|
|
|
|
|
(2,304
|
)
|
Change in fair value of investments and interest expense
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Other
|
|
|
112
|
|
|
|
(291
|
)
|
|
|
|
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
457
|
|
|
|
(2,577
|
)
|
|
|
|
|
|
|
(2,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(6,747
|
)
|
|
|
(10,534
|
)
|
|
|
(310
|
)
|
|
|
(17,591
|
)
|
Income tax benefit
|
|
|
|
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(6,747
|
)
|
|
$
|
(9,498
|
)
|
|
$
|
(310
|
)
|
|
$
|
(16,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations per share assuming 3 to 1
reverse stock split
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2.26
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,147
|
|
|
|
|
|
|
|
|
|
|
|
21,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted assuming 3 to 1 reverse stock split
|
|
|
2,716
|
|
|
|
|
|
|
|
|
|
|
|
7,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial Data
|
|
1.
|
The
Merger and Basis of Presentation
|
On May 13, 2010, Clean Diesel and CSI entered into a merger
agreement, under which a wholly-owned subsidiary of Clean
Diesel, will merge with and into CSI, with CSI becoming a
wholly-owned subsidiary of Clean Diesel. Pursuant to the merger
agreement, Clean Diesel will issue an estimated
12,320,982 shares of common stock of Clean Diesel, par
value $0.01 per share, in exchange for all outstanding shares of
common stock of CSI.
Because CSI stockholders will own a majority of the voting stock
of the combined company, CSI will assume key management
positions and CSI will hold a majority of the board of directors
seats upon closing of the merger, CSI is deemed to be the
acquiring company for accounting purposes and the transaction
will be accounted for as a reverse acquisition in accordance
with FASB Accounting Standards Codification (ASC) Topic 805,
Business Combinations. Accordingly, the assets and liabilities
of Clean Diesel will be recorded as of the merger closing date
at their estimated fair values.
The accompanying pro forma condensed combined financial
statements do not give effect to any cost savings or revenue
synergies that are expected to result from the merger of Clean
Diesel and CSI. Further, these pro forma condensed combined
financial statements will change, perhaps materially, based on
revisions to current estimates, facts and circumstances as of
the closing of the merger, including any adjustments resulting
from the cash position of each company as provided in the merger
agreement.
|
|
2.
|
Estimate
of Consideration Expected to Be Transferred
|
The acquisition method of accounting requires that the
consideration transferred in a business combination be measured
at fair value as of the closing date of the acquisition. As
Clean Diesels stock is traded on the NASDAQ with more
daily average volume than CSIs stock on the AIM exchange,
the closing market price of Clean Diesels common stock as
of May 11, 2010, the most recent date practical to allow
for the preparation of this filing, was used to estimate the
consideration transferred. Clean Diesel believes this method
provides the most reliable determination of fair value for the
purposes of the unaudited pro forma condensed combined financial
statements.
The following is a preliminary estimate of consideration
expected to be transferred to effect the merger:
|
|
|
|
|
Fair value of Clean Diesel outstanding common stock
|
|
$
|
11,992,000
|
|
Estimated fair value of Clean Diesel stock options and warrants
|
|
|
87,000
|
|
Estimated fair value of Clean Diesel shares issued to Innovator
Capital
|
|
|
771,000
|
|
Total estimated purchase consideration
|
|
$
|
12,850,000
|
|
|
|
|
|
|
On December 31, 2009, Clean Diesel had
8,213,988 shares of common stock outstanding and has not
issued any additional shares since this time. The fair value of
Clean Diesel common stock used in determining the purchase price
was $1.46 per share based on the closing price on NASDAQ on
May 11, 2010. The fair value of Clean Diesels stock
options and warrants is a preliminary estimate. The final
estimated fair value will be determined using the Black-Scholes
Model based on the number of Clean Diesel stock options and
warrants outstanding on the merger closing date pro-rated for
the portion vested prior to merger. Upon closing of the merger
Clean Diesel will issue shares of Clean Diesel common stock to
Innovator Capital, its financial advisor, as a transaction fee
for their services provided to Clean Diesel in connection with
the merger. The fair value was estimated based on the issuance
of 527,950 using a stock price of $1.46 per share. Clean Diesel,
at its option, may pay these fees in cash.
Clean Diesel estimates that professional fees and employee
expenses related to the merger transaction will approximate
$1,501,000. These costs include fees for legal, accounting, and
other direct costs necessary to complete this transaction. The
$1,501,000 of transaction costs consist of $646,000 of costs
expected to be incurred by Clean Diesel and $855,000 of costs
expected to be incurred by CSI. Clean Diesels $646,000 of
professional and employee expenses will be incurred by Clean
Diesel in the sale of their company, are in addition to the
estimated shares to be issued to Innovator Capital, and these
costs are included in liabilities to
36
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
be assumed by CSI in the merger. In addition, these costs
include other direct costs of approximately $477,000 expected to
be incurred related to employee retention and success bonuses as
a result of successful completion of the transaction.
Transaction fees of CSI will be expensed as incurred in
accordance with applicable accounting rules regarding business
combinations. In addition to the $855,000 of professional and
employee expenses, CSIs financial advisor,
Allen & Company LLC, will receive
1,000,000 shares and warrants to purchase an additional
1,000,000 shares of Clean Diesel. The estimated fair value
of such shares and warrants totaling $1,820,000, of which
$499,000 has been accrued at December 31, 2009, related to
the closing of the merger transaction will be expensed upon
closing of the merger.
|
|
3.
|
Preliminary
Allocation of Consideration Transferred to Net Assets
Acquired
|
Under the acquisition method of accounting, the total purchase
consideration is allocated to the acquired tangible and
intangible assets and assumed liabilities of Clean Diesel based
on their estimated fair values as of the merger closing date.
The excess of the purchase price over the fair value of assets
acquired and liabilities assumed is recorded to goodwill. A
preliminary allocation of the preliminary estimated purchase
consideration, as shown above, to the acquired tangible and
intangible assets and assumed liabilities of Clean Diesel based
on the estimated fair values as if the transaction closed on
December 31, 2009, is as follows:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,772,000
|
|
Accounts receivable and other assets
|
|
|
499,000
|
|
Inventory*
|
|
|
1,059,000
|
|
Investments
|
|
|
11,725,000
|
|
Fixed assets
|
|
|
294,000
|
|
Intangible Assets
|
|
|
|
|
Customer relationships
|
|
|
180,000
|
|
Trade name
|
|
|
948,000
|
|
Patents
|
|
|
2,352,000
|
|
In-process research and development
|
|
|
270,000
|
|
Goodwill
|
|
|
2,066,000
|
|
Total Assets Acquired
|
|
|
22,165,000
|
|
Liabilities assumed
|
|
|
(8,669,000
|
)
|
Merger related liabilities
|
|
|
(646,000
|
)
|
|
|
|
|
|
Total preliminary purchase price allocation
|
|
$
|
12,850,000
|
|
|
|
|
|
|
|
|
|
* |
|
Assumed carrying value equals fair value. |
The final determination of the allocation of purchase
consideration will be based on the estimated fair values of the
tangible and intangible assets acquired and liabilities assumed
at the date of the closing of the merger and will be made as
soon as practicable after the closing. The allocation of
purchase consideration will remain preliminary until Clean
Diesel completes its valuation of the tangible and intangible
assets acquired and liabilities assumed. The final fair value of
assets acquired and liabilities assumed could differ
significantly from the amounts presented in these pro forma
financial statements.
Balance Sheet Adjustments:
(a) To record CSIs professional and employee related
merger costs of $855,000 as more fully described in note 2.
These costs have not been reflected on the pro forma condensed
statements of operations as they are non-recurring in nature.
37
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
(b) To record CSIs merger costs related to the
issuance of shares and warrants to Allen & Company LLC upon
closing of the merger as more fully described in note
2. These costs have not been reflected on the pro forma
condensed statements of operations as they are non-recurring in
nature. These shares and warrants have an estimated fair value
of $1,820,000 and have been recorded to the condensed combined
balance sheets as follows:
|
|
|
|
|
an increase to capital stock of $1,460,000 reflecting the
estimated fair value of the Clean Diesel shares to be issued
|
|
|
|
an increase to accrued expenses of $360,000 reflecting the
estimated fair value of liability classified warrants to be
issued based on the preliminary terms of such instrument
|
|
|
|
a reduction of accounts payable of $499,000 reflecting the
settlement costs incurred and accrued prior to December 31,
2009
|
|
|
|
an increase to accumulated deficit of $1,321,000 reflecting the
portion of the share and warrant issuance not already accrued as
of December 31, 2009
|
(c) To eliminate historical Clean Diesel equity accounts.
(d) To record the fair value of the purchase consideration
of $12,850,000 as more fully described in note 2. Included
in this adjustment is the issuance of 12,320,982 shares and
3,000,000 warrants of Clean Diesel to the CSI shareholders. The
estimated fair value of the warrants totaling $1,080,000 has
been reflected as a liability based on the preliminary terms of
such instrument with remaining $11,770,000 recorded to capital
stock.
(e) To record the preliminary allocation of purchase
consideration as more fully described in note 3. The adjustment
reflects the difference between the estimated fair value and
Clean Diesels historical carrying value of the acquired
assets and assumed liabilities.
Statement of Operations Adjustments:
(f) To eliminate historical Clean Diesel amortization and
depreciation of $107,000.
(g) To record depreciation and amortization expense based
on the preliminary estimated fair value of the underlying
intangible assets to be acquired amortized over their useful
lives. The estimated useful lives are 10 years for trade
name, patents and
in-process
research and development and three years for customer
relationships.
|
|
5.
|
Pro Forma
Loss Per Share
|
Weighted average shares outstanding for the twelve months ended
December 31, 2009 include Clean Diesels historical
weighted average shares outstanding plus the
12,320,982 shares of Clean Diesel common stock to be issued
in connection with the merger, 1,000,000 shares issued to
Allen & Company LLC and 527,950 shares issued to
Innovator Capital.
Weighted average shares outstanding for the year ended
December 31, 2009 include:
|
|
|
|
|
|
|
|
|
|
|
Pre-Reverse
|
|
Post-Reverse
|
|
|
Split
|
|
Split
|
Clean Diesel weighted average shares outstanding
|
|
|
8,147,000
|
|
|
|
2,715,667
|
|
New shares to be issued in the Merger to CSI shareholders
|
|
|
12,320,982
|
|
|
|
4,106,994
|
|
New shares to be issued to Allen & Company
|
|
|
1,000,000
|
|
|
|
333,333
|
|
New shares to be issued to Innovator Capital
|
|
|
527,950
|
|
|
|
175,983
|
|
Total
|
|
|
21,995,932
|
|
|
|
7,331,977
|
|
Weighted average shares outstanding used for the calculation of
diluted pro forma loss per share is the same as basic and
excludes the anti-dilutive impact of approximately
6,490,000 warrants and options expected to be outstanding
at the time of the closing of the merger.
38
MARKET
PRICE AND DIVIDEND INFORMATION
Clean
Diesel
Clean Diesels common stock is traded on the NASDAQ Stock
Markets National Market under the symbol CDTI.
The following table sets forth the high and low sale prices of
Clean Diesels common stock on The NASDAQ Capital Market
for each of the periods listed. Prices indicated below with
respect to its share price include inter-dealer prices, without
retail mark up, mark down or commission and may not necessarily
represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
NASDAQ Capital Market
|
|
|
High
|
|
Low
|
|
2008
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
24.85
|
|
|
$
|
8.74
|
|
2nd
Quarter
|
|
$
|
15.98
|
|
|
$
|
10.50
|
|
3rd
Quarter
|
|
$
|
12.25
|
|
|
$
|
3.00
|
|
4th
Quarter
|
|
$
|
4.79
|
|
|
$
|
1.54
|
|
2009
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
3.05
|
|
|
$
|
1.00
|
|
2nd
Quarter
|
|
$
|
2.50
|
|
|
$
|
1.41
|
|
3rd
Quarter
|
|
$
|
2.20
|
|
|
$
|
1.25
|
|
4th
Quarter
|
|
$
|
2.23
|
|
|
$
|
1.40
|
|
2010
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
2.22
|
|
|
$
|
1.45
|
|
Holders
At March 22, 2010, there were 174 holders of record of its
common stock representing approximately 1,600 beneficial owners.
Dividends
No dividends have been paid on Clean Diesels common stock
and it does not anticipate paying dividends in the foreseeable
future.
CSI
CSIs common stock has been listed on AIM of the London
Stock Exchange since November 22, 2006. CSIs stock
trades in pence sterling (GBX), a subdivision of pounds sterling
(GBP), and trades under two symbols: the symbol CTS,
in a restricted manner as permitted by Regulation S of the
Securities Act and the symbol CTSU, in an
unrestricted manner under an available exemption provided under
the Securities Act.
39
The following table sets forth the high and low closing prices
of CSIs common stock on AIM for each of its trading lines
for the periods indicated. The U.S. dollar prices indicated
below are provided for convenience purposes only and were
calculated using the daily average conversion rate from pence
sterling to U.S. dollars for each reporting period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CTS
|
|
CTSU(1)
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
1.61
|
|
|
$
|
1.34
|
|
|
$
|
|
|
|
$
|
|
|
2nd
Quarter
|
|
$
|
1.33
|
|
|
$
|
1.15
|
|
|
$
|
|
|
|
$
|
|
|
3rd
Quarter
|
|
$
|
1.09
|
|
|
$
|
0.85
|
|
|
$
|
1.03
|
|
|
$
|
0.93
|
|
4th
Quarter
|
|
$
|
0.71
|
|
|
$
|
0.29
|
|
|
$
|
0.78
|
|
|
$
|
0.29
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
0.27
|
|
|
$
|
0.06
|
|
|
$
|
0.27
|
|
|
$
|
0.21
|
|
2nd
Quarter
|
|
$
|
0.19
|
|
|
$
|
0.09
|
|
|
$
|
0.22
|
|
|
$
|
0.05
|
|
3rd
Quarter(2)
|
|
$
|
0.09
|
|
|
$
|
0.05
|
|
|
$
|
0.08
|
|
|
$
|
0.02
|
|
4th
Quarter(2)
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
0.05
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
|
|
(1) |
|
The CTSU trading line was established on July 14, 2008. |
|
(2) |
|
CSI was unable to publish its results for the period ended
June 30, 2009 within the time period required by the AIM
(September 30, 2009) due primarily to a delay in
completing its goodwill impairment analysis. Due to this delay,
CSI requested that trading in its stock on AIM be suspended
until such time that the results would be announced. Trading was
suspended on September 30, 2009. CSI announced its results
for the period ended June 30, 2009 on November 9, 2009
and trading in its shares remained suspended pending CSIs
work to resolve its liquidity issues. CSI shares resumed trading
on December 21, 2009 in connection with an announcement of
CSIs updated financial position. |
Holders
At April 30, 2010, there were 209 holders of record of
CSIs common stock.
Dividends
CSI has never paid any dividends on its common stock and CSI
does not anticipate paying dividends in the foreseeable future.
40
CSI
Equity Compensation Plan Information as of December 31,
2009
The following table sets forth information on CSIs equity
compensation plans. All equity compensation plans have been
approved by CSIs stockholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Available for
|
|
|
|
|
|
|
Future Issuance
|
|
|
Number of
|
|
|
|
Under Equity
|
|
|
Securities to be
|
|
|
|
Compensation
|
|
|
Issued Upon
|
|
|
|
Plans (Excluding
|
|
|
Exercise of
|
|
Weighted Average
|
|
Securities
|
|
|
Outstanding
|
|
Exercise Price of
|
|
Reflected in
|
Plan Category
|
|
Options
|
|
Outstanding Options
|
|
Column (a))
|
|
|
Column(a)
|
|
Column(b)
|
|
Column(c)
|
|
Equity compensation plans approved by stockholders
|
|
|
4,640,943
|
(1)
|
|
|
1.73
|
(2)
|
|
|
1,722,207
|
(3)
|
Equity compensation plans not approved by stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
4,640,943
|
(1)
|
|
|
1.73
|
(2)
|
|
|
1,722,207
|
(3)
|
|
|
|
(1) |
|
This includes 2,283,150 options outstanding under CSIs
1997 Stock Option Plan, and 2,357,793 options outstanding under
CSIs 2006 Equity Compensation Plan. Each of these plans is
described in Note 6 to CSIs Consolidated Financial
Statements included elsewhere in this joint proxy
statement/prospectus. |
|
(2) |
|
The remaining weighted term of outstanding options is
4.87 years. |
|
(3) |
|
All of these shares remain available for future grants under
CSIs 2006 Equity Compensation Plan. |
41
THE
MERGER
This section and the section entitled The Merger
Agreement beginning on page 57 of this joint proxy
statement/information statement and prospectus describe the
material terms of the Merger, including the Merger Agreement.
While Clean Diesel and CSI believe that this description covers
all of the material terms of the Merger and the Merger
Agreement, it may not contain all of the information that is
important to you. You should read carefully this entire joint
proxy statement/information statement and prospectus, including
the Merger Agreement, which is attached as Annex A to this
joint proxy statement/information statement and prospectus, and
the other documents to which Clean Diesel and CSI have
referred.
Background
of the Development of the Merger
Clean Diesel develops, designs, markets and licenses patented
technologies and solutions that reduce harmful emissions from
internal combustion engines while improving fuel economy and
engine power. Clean Diesel is 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).
Clean Diesel was spun-off by Fuel Tech in a rights offering in
December 1995.
On June 15, 2007, Clean Diesel effected a reverse stock
split in order to achieve listing on the NASDAQ Capital Market.
Prior to that time, Clean Diesels Common Stock was quoted
on the
Over-the-Counter
Bulletin Board, or OTCBB.
Over the past 15 months, Clean Diesel has experienced a
period of challenging business and economic conditions.
Proactive effort to scrutinize the intellectual property
portfolio and commercialization approach resulted in an altered
strategy that focuses primarily on the growing, global retrofit
market. Clean Diesel further determined that the ability to
translate the new strategic direction into tangible results
would be a direct function of its organizational capability.
Therefore, to better position the company for growth and
sustained profitability, Clean Diesel restructured its
organization significantly in 2009. In February 2009,
Michael Asmussen was named President and CEO to lead the
change at the management level. In August 2009, Clean Diesel
implemented a reduction in force and made new appointments at
the Board of Director and executive management levels. At the
Board of Director level, Mr. Mungo Park was elected to the
Board and named Chairman in August 2009 to assist Clean Diesel
in its restructuring and lead the effort to reconstitute the
Board of Directors.
While Clean Diesel believes that the global opportunities in its
end markets are significant, a number of barriers to entry exist
that have been extremely difficult to overcome. Despite the
growth prospects, the challenges faced by Clean Diesel in 2009
and early 2010 are expected to continue. Long project lead
times, unpredictable schedules and extreme market fragmentation
will continue to plague the business until long term strategies
are put in place to not only diversify Clean Diesel with regard
to market segments and revenue streams, but also reach critical
mass through aggressive market consolidation. Therefore after
several iterations of strategic analysis, two key strategic
objectives were identified. The first was the need to reduce
dependence on existing revenue sources by acquiring additional
revenue that ramps more quickly yet originates from synergistic
sources. The second was to gain access to the best and broadest
portfolio of verified retrofit products available.
On September 16, 2009, Mr. James Quinn of
Allen & Company LLC, a New York based investment
banking firm, contacted Mr. Park, Chairman of the Board,
Clean Diesel, to discuss the possibility of a merger between
their client, CSI, and Clean Diesel. During the phone call,
Mr. Quinn explained to Mr. Park that they were
representing CSI as financial advisors and that the management
and board of CSI had expressed a strong interest in exploring
such a merger after having conducted a strategic review.
Following this conversation, Allen & Company LLC
forwarded a corporate overview presentation of CSI to
Mr. Park on September 18, 2009.
On September 24, 2009, CSI and Clean Diesel entered into a
mutual confidentiality and non-disclosure agreement.
42
On September 25, 2009, Mr. Charlie Call, Chief
Executive Officer of CSI, telephonically presented CSIs
business and strategic objectives to Mr. Park using the
corporate overview sent to Mr. Park the prior week. The
discussion included a history of CSI, the basic catalyst
technology that gives CSI its competitive advantage and the
strengths and capabilities of CSIs Engine Control Systems
(ECS) business that focuses on heavy duty diesel systems.
Mr. Quinn of Allen & Company LLC also
participated in the call. During the call the parties agreed
that there were enough obvious synergies that further
discussions were warranted.
On September 30, 2009, a meeting was held at the offices of
Allen & Company LLC in New York. In attendance were
Alexander Ellis III, Chairman of the Board and Mr. Call
from CSI and Mr. Park, Mr. Asmussen, Chief Executive
Officer, and Mr. Rogers, VP of Operations from Clean
Diesel, along with Mr. Quinn and Ms. Denise
Calvo-Silver of Allen & Company LLC. It was agreed
that there were real synergies in technology, operations,
channels to market, business strategy and business focus between
the two companies. There was a consensus that the proposed
merger was worth exploring further and that the two management
teams should exchange more information to further analyze mutual
benefits. It was also decided that CSI would send to Clean
Diesel preliminary terms outlining a potential transaction and
that an outline of the merger process, cost and timeline be
prepared in order to understand the complexities associated with
the merger of a UK listed company and a U.S. listed company.
On October 15, 2009, Mr. Asmussen and Mr. Rogers
visited CSIs heavy duty diesel systems division (Engine
Control Systems, Ltd. or ECS) in Toronto, Canada. Mr. Call,
Dr. Stephen Golden, Founder and Chief Technical Officer of
CSI, and the management team of ECS were in attendance. During
this meeting the two sides shared detailed presentations
relative to technology and market strategies. The two teams
confirmed that Clean Diesel and CSI were complementary to each
other with regard to technology, product portfolios and channel
strategies in the diesel emissions market and that ECS provided
a strong manufacturing and distribution platform to further
commercialize Clean Diesel technology. Likewise, the two teams
agreed that Clean Diesels European and Asian Pacific sales
and marketing presence and capabilities would provide an
immediate opportunity to strengthen the ECS sales channels for
their verified products, an area of previous weakness. The two
teams began to create a list of real market opportunities where
the potential of the combined companies would begin to provide
real benefits in a relatively short time.
On October 26, 2009, Allen & Company LLC
forwarded to Mr. Park a draft term sheet along with a
merger process and timeline that had been approved by the CSI
Board of Directors in a telephonic board meeting held on the
same day. The merger process and timeline was created with input
from legal counsel and Allen & Company LLC as
CSIs advisors in this potential transaction.
On November 2, 2009, the draft term sheet received by
Mr. Park was reported to the full Clean Diesel Board of
Directors. In addition to the term sheet, the Board was given an
introductory presentation focused on CSI company details and
potential synergy opportunities discussed between the companies.
During that meeting, the Clean Diesel Board of Directors
approved an official response indicating an interest to continue
discussions and gave management their approval to continue to
engage CSI in further discussion.
On November 5, 2009, Mr. Asmussen provided Clean
Diesels official response indicating an interest to
continue discussions and further explore key financial questions
with regard to the transaction. The questions dealt with a
number of issues. First, the Clean Diesel Board had concerns
related to the short term feasibility of a deal from a cash
requirement perspective. Second, more information was requested
relative to business results and projections related to
individual CSI business units. Third, the Clean Diesel Board was
interested in exploring alternative options such as CSIs
willingness to sell the ECS business alone. Lastly, the Clean
Diesel Board wanted additional research into a potential
valuation approach that would be equitable and communicate a
positive message to the market.
On November 9 and 10, 2009, the management teams of the two
companies convened at CSIs offices in Ventura, California.
In attendance were Mr. Asmussen, Mr. Rogers and
Ms. Ann Ruple, the former Chief Financial Officer of Clean
Diesel, and Mr. Call, Dr. Golden, Mr. Nikhil
Mehta, Chief Financial Officer and Mr. David Shea,
Controller, of CSI. The objective of the meeting was to not only
address the questions raised by the Clean Diesel Board but also
discuss in a great level of detail the technology, financial
plans and
43
business strategies of the two companies. As a result, the two
teams developed a preliminary merger plan including synergies,
growth prospects and financial performance for presentation to
the respective boards.
In November 20, 2009, Innovator Capital Limited, a
financial services company (Innovator), was approved
by a committee of independent directors to begin assisting Clean
Diesel in identifying organizations that may be suitable to
Clean Diesels desire to engage in merger and acquisition
activities. Mr. Mungo Park, the Chairman of the Board of
Clean Diesel, is also the Chairman of Innovator. Innovator also
agreed to assist Clean Diesel in certain capital raising efforts.
On December 1, 2009, members of the respective management
teams met at CSIs ECS offices in Toronto, Canada.
Mr. Call, Mr. Golden, and several members of the ECS
management team were in attendance as was Mr. Rogers, Dan
Skelton, Clean Diesels Vice President of Sales and
Mr. Asmussen. The meeting was meant to review research and
development (R&D) programs and projects at ECS,
Clean Diesel and CSI (as those projects relate to ECS work) to
look for possible synergies, overlap or duplication in an effort
to identify R&D savings and opportunities to get to market
more quickly. The teams also prioritized R&D projects and
completed a review of the market opportunities as seen by each
respective group. Lastly, resources were examined to further
flesh out prime operating synergies.
On December 9, 2009, Clean Diesel sent its response to the
term sheet to CSI, indicating a desire by the board to move
forward with the merger. The response touched on the majority of
the terms but remained silent on the equity split due to the
fact that an equitable valuation method had yet to be identified.
On December 16, 2009, the Clean Diesel Board of Directors
approved a motion to engage Houlihan and Smith to complete an
enterprise value study on CSI. The intent of this study was to
provide the Board an independent view of the value of CSI. The
same valuation study had been completed previously on Clean
Diesel, which provided a detailed comparison from which the
Board could develop a view on the relative values of the two
entities.
During the period from early December 2009 to early January
2010, the two companies shared further technological and
financial information with each other. On January 6 and 7, 2010,
Mr. Asmussen, Mr. Rogers and Ms. Ruple met with
Mr. Call, Dr. Golden, Mr. Mehta and Mr. Shea
at CSIs offices in Ventura, California. The discussion
reflected the increase in working knowledge that both companies
had gained regarding the businesses, technologies and
capabilities of the other side. It was clear that the merger
would combine two complementary companies. From the discussions,
the two teams developed a detailed merger plan outlining
organization structure, sales plans, cost redundancies, merger
costs and various other related items.
On January 15, 2010 the Clean Diesel Board of Directors was
updated on the progress of the discussions by Mr. Asmussen.
In addition to the status update, the result of the Houlihan and
Smith valuation study was presented and the Clean Diesel. It
indicated relative valuations in the range of $14.7 million
for Clean Diesel and $14.2 million for CSI. The Clean
Diesel management team recommended that Innovator Capital be
given the approval to pursue final negotiations with
Allen & Company LLC and CSI.
On January 21, 2010, the Clean Diesel Board of Directors
provided their approval for Innovator Capital pursuing final
negotiations with Allen & Company LLC and CSI relative
to the transaction terms. This approval was based on information
provided through the valuation project, detailed operational,
strategic and technical analysis completed by the executive
management team and contemplation of alternative strategic
options.
On January 26, 2010, a revised term sheet was sent to CSI.
On February 12, 2010, Mr. Park met with
Mr. Ellis III in Boston. Mr. Quinn from
Allen & Company LLC was also in attendance.
Discussions were held on the terms of the merger, potential
board composition and executive team of the new merged company.
On February 15, 2010, Mr. Park, Mr. Derek Gray,
Director and Mr. Asmussen of Clean Diesel met with
Mr. Call at Allen & Company LLCs offices.
Mr. John Simon, Mr. Quinn and Ms. Calvo-Silver of
Allen & Company LLC were also present. At this meeting
the terms of the merger were further discussed between the
meeting attendees, subject to review and approval by each
companys board of directors.
44
On February 18, 2010, a draft term sheet was circulated to
both sides by CSI counsel.
On February 19, 2010, the Clean Diesel Board of Directors
met to review the proposed term sheet. The Board instructed
Clean Diesel management to further research certain discrete
details of the proposed transaction and further agreed that
documentation and information on progress would be circulated to
the directors and that a meeting would be called when action on
a definitive Agreement and Plan of Merger was required or if
other matters arise that would require a meeting.
On February 26, 2010, the key terms of the merger were
discussed at a CSI board meeting and the board asked CSI
management to proceed with the negotiation of the merger
agreement.
On March 4, 2010, CSIs Board of Directors met and
received an update from management and counsel regarding the
progress of negotiations and the key terms of the merger,
including the closing conditions with respect to CSIs cash
position and credit facility with Fifth Third. CSIs Board
asked CSI management to proceed with the negotiation of the
merger agreement.
On March 19, 2010, the respective working parties met to
discuss the status of the transaction and discuss the
finalization of remaining open issues.
On April 1, 2010, the key terms of the merger, along with
updates regarding CSIs ability to meet the closing
conditions with respect to CSIs cash position and credit
facility with Fifth Third, were discussed at a CSI board meeting
and the board asked CSI management to proceed with the
negotiation of the merger agreement.
On April 6, 2010, Clean Diesel Board Members Derek Gray and
John de Havilland participated on an informational conference
call with CSI executives Mr. Call, Dr. Golden and
Mr. Mehta. The purpose of the call was for Mr. Gray
and Mr. de Havilland to familiarize themselves with the
underlying details behind the CSI audited financials.
Mr. Gray and Mr. de Havilland were also interested in the
integration of CSI and Clean Diesel technology into heavy duty
diesel systems and CSIs view on fuel borne catalyst
technology opportunities in retrofit market applications.
From April 14 to April 16, 2010 Mr. Mehta and
Mr. Shea of CSI were present at the Bridgeport offices of
Clean Diesel to review and discuss respective financial
information and strategize as to how to approach the
S-4 filing
and the estimated financial position of the combined companies.
On April 15, 2010, the key terms of the merger, along with
updates regarding CSIs ability to meet the closing
conditions with respect to CSIs cash position and credit
facility with Fifth Third, were discussed at a CSI board meeting
and the board asked CSI management to proceed with the
negotiation of the merger agreement.
On April 19, 2010, the Clean Diesel Board of Directors was
advised on the status of the transaction as an agenda point of a
formal Board call. Also on April 19, Clean Diesel
terminated the employment of Ms. Ruple and approved the
hiring of John B. Wynne as Interim Chief Financial Officer.
On April 20, 2010, Mr. Ellis, Mr. Call,
Mr. Mehta & Mr. Quinn from CSI and
Allen & Company LLC and Mr. Park and
Mr. Asmussen from Clean Diesel convened a conference call
to discuss outstanding items with regard to the transaction and
timelines to close said items.
On April 24, 2010, Mr. Ellis, Mr. Call,
Mr. Mehta, Mr. Simon and Mr. Quinn from CSI and
Allen & Company LLC and Messrs. Park and Asmussen
from Clean Diesel convened a conference call to
follow-up on
the outstanding items discussed on April 20th.
On April 28, 2010, the Clean Diesel Board of Directors was
advised on the status of the transaction by legal counsel.
On April 30, 2010, the CSI Board of Directors was advised
on the status of the transaction by legal counsel and
management, including with respect to CSIs forbearance
agreement with Fifth Third and discussions with potential
investors in the proposed interim capital raise.
45
On May 3, 2010,the CSI Board of Directors was advised on
the status of the transaction by legal counsel and management,
including with respect to CSIs forbearance agreement with
Fifth Third and discussions with potential investors in the
proposed interim capital raise. The CSI Board instructed
management to proceed with the negotiation of the merger
agreement.
On May 7, 2010, CSIs Board of Directors met and
received presentations from management outlining the key terms
of the merger agreement, the status of negotiations with
potential investors in the necessary interim capital raise, and
received an update as to the status of managements
discussions with Fifth Third regarding extending the forbearance
agreement under CSIs credit facility. At the meeting,
CSIs Board instructed CSI management to proceed with the
negotiation and finalization of the merger agreement.
On May 10, 2010, John de Havilland, one of Clean
Diesels independent directors, resigned from the board of
directors of Clean Diesel.
On May 11, 2010, Clean Diesels board of directors met
and received presentations from Clean Diesels management
evaluating the merger and strategic alternatives, and Ardour
Capital discussing the terms of the proposed merger. They also
received indications that existing Clean Diesel stockholders
would subscribe to the shares and warrants that Clean Diesel
proposed to issue to raise approximately $1 million in
additional capital, and assurances from management that they
were confident that Clean Diesel would have a $4.5 million
cash position at June 30, 2010, which would avoid a
negative adjustment to the merger considerations. Following
these presentations, the Clean Diesel board voted unanimously to
approve the proposed merger, the form of merger agreement and
the associated transactions. Also on May 11, 2010, the
Clean Diesel board approved transition and severance
arrangements for certain of Clean Diesels employees,
totaling approximately $140,000.
On May 11, 2010, CSIs board of directors met and
received presentations from CSIs management evaluating the
merger and strategic alternatives, and Marshall &
Stevens discussing the terms of the proposed merger. CSIs
board of directors also received an update regarding the
preliminary terms (subject to final documentation) being
negotiated with certain existing CSI shareholders providing for
the sale of up to $4 million of subordinated convertible
notes at par, and assurances from management that they were
confident that CSI would reach agreement with Fifth Third bank
regarding finalization of an agreement to further extend
forbearance, subject to finalizing the terms of CSIs
capital raise such that CSI would meet the closing conditions
with respect to CSIs cash position and credit facility
with Fifth Third. Following these presentations, the CSI board
voted unanimously to approve the proposed merger, the form of
merger agreement and the associated transactions.
On May 13, 2010, CSIs Board of Directors met to be
updated on the status of discussions with CSIs interim
capital raise and Fifth Third bank and management indicated that
CSI and Clean Diesel anticipated entering into the formal merger
agreement as presented (and approved) by the Board on such date.
Clean
Diesels Reasons for the Merger; Recommendation of Clean
Diesels Board of Directors
Clean Diesels board of directors believes that the merger
is fair to, and in the best interest of, Clean Diesel and its
stockholders. Clean Diesels board of directors believes
that the combination of Clean Diesel and CSI will result in
greater financial stability and growth prospects than Clean
Diesel has operating alone. This is due primarily to the
mitigation of operating risks through the diversification and
stabilization of revenues, broadening of the product portfolio
and the potential for financial and operating synergies. The
combination of entities also provides:
|
|
|
|
|
Improved OEM channel access for Clean Diesel intellectual
property
|
|
|
|
Greater global scale, operating flexibility and market
credibility critical to future success
|
|
|
|
Strengthened technical capability with extensive and relevant
intellectual property creating a world class, diversified,
emission control company operating in both the OEM and retrofit
sectors
|
46
In concluding to approve the Merger, the board of directors of
Clean Diesel consulted with its management, as well as with its
financial and legal advisors, and considered a variety of
factors, including the following:
|
|
|
|
|
The belief that the merger with CSI represents the strategic
option most likely to maximize stockholder value after
consideration of prominent risk factors associated with several
strategic alternatives;
|
|
|
|
The expectation that the combined companys results of
operations should be able to grow at a more rapid rate than
either Clean Diesels or CSIs results of operations
are likely to grow on an independent basis;
|
|
|
|
The expectation that Clean Diesel after the Merger will be
better positioned to pursue and implement its business strategy;
|
|
|
|
The belief that the merger would result in a stronger and
financially more stable company which would provide a platform
for growth through complementary acquisitions;
|
|
|
|
The complementary nature of Clean Diesels and CSIs
respective business, management and employee cultures and skill
sets;
|
|
|
|
The similarity of the visions and values held by the respective
boards and management teams of Clean Diesel and CSI;
|
|
|
|
The expectation that the combined company should be able to
improve its results of operations by reducing redundant
operating expenses presently incurred by both Clean Diesel and
CSI;
|
|
|
|
The expectation that the Merger would increase Clean
Diesels revenues, increase internal resources, reduce net
loss and provide greater operational scale and financial
solidity;
|
|
|
|
The expectation that Clean Diesel would be able to sell to its
customers CSIs verified retrofit products while it was in
the process of undergoing testing required for its own
proprietary products;
|
|
|
|
The anticipated ability of the combined company to facilitate an
increase in revenue and gross profit from a broader and more
extensive combined portfolio of verified diesel emission
products and systems, an increased number of relationships with
OEMs and distribution partners, and cross-selling of CSIs
products to Clean Diesels customers;
|
|
|
|
The anticipated ability of the combined company to broaden its
geographic reach within the global diesel emissions industry;
|
|
|
|
The belief that the significant disparity in the relative market
capitalizations of Clean Diesel and CSI, and the terms of the
interim capital raises of Clean Diesel and CSI, each as compared
to the relative percentage that each of Clean Diesels
stockholders and CSIs shareholders will own in the
combined company, are not reflective of the actual values of the
two companies;
|
|
|
|
The results of Clean Diesels due diligence review of
CSIs business, finances and operations and its evaluation
of CSIs management, competitive positions and prospects;
|
|
|
|
The likelihood in the judgment of the board of directors of
Clean Diesel that the conditions to be satisfied prior to
consummation of the Merger transaction will be satisfied or
waived;
|
|
|
|
Under the terms of the Merger Agreement, another party could
make a superior acquisition proposal that could be accepted by
the board of directors of Clean Diesel, and that the termination
fee, payable to CSI in such situation, would not be a
significant impediment to accepting such proposal;
|
|
|
|
The judgment that the shares of CSI as the Surviving Subsidiary
issuable pursuant to the terms of the 2006 Equity Compensation
Plan of CSI and the Silicon Valley Bank warrant, if any, after
the Merger would not be material, and that the costs associated
with dealing on an arms length basis with the Surviving
Subsidiary after the Merger would not be material;
|
47
|
|
|
|
|
The belief that the tax benefits associated with Clean
Diesels tax loss carryforwards were unlikely to be
realized, and that the likely limitation on the use of those tax
loss carryforwards resulting from the Merger would not be
material; and
|
|
|
|
The fairness opinion obtained by Clean Diesel.
|
The actual benefits to be derived from the merger, costs of
integration and ability of the combined company to achieve
expected cost reductions and business synergies could differ
materially from the estimates and expectations discussed above.
Accordingly, the potential benefits described above or the
potential benefits described elsewhere in this joint proxy
statement/information statement and prospectus may not be
realized. In considering the merits of the merger, Clean
Diesels board of directors considered these negative
factors and the related risks involved, including the following:
|
|
|
|
|
The possibility that the anticipated benefits from the Merger
are not received by Clean Diesel;
|
|
|
|
The companies ability to successfully integrate operations
and realize expected synergies and cost reductions;
|
|
|
|
Availability, terms and use of capital to continue to grow the
companies business;
|
|
|
|
The costs of bringing CSIs financial reporting procedures
and accounting controls to U.S. public company standards
and the risks of failing to do so in a timely manner;
|
|
|
|
The costs of the Merger, including costs associated with the
integration of the businesses, technology, content, channel
relationships and employees of Clean Diesel and CSI;
|
|
|
|
Neither Clean Diesel nor CSI have experienced positive cash flow
from their operations, and the ability of the combined company
to achieve positive cash flow from operations, or finance
negative cash flow from operations, will depend on reductions in
their operating costs which may not be achievable;
|
|
|
|
If Clean Diesel has to pay the termination fee, it could
negatively affect Clean Diesels business operations;
|
|
|
|
The possibility of the loss of key employees following the
merger;
|
|
|
|
The possibility that Clean Diesel may pay a higher price for CSI
common stock if the value of Clean Diesel common stock
increases, because the value of the Clean Diesel common stock
issued in connection with the Merger will depend on its market
price at the time of the Merger and the exchange ratio for the
CSI shares of common stock at the closing of the Merger is fixed
by a formula that only adjusts the exchange ratio for changes in
each companys closing cash position;
|
|
|
|
The significant dilution of the stockholders of Clean Diesel as
a result of the merger consideration;
|
|
|
|
The possibility of a decline in the market price of Clean Diesel
common stock as a result of the large number of shares that will
become eligible for sale after consummation of the
Merger; and
|
|
|
|
The possibility that Clean Diesel may not have uncovered all the
risks associated with the acquisition of CSI and a significant
liability may be discovered after closing of the Merger, and the
Merger Agreement does not provide for Clean Diesels
indemnification by the former CSI shareholders against any of
CSIs liabilities, should they arise or become known after
the closing of the Merger.
|
For additional information concerning the above risks, see
RISK FACTORS beginning on page 13 and
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
on page 32.
The discussion of the information and factors considered by
Clean Diesels board of directors is not intended to be
exhaustive but includes many of the factors the board
considered. In reaching the determination to approve and
recommend the merger, Clean Diesels board of directors did
not assign any relative or specific weights to the foregoing
factors, and individual directors may have given differing
weights to different factors.
48
The CSI
Reasons for the Merger
In concluding to approve the Merger, the board of directors of
CSI consulted with its management, as well as with its financial
and legal advisors, and considered a variety of factors,
including the following:
|
|
|
|
|
The fact that the Merger will allow the CSI shareholders to gain
an equity interest in Clean Diesel, thus providing a vehicle for
continued participation by the CSI shareholders in the future
performance of not only the Surviving Subsidiary, but also of
Clean Diesel;
|
|
|
|
The increased liquidity available to CSI shareholders on a
U.S. securities exchange through receipt of the registered
shares of Clean Diesel;
|
|
|
|
The Merger will allow CSI shareholders to participate in a
better capitalized business, with operations of the enlarged
group having improved access to development capital;
|
|
|
|
The belief that the combined company after the Merger will be
better positioned to pursue and implement its business strategy;
|
|
|
|
The belief that the merger would result in a stronger and
financially more stable company that would provide a platform
for growth through complementary acquisitions;
|
|
|
|
The complementary nature of CSIs and Clean Diesels
respective business, management and employee cultures and skill
sets;
|
|
|
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The similarity of the visions and values held by the respective
boards and management teams of CSI and Clean Diesel;
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The expectation that the combined companys results of
operations should be able to grow at a more rapid rate than
either Clean Diesels or CSIs results of operations
are likely to grow on an independent basis;
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The expectation that the combined company should be able to
improve its results of operations by reducing redundant
operating expenses presently incurred by both Clean Diesel and
CSI;
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The expectation that the Merger would increase CSIs
revenues, reduce net loss and increase internal resources and
provide greater operational scale and financial solidity;
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The expectation that CSI would be able to sell to its customers
Clean Diesels verified fuel-borne catalyst products;
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The anticipated ability of the combined company to facilitate an
increase in revenue and gross profit from a broader and more
extensive combined portfolio of verified diesel emission
products and systems, an increased number of relationships with
OEMs and distribution partners, and cross-selling of Clean
Diesels products to CSIs customers and CSIs
products and systems to Clean Diesels customers;
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The anticipated ability of the combined company to broaden its
geographic reach within the global diesel emissions industry;
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The belief by the CSI Board that the alternative strategy of not
pursuing the merger and selling or liquidating CSIs assets
would not result in a comparable opportunity for CSIs
shareholders;
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Under the terms of the Merger Agreement, another party could
make a superior acquisition proposal that could be accepted by
the board of directors of CSI, and that the termination fee,
payable to Clean Diesel in such situation, would not be a
significant impediment to accepting such proposal;
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The results of CSIs due diligence review of Clean
Diesels business, finances and operations and its
evaluation of Clean Diesels management, technology,
competitive positions and prospects;
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The likelihood in the judgment of the board of directors of CSI
that the conditions to be satisfied prior to consummation of the
Merger transaction will be satisfied or waived;
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49
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The judgment that the shares of CSI as the Surviving Subsidiary
issuable pursuant to the terms of the CSI 2006 Equity
Compensation Plan and the Silicon Valley Bank Warrant after the
Merger, if any, would not be material, and that the costs
associated with dealing on an arms length basis with the
Surviving Subsidiary after the Merger would not be material;
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The belief that the tax benefits associated with CSIs tax
loss carryforwards were unlikely to be realized, and that the
likely limitation on the use of those tax loss carryforwards
resulting from the Merger would not be material; and
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The fairness opinion obtained by CSI.
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The actual benefits to be derived from the merger, costs of
integration and ability of the combined company to achieve
expected cost reductions and business synergies could differ
materially from the estimates and expectations discussed above.
Accordingly, the potential benefits described above or the
potential benefits described elsewhere in this joint proxy
statement/information statement and prospectus may not be
realized. In considering the merits of the merger, CSIs
board of directors considered these negative factors and the
related risks involved, including the following:
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The possibility that the anticipated benefits from the merger
are not received by CSI;
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The fact that Clean Diesels investments are in the form of
auction rate securities and that there is a limited market for
such securities and this could jeopardize the ability of Clean
Diesel to complete the merger with the cash required in the
merger agreement;
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The companies ability to successfully integrate operations
and realize expected synergies and cost reductions;
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Availability, terms and use of capital to continue to grow the
companies business;
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The costs of bringing CSIs financial reporting procedures
and accounting controls to U.S. public company standards
and the risks of failing to do so in a timely manner;
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The costs of the merger, including costs associated with the
integration of the businesses, technology, content, channel
relationships and employees of Clean Diesel and CSI;
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Neither Clean Diesel nor CSI have experienced positive cash flow
from their operations, and the ability of the combined company
to achieve positive cash flow from operations, or finance
negative cash flow from operations, will depend on reductions in
their operating costs which may not be achievable;
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If CSI has to pay the termination fee, it could negatively
affect CSIs business operations;
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The possibility of the loss of key employees following the
merger;
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The significant dilution of the stockholders of Clean Diesel as
a result of the merger consideration;
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The possibility of a decline in the market price of Clean Diesel
common stock as a result of the large number of shares that will
become eligible for sale after consummation of the
Merger; and
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The possibility that CSI may not have uncovered all the risks
associated with entering into a business combination with Clean
Diesel and a significant liability may be discovered after
closing of the Merger, and the Merger Agreement does not provide
for CSIs indemnification by the Clean Diesel shareholders
against any of Clean Diesels liabilities, should they
arise or become known after the closing of the Merger.
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Opinion
of the Financial Advisor of Clean Diesel
Clean Diesel retained Ardour Capital to render an opinion to the
Clean Diesel board of directors as to the fairness, from a
financial point of view, of the consideration to be paid to the
CSI common shareholders in connection with the Merger. On
May 11, 2010, at a meeting of the Clean Diesel board of
directors, Ardour Capital delivered an oral opinion and
subsequently delivered its written opinion that stated, as of
the date of the opinion and based upon and subject to various
assumptions and limitations described in the opinion, the
50
consideration to be paid to the CSI common shareholders in the
merger was fair, from a financial point of view, to Clean
Diesels common stockholders.
The full text of Ardour Capitals written opinion to the
Clean Diesel board of directors, which describes, among other
things, the assumptions made, procedures followed, factors
considered and limitations on the review undertaken, is attached
as Annex C to the joint proxy statement/information
statement and prospectus. The following summary of Ardour
Capitals opinion is qualified in its entirety by reference
to the full text of the opinion. Ardour Capital delivered its
opinion to the Clean Diesel board of directors for use in
connection with the Clean Diesel board of directors evaluation
of the merger consideration from a financial point of view.
Ardour Capitals opinion does not address any other aspect
of the merger and does not constitute a recommendation to any
stockholder as to how to vote with respect to the proposed
merger or any related matter. Holders of Clean Diesel common
stock are encouraged to read Ardour Capitals opinion for a
discussion of the procedures followed, factors considered,
assumptions made and qualifications and limitations of the
review undertaken by Ardour Capital in connection with its
opinion.
In connection with rendering the opinion described above and
performing its related financial analyses, Ardour Capital
reviewed:
(i) reviewed the draft Summary of Terms dated,
February 24, 2010, between Clean Diesel and CSI;
(ii) reviewed the draft Agreement and Plan of Merger dated
March 10, 2010 between Clean Diesel and CSI;
(iii) had discussions with management of Clean Diesel
regarding the history and nature, as well as the current and
future prospects for the environmental emissions control market
for Clean Diesels and CSIs technologies;
(iv) reviewed Clean Diesels audited financial
statements for the year ending December 31, 2009 filed with
the SEC on March 25, 2010;
(v) reviewed CSIs Managements Discussion
of Results and audited financial statements for the year
ended December 31, 2009, both as provided by Clean Diesel
management;
(vi) reviewed the capitalization table of Clean Diesel;
(vii) reviewed the capitalization of CSI with the exception
of a complete derivative securities provisions review;
(viii) reviewed Clean Diesels prepared financial
projections for 2010 through 2014;
(ix) reviewed CSIs financial projections for 2010 and
2011 included in the PDF version of the merger model provided by
Clean Diesels management;
(x) reviewed separate third party valuation assessments of
both Clean Diesel and CSI;
(xi) reviewed publicly available data for comparable
companies;
(xii) reviewed certain publicly available financial
information relating to Clean Diesel and CSI;
(xiii) reviewed a pro forma capitalization table and a pro
forma balance sheet dated May 3, 2010, both as of the
effective time of the contemplated merger, as jointly prepared
by management of CSI and Clean Diesel; and
(xiv) conducted such other financial studies, analyses,
investigations, and considered such other information as it
deemed necessary or appropriate.
In connection with its review, Ardour Capital did not
independently verify any of the information reviewed by it for
the purpose of its opinion and relied on such information being
complete and accurate in all material respects. In addition, it
did not make any independent evaluation or appraisal of any of
the assets or liabilities (contingent or otherwise) of Clean
Diesel or CSI, and had not been furnished with any such
evaluation or appraisal. Ardour Capital is not tax, accountancy
or other specialist advisors and did not make
51
any determination as to the value of Clean Diesels or
CSIs tax loss carry-forwards and assumed, based on Clean
Diesels managements assessment that no opportunity
exists for Clean Diesel to realize a material value through the
use of such tax loss carry-forwards, that the value of tax loss
carry forwards is not material to Clean Diesel. Its opinion is
necessarily based on economic, monetary, market and other
conditions as in effect on, and the information made available
to it as of, the date of its opinion.
Valuation
Methods
Generally a publicly traded companys value can be
determined by its market capitalization. The market
capitalization approach assumes an efficient marketplace for the
companys stock. In Ardour Capitals view the public
market capitalizations were an insufficient basis for valuation
of Clean Diesel and CSI for business combination purposes.
Ardour Capital also considered comparable transactions with
disclosed deal metrics, but considered there to be an absence of
available appropriate transaction metrics. In light of the lack
of transaction comparables and the lack of an efficient public
market for the securities of both Clean Diesel and CSI, Ardour
Capital used two primary acceptable valuation methods to
determine value: discounted cash flow analysis (DCF) and
comparable company analysis.
Discounted
Cash Flow Valuation
Discounted cash flow (DCF) analysis uses projected future free
cash flows and a terminal value for subsequent years beyond the
projected years, and discounts them to arrive at the present
value of a company. For a standard DCF, free cash flows are
calculated for 3 to 5 years using projections. Terminal
value is calculated based on either a multiple of terminal year
EBITDA (earnings before interest, taxes, depreciation, and
amortization) or of revenue. Terminal value can also be
calculated based on certain growth assumptions beyond the
terminal year.
Clean Diesel has similar characteristics to many other energy
technology research, development, and early commercialization
companies with respect to difficulty in predicting future
revenues. Due to the variability of the order size, timing,
competitive landscape, and Clean Diesels recent historical
revenue performance, Ardour Capital took the financial
projections provided by Clean Diesel for fiscal years through
2014 and applied a discount rate commensurate with the inherent
uncertainty in Clean Diesels future cash flows. Using a
discount rate of 70% and a terminal year revenue multiple of
1.00x revenues (based on comparable company analysis) results in
a Clean Diesel equity valuation of approximately
$7.7 million. Based on discussions with Clean Diesel
management, Ardour Capital believes that this discount rate and
multiple fairly depict Clean Diesels current market
valuation using the DCF methodology.
CSI also operates in the same industry. Accordingly, Ardour
Capital adopted a similar method of valuation. Due to the
variability of the order size, timing, and competitive
landscape, it took CSIs financial projections provided by
Clean Diesel and applied a discount rate commensurate with the
inherent uncertainty in CSIs future cash flows. Though
CSIs revenue performance has certainly been affected by
the economic downturn, it is comparable to that of its peer
group. Based on the two year projections provided and using a
relatively lower discount rate of 40% for CSI and a terminal
year revenue multiple of 1.00x revenues (based on comparable
company analysis) applied to the 2011 projected revenues
resulted in a CSI equity valuation of $21.3 million.
Ardour Capital performed a sensitivity analysis for the DCF
valuation for Clean Diesel. The results used variable discount
rates from 35% to 85% and terminal value revenue multiples from
.70 to 1.40. These sensitivity results produced equity
valuations from $6.1 million to $18.2 million. Ardour
Capital considered the range of values from $7 million to
approximately $8.5 million as the most plausible range.
A similar sensitivity analysis for CSI, using terminal value
multiples of .70 to 1.40, and discount rates of 25% to 75%,
produced equity values for CSI of approximately
$4.4 million to $45.1 million. Ardour Capital
considered the range of $16.2 million to $27.0 million
as the most plausible.
52
Comparable
Company Analysis
Comparable
Company Analysis
Comparable company analysis uses EBITDA or revenue multiples of
companies that have comparable business, target market,
revenues, earnings, and market capitalization. Because both
Clean Diesel and CSI had negative earnings, Ardour Capital used
revenue multiples for the analysis. There are a limited number
of publicly traded independent companies that may be considered
direct comparables, especially in terms of size and revenue. In
its analysis, Ardour Capital excluded companies with annual
revenues over $600 million. The same set of comparable
companies was used for both Clean Diesel and CSI as they operate
in similar sectors and are of comparable relative size. The
following companies have comparable businesses, are active in
the same industry, and are all revenue generating independent
publicly traded companies: Innospec, Inc., Twintec AG, CECO
Environmental Corp., Environmental Solutions Worldwide and Clean
Air Power Plc.
The companies were valued using last-twelve-month, estimated
2010 and projected 2011 revenue multiples. Ardour Capital felt
that this time frame was prudent given the uncertainty
associated with private investments and investor expectations
for a clear path to a liquidity harvest.
This analysis produced a mean equity value for Clean Diesel of
$12.7 million (within a range of $8.0 to
$15.7 million), and a mean equity value of CSI of
$38.3 million (within a range of $32.4 million to
$47.4 million).
Assumptions
The foregoing analyses were based on the following assumptions:
General
Assumptions
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Relative valuation of Clean Diesel and CSI was derived using
balance sheet data as of December 31, 2009
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CSI options and warrants are assumed not exercised as they are
out of the money and do not survive the Clean Diesel-CSI merger
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CSI options and warrants do not contain disruptive change of
control provisions
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Clean Diesel options and warrants were assumed not exercised,
but to survive the Clean Diesel-CSI merger
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Discounted
Cash Flow Assumptions
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CSI capital expenditures projections are not available and DCF
analysis does not include its effects on free cash flows
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Tax rates for both companies were assumed to be 35%
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Comparable
Company Analysis Assumptions
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The same set of comparable companies was used for both Clean
Diesel and CSI as they operate in similar sectors and are of
comparable relative size
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Actual equity values for Clean Diesel, CSI, and comparable
public companies were based on closing share prices on
May 6, 2010
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Currency conversion rates used were 1 GBP = $1.4827 and 1
= $1.2624 as of May 6, 2010 as quoted on Bloomberg LP.
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53
Opinion
of the Financial Advisor to the Board of Directors of
CSI
In connection with the merger, the Board of Directors engaged
Marshall & Stevens, Inc., or Marshall &
Stevens, to advise it as to the fairness, from a financial point
of view, of the consideration to be received by the holders of
its Class A Common Stock (the Class A Common
Stockholders) in the merger. On May 11, 2010,
Marshall & Stevens rendered its oral opinion and
subsequently submitted its written opinion to the Board of
Directors that, as of such date, and based upon qualifications,
assumptions, limiting conditions and other matters set forth in
such written opinion, the consideration to be received the
Class A Stockholders in the merger, as described in such
written opinion, is fair from a financial point of view to such
Class A Common Stockholders.
The Board of Directors selected Marshall & Stevens to
conduct this fairness review because Marshall &
Stevens is a nationally-recognized financial valuation firm that
is engaged in providing financial valuation services including
rendering fairness opinions in connection with mergers and
acquisitions and providing valuations of businesses and
securities for a variety of regulatory and planning purposes.
The full text of Marshall & Stevens written
opinion, which sets forth the assumptions made, matters
considered and limits on the review undertaken is attached as
Annex D to this joint proxy statement/information
statement and prospectus and is incorporated herein by reference
(the M&S Opinion). The summary of the M&S
Opinion is qualified in its entirety by reference to the full
text of that opinion. Persons reading this joint proxy
statement/information statement and prospectus are urged to
carefully read the M&S Opinion in its entirety, including
the description of assumptions and limiting conditions included
therein rather than rely upon this summary.
In reading the description of the M&S Opinion set forth
below, you should be aware that such fairness opinion
(1) was provided to CSIs Board of Directors for its
benefit in connection with the merger, (2) does not
constitute a recommendation to CSIs Board of Directors in
connection with the merger, (3) does not constitute a
recommendation to any equity holder of CSI as to how to vote in
connection with the merger and (4) does not address the
underlying business decision to pursue the merger or the
relative merits of the merger.
Overview
of Marshall & Stevens Fairness Opinion
Marshall & Stevens evaluated the fairness of the
merger to the Class A Common Stockholders from a financial
point of view. This analysis focuses on the comparative value of
the shares being given up in the merger and the securities being
received in the merger, and does not address procedural or other
aspects of the merger. The terms and conditions of the merger
were determined by negotiations between CSI and Clean Diesel.
Marshall & Stevens did not participate in those
negotiations and made no recommendation or other advice as to
the amount of consideration or form of consideration to be paid
to Class A Common Stockholders if the merger is consummated.
In connection with its opinion, Marshall & Stevens
made such reviews, analyses and inquiries as it deemed necessary
and appropriate under the circumstances. The information
considered is summarized in the M&S Opinion.
In rendering its opinion, Marshall & Stevens did not
independently verify the accuracy and completeness of the
financial information or other information furnished by CSI
orally or in writing, or other information obtained from
publicly available sources. Marshall & Stevens
reviewed the most current and best available estimates and
judgments of the management of CSI as to its expected future
financial and operating performance and did not undertake any
obligation to assess whether such forecasts, estimates or
judgments were reasonable or were likely to be accurate, nor did
Marshall & Stevens undertake any obligation
independently to verify the underlying assumptions made in
connection with such forecasts, estimates or judgments.
Marshall & Stevens did not make an independent
valuation or appraisal of any particular assets or liabilities
of CSI or Clean Diesel. The M&S Opinion is based on
business, economic, market and other conditions as they existed
as of the date of the opinion. Marshall & Stevens
assumed that the factual circumstances, agreements and terms, as
they existed at the date of the opinion, will remain
substantially unchanged through the time the merger is
completed. Marshall & Stevens did not (1) opine
as to the tax or
54
accounting treatment of the merger or any related matter
thereto, (2) assess the impact of compliance with any labor
laws, including without limitations, the federal Worker
Adjustment and Retraining Notification (WARN) Act, or
(3) independently verify any third party appraisals in
arriving at its opinion.
Additional assumptions and limiting conditions upon which the
opinion is based, include, without limitation, the following:
1. No investigation of legal title was made by
Marshall & Stevens, and Marshall & Stevens
rendered no opinion as to ownership of CSI or the underlying
assets; however, Marshall & Stevens did assume good
title as to CSIs assets and that the title of such assets
was marketable;
2. The dollar amount of any value reported by
Marshall & Stevens was based upon the purchasing power
of the U.S. dollar as of May 11, 2010, the date of the
opinion, and Marshall & Stevens assumes no
responsibility for economic or physical factors occurring
subsequent to the valuation date which may affect the opinion;
3. Information supplied by others that was considered in
Marshall & Stevens analysis is from sources
believed to be reliable, no further responsibility is assumed
for its accuracy and Marshall & Stevens reserves the
right to make adjustments to its opinion based upon
consideration of additional or more reliable data that may
become available subsequent to the issuance of its opinion;
4. Marshall & Stevens assumes there are no hidden
or unexpected conditions of the assets of CSI or Clean Diesel
that would adversely affect its opinion or CSIs or Clean
Diesels value; and
5. No opinion is expressed with respect to matters that
require legal or specialized expertise, investigation or
knowledge beyond that customarily employed by financial analysts.
None of the analysts involved nor any officer or director of
Marshall & Stevens has any financial interest in CSI
or Clean Diesel.
The following paragraphs summarize the material analyses
performed by Marshall & Stevens in arriving at its
opinion and reviewed with the Board of Directors of CSI, but do
not purport to be a complete description of the analyses
performed by Marshall & Stevens.
Valuation
Analysis of CSI and Clean Diesel
Marshall & Stevens reviewed background, stock price
performance, competitive position, competitive advantages,
financial position and operations of both CSI and Clean Diesel.
Marshall & Stevens also performed a review of their
industry. Marshall & Stevens evaluated the equity
values of CSI and Clean Diesel by utilizing the market
capitalization approach, income approach, and the public market
approach.
Market Capitalization Approach. CSI is
a publicly traded entity, listed on the London Stock Exchange
AIM, and its shares are available for public sale. Clean Diesel
is also a publicly traded entity, listed on the NASDAQ Stock
Market, and its shares are available for public sale. Therefore,
the public information presents an indication of value.
Marshall & Stevens utilized both the share price as of
the May 10, 2010 (Valuation Date), as well as
the calculated Volume-Weighted Average Share Price
(VWAP) for the 50 trading days and 200 trading days
prior to the Valuation Date. These stock prices were multiplied
by the total number of shares outstanding of each company to
give the total market value. Marshall & Stevens then
added a control premium. Marshall & Stevens added the
total debt and subtracted cash from each value to arrive at a
total enterprise value on a marketable, controlling basis.
Income Approach Discounted Cash Flow
Method. The income approach is used to
estimate the value of a Company based on expected future
economic benefits. The Discounted Cash Flow (DCF)
method is a commonly used valuation method under the income
approach. In applying the discounted cash flow method, an
identified level of cash flow is estimated for a finite period
of years. Annual estimated cash flows and a terminal value (the
continuing value or, in some cases, the estimated
value of the company at the end of the projection period) are
then discounted to present value, at an appropriate discount
rate, to arrive at an indication of fair market value. The
discount rate utilized reflects estimates of investor-required
rates of return
55
for investments that are seen as similar to an investment in the
subject company. The income approach is most relevant when
valuing an equity interest that is based on the premise that the
subject company is considered a going concern or a viable
business for the foreseeable future.
To apply the income approach, Marshall & Stevens used
management projections of each company from the valuation date
for the discrete and terminal period. Marshall &
Stevens then calculated the present value of periodic cash flow
using the weighted average cost of capital (WACC) of
CSI and Clean Diesel. Using a range of long-term rates of growth
and a range of WACC, Marshall & Stevens determined a
range of enterprise value based upon the income approach on the
marketable, controlling basis.
Market Approach Guideline Public Company
Method. The market approach is a valuation
approach in which the value of a business is estimated by
comparing the subject company to similar companies that have
been sold or whose ownership interests are publicly traded. The
Guideline Public Company Method compares the subject company to
comparable business interests (generally publicly traded) on a
minority, per share basis. Multiples are then selected and
applied to operating statistics for the subject interest, to
arrive at an indication of value. The market approach is most
relevant when valuing an equity interest that is based on the
premise that the subject company is considered a going concern
or a viable business for the foreseeable future. Furthermore,
this approach is most suitable when the selected guideline
companies or acquired companies are as similar as possible to
the subject company. Similarity can be affected by, among other
things, products or services produced or sold, geographic
markets served, competitive position, profitability, growth
expectations, size, risk perception, and capital structure.
Marshall & Stevens evaluated seven comparable
companies of CSI and six comparable companies of Clean Diesel to
determine a range of multiples, such as the last-twelve-months
(LTM) revenue, next-twelve-months (NTM) revenue, LTM EBITDA, and
NTM EBITDA with respect to enterprise value.
Marshall & Stevens applied a range of NTM revenue and
NTM EBITDA multiples to CSI and applied a range of NTM revenue
multiple to Clean Diesel. Then, Marshall & Stevens
added a control premium to determine a range of enterprise value
of CSI and Clean Diesel based upon the market approach on the
marketable, controlling basis.
In summary, using the market capitalization approach, the income
approach, and the market approach, Marshall & Stevens
concluded on an enterprise value of CSI and Clean Diesel.
Marshall & Stevens then weighted the three approaches
to conclude on a weighted enterprise value on a marketable,
controlling basis. In order to conclude on equity value on a
non-marketable, controlling basis, Marshall & Stevens
subtracted debt, then applied a marketability discount and added
cash and cash equivalents to the enterprise value.
Marshall & Stevens also considered the projected value
of Clean Diesel immediately after consummation of the merger,
using an income approach and a market approach. A market
capitalization approach was not used, as there is no trading
history on which Marshall & Stevens could rely, given
the materiality of the merger to Clean Diesel, as the surviving
entity.
Marshall & Stevens performed the fairness analysis
under the proposed deal structure utilizing the target scenario
and the worst case scenario. In each case, Marshall &
Stevens determined that the consideration to be received by the
Class A Common Stockholders was fair from a financial point
of view to the Class A common stockholders.
Other
Considerations
The preparation of a fairness opinion is a complex process that
involves various judgments and determinations as to the most
appropriate and relevant methods of financial and valuation
analysis and the application of those methods to the particular
circumstances. The opinion is, therefore, not necessarily
susceptible to partial analysis or summary description.
Marshall & Stevens believes that its analyses must be
considered as a whole and that selecting portions of its
analyses and the factors considered, without considering all of
the analyses and factors, would create a misleading and
incomplete view of the processes underlying its opinion.
Marshall & Stevens did not form an opinion as to
whether any individual analysis or factor, whether positive or
negative, considered in isolation, supported or failed to
support its opinion. In arriving at its opinion,
Marshall & Stevens did not assign any particular
weight to any analysis or factor considered by it, but rather
made qualitative judgments based upon its experience in
providing such opinions
56
and on then-existing economic, monetary, financial, capital
markets, general business and other conditions as to the
significance of each analysis and factor. In performing its
analyses, Marshall & Stevens, at CSIs direction
and with the consent of the Board of Directors, made assumptions
with respect to industry performance, general business
conditions and other matters, many of which are beyond the
control of CSI, the Board of Directors
and/or
Marshall & Stevens. Any assumed estimates implicitly
contained in Marshall & Stevens opinion or
relied upon by Marshall & Stevens in rendering its
opinion do not necessarily reflect actual values or predict
future results or values. Any estimates relating to the value of
the business or securities do not purport to be appraisals or to
necessarily reflect the prices at which companies or securities
may actually be sold or traded.
Pursuant to the terms of the executed engagement letter dated
March 11, 2010, CSI has agreed to pay Marshall &
Stevens a fee for its services in connection with its engagement
as financial advisor. No portion of Marshall &
Stevens fee was contingent upon the consummation of the
merger or the conclusions reached by Marshall &
Stevens in its written opinion.
Interests
of Clean Diesel Directors and Executive Officers in the
Merger
Certain directors and executive officers of Clean Diesel have
interests in the Merger that differ from, or are in addition to,
their interests as Clean Diesel stockholders. Specifically:
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Innovator Capital, an investment banking firm of which
Mr. Mungo Park is principal and chairman, Clean
Diesels non-executive Chairman, is advising Clean Diesel
with respect to its capital raising and the Merger, and will
receive a fee in respect of those activities. Pursuant to an
Engagement Letter with Innovator, it is estimated Mr. Park
will receive approximately $821,324 as compensation for
Innovators services in connection with the Merger. The fee
may be paid in cash or stock.
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Three of the directors of Clean Diesel, Mr. Park,
Mr. Gray and Mr. Asmussen, are expected to continue as
directors of Clean Diesel after the Merger. Two of the directors
of Clean Diesel, Mr. Grinnell and Mr. Merrion are
expected to resign at the effective time of the Merger and be
replaced by former directors of CSI.
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|
|
Clean Diesels President, Mr. Asmussen, has indicated his
intention to continue with Clean Diesel as its President through
the consummation of the Merger. CSI has indicated its desire
that Mr. Asmussen continue to serve Clean Diesel as its Chief
Commercial Officer subsequent to the effective time of the
Merger. It is expected that Clean Diesel and Mr. Asmussen will
discuss a mutually acceptable employment agreement to this
effect, but no assurances can be given that these discussions
will be successfully concluded. Any such employment agreement
entered into prior to the effective time of the Merger would
have to be approved by CSI as well.
|
The Clean Diesel board of directors was aware of these potential
conflicts of interest and considered them, among other matters,
in reaching its decision to approve the Merger Agreement and the
Merger, and to recommend that the Clean Diesel shareholders
approve the proposals to be presented to the Clean Diesel
shareholders for consideration at the annual as contemplated by
this joint proxy statement/information statement and prospectus.
As of the record date for the Clean Diesel annual meeting, the
directors and executive officers of Clean Diesel, together with
their affiliates, owned in the aggregate approximately
[ ] shares
of Clean Diesel common stock, entitling them to exercise
approximately [ ]% of the voting
power of the Clean Diesel common stock at the Clean Diesel
annual meeting. Clean Diesel cannot complete the Merger unless
the issuance of the shares of Clean Diesel common stock and
warrants to purchase shares of Clean Diesel common stock in
connection with the Merger is approved by the affirmative vote
of the holders of a majority of the shares of Clean Diesel
common stock voting at the Clean Diesel annual meeting.
57
Interests
of CSI Directors and Executive Officers in the Merger
Certain directors and executive officers of CSI have interests
in the Merger that differ from, or are in addition to, their
interests as CSI stockholders. Specifically:
|
|
|
|
|
Four of the directors of CSI, Mr. Call, Mr. Cherry,
Mr. Ellis and Dr. Engles, are expected to continue as
directors of Clean Diesel after the Merger.
|
|
|
|
CSIs three executive officers, Mr. Call, Chief
Executive Officer, Mr. Mehta, Chief Financial Officer and
Dr. Golden, Chief Technical Officer, are expected to
continue with Clean Diesel after the Merger pursuant to the
terms of their existing employment agreements which are expected
to be assumed by Clean Diesel at the effective time of the
Merger.
|
As of the record date for the CSI special shareholder meeting,
the directors and executive officers of CSI, together with their
affiliates, owned in the aggregate approximately
[ ] shares
of CSI common stock, entitling them to exercise approximately
[ ]% of the voting power of the CSI
common stock at the CSI annual meeting.
In considering the recommendation of the CSI board of directors
with respect to adopting the Merger Agreement, CSI shareholders
should be aware that certain members of the CSI Board of
Directors and certain executive officers of CSI have interests
in the Merger that may be different from, or in addition to,
interests they may have as CSI shareholders. The CSI board of
directors was aware of these potential conflicts of interest and
considered them, among other matters, in reaching their decision
to approve the Merger Agreement and the Merger, and to recommend
that the CSI shareholders approve the CSI proposals to be
presented to the CSI shareholders for consideration at the CSI
special meeting as contemplated by this joint proxy
statement/information statement and prospectus.
Indemnification
of CSI Officers and Directors
The Merger Agreement provides that Clean Diesel will cause to be
maintained by CSI, for a period of two years after the effective
time of the merger, directors and officers liability
insurance policy to cover the directors and officers of CSI or,
if Clean Diesel cannot procure such insurance, Clean Diesel will
cause the directors and officers of CSI to be covered for a
period of five years by a tail policy under the existing
directors and officers liability insurance policy of
Clean Diesel or CSI, as the case may be, with coverage in amount
and scope at least as favorable as the coverage under the
existing CSI policy at the time the Merger becomes effective;
provided, that Clean Diesel will not be required to spend
more than 200% per year of coverage of the amount currently
spent by Clean Diesel per year of coverage immediately prior to
the time that the Merger becomes effective.
Merger
Consideration
In exchange for their shares of CSI common stock, all CSI
shareholders will receive shares of Clean Diesel common stock
and each holder of shares designated as Class A common
stock will also receive a warrant to purchase shares of Clean
Diesel common stock at an exercise price to be set pursuant to a
formula at the effective time of the Merger. Each warrant to
purchase CSI common stock outstanding and not terminated or
exercised immediately prior to the effective time of the Merger
is expected to be converted into a warrant to purchase shares of
Clean Diesel common stock, except for warrants held by Silicon
Valley Bank, which could remain outstanding after the effective
time of the Merger. All options to purchase shares of CSI common
stock issued under CSIs 1997 Stock Option Plan that are
outstanding and unexercised immediately prior to the effective
time of the Merger will be terminated and cancelled. Options
issued under the 2006 Equity Compensation Plan will not
terminate, but will continue to be exercisable for shares of the
Surviving Subsidiary. However, CSI has undertaken to obtain the
consent of each current executive officer and director of CSI to
agree that options under the 2006 Equity Compensation Plan will
expire at the effective time of the Merger. CSI has undertaken
to use commercially reasonable efforts to obtain similar
agreements from each other holder. Options to purchase
686,000 shares under the 2006 Equity Compensation Plan are
not now subject to such agreements and could remain exercisable
after the effective time of the Merger.
58
The precise numbers of shares and warrants CSI shareholders will
receive cannot be determined now, and depend on a formula set
out in the Merger Agreement. In general, CSI shareholders will
receive such numbers of Clean Diesel common stock so that after
the Merger they will own 60% of the outstanding shares of Clean
Diesel common stock, subject to adjustment for the cash position
of each of CSI and Clean Diesel at closing. Each share of CSI
common stock to be designated Class A will also
be converted into the right to receive a ratable portion (based
on the number of shares of CSI Class A common stock
outstanding and
in-the-money
warrants) of warrants to purchase up to 3,000,000 shares of
Clean Diesel common stock. A number of warrants will be reserved
for possible issuance to holders of warrants to purchase CSI
common stock that are
in-the-money.
Both CSI and Clean Diesel intend to issue additional shares of
common stock prior to the Merger in order that they can finance
current operations and have, at the earlier of the effective
time of the Merger or June 30, 2010, at least a $2,000,000
cash position in the case of CSI, and at least a $4,500,000 cash
position in the case of Clean Diesel. As a result, neither the
number of outstanding shares of CSI common stock immediately
prior to the effective time of the Merger nor the number of
outstanding shares of Clean Diesel common stock immediately
prior to the effective time of the Merger can be known.
Although the interim capital raise is still subject to
definitive agreement between CSI and its accredited investors,
it is currently anticipated that CSI will sell an aggregate
$4,000,000 of convertible subordinated notes at par to a group
of accredited investors, $2,000,000 of which is expected to be
sold by CSI in four equal installments prior to the CSI special
meeting of shareholders, and the remaining $2,000,000 of which
is expected to be sold after shareholder approval of the merger
and necessary approvals under CSIs articles of
incorporation but prior to the effective time of the Merger. An
aggregate of approximately 137,887,188 shares of CSI common
stock is potentially issuable upon conversion of these notes.
Clean Diesel currently expects that its interim capital raise
will take the form of a sale of approximately
650,197 shares of its common stock and warrants to purchase
up to 1,000,000 shares of its common stock in a
Regulation S offering to raise approximately
$1 million. If these financing activities are completed in
this form, after the effective date of the Merger, and without
taking into account the further adjustment described in the next
paragraph, ownership of Clean Diesel would be distributed
approximately as follows:
|
|
|
|
|
Existing CSI Shareholders
|
|
|
16
|
%*
|
CSIs financial advisor
|
|
|
4
|
%*
|
Purchasers of CSI convertible subordinated notes
|
|
|
40
|
%
|
Existing Clean Diesel Shareholders
|
|
|
37
|
%
|
Purchasers of newly issued Clean Diesel shares
|
|
|
3
|
%**
|
|
|
|
* |
|
Does not give effect to warrants to purchase four million shares
of Clean Diesel common stock (up to three million of which are
part of the merger consideration and one million of which will
be issued to CSIs financial advisor). |
|
** |
|
Does not give effect to warrants to purchase one million shares
of Clean Diesel common stock. |
In addition, for every $166,666.66 by which CSIs cash
position at the earlier of the effective time of the Merger or
June 30, 2010 is less than $2,000,000, the percentage of
post-closing outstanding common stock of Clean Diesel to be held
by CSI shareholders will be reduced by 1%, but not below 48%
(and the percentage of post-closing outstanding common stock of
Clean Diesel to be held by Clean Diesel stockholders will be
increased by 1%, but not above 52%). For every $116,666.66 by
which Clean Diesels cash position at the earlier of the
effective time of the Merger or June 30, 2010 is less than
$4,500,000, the percentage of post-closing outstanding common
stock of Clean Diesel to be held by CSI shareholders will be
increased by 1%, but not above 90% (and the percentage of
post-closing outstanding common stock of Clean Diesel to be held
by Clean Diesel stockholders will be reduced by 1%, but not
below 10%).
59
The following table illustrates the effect of the adjustment for
cash position in terms of the percentage ownership of Clean
Diesel common stock held by CSI shareholders after the effective
time of the Merger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Position of CSI
|
|
Cash Position of Clean Diesel
|
|
|
|
$
|
2,000,000
|
|
|
$
|
1,750,000
|
|
|
$
|
1,500,000
|
|
|
$
|
1,250,000
|
|
|
$
|
1,000,000
|
|
|
$
|
750,000
|
|
|
$
|
500,000
|
|
|
$
|
250,000
|
|
|
$
|
0
|
|
$4,500,000
|
|
60%
|
|
|
59
|
%
|
|
|
57
|
%
|
|
|
56
|
%
|
|
|
54
|
%
|
|
|
53
|
%
|
|
|
51
|
%
|
|
|
50
|
%
|
|
|
48
|
%
|
|
|
|
|
$4,250,000
|
|
62%
|
|
|
61
|
%
|
|
|
59
|
%
|
|
|
58
|
%
|
|
|
56
|
%
|
|
|
55
|
%
|
|
|
53
|
%
|
|
|
52
|
%
|
|
|
50
|
%
|
|
|
|
|
$4,000,000
|
|
64%
|
|
|
63
|
%
|
|
|
61
|
%
|
|
|
60
|
%
|
|
|
58
|
%
|
|
|
57
|
%
|
|
|
55
|
%
|
|
|
54
|
%
|
|
|
52
|
%
|
|
|
|
|
$3,750,000
|
|
66%
|
|
|
65
|
%
|
|
|
63
|
%
|
|
|
62
|
%
|
|
|
60
|
%
|
|
|
59
|
%
|
|
|
57
|
%
|
|
|
56
|
%
|
|
|
54
|
%
|
|
|
|
|
$3,500,000
|
|
69%
|
|
|
67
|
%
|
|
|
66
|
%
|
|
|
64
|
%
|
|
|
63
|
%
|
|
|
61
|
%
|
|
|
60
|
%
|
|
|
58
|
%
|
|
|
57
|
%
|
|
|
|
|
$3,250,000
|
|
71%
|
|
|
69
|
%
|
|
|
68
|
%
|
|
|
66
|
%
|
|
|
65
|
%
|
|
|
63
|
%
|
|
|
62
|
%
|
|
|
60
|
%
|
|
|
59
|
%
|
|
|
|
|
$3,000,000
|
|
73%
|
|
|
71
|
%
|
|
|
70
|
%
|
|
|
68
|
%
|
|
|
67
|
%
|
|
|
65
|
%
|
|
|
64
|
%
|
|
|
62
|
%
|
|
|
61
|
%
|
|
|
|
|
$2,750,000
|
|
75%
|
|
|
73
|
%
|
|
|
72
|
%
|
|
|
70
|
%
|
|
|
69
|
%
|
|
|
67
|
%
|
|
|
66
|
%
|
|
|
64
|
%
|
|
|
63
|
%
|
|
|
|
|
$2,500,000
|
|
77%
|
|
|
76
|
%
|
|
|
74
|
%
|
|
|
73
|
%
|
|
|
71
|
%
|
|
|
70
|
%
|
|
|
68
|
%
|
|
|
67
|
%
|
|
|
65
|
%
|
|
|
|
|
$2,250,000
|
|
79%
|
|
|
78
|
%
|
|
|
76
|
%
|
|
|
75
|
%
|
|
|
73
|
%
|
|
|
72
|
%
|
|
|
70
|
%
|
|
|
69
|
%
|
|
|
67
|
%
|
|
|
|
|
$2,000,000
|
|
81%
|
|
|
80
|
%
|
|
|
78
|
%
|
|
|
77
|
%
|
|
|
75
|
%
|
|
|
74
|
%
|
|
|
72
|
%
|
|
|
71
|
%
|
|
|
69
|
%
|
|
|
|
|
$1,750,000
|
|
84%
|
|
|
82
|
%
|
|
|
81
|
%
|
|
|
79
|
%
|
|
|
78
|
%
|
|
|
76
|
%
|
|
|
75
|
%
|
|
|
73
|
%
|
|
|
72
|
%
|
|
|
|
|
$1,500,000
|
|
86%
|
|
|
84
|
%
|
|
|
83
|
%
|
|
|
81
|
%
|
|
|
80
|
%
|
|
|
78
|
%
|
|
|
77
|
%
|
|
|
75
|
%
|
|
|
74
|
%
|
|
|
|
|
$1,250,000
|
|
88%
|
|
|
86
|
%
|
|
|
85
|
%
|
|
|
83
|
%
|
|
|
82
|
%
|
|
|
80
|
%
|
|
|
79
|
%
|
|
|
77
|
%
|
|
|
76
|
%
|
|
|
|
|
$1,000,000
|
|
90%
|
|
|
88
|
%
|
|
|
87
|
%
|
|
|
85
|
%
|
|
|
84
|
%
|
|
|
82
|
%
|
|
|
81
|
%
|
|
|
79
|
%
|
|
|
78
|
%
|
|
|
|
|
$750,000
|
|
90%
|
|
|
90
|
%
|
|
|
89
|
%
|
|
|
88
|
%
|
|
|
86
|
%
|
|
|
85
|
%
|
|
|
83
|
%
|
|
|
82
|
%
|
|
|
80
|
%
|
|
|
|
|
$500,000
|
|
90%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
88
|
%
|
|
|
87
|
%
|
|
|
85
|
%
|
|
|
84
|
%
|
|
|
82
|
%
|
|
|
|
|
$250,000
|
|
90%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
89
|
%
|
|
|
87
|
%
|
|
|
86
|
%
|
|
|
84
|
%
|
|
|
|
|
$0
|
|
90%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
88
|
%
|
|
|
87
|
%
|
|
|
|
|
The following table illustrates the effect of the adjustment for
cash position in terms of the number of shares issued to CSI
shareholders in the aggregate, based on the assumption that
Clean Diesel would be issuing 14,236,269 shares of its
common stock in the absence of any adjustment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Position of CSI
|
|
Cash Position of Clean Diesel
|
|
|
|
$
|
2,000,000
|
|
|
$
|
1,750,000
|
|
|
$
|
1,500,000
|
|
|
$
|
1,250,000
|
|
|
$
|
1,000,000
|
|
|
$
|
750,000
|
|
|
$
|
500,000
|
|
|
$
|
250,000
|
|
|
$
|
0
|
|
$4,500,000
|
|
14,236,269
|
|
|
13,657,559
|
|
|
|
12,580,889
|
|
|
|
12,079,259
|
|
|
|
11,141,428
|
|
|
|
10,702,443
|
|
|
|
9,878,227
|
|
|
|
9,490,846
|
|
|
|
8,760,781
|
|
|
|
|
|
$4,250,000
|
|
15,485,065
|
|
|
14,844,657
|
|
|
|
13,657,559
|
|
|
|
13,106,406
|
|
|
|
12,079,259
|
|
|
|
11,599,923
|
|
|
|
10,702,443
|
|
|
|
10,281,750
|
|
|
|
9,490,846
|
|
|
|
|
|
$4,000,000
|
|
16,872,615
|
|
|
16,160,089
|
|
|
|
14,844,657
|
|
|
|
14,236,269
|
|
|
|
13,106,406
|
|
|
|
12,580,889
|
|
|
|
11,599,923
|
|
|
|
11,141,428
|
|
|
|
10,281,750
|
|
|
|
|
|
$3,750,000
|
|
18,423,407
|
|
|
17,625,857
|
|
|
|
16,160,089
|
|
|
|
15,485,065
|
|
|
|
14,236,269
|
|
|
|
13,657,559
|
|
|
|
12,580,889
|
|
|
|
12,079,259
|
|
|
|
11,141,428
|
|
|
|
|
|
$3,500,000
|
|
20,168,048
|
|
|
19,269,293
|
|
|
|
17,625,857
|
|
|
|
16,872,615
|
|
|
|
15,485,065
|
|
|
|
14,844,657
|
|
|
|
13,657,559
|
|
|
|
13,106,406
|
|
|
|
12,079,259
|
|
|
|
|
|
$3,250,000
|
|
22,145,307
|
|
|
21,124,786
|
|
|
|
19,269,293
|
|
|
|
18,423,407
|
|
|
|
16,872,615
|
|
|
|
16,160,089
|
|
|
|
14,844,657
|
|
|
|
14,236,269
|
|
|
|
13,106,406
|
|
|
|
|
|
$3,000,000
|
|
24,405,033
|
|
|
23,236,209
|
|
|
|
21,124,786
|
|
|
|
20,168,048
|
|
|
|
18,423,407
|
|
|
|
17,625,857
|
|
|
|
16,160,089
|
|
|
|
15,485,065
|
|
|
|
14,236,269
|
|
|
|
|
|
$2,750,000
|
|
28,472,538
|
|
|
27,012,408
|
|
|
|
24,405,033
|
|
|
|
23,236,209
|
|
|
|
21,124,786
|
|
|
|
20,168,048
|
|
|
|
18,423,407
|
|
|
|
17,625,857
|
|
|
|
16,160,089
|
|
|
|
|
|
$2,500,000
|
|
31,773,702
|
|
|
30,054,346
|
|
|
|
27,012,408
|
|
|
|
25,660,435
|
|
|
|
23,236,209
|
|
|
|
22,145,307
|
|
|
|
20,168,048
|
|
|
|
19,269,293
|
|
|
|
17,625,857
|
|
|
|
|
|
$2,250,000
|
|
35,703,659
|
|
|
33,649,363
|
|
|
|
30,054,346
|
|
|
|
28,472,538
|
|
|
|
25,660,435
|
|
|
|
24,405,033
|
|
|
|
22,145,307
|
|
|
|
21,124,786
|
|
|
|
19,269,293
|
|
|
|
|
|
$2,000,000
|
|
40,460,975
|
|
|
37,963,384
|
|
|
|
33,649,363
|
|
|
|
31,773,702
|
|
|
|
28,472,538
|
|
|
|
27,012,408
|
|
|
|
24,405,033
|
|
|
|
23,236,209
|
|
|
|
21,124,786
|
|
|
|
|
|
$1,750,000
|
|
46,337,660
|
|
|
43,236,076
|
|
|
|
37,963,384
|
|
|
|
35,703,659
|
|
|
|
31,773,702
|
|
|
|
30,054,346
|
|
|
|
27,012,408
|
|
|
|
25,660,435
|
|
|
|
23,236,209
|
|
|
|
|
|
$1,500,000
|
|
53,781,461
|
|
|
49,826,942
|
|
|
|
43,236,076
|
|
|
|
40,460,975
|
|
|
|
35,703,659
|
|
|
|
33,649,363
|
|
|
|
30,054,346
|
|
|
|
28,472,538
|
|
|
|
25,660,435
|
|
|
|
|
|
$1,250,000
|
|
63,515,662
|
|
|
58,300,911
|
|
|
|
49,826,942
|
|
|
|
46,337,660
|
|
|
|
40,460,975
|
|
|
|
37,963,384
|
|
|
|
33,649,363
|
|
|
|
31,773,702
|
|
|
|
28,472,538
|
|
|
|
|
|
$1,000,000
|
|
85,417,614
|
|
|
76,789,572
|
|
|
|
63,515,662
|
|
|
|
58,300,911
|
|
|
|
49,826,942
|
|
|
|
46,337,660
|
|
|
|
40,460,975
|
|
|
|
37,963,384
|
|
|
|
33,649,363
|
|
|
|
|
|
$750,000
|
|
85,417,614
|
|
|
85,417,614
|
|
|
|
76,789,572
|
|
|
|
69,599,537
|
|
|
|
58,300,911
|
|
|
|
53,781,461
|
|
|
|
46,337,660
|
|
|
|
43,236,076
|
|
|
|
37,963,384
|
|
|
|
|
|
$500,000
|
|
85,417,614
|
|
|
85,417,614
|
|
|
|
85,417,614
|
|
|
|
85,417,614
|
|
|
|
69,599,537
|
|
|
|
63,515,662
|
|
|
|
53,781,461
|
|
|
|
49,826,942
|
|
|
|
43,236,076
|
|
|
|
|
|
$250,000
|
|
85,417,614
|
|
|
85,417,614
|
|
|
|
85,417,614
|
|
|
|
85,417,614
|
|
|
|
85,417,614
|
|
|
|
76,789,572
|
|
|
|
63,515,662
|
|
|
|
58,300,911
|
|
|
|
49,826,942
|
|
|
|
|
|
$0
|
|
85,417,614
|
|
|
85,417,614
|
|
|
|
85,417,614
|
|
|
|
85,417,614
|
|
|
|
85,417,614
|
|
|
|
85,417,614
|
|
|
|
76,789,572
|
|
|
|
69,599,537
|
|
|
|
58,300,911
|
|
|
|
|
|
60
Procedures
for Exchange of CSI Stock Certificates
As soon as reasonably practicable after the completion of the
Merger, if you are a CSI shareholder, Clean Diesels
exchange agent will mail you a letter of transmittal and
instructions for use in surrendering your CSI stock (including
any stock certificates if you hold shares in certificated form)
for stock of Clean Diesel, a fractional share payment in lieu of
any fractional shares of Clean Diesel common stock and, if
applicable, warrants. When you deliver your CSI stock
certificates to the exchange agent along with a properly
executed letter of transmittal and any other required documents,
your CSI stock certificates will be cancelled. Holders of CSI
common stock will receive stock certificates for Clean Diesel
common stock, and, if applicable, warrants.
PLEASE DO NOT SUBMIT YOUR CSI STOCK CERTIFICATES FOR EXCHANGE
UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND LETTER
OF TRANSMITTAL FROM THE EXCHANGE AGENT.
If you hold CSI stock certificates, you will not be entitled to
receive any dividends or other distributions on Clean Diesel
common stock until the Merger is completed and you have
surrendered your CSI stock certificates in exchange for Clean
Diesel common stock. If Clean Diesel effects any dividend or
other distribution on the Clean Diesel common stock with a
record date occurring after the time the Merger is completed and
a payment date before the date you surrender your CSI stock
certificates, you will receive the dividend or distribution,
without interest, with respect to the whole shares of Clean
Diesel common stock issued to you after you surrender your CSI
stock certificates and the shares of Clean Diesel common stock
are issued in exchange. If Clean Diesel effects any dividend or
other distribution on the Clean Diesel common stock with a
record date after the date on which the Merger is completed and
a payment date after the date you surrender your CSI stock
certificates, you will receive the dividend or distribution,
without interest, on that payment date with respect to the whole
shares of Clean Diesel common stock issued to you.
If your CSI stock certificate has been lost, stolen or
destroyed, you may receive shares of Clean Diesel common stock
upon the making of an affidavit of that fact. Clean Diesel may,
in its discretion, require you to post a bond in such an amount
as Clean Diesel may determine is reasonable necessary as
indemnity against any claim that may be made against Clean
Diesel or the exchange agent with respect to the lost, stolen or
destroyed CSI stock certificate. Clean Diesel will issue stock
(or make a fractional share payment) in a name other than the
name in which a surrendered CSI stock certificate is registered
only if you present the exchange agent with all documents
required to show and effect the unrecorded transfer of ownership
and show that you paid any applicable stock transfer taxes.
Appraisal
Rights and Dissenters Rights
Rights
of Clean Diesel Stockholders
Clean Diesel stockholders are not entitled to dissenters
rights or appraisal rights under the Delaware General
Corporation Law in connection with the Merger.
Rights
of CSI Shareholders
CSI shareholders are entitled to exercise dissenters
rights in connection with the Merger under the provisions of
Sections 1300 through 1304 of Chapter 13 of the
California Corporations Code relating to the rights of
dissenting shareholders in the context of a merger.
The discussion below is not a complete summary regarding the
dissenters rights of CSI shareholders under the California
Corporations Code, and is qualified in its entirety by reference
to the text of the relevant provisions of the California
Corporations Code attached to this joint proxy
statement/information statement and prospectus as
Annex E. CSI shareholders intending to exercise
dissenters rights should carefully review
Annex E. Failure to follow precisely any of the
statutory procedures set forth in Annex E may result
in loss or waiver of dissenters rights. This summary does
not constitute legal or other advice, nor is it a recommendation
that CSI shareholders exercise dissenters rights under
California law.
61
Even though a CSI shareholder wishing to exercise
dissenters rights may be required to take certain actions
before the effective time of the Merger, if the Merger Agreement
is later terminated and the Merger is abandoned, no shareholder
of CSI will have the right to any payment from CSI by reason of
having taken that action. The following discussion is subject to
this qualification.
Within ten days after the approval of the Merger by CSI
shareholders, CSI will mail a notice of approval to each holder
of CSI common stock who did not vote their shares of CSI common
stock in favor of the Merger. This notice of approval must
include a statement of the price determined by CSI to be the
relevant fair market value of the shares of CSI common stock,
which statement will constitute an offer by CSI to purchase
shares of CSI common stock that qualify as dissenting
shares at the stated price if the Merger becomes
effective, unless such shares lose their status as
dissenting shares under Section 1309 of the
California Corporations Code. Chapter 13 of the California
Corporations Code provides that the fair market value, for this
purpose, is determined as of the day before the first
announcement of the Merger, excluding any appreciation or
depreciation as a consequence of the announcement of the Merger.
The notice of approval must also include a brief description of
the procedures to be followed by CSI shareholders who wish to
exercise their dissenters rights and a copy of
Sections 1300 through 1304 of Chapter 13 of the
California Corporations Code.
To exercise dissenters rights as to any of your shares of
CSI common stock in connection with the Merger, you must not
vote the CSI shares in favor of either the Merger or the Merger
Agreement, and you must make a written demand to have CSI
purchase your CSI shares at their fair market value.
The written demand must:
|
|
|
|
|
be received by CSI within 30 days after the date on which
the notice of approval is mailed to you by CSI (as described
above);
|
|
|
|
specify the number and class of CSI shares held of record by you
which you demand CSI purchase;
|
|
|
|
state that you are demanding purchase of your CSI shares and
payment of their fair market value; and
|
|
|
|
include a statement of the price you claim to be the fair market
value of the CSI shares as of the day before the announcement of
the terms of the Merger, which statement will constitute an
offer by you to sell your CSI shares to CSI at that price.
|
All written demands should be addressed to:
Catalytic
Solutions, Inc.
4567 Telephone Road
Suite 206
Ventura, California 93003
Attention: Investor Relations
In addition, within 30 days after the date on which the
notice of approval is mailed to you by CSI, you must submit to
CSI or its transfer agent the stock certificate(s) representing
the CSI shares as to which you wish to exercise dissenters
rights.
Under Chapter 13 of the California Corporations Code, a
dissenting CSI shareholder may not withdraw the demand for
payment of the fair market value of the shareholders
dissenting CSI shares in cash unless CSI consents.
If the shareholder and CSI agree that the shares of CSI common
stock as to which the shareholder is seeking dissenters
rights qualify as dissenting shares and also agree upon the
price to be paid to purchase the CSI shares, then the dissenting
shareholder is entitled to the agreed price with interest
thereon at the legal rate on judgments from the date of the
agreement. Any agreements fixing the fair market value of any
dissenting shares as between CSI and any dissenting CSI
shareholder must be filed with the Secretary of CSI.
However, if CSI disputes that the shareholders CSI shares
qualify as dissenting shares or CSI and the
dissenting shareholder fail to agree upon the fair market value
of the dissenting shares, then within six months
62
after the date on which CSI mailed the notice of approval, the
CSI shareholder must either file a complaint in the California
Superior Court of the proper county requesting the court to make
these determinations or intervene in a pending action brought by
another dissenting CSI shareholder. If the dissenting CSI
shareholder does not file a complaint or intervene in a pending
action within the specified six-month period, the
dissenters rights are lost.
If the court determines that the shareholders CSI shares
qualify as dissenting shares, then, following
determination of their fair market value, CSI will be obligated
to pay the dissenting CSI shareholder the fair market value of
the CSI shares, as so determined, together with interest thereon
at the legal rate from the date on which judgment is entered.
Payment on this judgment will be due upon the endorsement and
delivery to CSI of the stock certificate(s) for the CSI shares
as to which the dissenters rights are being exercised. Any
party may appeal from the judgment.
In determining the fair market value of the dissenting CSI
shares, the court may appoint one or more impartial appraisers
to make the determination. Within ten days of their appointment,
the appraiser, or a majority of them, will make and file a
report with the court. If the appraisers cannot determine the
fair market value within ten days of their appointment, or
within a longer time determined by the court, or the court does
not confirm their report, then the court will determine the fair
market value. The costs of the appraisal action, including
reasonable compensation to the appraisers appointed by the
court, will be allocated between CSI and dissenting CSI
shareholder as the court deems equitable. However, if the
appraisal of the fair market value of the CSI shares exceeds the
price offered by CSI in the notice of approval, then CSI shall
pay the costs. If the fair market value of the shares awarded by
the court exceeds 125% of the price offered by CSI, then the
court may in its discretion impose additional costs on CSI,
including attorneys fees, fees of expert witnesses and
interest.
CSI shareholders considering whether to exercise
dissenters rights should consider that the fair market
value of their CSI common stock determined under Chapter 13
of the California Corporations Code could be more than, the same
as or less than the value of merger consideration to be paid in
connection with the Merger, as set forth in the Merger
Agreement. Also, CSI reserves the right to assert in any
appraisal proceeding that, for purposes thereof, the fair market
value of the CSI common stock is less than the value of the
merger consideration to be issued and paid in connection with
the Merger, as set forth in the Merger Agreement.
Strict compliance with certain technical prerequisites is
required to exercise dissenters rights. CSI shareholders
wishing to exercise dissenters rights should consult with
their own legal counsel in connection with compliance with
Chapter 13 of the California Corporations Code. Any CSI
shareholder who fails to comply with the requirements of
Chapter 13 of the California Corporations Code, attached as
Annex E to this joint proxy statement/information
statement and prospectus, will forfeit the right to exercise
dissenters rights and will, instead, receive the merger
consideration to be issued and paid in connection with the
Merger, as set forth in the Merger Agreement.
The Merger Agreement provides that Clean Diesel will not be
required to complete the Merger if dissenters rights have
been exercised with respect to 3% or more, in the aggregate, of
all outstanding CSI common stock. As a result, exercise of
dissenters rights with respect to 3% or more of the
outstanding shares of CSI common stock could prevent the Merger
from going forward. Clean Diesel is entitled to waive this
requirement and permit the Merger to proceed even if 3% or more
of the outstanding CSI common stock exercise dissenters
rights.
NASDAQ
Listing of Clean Diesel Shares Issued in Connection with
the Merger
Clean Diesel will use commercially reasonable efforts to cause
all shares of Clean Diesel common stock to be issued in
connection with the Merger and all shares of Clean Diesel common
stock to be issued upon exercise of the warrants to purchase
shares of Clean Diesel common stock to be listed on the NASDAQ
Stock Market as of the effective time of the Merger, and the
Merger Agreement provides that neither Clean Diesel nor CSI will
be required to complete the Merger if the shares of Clean Diesel
common stock to be issued in connection with the Merger are not
approved for listing, subject to notice of issuance, on the
NASDAQ Stock Market.
63
Effective
Time of the Merger
The Merger will be completed and become effective at the time
Merger Sub merges with and into CSI and the certificate of
amendment is filed with the Secretary of State of the State of
California. The parties intend to complete the Merger as soon as
practicable following the approval and adoption of the Merger
Agreement and the issuance of the shares of Clean Diesel common
stock in connection with the Merger by each of the CSI
shareholders and Clean Diesel stockholders, respectively, and
the satisfaction or waiver of the conditions to closing of the
Merger set forth in the Merger Agreement. The parties to the
Merger Agreement currently anticipate that the Merger will be
completed sometime in the third quarter of 2010. However,
because the Merger is subject to a number of conditions, the
exact timing of the completion of the Merger cannot be
determined with any certainty, if it is completed at all.
The Board
of Directors and Management of Clean Diesel and CSI Following
the Merger
After completion of the Merger, the Clean Diesel board of
directors will consist of seven directors. Clean Diesel
currently anticipates that the following individuals will serve
as its board of directors immediately following completion of
the Merger:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Charles F. Call
|
|
|
62
|
|
|
Director, Chief Executive Officer
|
Alexander Ellis, III
|
|
|
61
|
|
|
Director
|
Dr. Charles R. Engles
|
|
|
62
|
|
|
Director
|
Bernard H. Cherry
|
|
|
70
|
|
|
Director
|
Michael L. Asmussen
|
|
|
39
|
|
|
Director, Chief Commercial Officer
|
Mungo Park
|
|
|
53
|
|
|
Director
|
Derek R. Gray
|
|
|
76
|
|
|
Director
|
For information regarding the business experience and
qualifications of the directors, see biographies included under
the section titled Management Following The
Merger Executive Officers and Directors
Directors of the Combined Company.
After completion of the Merger, the Clean Diesel executive
officers are expected to be Charles F. Call, Nikhil A. Mehta,
Stephen J. Golden, Ph.D. and Michael L. Asmussen. For
information regarding the business experience and qualifications
of the officers, see biographies included under the section
titled Management Following The Merger
Executive Officers and Directors Executive Officers
of the Combined Company.
As a result of the Merger, CSI will be a California corporation
and a wholly-owned subsidiary of Clean Diesel.
Ownership
of Clean Diesel Following the Merger
After the Merger, CSI will continue as a wholly-owned subsidiary
of Clean Diesel, subject to potential future dilution, and CSI
shareholders will no longer have any interest in CSI, but will
have an equity stake in Clean Diesel, the new parent company of
CSIs operations. Immediately after the Merger, and
assuming no adjustments for the cash position of each company
existing Clean Diesel stockholders are expected to own
approximately 40% of the outstanding shares of Clean Diesel
common stock and the former CSI shareholders are expected to own
approximately 60% of the outstanding shares of Clean Diesel
common stock.
For detailed information regarding the beneficial ownership of
certain key stockholders of the combined company prior to and
after consummation of the Merger, see the sections entitled
Principal Stockholders of
64
Clean Diesel and Principal Shareholders of CSI
and Principal Stockholders of Combined Company in
this joint proxy statement/information statement and prospectus.
Anticipated
Accounting Treatment
For accounting purposes, CSI will be acquiring Clean Diesel,
which means that the assets and liabilities of Clean Diesel will
be recorded at their fair value and results of operations of
Clean Diesel will be included in CSIs results from and
after the effective time of the Merger in accordance with FASB
Accounting Standards Codification (ASC) Topic 805, Business
Combinations.
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER
The following discussion of material U.S federal income tax
consequences of the Merger to CSI shareholders and warrant
holders is based on the Internal Revenue Code of 1986, as
amended (Code), the related Treasury regulations,
administrative interpretations, and court decisions, all of
which are subject to change, possibly with retroactive effect.
Any such change could affect the accuracy of the statements and
the conclusions discussed below and the presently anticipated
tax consequences of the Merger. This discussion applies only to
CSI shareholders and warrant holders that hold their shares of
CSI common stock and warrants to purchase shares of CSI common
stock, and will hold any shares of Clean Diesel common stock and
warrants to purchase shares of Clean Diesel common stock
received in exchange therefor, as capital assets within the
meaning of Section 1221 of the Code. This discussion does
not address all federal income tax consequences of the Merger
that may be relevant to particular CSI shareholders or warrant
holders, including shareholders or warrant holders that are
subject to special tax rules. Some examples of shareholders and
warrant holders that are subject to special tax rules are:
dealers in securities; financial institutions; insurance
companies; tax-exempt organizations; holders of shares of CSI
common stock or warrants to purchase shares of CSI common stock
as part of a position in a straddle or as part of a
hedging or conversion transaction;
holders who have a functional currency other than
the U.S. dollar; holders who are foreign persons; holders
who own their shares or warrants indirectly through
partnerships, trusts or other entities that may be subject to
special treatment; and shareholders or warrant holders who
acquired their shares of CSI common stock or warrants as
compensation.
In addition, this discussion does not address any consequences
arising under the laws of any state, local or foreign
jurisdiction. CSI SHAREHOLDERS AND WARRANT HOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO SPECIFIC TAX CONSEQUENCES
TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF
ANY STATE, LOCAL OR FOREIGN TAX LAWS AND OF CHANGES IN
APPLICABLE TAX LAWS.
Treatment
of the Merger as a Reorganization
The parties have structured the Merger with the intent that it
qualify as a reorganization under Section 368 of the Code.
The qualification of the Merger as a reorganization depends on
compliance with the technical requirements of Section 368
of the Code including in particular whether CSI shareholders
will receive a sufficient amount of Clean Diesel common stock to
satisfy the continuity of interest test set forth in
the Treasury regulations promulgated under Section 368 and
the control test set forth in
Section 368(a)(2)(E) of the Code. The continuity of
interest test requires that, after the Merger, a
substantial part of the value of the proprietary interests in
CSI be maintained through the ownership of Clean Diesel common
stock. Current Treasury regulations provide several examples in
which a continuing proprietary interest is maintained where the
target shareholders receive stock in the acquiring corporation
worth 40% of the total consideration received. The Treasury
regulations also provide that in determining whether a
proprietary interest in an acquired corporation is preserved in
an acquisition, the consideration issued to the shareholders of
the acquired corporation shall be valued on the last business
day before the signing of a binding contract providing for fixed
consideration for the acquisition. The control test
requires that the CSI shareholders receive Clean Diesel voting
stock in exchange for stock possessing 80% of the voting power
of CSI. Clean Diesel and CSI believe that under the Treasury
regulations the value of the stock portion of the Merger
consideration as of the
65
valuation date should represent approximately 96% of the total
estimated value of the Merger consideration based on the trading
price of Clean Diesel stock, such that more than 80% of the
common voting stock of CSI is being acquired in exchange for
shares of common stock of Clean Diesel. Accordingly, it is
anticipated that both the continuity of interest and control
tests will be met.
Clean Diesel and CSI, however, cannot assure you that the
Internal Revenue Service will accept Clean Diesels and
CSIs position on the value of the shares of Clean Diesel
common stock, the warrants to purchase shares of Clean Diesel
common stock or the discounts, adjustments and other factors
that have been used to arrive at such estimated values. If the
Internal Revenue Service were to challenge the analysis and
successfully contend that the Merger failed to qualify as a
reorganization, the Merger would be a fully taxable transaction
to CSI shareholders. Clean Diesel does not intend to obtain a
ruling from the Internal Revenue Service with respect to the
federal income tax consequences of the Merger. No assurance can
be given that contrary positions will not successfully be
asserted by the Internal Revenue Service or adopted by a court
if the issues are litigated.
The following are the material federal income tax consequences
to CSI shareholders who receive their shares of Clean Diesel
common stock pursuant to a transaction constituting a
reorganization within the meaning of Section 368(a) of the
Code.
Consequences
to CSI Shareholders under Reorganization Treatment
If the Merger constitutes a reorganization, CSI shareholders who
exchange CSI common shares for shares of Clean Diesel common
stock and warrants to purchase shares of Clean Diesel common
stock pursuant to the Merger will not recognize gain in respect
of the shares of Clean Diesel common stock and warrants to
purchase shares of Clean Diesel common stock received in the
exchange (but may recognize an immaterial gain in the amount of
any cash received in respect of fractional shares, which gain
would generally be treated as capital gain or as a dividend).
The aggregate tax basis in the Clean Diesel common stock and
warrants to purchase Clean Diesel common stock received pursuant
to the Merger will be equal to the aggregate tax basis in the
shares of CSI common stock surrendered in the transactions, such
basis to be allocated among the Clean Diesel common stock and
warrants to purchase Clean Diesel common stock according to
their respective fair market values and increased ratably by the
amount of gain, if any, recognized or any amount treated as a
dividend. The holding period of the Clean Diesel common stock
and warrants to purchase Clean Diesel common stock received in
the Merger by a holder of shares of CSI common stock will
include the holding period of the shares of CSI common stock
that he or she surrendered in exchange therefor. If a CSI
shareholder has differing tax bases
and/or
holding periods in respect of the shareholders CSI common
stock, the CSI shareholder should consult with a tax advisor in
order to identify the tax bases
and/or
holding periods of the particular shares of Clean Diesel common
stock and warrants to purchase shares of Clean Diesel common
stock that the CSI shareholder receives pursuant to the Merger.
Consequences
to CSI Warrant Holders under Reorganization Treatment
If the Merger constitutes a reorganization, CSI warrant holders
who exchange their warrants to purchase shares of CSI common
stock for warrants to purchase shares of Clean Diesel common
stock pursuant to the Merger will be treated under Treasury
Regulation Section 1.354-
1(e) as receiving securities with no principal amount and as
such will not recognize any gain or loss in the exchange. The
aggregate tax basis in the warrants to purchase shares of Clean
Diesel common stock received pursuant to the Merger will be
equal to the aggregate tax basis in the warrants to purchase
shares of CSI common stock surrendered in exchange therefor. The
holding period of the warrants to purchase shares of Clean
Diesel common stock received in the Merger will include the
holding period of the warrants to purchase shares of CSI common
stock surrendered in exchange therefor. If a CSI warrant holder
has differing tax bases
and/or
holding periods in respect of its CSI warrants, the CSI warrant
holder should consult with a tax advisor in order to identify
the tax bases
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and/or
holding periods of the particular warrants to purchase shares of
Clean Diesel common stock that the CSI warrant holder receives
pursuant to the Merger.
Consequences
to Clean Diesel and CSI
Neither Clean Diesel nor CSI will recognize a gain or loss as a
result of the Merger, except for any gain that might arise if
Clean Diesel pays cash or property to CSI in connection with
these transactions and such cash or property is not distributed
to CSI shareholders. Clean Diesel does not expect any such gain
to be material.
Consequences
to Clean Diesel Shareholders
Clean Diesel shareholders will not recognize gain or loss as a
result of the Merger, whether or not the Merger qualifies as a
reorganization under Section 368 of the Code.
Consequences
to CSI Shareholders and Warrant Holders if Merger is Treated as
a Fully Taxable Transaction
If for any reason the Merger failed to qualify as a
reorganization, the Merger would be a fully taxable transaction
to CSI shareholders and warrant holders. In such case, CSI
shareholders and warrant holders would recognize gain or loss
measured by the difference between the value of all
consideration received by them in the Merger and their tax basis
in the shares of CSI common stock and the warrants to purchase
shares of CSI common stock, as the case may be, surrendered in
the Merger. The aggregate tax basis in the Clean Diesel common
stock received pursuant to the Merger will be equal to the fair
market value of such stock at the time of the Merger. The
holding period of such Clean Diesel common stock will begin on
the date immediately following the date of the Merger.
Information
Reporting and Backup Withholding
Certain U.S. holders may be subject to information
reporting with respect to the cash received in exchange for
shares of CSI common stock. U.S. holders who are subject to
information reporting and who do not provide appropriate
information when requested may also be subject to backup
withholding. Any amount withheld under such rules is not an
additional tax and may be refunded or credited against such
U.S. holders federal income tax liability, provided
that the required information is properly furnished in a timely
manner to the Internal Revenue Service.
Treatment
of Net Operating Loss Carryforwards
CSI had approximately $89.8 million and $70.5 million
of federal and state income tax net operating loss carry
forwards at December 31, 2009, respectively and Clean
Diesel had approximately $53.7 million and
$39.9 million of federal and state income tax net operating
loss carry forwards at December 31, 2009, respectively. The
federal and state income tax net operating loss carry forwards
for CSI expire starting in 2017 and 2012, respectively and those
of Clean Diesel expire starting in 2010 and 2020 respectively.
Future utilization of the net operating losses and credit carry
forwards are subject to a substantial annual limitation due to
ownership change limitations as required by Sections 382
and 383 of the Internal Revenue Code of 1986, as amended (the
Code), as well as similar state limitations. Due to
previous share ownership changes and the substantial change in
capitalization and share ownership caused by this Merger, both
companies are expected to be subjected to such limitations. As
such, tax loss carryforwards will be limited going forward.
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THE
MERGER AGREEMENT
This section is a summary of the material provisions of the
Merger Agreement. Because it is a summary, it does not include
all the information that may be important to you. Clean Diesel
and CSI encourage you to read carefully the entire copy of the
Merger Agreement, which, with the exception of schedules and
exhibits, is attached as Annex A to this joint proxy
statement/information statement and prospectus, before you
decide how to vote.
The Merger Agreement has been included to provide you with
information regarding its terms. It is not intended to provide
any other factual information about Clean Diesel, CSI or Merger
Sub. Such information can be found elsewhere in this proxy
statement and in the other public filings Clean Diesel makes
with the Securities and Exchange Commission, which are available
without charge at www.sec.gov.
The Merger Agreement contains representations and warranties
that Clean Diesel, CSI and Merger Sub made to each other as of
specific dates. The assertions embodied in those representations
and warranties were made solely for purposes of the contract
between Clean Diesel, CSI and Merger Sub and may be subject to
important qualifications and limitations agreed to by Clean
Diesel, CSI and Merger Sub in connection with negotiating its
terms. The representations and warranties of Clean Diesel, CSI
and Merger Sub may be intended not as statements of fact, but
rather as a way of allocating the risk to one of the parties if
those statements prove to be inaccurate. Moreover, certain
representations and warranties may not be accurate or complete
as of any specified date because they are subject to a
contractual standard of materiality different from those
generally applicable to stockholders or were used for the
purpose of allocating risk among Clean Diesel, CSI and Merger
Sub rather than establishing matters as facts. For the foregoing
reasons, you should not rely on the representations and
warranties as statements of factual information.
General
Pursuant to the Merger Agreement, through a merger CSI will
become a wholly-owned subsidiary of Clean Diesel, subject to
potential future dilution. The Merger Agreement provides that
CDTI Merger Sub, Inc., a California corporation and wholly-owned
subsidiary of Clean Diesel (Merger Sub), will merge
with and into CSI, with CSI as the surviving corporation (the
Surviving Subsidiary). In exchange for their shares
of CSI common stock, the securityholders of CSI will receive
shares of Clean Diesel common stock and each holder of shares
designated as Class A common stock will also receive
warrants to purchase shares of Clean Diesel common stock.
Merger
Consideration
At the effective time of the Merger, each share of issued and
outstanding CSI common stock (as it may be redesignated
Class A Common Stock) existing immediately prior to the
effective time of the Merger will, without any action on the
part of the shareholder thereof, automatically be retired and
cease to exist and be converted into the right to receive the
Class A Merger Consideration as described under
the heading Determination of Shares of Clean Diesel Common
Stock below. However, the CSI securities described below
will not be converted into the Class A Merger Consideration:
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CSI shares owned by Clean Diesel or the Merger Sub
these CSI shares will be cancelled without consideration;
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CSI shares held by CSI these CSI shares will be
cancelled without consideration;
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CSI shares that are held by shareholders properly demanding and
perfecting dissenters rights pursuant to
Sections 1300-1313
of the California Corporations Code (the dissenting
shares) these CSI shares will be entitled to
receive the consideration provided for pursuant to
Sections 1300-1313
of the California Corporations Code; and
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CSI common stock to be designated as Class B common stock;
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At the effective time of the Merger, by virtue of the Merger and
without any action on the part of the holder of any shares of
the capital stock of the CSI, each share of CSI common stock to
be designated as
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CSIs Class B common stock issued and outstanding
immediately prior to the effective time of the Merger shall be
converted into the Class B Merger Consideration as
described under the heading Determination of Shares of
Clean Diesel Common Stock.
Determination
of Shares of Clean Diesel Common Stock
Each share of CSIs common stock (as it may be redesignated
as CSIs Class A common stock prior to the effective
time of the Merger) issued and outstanding immediately prior to
the effective time of the Merger (including (i) shares of
CSI common stock issued by CSI in connection with the Merger,
and (ii) any shares of CSI common stock other than shares
of CSIs Class B common issued upon exercise or
conversion of any securities that may be issued in connection
with the issuance of securities or the incurrence of debt or
other obligations of the CSI, the proceeds of which may be used
by CSI to supplement its cash position; provided that any debt
shall have been repaid, converted to equity or otherwise
extinguished not later than the closing date of the Merger) will
be converted into:
(a) a number of shares of Clean Diesel common stock equal
to the number obtained by dividing (i) the Aggregate
Class A Consideration by (ii) the number of
Outstanding CSI Shares and (b) warrants to acquire a number
of shares of Clean Diesel Common Stock equal to the quotient
obtained by dividing (i) 3,000,000 by (ii) the number
of Outstanding CSI Shares.
The shares of Clean Diesel common stock referred to in
clause (a) and the warrants referred to in clause (b)
above are sometimes collectively referred to as the
Class A Merger Consideration.
At the effective time of the Merger, by virtue of the Merger and
without any action on the part of the holder of any shares of
the capital stock of the CSI, each share of CSIs
Class B common stock, no par value issued and outstanding
immediately prior to the effective time of the Merger shall be
converted into a number of shares of Clean Diesel common stock
equal to the quotient obtained by dividing (i) the
Aggregate Class B Stock Consideration by (ii) the
number of Outstanding CSI Class B Shares (the
Class B Merger Consideration and, together with
the Class A Merger Consideration, the Merger
Consideration).
Adjusted Ratio means the quotient obtained by
dividing (i) the CSI Percentage by (ii) the Clean
Diesel Percentage; provided that in no event shall the Adjusted
Ratio exceed 9.0 or be less than 0.923077.
Aggregate Class A Consideration means
the difference obtained by subtracting (a) the Aggregate
Class B Consideration from (b) the Aggregate CSI Stock
Consideration.
Aggregate Class B Consideration means
that portion of the Aggregate CSI Stock Consideration that,
pursuant to the terms of the CSI Convertible Notes, is to be
allocated to the holders of the Outstanding CSI Class B
Shares upon the consummation of the Merger.
Aggregate CSI Stock Consideration means
(x) the product of (A) the Outstanding Clean Diesel
Shares and (B) the Adjusted Ratio minus (y) the number
of shares of Allen & Company LLC Clean Diesel common stock.
Allen & Company LLC Clean Diesel Common
Stock means the 1,000,000 shares of Clean Diesel
common stock being issued to Allen & Company LLC at
the effective time of the Merger (before giving effect to the
reverse stock split), provided, however, that the aforesaid
1,000,000 number assumes an Adjusted Ratio of 1.5, and, in the
event that the Adjusted Ratio is greater or less than 1.5, the
number of shares of Allen & Company LLC Clean Diesel
common stock shall be increased (if the Adjusted Ratio is
greater than 1.5) or decreased (if the Adjusted Ratio is less
than 1.5) by the same proportion that the Aggregate Class A
Consideration will be increased or decreased by such difference.
Clean Diesel Financing means Clean
Diesels financing for a number of shares of Clean Diesel
Common Stock with an aggregate value of $1,000,000 and the
related issuance of the Clean Diesel Warrants.
Clean Diesel Warrants means warrants to
acquire up to 1,000,000 shares of Clean Diesel common stock
(before giving effect to the reverse stock split) that may be
issued in connection with the Clean Diesel Financing.
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Clean Diesel Percentage means 40 minus the
Clean Diesel Percentage Penalty, if any, plus the CSI Percentage
Penalty, if any.
Clean Diesel Percentage Penalty means the
quotient obtained, rounded downward to the next whole integer,
by dividing the amount by which the Clean Diesel Cash Position
is less than $4,500,000, by $116,666.66. For example, if the
Clean Diesel Cash Position is $4,300,000, the Clean Diesel
Percentage Penalty would be 1 ($200,000 divided by $116,666.66,
or 1.7143, rounded downward to the next whole integer, or 1).
CSI Convertible Notes means an aggregate of
$4,000,000 of CSIs subordinated convertible notes that
shall have been issued prior to the effective time in connection
with the CSI Financing.
CSI Financing means the issuance of
securities or the incurrence of debt or other obligations of
CSI, the proceeds of which may be used by CSI to supplement its
Cash Position; provided that any debt shall have been repaid,
converted to equity or otherwise extinguished not later than the
Closing Date.
CSI Warrants means warrants to acquire up to
3,000,000 shares of Clean Diesel common stock (before
giving effect to the reverse stock split).
CSI Percentage means 60 minus the CSI
Percentage Penalty, if any, plus the Clean Diesel Percentage
Penalty, if any.
CSI Percentage Penalty means the quotient
obtained, rounded downward to the next whole integer, by
dividing the amount by which the CSI Cash Position is less than
$2,000,000 (if the CSI Cash Position is less than $2,000,000),
by $166,666.66. For example, if the CSI Cash Position is
$1,800,000, the CSI Percentage Penalty would be 1 ($200,000
divided by $166,666.66, or 1.2, rounded downward to the next
whole integer, or 1).
Outstanding Clean Diesel Shares means the
number of shares of Clean Diesel common stock that are issued
and outstanding immediately preceding the effective time after
giving effect to the reverse stock split and specifically
including (a) any Clean Diesel common stock issued or
issuable upon exercise or conversion of any securities that may
be issued in connection with Clean Diesel financing and
(b) any Clean Diesel common stock that was issued or that
is issuable upon the exercise of warrants or other securities
that may be issued to Clean Diesels investment banker in
connection with either the Clean Diesel Financing or the Merger,
but, notwithstanding the foregoing, shall not include the Clean
Diesel Warrants or the 1,000,000 shares of Clean Diesel
Common Stock that may be issued upon exercise thereof.
Outstanding CSI Class B Shares means the
number of shares of CSI Class B Stock that are issued and
outstanding immediately preceding the Effective Time
Dissenters
Rights
Shares of CSI common stock that were outstanding on the date for
the determination of shareholders entitled to vote on the Merger
and were not voted in favor of the Merger and the holders of
which have demanded that CSI purchase such shares at their fair
market value in accordance with Section 1301 of the
California Corporations Code and have not otherwise failed to
perfect or shall not have effectively withdrawn or lost their
rights to have CSI purchase such shares for cash under the
California Corporations Code (the dissenting shares)
shall not be converted into the Merger Consideration, but,
instead, the holders thereof shall be entitled to have their
shares purchased by CSI for cash at the fair market value of
such dissenting shares as agreed upon or determined in
accordance with the provisions of Section 1300 et seq. of
the California Corporations Code; provided, however, that if any
such holder shall have failed to perfect or shall have
effectively withdrawn or lost his, her or its right to payment
under the California Corporations Code, such holders
shares of CSI common stock shall thereupon be deemed to have
been converted, at the effective time of the Merger, into the
Merger Consideration, without any interest thereon. See the
section entitled The Merger Appraisal Rights
and Dissenters Rights for additional information.
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Treatment
of CSI Options, Restricted Stock and Warrants
CSI
Options and Restricted Stock
(a) CSI has two stock option plans, the CSI 1997 Stock
Option Plan (the 1997 Plan) and the CSI 2006 Equity Compensation
Plan (the 2006 Plan). During the 30 day period prior to the
Closing, each holder of outstanding options to purchase shares
of CSI common stock granted under the 1997 Plan, whether or not
then vested or exercisable by its terms, will have the
opportunity to exercise his or her stock options upon payment of
the exercise price in accordance with the terms of 1997 Plan.
Except for vested CSI stock options that are being exercised in
accordance with the terms of the 1997 Plan, such stock option
exercises will be deemed effective immediately prior to, and
conditioned upon, the occurrence of the Closing. CSI stock
options issued under the 1997 Plan that are not exercised prior
to the Closing will be cancelled upon the occurrence of the
Closing and the holders of such options will not receive any
payment or consideration for such cancelled options. Prior to
the closing, CSI shall obtain the consent of each of CSIs
directors and executive officers who has options outstanding
under the 2006 Plan to the termination of such options as of the
effective time of the Merger. CSI will use commercially
reasonable efforts to obtain the consent of any other holder of
any options under the 2006 Plan to the termination of such
options as of the effective time of the Merger. Any options
under the 2006 Plan that are not terminated prior to the
effective time of the Merger will remain outstanding and
exercisable in accordance with their terms. Currently holders of
options to purchase 686,000 shares of CSI common stock have
not consented to the termination of such options in connection
with the Merger.
(b) Shares of restricted stock granted under CSIs
stock option plans that are outstanding immediately prior to the
Closing will automatically vest and be settled in CSI common
stock effective as of, and conditioned upon, the occurrence of
the Closing and will be converted in Clean Diesel common stock
and warrants pursuant to the Merger Agreement.
(c) At the Closing, the 1997 Plan and the 2006 Plan will be
terminated.
(d) Upon termination of the 1997 Plan and the 2006 Plan, no
holder of CSI stock options or any participant in or beneficiary
of the CSI Stock Plans, will have any right to acquire or
receive any equity securities of the Surviving Corporation or
any Subsidiary thereof or any consideration other than as
discussed above.
CSI
Warrants
CSI has outstanding warrants to purchase CSI common stock held
by Cycad Group, LLC, Capital Works ECS Investors, LLC and
Silicon Valley Bank. At the effective time of the Merger, the
warrants held by Cycad Group, LLC and Capital Works ECS
Investors, LLC, by their terms, will be exercisable for the
number of shares of Clean Diesel common stock and warrants to
acquire Clean Diesel common stock that the holder of such
warrant would have received if such warrant had been exercised
for CSI common stock immediately prior to the merger. CSI will
use commercially reasonable efforts to obtain the consent of
Silicon Valley Bank for a cancellation of the warrants held by
Silicon Valley Bank, or an amendment to the terms of such
warrants so that they are treated the same way as those warrants
held by Cycad Group, LLC and Capital Works ECS Investors, LLC.
Warrants
The following is a description of the warrants to purchase
shares of Clean Diesel common stock that are to be issued as
part of the merger consideration to CSI shareholders. A copy of
the form of warrant agreement is attached as Annex I
to this joint proxy statement/information statement and
prospectus.
Exercise
Price; Expiration
Warrants to purchase shares of Clean Diesel common stock that
are issued as part of the merger consideration to CSI
shareholders, will have an exercise price determined by a
formula set at the effective time of the Merger. The exercise
price for warrants to purchase shares of Clean Diesel common
stock issued in exchange for any warrants to purchase CSI common
stock that are outstanding as of the effective time of the
Merger will be determined by dividing the per share exercise
price of the CSI common stock subject to
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each warrant as in effect immediately prior to the effective
time of the Merger by the conversion ratio, and rounding that
result up to the nearest cent.
All of the warrants to purchase shares of Clean Diesel common
stock will expire on the earlier of (i) the third
anniversary of the effective time of the Merger and
(ii) that date which is thirty (30) days after Clean
Diesel gives notice to the warrant holder that the market value
of one share of Clean Diesel common stock has exceeded 130% of
the exercise price of the warrant for 10 consecutive days.
Exercise
The registered holder of a warrant to purchase shares of Clean
Diesel common stock can exercise all or any portion of the
warrants evidenced by the warrant certificate by delivering on
any business day during the exercise period to American Stock
Transfer and Trust Company, the transfer agent,
(i) the warrant certificate, (ii) a subscription form
substantially in the form attached to the warrant certificate,
as duly and properly executed by the registered holder, and
(iii) an amount equal to the aggregate exercise price for
the number of full shares of Clean Diesel common stock as to
which warrants are exercised, and (iv) any and all
applicable withholding taxes due in connection with the exercise
of the warrants.
Adjustments
to Prevent Dilution
The exercise price per share of Clean Diesel common stock and
the number of shares of Clean Diesel common stock issuable upon
any subsequent exercise of the warrants to purchase shares of
Clean Diesel common stock will be appropriately and
proportionately adjusted in the event that Clean Diesel effects
a reclassification, split or subdivision of the outstanding
shares of Clean Diesel common stock.
Effect
of a Merger
If there is a sale of all or substantially all of Clean
Diesels properties and assets to another person, or a
merger or consolidation of Clean Diesel with and into another
corporation pursuant to which Clean Diesel is not the surviving
entity, then as part of such sale provisions shall be made such
that the holder of the warrant to purchase shares of Clean
Diesel common stock will thereafter be entitled to receive,
during the period specified by the warrant, an equivalent number
of shares of common stock or other securities or property of the
surviving entity that the holder would have been entitled to in
such sale if the warrant to purchase shares of Clean Diesel
common stock had been exercised immediately prior to the sale.
Appropriate adjustment shall be made to the exercise price of
the warrant to purchase shares of Clean Diesel common stock so
that the aggregate exercise price of the warrants remain
substantially the same.
Transfer
Restrictions
Subject to certain limited exceptions, the warrants to purchase
shares of Clean Diesel common stock will not be transferable by
the holder without the prior written consent of Clean Diesel.
Share
Rights
The accrual of dividends, if any, on the shares of common stock
issued upon the exercise of any warrant to purchase shares of
Clean Diesel common stock evidenced by a warrant certificate
will be governed by the terms generally applicable to Clean
Diesel common stock. Neither a warrant certificate nor the
warrants to purchase shares of Clean Diesel common stock
evidenced thereby shall entitle any holder thereof to any of the
rights of a holder of shares of Clean Diesel common stock,
including, without limitation, the right to receive dividends,
if any, or payments upon the liquidation, dissolution or winding
up of Clean Diesel or to exercise any preemptive rights to vote
or to consent or to receive notice as stockholders in respect of
the meetings of stockholders or the election of directors of
Clean Diesel or any other matter.
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Legends
The Merger Agreement provides that each warrant certificate
representing the warrants to purchase Clean Diesel common stock
issued as part of the merger consideration, and any other
securities issued upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event, shall
be stamped or otherwise imprinted with legends in the following
form (in addition to any other legends required under applicable
securities laws):
THIS WARRANT IS NOT TRANSFERABLE OTHER THAN IN THE LIMITED
CIRCUMSTANCES PROVIDED HEREIN AND THE HOLDER HEREOF AGREES FOR
THE BENEFIT OF THE COMPANY THAT THIS WARRANT MAY NOT BE OFFERED,
SOLD, PLEDGED, OR OTHERWISE TRANSFERRED BY SUCH HOLDER OTHER
THAN AS PROVIDED HEREIN.
Clean Diesel and any duly appointed transfer agent for the
registration or transfer of the warrants to purchase shares of
Clean Diesel common stock is authorized to decline to make any
transfer of the warrants if such transfer would constitute a
violation or breach of the foregoing.
Adjustments
to Prevent Dilution
The merger consideration will be appropriately and equitably
adjusted to reflect fully the effect of any stock split, reverse
stock split, reclassification, recapitalization, consolidation,
exchange or like change with respect to Clean Diesel common
stock or CSI common stock.
Governing
Documents
CSIs articles of incorporation, as in effect on the date
of the Merger Agreement, will be amended and restated as of the
effective time to be identical to the certificate of
incorporation of Merger Sub, except the name of the corporation
will be Catalytic Solutions, Inc. At the effective time, the
bylaws of Merger Sub, as in effect immediately prior to the
effective time of the Merger, will be the bylaws of the
surviving corporation.
Directors
and Officers
The directors of Merger Sub immediately prior to the Merger will
become the directors of the surviving corporation following the
Merger. The officers of CSI immediately prior to the Merger will
become the officers of the surviving corporation following the
Merger.
Representations
and Warranties
The Merger Agreement contains representations and warranties,
which may differ from what may be viewed as material by
CSIs shareholders or Clean Diesels stockholders.
Representations
and Warranties of CSI
The Merger Agreement contains customary representations and
warranties that CSI made to Clean Diesel and Merger Sub
regarding, among other things:
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corporate matters, including qualification, organization and
subsidiaries;
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capitalization;
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corporate authority relative to the agreement; no violation of
laws, organizational documents, or contracts and no creation of
any liens as a result of the Merger;
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AIM filings and financial statements;
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no undisclosed material liabilities;
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absence of certain changes or events affecting its business
since January 1, 2010;
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compliance with laws;
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material contracts;
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employees and employee benefit plans;
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labor matters;
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investigations and litigation;
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filing of tax returns, payment of taxes and other tax matters;
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environmental laws and regulations;
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intellectual property;
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absence of indemnifiable claims by directors or officers;
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title to property;
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Board approval;
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required vote of shareholders; and
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brokers and finders.
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Representations
and Warranties of Clean Diesel and Merger Sub
The Merger Agreement contains customary representations and
warranties that Clean Diesel and Merger Sub made to CSI
regarding, among other things:
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corporate matters, including qualification, organization and
subsidiaries;
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capitalization;
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corporate authority relative to the agreement; no violation of
laws, organizational documents, or contracts and no creation of
any liens;
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SEC filings and financial statements;
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no undisclosed material liabilities;
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absence of certain changes or events affecting its business
since January 1, 2010;
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employees and employee benefit plans;
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labor matters;
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material contracts;
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compliance with laws and permits;
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investigations and litigation;
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filing of tax returns, payment of taxes and other tax matters;
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environmental laws and regulations;
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intellectual property;
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absence of indemnifiable claims by officers and directors;
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title to property;
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Board approval;
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required vote of stockholders; and
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brokers and finders.
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Qualifications
Many of the representations and warranties of the parties are
qualified by a material adverse effect standard. A
material adverse effect means any material change,
effect, event, development, occurrence, condition or state of
facts (individually or in the aggregate) in the business,
operations, assets, results of operation or condition (financial
or otherwise) of a party. It also means any change, effect,
event, development, occurrence, condition or state of facts
which (individually or in the aggregate with all other such
changes, effects, events, developments, occurrences or states of
fact) prevents or materially impedes or materially delays the
consummation by the affected Party of the Merger or the other
transactions contemplated hereby. Changes, effects, events,
developments, occurrences, conditions or states of facts
resulting from or attributable to the following will not be
considered a material adverse effect:
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those generally affecting the economy or financial markets in
general, except to the extent such changes adversely affect the
affected Party in a disproportionate manner relative to other
persons in such Partys industry;
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those resulting from the economic, business, financial or
regulatory environment generally affecting the industry in which
the affected Party operates, except to the extent such changes
adversely affect such Party and its Subsidiaries in a
disproportionate manner relative to other persons in such
Partys industry;
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those resulting from changes in Law or applicable accounting
regulations or principles or interpretations thereof, except to
the extent such changes adversely affect such Party and its
Subsidiaries in a disproportionate manner relative to other
persons in such Partys industry;
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those resulting from the announcement or the existence of, the
Merger Agreement or any of the transactions contemplated by the
Merger Agreement; or
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those resulting from an act of terrorism or an outbreak or
escalation of hostilities or war (whether declared or not
declared) or any natural disasters or any national or
international calamity or crisis, except to the extent such
changes adversely affect the affected Party and its Subsidiaries
in a disproportionate manner relative to other persons in such
Partys industry.
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Survivability
of Representations and Warranties
None of the representations, warranties, covenants and
agreements in the Merger Agreement or in any instrument
delivered pursuant to the Merger Agreement shall survive the
closing of the Merger, except for provisions regarding
indemnification of officers and directors.
Covenants
Relating to the Conduct of Business Pending the Merger
From the date of the Merger Agreement through the effective time
of the Merger, each of CSI and Clean Diesel has agreed, and have
agreed to cause their respective subsidiaries, to conduct its
business in the ordinary course of business.
During the same period, each of Clean Diesel and CSI have also
agreed that, subject to certain exceptions, it will not do any
of the following without the prior written consent of the other:
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incur any indebtedness for borrowed money (other than
indebtedness of CSI or any of its subsidiaries to CSI or any of
its subsidiaries, on the one hand, or of Clean Diesel or any of
its subsidiaries to Clean Diesel or any of its subsidiaries, on
the other hand and other than as specifically provided in the
Merger Agreement), assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any
other individual, corporation or other entity, or make any loan
or advance;
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adjust, split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for, shares of its
capital stock;
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authorize or pay any dividends on, or make any other
distributions with respect to its outstanding shares of capital
stock, other than dividends and distributions from its
respective subsidiaries;
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sell, transfer, mortgage, encumber or otherwise dispose of any
of its material properties or assets to any individual,
corporation or other entity other than a subsidiary;
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cancel, release or assign any indebtedness owed to or from any
such person or any claims by or against any such person, other
than in the ordinary course of business consistent with past
practices or pursuant to contracts or agreements in force at the
date hereof and other than as specifically provided in the
Merger Agreement;
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make any material investment either by purchase of stock or
securities, contributions to capital, property transfers, or
purchase of any property or assets of any other individual,
corporation or other entity other than a subsidiary thereof;
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terminate, or waive any material provision of, any material
contract, or make any change in any instrument or agreement
governing the terms of any of its securities, or material lease
or contract, other than normal renewals of contracts and leases
without material adverse changes of terms;
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increase in any manner the compensation or fringe benefits of
any of its employees or pay any pension or retirement allowance
not required by any existing plan or agreement to any such
employees;
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become a party to, amend or commit itself to any pension,
retirement, profit-sharing or welfare benefit plan or agreement
or employment agreement with or for the benefit of any employee
other than in the ordinary course of business, or accelerate the
vesting of, or the lapsing of restrictions with respect to, any
stock options or other stock-based compensation (except to the
extent required under the terms of the applicable plan or
related award agreement);
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settle any material claim, action or proceeding, except in the
ordinary course of business consistent with past practices;
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other than the reverse stock split, amend its articles of
incorporation, its bylaws or comparable governing documents;
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take any action that is intended or expected to result in any of
its representations and warranties set forth in the Merger
Agreement being or becoming untrue in any material respect at
any time prior to the effective time of the Merger, or in any of
the conditions to the Merger set forth in Article VII of
the Merger Agreement not being satisfied or in a violation of
any provision of the Merger Agreement, except, in every case, as
may be required by applicable law;
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implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by
U.S. GAAP; or
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agree to take, make any commitment to take, adopt any
resolutions of its board of directors in support of any of the
actions set forth above.
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Covenants
of Clean Diesel and Merger Sub
Clean Diesel has various obligations and responsibilities under
the Merger Agreement from the date thereof until the effective
time of the Merger, including, but not limited to, the following:
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cause this joint proxy statement/information statement and
prospectus to comply with the applicable rules and regulations
promulgated by the SEC;
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to respond promptly to any comments of the SEC or its staff and
to have this
Form S-4
declared effective under the Securities Act as promptly as
practicable after it is filed with the SEC;
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cause this joint proxy statement/information statement and
prospectus to be mailed to CSIs and Clean Diesels
stockholders as promptly as practicable after the
Form S-4
Registration Statement is declared effective under the
Securities Act;
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promptly prepare and file all necessary documentation, to effect
all applications, notices, petitions and filings, to obtain as
promptly as practicable all permits, consents, approvals and
authorizations of all
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third parties and governmental entities which are necessary or
advisable to consummate the transactions contemplated by the
Merger Agreement;
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furnish, upon request, information about each other in
connection with this joint proxy statement/information statement
and prospectus;
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The Board of Directors of each of Clean Diesel and CSI will
recommend to its respective stockholders, subject to certain
exceptions described below under Acquisition
Proposals, to vote in favor of the approval of the Merger
Agreement (including approval by the Clean Diesel stockholders
of the amendment to the Clean Diesel Certificate) and the
transactions contemplated thereby. Each of Clean Diesel and CSI,
through its respective Board of Directors, shall not withdraw,
modify or change such recommendation and shall use its
reasonable best efforts to obtain the approval of the Clean
Diesel stockholders and the CSI shareholders.
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use their reasonable best efforts (a) to take, or cause to
be taken, all actions necessary, proper or advisable to comply
promptly with all legal requirements that may be imposed on such
party or its subsidiaries with respect to the Merger and
consummate the transactions contemplated by the Merger Agreement
and (b) to obtain (and to cooperate with the other party to
obtain) any material consent, authorization, order or approval
of, or any exemption by, any governmental entity and any other
third party that is required to be obtained by the CSI or Clean
Diesel or any of their respective Subsidiaries in connection
with the Merger and the other transactions contemplated by the
Merger Agreement.
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Clean Diesel will use its commercially reasonable efforts to
cause the shares of Clean Diesel common stock to be issued in
the Merger to shares of CSI or to be issued upon conversion of
the Warrants in accordance with the terms thereof, to be
approved for listing on the NASDAQ Capital Market System,
subject to official notice of issuance, prior to the effective
time.
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CSI will use its commercially reasonable efforts to cause its
common stock to no longer be listed for trading on the AIM after
the Merger.
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If it gets stockholder approval, Clean Diesel will cause an
appropriate filing to be made with the Secretary of State of the
State of Delaware, in the form of a restated certificate of
incorporation or as a certificate of amendment to the existing
restated certificate of incorporation, where each three shares
of Clean Diesel common stock issued and outstanding immediately
prior to the filing of such certificate shall be converted into
and become one fully paid and nonassessable share of Clean
Diesel common stock.
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upon the occurrence of the Merger, Clean Diesel will be
headquartered in California.
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Director
and Officer Indemnification and Insurance
Indemnification
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Each of CSI and Clean Diesel agree to cooperate, and to use
reasonable best efforts to defend against and respond to, any
threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative,
including, any such claim, action, suit, proceeding or
investigation in which any individual who is now, or has been at
any time prior to the date hereof, or who becomes prior to the
Effective Time, a director or officer or employee of the Clean
Diesel or CSI, is, or is threatened to be, made a party based in
whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he is or was a director,
officer or employee of Clean Diesel or CSI or (ii) the
Merger Agreement or any of the transactions contemplated by the
Merger Agreement.
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Prior to the effective time, the foregoing obligations of either
CSI or Clean Diesel shall be only to cooperate with the other
party.
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After the effective time, Clean Diesel shall indemnify and hold
harmless, as and to the fullest extent permitted by law, each of
CSI and Clean Diesels officers, directors and employees
against any losses, claims, damages, liabilities, costs,
expenses (including reasonable attorneys fees and expenses
in
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advance of the final disposition of any claim, suit, proceeding
or investigation to each Indemnified Party to the fullest extent
permitted by law upon receipt of any undertaking required by
applicable law), judgments, fines and amounts paid in settlement
(to the extent, in the case of settlements, that the settlement
was approved in writing by Clean Diesel, such approval not to be
unreasonably withheld) in connection with any threatened or
actual claim, action, suit, proceeding or investigation. It is
understood that after the effective time Clean Diesel may assume
and control the defense of any claim for which Clean Diesel is
obligated to provide indemnification, provided that the
foregoing shall not apply with respect to any claim for which
counsel has been retained with the approval of the applicable
liability insurer (if such approval is required under the
applicable insurance policy, if any, to obtain coverage) and
commenced the defense prior to the effective time unless Clean
Diesels Audit Committee otherwise determines following the
effective time.
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Insurance
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Clean Diesel agrees that the individuals serving as officers and
directors of Clean Diesel and CSI or any of their subsidiaries
immediately prior to the effective time of the Merger will be
(i) covered for a period of two years from the Merger by
Clean Diesels directors and officers liability
insurance policy (in the case of officers and directors of Clean
Diesel) and by CSIs directors and officers
liability insurance policy (in the case of officers and
directors of CSI) (Clean Diesel and CSI may substitute policies
of at least the same coverage and amounts containing terms and
conditions that are not less advantageous than such policy) with
respect to acts or omissions occurring prior to the effective
time of the Merger that were committed by such officers and
directors in their capacity as such or (ii) if such
insurance cannot be obtained, covered for a period of five years
by a tail policy on CSIs and Clean
Diesels existing directors and officers
liability insurance policies, as the case may be, of at least
the same coverage and amounts containing terms and conditions
that are no less advantageous than such existing policy. In no
event will Clean Diesel be required to expend more than 200% per
year of coverage of the amount currently expended by Clean
Diesel per year of coverage as of the date of the Merger
Agreement to maintain or procure insurance coverage pursuant
hereto.
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Certain
Covenants of both Clean Diesel and CSI
Acquisition
Proposals
The Merger Agreement provides that neither Clean Diesel nor CSI
will authorize or permit any of its representatives to, and will
cause each such representative to cease and cause to be
terminated any discussions or negotiations with any parties that
may be ongoing as of the date of the agreement with respect to
an Acquisition Proposal. Each of Clean Diesel and CSI also will
not and, will cause its subsidiaries not to and will use
commercially reasonable efforts to cause its representatives not
to, directly or indirectly:
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solicit, initiate, facilitate or knowingly encourage any
Acquisition Proposal;
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enter into any letter of intent, memorandum of understanding or
other agreement or agreement in principle with respect to any
Acquisition Proposal;
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participate in any way in any negotiations or discussions
regarding, or furnish or disclose to any third party any
information with respect to an Acquisition Proposal; or
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withdraw, modify or qualify (or propose to withdraw, modify or
qualify) in any manner adverse to the other party the
recommendation by such partys Board of Directors of the
Merger Agreement to its stockholders or take any action or make
any statement in connection with such partys meeting of
stockholders inconsistent with such recommendation, including
any action to approve, endorse or recommend, or to propose to
approve, endorse or recommend, an Acquisition Proposal
(collectively, a Change of Recommendation).
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Each of Clean Diesel and CSI have further agreed that, except as
set forth below, each of their respective boards will recommend
that each of their stockholders and shareholders, respectively,
approve and adopt the Merger Agreement and the other
transactions contemplated thereby.
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Notice
of Acquisition Proposals
Prior to but not after the approval and adoption of the Merger
Agreement by the stockholders of Clean Diesel and the
shareholders of CSI, in response to an unsolicited Acquisition
Proposal that Clean Diesels or CSIs board of
directors reasonably believes is bona fide and determines in
good faith (after consultation with its outside counsel and its
financial advisors) that failure to take such actions would
result in a violation of its fiduciary duties under applicable
law, Clean Diesel or CSI, as the case may be, may
(i) furnish nonpublic information or data to a person
making such an alternative acquisition proposal pursuant to a
customary confidentiality and standstill agreement and
(ii) participate in discussions with or negotiations with
the person making such an alternative acquisition proposal.
Promptly upon receipt of an Acquisition Proposal, each party is
required to inform the other party of such proposal. Upon
determination by the respective board of directors that failure
to pursue an Acquisition Proposal would result in a violation of
its fiduciary duties under applicable law, said party must
deliver to the other party written notice of such determination
and the material terms of such proposal (including the identity
of the third party making the proposal) and provide such other
party five business days notice prior to said partys
withdrawing, modifying or qualifying its board of
directors recommendation in favor of the Merger Agreement.
Said party, upon request of the other party, is required to
negotiate in good faith with such other party during such period
to amend the Merger Agreement so that the board of directors of
said party may continue to recommend the approval of the Merger
Agreement.
If Clean Diesel or CSI effects a Change of Recommendation, CSI
or Clean Diesel, as the case may be, will have the option,
exercisable within ten business days after a Change of
Recommendation, to cause Clean Diesels or CSIs board
of directors, as the case may be, to submit the Merger Agreement
to its stockholders for a the purpose of adopting the Merger
Agreement and approving the Merger.
An Acquisition Proposal means any offer, proposal or
inquiry relating to, or any indication of interest in, an
Alternative Transaction received by a party from any person
other than the other party, in each case, whether or not in
writing and whether or not delivered to such party or to the
stockholders of such party generally. An Alternative
Transaction means any of (i) a transaction (or series
of related transactions) pursuant to which any person (or group
of persons), directly or indirectly, acquires or would acquire
direct or indirect beneficial ownership of more than 15% of the
outstanding shares of a partys common stock or outstanding
voting power or of any new series or new class of preferred
stock that would be entitled to a class or series vote with
respect to the Merger or that would be entitled to more than 15%
of the fair market value of the outstanding equity interests of
such party, whether from such party or pursuant to a tender
offer or exchange offer or otherwise, (ii) a merger, share
exchange, business combination, consolidation, sale of all or
substantially all of the assets, liquidation, dissolution or
similar transaction involving a party or any of its
significant subsidiaries (as defined in
Rule 1-02
of
Regulation S-X
promulgated by the SEC), (iii) any transaction (or series
of related transactions) pursuant to which any person (or group
of persons) acquires or would acquire control of assets
(including for this purpose the outstanding equity securities of
Subsidiaries of such party and securities of the entity
surviving any merger or business combination including any of
its Subsidiaries) of such party, or any of its Subsidiaries
representing more than 15% of the fair market value of all the
assets, net revenues or net income of such party and its
Subsidiaries, taken as a whole, immediately prior to such
transaction (or series of related transactions) or (iv) any
other consolidation, business combination, recapitalization or
similar transaction (or series of related transactions)
involving a party or any of its Subsidiaries.
Nothing in the Merger Agreement prohibits Clean Diesels
board from complying with
Rules 14d-9
or 14e-2 of
the Exchange Act with regard to an Acquisition Proposal;
provided, that those Rules will not in any way eliminate
or modify the effect that any action pursuant to those Rules
would otherwise have under the Merger Agreement.
Access
to Information
Until the completion of the Merger, each of Clean Diesel and CSI
will afford the other party and its representatives reasonable
access on reasonable notice to all its respective properties,
books, contracts,
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commitments, personnel and records. Each of Clean Diesel and CSI
will keep confidential any nonpublic information in accordance
with the terms of the Confidential Disclosure Agreement, dated
September 24, 2009 by and between Clean Diesel and CSI.
Notification
of Certain Matters; Supplements to Disclosure
Schedules
Each of Clean Diesel and CSI will promptly notify the other of
any changes or events that would have a Material Adverse Effect
on such party or that it believes would or would be reasonably
likely to cause a material breach of such partys
representations, warranties or covenants contained in the Merger
Agreement.
Public
Announcements
Except as required by applicable law or the NASDAQ rules, Clean
Diesel and CSI will not make any public announcement or issue
any press release regarding the merger without the others
consent.
Conditions
to Each Partys Obligation to Effect the
Merger
The obligations of each of the parties to effect the Merger are
subject to the satisfaction, at or prior to the Merger, of
various mutual conditions (which may, to the extent permitted by
applicable law, be waived in writing by any party in its sole
discretion, with such waiver only effective as to the
obligations of such party), which include the following:
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the CSI shareholders must have approved and adopted the Merger
Agreement;
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the Clean Diesel stockholders must have approved the Certificate
of Amendment effecting the reverse stock split and the approval
of the issuance of Clean Diesel common stock and warrants
exercisable for shares of Clean Diesel common stock to be issued
to the shareholders of CSI in the Merger;
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authorization of the listing of the shares of Clean Diesel
common stock to be issued in the Merger and the shares of Clean
Diesel common stock to be issued upon exercise of the warrants
to be issued in the Merger on the NASDAQ Capital Market System,
subject to official notice of issuance;
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effectiveness of this joint proxy statement/information
statement and prospectus and the absence of a stop order or
proceedings threatened or initiated by the SEC for that purpose;
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the obtaining of all consents, approvals and authorizations of
any governmental body required to consummate the Merger;
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all shares of capital stock of Merger Sub outstanding
immediately prior to the Merger and all shares of capital stock
of the Surviving Corporation outstanding immediately after the
Merger shall be owned by Clean Diesel;
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delisting of the CSI Common Stock for trading on AIM; and
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the Merger shall not have been prohibited or an injunction
issued.
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In addition, Clean Diesels obligation to effect the Merger
is subject to the satisfaction or waiver of the following
conditions:
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the representations and warranties of CSI in the Merger
Agreement must be true and correct except for deviations and
inaccuracies that do not, in the aggregate, constitute a
Material Adverse Effect;
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CSI must have performed in all material respects the obligations
required to be performed by it under the Merger Agreement at or
prior to the closing date of the Merger;
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The officers of CSI immediately prior to the Merger will be
Charles F. Call, Nikhil A. Mehta and Stephen J. Golden, Ph.D.;
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CSIs principal credit facility shall have been extended,
modified or refinanced on terms reasonably satisfactory to Clean
Diesel, or if the effective time occurs prior thereto, the
lender shall have entered into a forbearance agreement
reasonably satisfactory to Clean Diesel; and
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CSIs cash position will be not less than
$1,000,000; and
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No more than 3% of CSIs outstanding shares of common stock
will be eligible to be dissenting shares.
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In addition, the obligation of CSI to effect the Merger is
subject to the satisfaction or waiver of the following
conditions:
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the representations and warranties of Clean Diesel in the Merger
Agreement must be true and correct except for deviations and
inaccuracies that do not, in the aggregate, constitute a
Material Adverse Effect;
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Clean Diesel must have performed in all material respects the
obligations required to be performed by it under this Agreement
at or prior to the Closing Date;
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Clean Diesel must take steps to cause transactions contemplated
by the Merger Agreement to be exempt from reporting under
Rule 16b-3
of the Exchange Act;
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Clean Diesel will elect Charles F. Call, Nikhil A. Mehta and
Stephen J. Golden, PhD. as officers of Clean Diesel after the
Merger;
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the board of Clean Diesel shall be seven members and the
directors are expected to be Mungo Park, Derek R. Gray, Michael
L. Asmussen, Charles F. Call, Alexander Ellis, III, Charles
R. Engles, Ph.D., and Bernard H. Cherry;
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certain of the other officers and directors of Clean Diesel
shall have submitted to Clean Diesel his or her resignation in
such capacity to be effective as of the effective time;
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Clean Diesels holdings of auction rate securities shall
have been redeemed in accordance with the terms of commitment
governing such auction rate securities or, if the effective time
of the Merger is prior to the date of redemption of such auction
rate securities , CSI will be reasonably satisfied that
(i) such redemption of auction rate securities will occur
no later than July 11, 2010 and substantially in the manner
set forth in the commitment governing the redemption of such
auction rate securities notwithstanding the Merger,
(ii) such commitment will remain enforceable in accordance
with it terms following the effective time and (iii) the
ability of Clean Diesel to continue to utilize the credit
facility associated with the auction rate securities until the
time of the redemption of such auction rate securities will be
unimpaired; and
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Clean Diesels cash position will be not less than
$1,000,000.
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Termination
The Merger Agreement may be terminated at any time prior to the
effective time of the Merger by the mutual written consent of
Clean Diesel and CSI. The Merger Agreement also may be
terminated at any time prior to the effective time of the Merger
(including after the approval of the stockholders) by either
Clean Diesel or CSI as follows:
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if approval is denied by a governmental entity that must approve
of the Merger and such denial is final and non-appealable,
unless the failure to obtain such a governmental approval is due
to the failure of the party seeking to terminate the Merger
Agreement to fulfill its obligations under the Merger Agreement;
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if there is a permanent injunction issued; or
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if the Merger has not been consummated by September 6,
2010, unless the failure to complete the Merger is due to the
failure of the party seeking to terminate the agreement to
fulfill its obligations under the Merger Agreement.
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By Clean Diesel, if:
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CSI breaches or fails to perform any representation, warranty,
covenant or agreement that would result in the failure of a
condition to Clean Diesels obligation to effect the Merger
being satisfied and which,
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if curable, is not cured within 30 days after notice of the
breach or failure to perform is given to it (provided that Clean
Diesel is not in material breach of any representation,
warranty, covenant or agreement contained in the Merger
Agreement at the time of termination);
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Clean Diesel fails to obtain the requisite vote of its
stockholders to approve the amendment to Clean Diesels
certificate of incorporation and the reverse stock split
(provided that Clean Diesel has not materially breached certain
of its obligations under the Merger Agreement);
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CSI fails to obtain the requisite vote of its shareholders to
approve the Merger Agreement and the Merger (provided that Clean
Diesel has not materially breached certain of its obligations
under the Merger Agreement);
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CSIs board (i) withdraws, modifies or qualifies in a
manner adverse to Clean Diesel its recommendation that its
shareholders approve and adopt the Merger Agreement, or
(ii) knowingly breached certain of its obligations under
the Merger Agreement in any material respect; or
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Clean Diesels board of directors withdraws, modifies or
qualifies in a manner adverse to CSI its recommendation that its
stockholders approve the amendment to Clean Diesels
certificate of incorporation and the reverse stock split and CSI
has not elected to require a vote of Clean Diesels
stockholders within ten days of CSIs receiving notice of
Clean Diesels boards change in recommendation.
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By CSI, if:
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Clean Diesel breaches or fails to perform any representation,
warranty, covenant or agreement that would result in the failure
of a condition to CSIs obligation to effect the Merger
being satisfied and, if curable, is not cured within
30 days after notice of the breach or failure to perform is
given to Clean Diesel (provided that CSI is not in material
breach of any representation, warranty, covenant or agreement
contained in the Merger Agreement at the time of termination);
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Clean Diesel fails to obtain the requisite vote of its
stockholders to approve the amendment to Clean Diesels
certificate of incorporation and the reverse stock split
(provided that CSI has not materially breached certain of its
obligations under the Merger Agreement);
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CSI fails to obtain the requisite vote of its shareholders to
approve the Merger Agreement and the Merger (provided that CSI
has not materially breached certain of its obligations under the
Merger Agreement);
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Clean Diesels board (i) fails to recommend to its
stockholders their approval of the Merger Agreement,
(ii) withdraws, modifies or qualifies in a manner adverse
to CSI its recommendation that its stockholders approve and
adopt the transactions contemplated by the Merger Agreement, or
fails to recommend against a tender offer or exchange offer for
Clean Diesels outstanding common stock that has been
publicly disclosed (other than by CSI or its affiliates) within
10 business days after the commencement of such tender or
exchange offer, or (iii) knowingly breached certain of its
obligations under the Merger Agreement in any material
respect.; or
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CSIs board of directors withdraws, modifies or qualifies
in a manner adverse to CSI its recommendation that its
shareholders approve the Merger Agreement and the Merger and
Clean Diesel has not elected to require a vote of CSIs
shareholders within ten days of Clean Diesels receiving
notice of CSIs boards change in recommendation.
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Termination
Fees
The Merger Agreement obligates CSI to pay a termination fee to
Clean Diesel of $300,000 in cash plus reasonable costs and
expenses not to exceed $350,000 in the aggregate, if:
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A bona fide Acquisition Proposal shall have been made known to
Clean Diesel or directly to its stockholders generally and
(i) the Merger Agreement is terminated (A) by Clean
Diesel or CSI because the stockholders of either party fail to
approve the transactions contemplated by the Merger Agreement,
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(B) by Clean Diesel because CSI has willfully and
materially breached its covenants, representations or warranties
under the Merger Agreement which, if curable, has not been cured
within 30 days, or (C) by Clean Diesel because the
Merger is not consummated by September 6, 2010 because of a
material and willful breach of the Merger Agreement by CSI, and
(ii) within 12 months of such termination of the
Merger Agreement CSI consummates an Acquisition Proposal or
enters into a definitive agreement for an Acquisition Proposal;
provided that for purposes of this obligation to pay the
termination fee, each reference to 15%, respectively, in the
definition of Acquisition Proposal above is deemed
to be 40%,
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the Merger Agreement is terminated by Clean Diesel because
CSIs board (i) withdraws, modifies or qualifies in a
manner adverse to Clean Diesel its recommendation that its
shareholders approve and adopt the Merger Agreement, or
(ii) knowingly breached certain of its obligations under
the Merger Agreement in any material respect; or
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the Merger Agreement is terminated by CSI because CSIs
board of directors withdraws, modifies or qualifies in a manner
adverse to CSI its recommendation that its shareholders approve
the Merger Agreement and the Merger and Clean Diesel has not
elected to require a vote of CSIs shareholders within ten
days of Clean Diesels receiving notice of CSIs
boards change in recommendation.
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The Merger Agreement obligates Clean Diesel to pay a termination
fee to CSI of $300,000 in cash plus reasonable costs and
expenses not to exceed $350,000 in the aggregate, if:
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A bona fide Acquisition Proposal shall have been made known to
CSI or directly to its shareholders generally and (i) the
Merger Agreement is terminated (A) by Clean Diesel or CSI
because the stockholders of either party fail to approve the
transactions contemplated by the Merger Agreement, (B) by
CSI because Clean Diesel has willfully and materially breached
its covenants, representations or warranties under the Merger
Agreement which, if curable, has not been cured within
30 days, or (C) by CSI because the Merger is not
consummated by September 6, 2010 because of a material and
willful breach of the Merger Agreement by Clean Diesel, and
(ii) within 12 months of such termination of the
Merger Agreement Clean Diesel consummates an Acquisition
Proposal or enters into a definitive agreement for an
Acquisition Proposal; provided that for purposes of this
obligation to pay the termination fee, each reference to 15%,
respectively, in the definition of Acquisition
Proposal above is deemed to be 40%;
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The Merger Agreement is terminated by CSI because CSIs
board of directors withdraws, modifies or qualifies in a manner
adverse to CSI its recommendation that its shareholders approve
the Merger Agreement and the Merger and Clean Diesel has not
elected to require a vote of CSIs shareholders within ten
days of Clean Diesels receiving notice of CSIs
boards change in recommendation; or
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The Merger Agreement is terminated by Clean Diesel because Clean
Diesels board of directors withdraws, modifies or
qualifies in a manner adverse to CSI its recommendation that its
stockholders approve the amendment to Clean Diesels
certificate of incorporation and the reverse stock split and CSI
has not elected to require a vote of Clean Diesels
stockholders within ten days of CSIs receiving notice of
Clean Diesels boards change in recommendation.
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Fees and
Expenses
All costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby, except as
provided for in the event of certain terminations (as described
above) shall be paid by the party incurring such expense.
Amendment
The Merger Agreement may be amended by the parties by action
taken or authorized by their respective boards of directors,
except that after the Merger Agreement has been adopted by the
stockholders of Clean Diesel or shareholders of CSI, no
amendment which by law requires further approval by the
stockholders of Clean Diesel or shareholders of CSI, as the case
may be, shall be made without such further approval.
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INFORMATION
ABOUT CLEAN DIESEL
Information about Clean Diesel may be found in (i) the
Clean Diesel
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated by reference
herein and (ii) the Clean Diesel
Form 10-Q
for the three months ended March 31, 2010, as amended,
attached to this joint proxy statement/information statement and
prospectus as Annex G and incorporated by reference
herein.
INFORMATION
ABOUT CSI
CSI
BUSINESS
Overview
CSI is a vertically integrated global manufacturer and
distributor of emissions control systems and products, focused
in the heavy duty diesel, and light duty vehicle markets.
Utilizing its proprietary patented Mixed Phase Catalyst
(MPC®)
technology, CSIs emissions control systems and products
are designed to deliver high value to its customers while
benefiting the global environment through air quality
improvement, sustainability and energy efficiency.
CSI, a California corporation formed in 1996, has over
25 years of experience in the heavy duty diesel systems
market through its Heavy Duty Diesel Systems division and has
proven technical and manufacturing competence in the light duty
vehicle catalyst market which meets auto makers most
stringent requirements. CSIs Catalyst division has
supplied over 9 million catalyst parts to light duty
vehicle customers since 1996. CSIs business is organized
into two divisions: its Heavy Duty Diesel Systems division and
its Catalyst division.
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Heavy Duty Diesel Systems
Division. CSIs Heavy Duty Diesel
Systems division is a leading environmental business
specializing in the design and manufacture of verified exhaust
emissions control solutions. Globally, CSIs Heavy Duty
Diesel Systems division offers a full range of products for the
original equipment manufacturer (OEM), occupational health
driven and verified retrofit markets through its Engine Control
Systems (ECS) subsidiary. These ECS-branded products are used to
reduce exhaust emissions created by on-road, off-road and
stationary diesel and alternative fuel engines including propane
and natural gas.
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Catalyst Division. CSIs Catalyst
division houses its proprietary
MPC®
technology. This technology enables CSI to produce catalyst
formulations for gasoline, diesel and natural gas induced
emissions that offer superior performance, proven durability and
cost effectiveness for multiple markets and a wide range of
applications. Using its proprietary
MPC®
technology, CSI has developed a family of unique
high-performance catalysts with base-metals or low
platinum group metal and zero-platinum group metal
content to provide increased catalytic performance
and value for technology-driven automotive industry customers.
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CSIs common stock has been listed on the AIM of the London
Stock Exchange (AIM: CTS and CTSU) since November 22, 2006
and it currently has operations in the United States, Canada,
France, Japan and Sweden as well as an Asian joint venture. CSI
reported revenues of $50.5 million and gross profit of
$12.0 million for the year ended December 31, 2009.
Market
Overview
Governments around the world have adopted tighter emission
standards related to nitrogen oxide and particulate matter from
diesel-powered vehicles and various regulatory programs have
been put in place to address the millions of diesel engines
already in use.
According to the U.S. Environmental Protection Agency
(EPA), reducing emissions from diesel engines is one of the most
important air quality challenges facing the country today. The
EPA established the National Clean Diesel Campaign to promote
diesel emission reduction strategies. The National Clean Diesel
Campaign
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includes regulatory programs to address new diesel engines as
well as innovative programs to address the millions of diesel
engines already in use. Diesel engines power the movement of
goods across the nation, help construct buildings, help build
roads, and carry millions of children to school each day. While
diesel engines provide mobility and are critical to the
nations economy, exhaust from diesel engines contains
pollutants that negatively impact human health and the
environment. Diesel engines emit large amounts of nitrogen
oxide, particulate matter and air toxics, which contribute to
serious public health problems. The EPA estimates that more than
20 million diesel engines in operation today do not meet
the new clean diesel standards, yet the engines can continue to
operate for 20 to 30 years.
Current techniques for diesel engines to meet emissions
standards require the use of several methods, including diesel
oxidation catalysts, catalyzed diesel particulate filters, and
selective catalytic reduction systems.
Similar standards have been adopted worldwide to regulate the
emissions of nitrogen oxide, particulate matter, carbon monoxide
and carbon dioxide from motor vehicles. In the United States,
emissions standards are managed by the EPA. The state of
California has special dispensation to promulgate more stringent
vehicle emissions standards, and other states may choose to
follow either the national or California standards.
According to a 2005 EPA study, the largest emission of nitrogen
oxide came from on-road motor vehicles, with the second largest
contributor being non-road equipment which is mostly gasoline
and diesel engines. The study also lists on-road vehicles as the
second largest source of volatile organic compounds at 26%, with
and 19% from non-road equipment. According to the same study,
on-road vehicles were responsible for 60% of carbon monoxide
emissions and motor vehicle use is increasing. Nationwide,
three-quarters of carbon monoxide emissions come from on-road
motor vehicles (cars and trucks) and non-road engines (such as
boats and construction equipment). Control measures have reduced
pollutant emissions per vehicle over the past 20 years, but
the number of cars and trucks on the road and the miles they are
driven have doubled in the past 20 years. Vehicles are now
driven two trillion miles each year in the United States. With
more and more cars traveling more and more miles, growth in
vehicle travel may eventually offset progress in vehicle
emissions controls.
Emission control catalysts eliminate dangerous engine pollutants
from a range of fuels, including gasoline, diesel, natural gas
and alternative fuels.
CSIs target markets include:
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Diesel. United States and European
legislation requires significant reduction in particulate matter
and nitrogen oxide emissions from off-road diesel vehicles to be
phased in through 2015, including reductions in particulate
matter, which began in 2009. Catalysts using traditional
technology will require high loadings of platinum group metals
to comply with these standards, and diesel engine manufacturers
are very concerned about the high price of these units.
Additionally, OEMs complying with existing on-road legislation
will be looking for more cost-effective suppliers for existing
technology applications as well as potential expansion into
urea-based selective catalytic reduction technologies. This
growing market is highly driven by increasingly stringent
worldwide regulatory standards and is frequently funded by both
public and private sources for early, voluntary compliance.
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Automotive. Since 2005, 100% of new
cars sold in the United States and over 90% of all new cars sold
worldwide have been equipped with a catalytic converter as the
principal means of meeting emissions standards (Manufacturers of
Emissions Controls Association, Clean Air Facts, The Catalytic
Converter: Technology for Clean Air). The regulations
controlling auto emissions in countries throughout the world
have become increasingly restrictive and will continue to
tighten in the future.
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CSIs catalysts and heavy duty diesel systems, which
utilize its proprietary
MPC®
technology provide customers with high value-added,
cost-effective and efficient emission control systems. CSI is a
vertically-integrated provider of emission control systems whose
customers benefit from purchasing systems where the embedded
catalyst technology is optimized for system performance.
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Competitive
Advantages
CSIs proprietary patented
MPC®
technology was developed in response to the need for a more
cost-effective solution for automotive catalytic converters as
emission standards around the world continue to tighten.
Traditional automotive catalytic coating technologies currently
utilize high loadings of platinum group metals
platinum, palladium and rhodium to satisfy
performance requirements mandated by governmental regulations,
resulting in high costs to the automotive OEMs. Platinum group
metals have become increasingly expensive over the past
15 years due to growing demand and limited supply. In 2009,
the average troy ounce costs of platinum group metals were $263
for palladium, $1,203 for platinum and $1,442 for rhodium
compared to the base metals used in certain of CSIs
catalysts that cost less than $1 per troy ounce. CSIs
technology offers performance equal to or exceeding that of
competing catalytic coatings with a significant reduction in
platinum group metal loadings. In addition, increasingly
stringent emission standards for diesel engines and gas turbines
continue to drive demand for superior catalytic solutions in the
diesel and energy markets.
CSI believes that its technology and products represent a
fundamentally different emissions control solution, which
delivers the following key benefits:
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Broad Portfolio of Verified heavy duty diesel
systems. CSI offers one of the
industrys most comprehensive portfolio of system products
that have been evaluated and verified (approved) by the EPA and
the California Air Resources Board (CARB) for use in engine
retrofit programs, as well as in several European countries. CSI
has a thorough understanding of the verification process and the
demonstrated ability to get products broadly verified
specifically for the retrofit market.
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Superior Catalyst
Performance. CSIs proprietary
MPC®
technology enables it to produce catalytic coatings capable of
significantly better catalytic performance than previously
available. CSI has achieved this demonstrated performance
advantage by creating a catalyst using unique nanostructures
with superior stability under prolonged exposure to high
temperatures. This nanostructure technology enables the oxide
catalysts in its compounds to resist sintering, or fusing,
thereby maintaining a high catalytic surface area. As a result,
in heavy duty diesel and automotive applications, CSIs
catalyst formulations are able to maintain high levels of
performance over time using substantially lower platinum group
metals than products previously available.
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Significant Cost Advantage. In the
automotive market in particular, where platinum group metal
costs represent a large portion of manufacturers costs, a
significant benefit of CSIs catalyst technology is that it
offers performance equal to or exceeding that of competing
catalytic coatings with a 30% 80% reduction in
platinum group metal loadings.
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Wide Range of Catalyst
Applications. CSIs proprietary
technology is a design approach, as opposed to a single chemical
formulation. CSI has developed its technology since inception as
a platform that can be tailored for a range of different
industrial applications. Specifically, CSIs formulations
can be tailored in two distinct ways. First, the oxide compounds
used in its formulations can be adapted for specific
applications by adding to them, or doping them with, a wide
range of chemical elements, a process known as tuning. By
contrast, the catalyst offerings of its competitors can be tuned
only by adjusting the platinum group metal content. Second, CSI
is able to vary the mixtures of its compounds to create
customized solutions for specific applications. These two
independent design mechanisms allow for customization and
optimization for different vehicle platforms within the auto
industry, complex heavy duty diesel equipment for the OEM,
aftermarket and retrofit markets, and for completely different
applications in the energy sector, such as selective catalyst
reduction nitrogen oxide control for industrial and utility
boilers, process heaters, gas turbines and generator sets. CSI
offers a full range of EPA and CARB verified heavy duty diesel
emission control products.
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Proven Durability. CSIs products
and systems have undergone substantial laboratory and field
testing by its existing and prospective customers and have
demonstrated their durability and reliability in a wide range of
applications in actual use for many years. In addition,
CSIs products and systems have achieved numerous
certifications and match or exceed industry standards.
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Compatibility with Existing Manufacturing Infrastructure
and Operating Specifications. Catalytic
converters using CSIs catalysts are compatible with
existing automotive manufacturing processes as well as specific
vehicle operating specifications. There is no need for
CSIs customers to change their manufacturing operations,
processes, or how their products operate, in order to utilize
its proprietary technology. CSIs heavy duty diesel
emission control products and solutions are engineered to each
customers specific application and designed to deliver
custom and industry-leading solutions that meet or exceed
environmental mandates.
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Strategy
CSIs strategy is to grow a diversified, vertically
integrated emissions control business. CSI is focused on certain
segments that will benefit most from its unique catalyst
technology and strengths in the heavy duty diesel emission
systems space. Over the last several years, CSIs Catalyst
division has made several advances in low platinum group metal
and zero- platinum group metal technology, as well as in the
ability to tailor catalyst performance to particular
environments. In addition, the catalyst technology has been
proven to provide benefit outside the traditional light duty
vehicle and gasoline markets such as the heavy duty diesel
markets. CSIs Heavy Duty Diesel Systems division has a
proven track record spanning several decades and has one of the
broadest ranges of EPA and CARB verified emission systems and
products. Vertical integration enables CSI to offer systems
products incorporating customized catalysts. This ability is
unique in the emission control industry.
Vertical
Integration
CSI believes that its strategy of vertical integration provides
several advantages in each of its divisions. These advantages
include reduced manufacturing and delivery times, lower costs,
direct sourcing of raw materials and quality control. CSI also
believes that it offers significant added value to its customers
by providing a full range of vertically-integrated services
including catalyst design and customization, subsystem concept
design and application engineering, product prototyping and
development, and efficient pre-production, short-run and high
volume manufacturing. CSI believes that its vertical integration
differentiates it from many of its competitors and provides
value to its customers who can rely on CSI to be an integrated
supplier. CSI intends to continue to leverage its vertically
integrated services to create greater value for its customers in
the design and manufacture of CSI products.
Capitalize
on growing market for heavy duty diesel systems
CSIs Heavy Duty Diesel Systems division operates in a
market that is expected to grow substantially over the next
decade as new emission targets for nitrogen oxide reduction are
legislated in North America and Europe, and similar legislation
is enacted in major countries such as China and India. In
addition, CSI expects to benefit from the trend toward
additional government spending to reduce emissions as evidenced
by the American Recovery and Reinvestment Act of 2009 (commonly
referred to as the Stimulus Bill). With a broad
array of existing products, new products in the pipeline and
with the benefit of CSIs catalyst technology, CSI expects
to benefit from this market growth.
Focused
growth of catalyst business
CSIs Catalyst division is focused on gaining more business
from existing light duty vehicle customers and selectively
acquiring new customers who value the benefits of CSIs
technology. In addition, this division will increase its
presence in the growing off-road and on-road heavy duty diesel
catalyst markets through organic growth and key partnerships.
The development and production of catalysts to supply the Heavy
Duty Diesel Systems division is a top priority.
Partnerships
and Acquisitions
CSIs Heavy Duty Diesel Systems division has been
strengthened through the expansion of its North American
distribution channel and through partnerships with major
companies operating in the on-road heavy
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duty diesel markets. CSI may selectively enter new partnerships
to acquire new technologies or distribution capabilities. In
addition, given the fragmented nature of this industry, CSI
expects to target complementary businesses for acquisition.
CSIs Catalyst division participates in a joint venture in
Asia (described below under Asian Joint Venture).
This division will continue to seek partnerships that may
encompass technology sharing, manufacturing or distribution, in
order to expand presence in the heavy duty diesel on-road and
off-road markets. Opportunities to monetize CSIs
intellectual property estate outside these areas may be pursued
through sale and licensing or through partnerships to maximize
the return on its investment.
MPC®
Technology
CSIs break through proprietary catalyst technology is the
core of its business. CSI has developed and patented
intellectual property rights to a novel technology for creating
and manufacturing catalysts known as mixed phase catalyst
(MPC®).
CSIs technology involves the self-assembly of a ceramic
oxide matrix with catalytic metals precisely positioned within
three-dimensional structures.
The
MPC®
design gives its catalyst products two critical attributes that
differentiate them from competing offerings:
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Superior stability that allows heat, resistance and high
performance with very low levels of precious metals; and
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Base metal activation allows base metals to be used instead of
costly platinum group metals without compromising catalytic
performance.
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CSI protects this proprietary technology, along with its other
intellectual property, through the use of patents, trade secrets
and registered and common law trademarks. See
Intellectual Property below.
Products
Heavy
Duty Diesel Systems Division
CSIs Heavy Duty Diesel Systems division offers a full
range of products globally for OEM, occupational health driven
and verified retrofit markets for the reduction of exhaust
emissions of on-road, off-road and stationary diesel and
alternative fuel engines including propane and natural gas.
These division products include closed crankcase ventilation
systems, diesel oxidation catalysts, diesel particulate filters,
alternative fuel products and exhaust accessories.
Closed
Crankcase Ventilation Systems
Contaminated crankcase emissions are a serious problem for
diesel engine owners and the environment. These emissions are a
result of gas escaping past the piston rings due to high
cylinder pressure into the crankcase. In the crankcase, these
gases are contaminated with oil, mist, water, etc. These
contaminated emissions escape through the engine breather into
the engine compartment and the engine intake system or into the
environment in general. Closed crankcase ventilation systems
assist in elevating the level of exhaust emission reduction by
eliminating crankcase emissions.
In combination with select emission control solutions,
CSIs ECS-branded verified closed crankcase ventilation
system elevates the level of exhaust emission reduction by
eliminating crankcase emissions. Unlike exhaust emissions,
crankcase gases normally escape into the environment through the
crankcase vent tube. CSIs closed crankcase ventilation
system is a truly closed crankcase ventilation system that
effectively eliminates 100% of crankcase emissions at all times.
The system is designed to improve passenger compartment air
quality, which is especially important in all types of buses
(school, shuttle, urban, etc.), as well as refuse and municipal
fleets, while improving air quality for personnel working in the
vicinity of an operating piece of equipment. In addition, the
system increases efficiency by reducing fouling in the engine
compartment of charge air coolers, radiators, etc. Closed
crankcase ventilation systems have been proven by the EPA to
reduce pollutants released from closed crankcases when combined
with a diesel oxidation catalyst, by up to
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40%. When paired with a diesel oxidation catalyst, CSIs
closed crankcase ventilation systems can lead to a cleaner
engine environment, improve vehicle and equipment reliability
with less need for maintenance, keep the engine compartment as
well as components cleaner, and, reduce the use of oil and lower
vehicle operating costs. CSIs ECS-branded line of closed
crankcase ventilation systems are EPA verified, helping
customers not only lower emissions, but lower operating costs as
well.
Diesel
Oxidation Catalysts
A diesel oxidation catalyst is a device that utilizes a chemical
process in order to break down pollutants from diesel engines in
the exhaust stream, turning them into less harmful components.
They are normally a honeycomb shaped configuration coated in a
catalyst designed to trigger a chemical reaction to reduce
particulate matter. A diesel oxidation catalyst is an excellent
example of a device that can be utilized to upgrade a diesel
engine or retrofit it in order to pollute less.
Diesel oxidation catalysts typically reduce emissions of
particulate matter by 20% to 40% or more.
CSI has two verified diesel oxidation catalysts: the AZ Purifier
and
Purimuffler®.
When combined with its ECS-branded closed crankcase ventilation
system, these diesel oxidation catalysts increase EPA verified
particulate matter reduction to 40% for most 1991 to 2004 medium
and heavy duty on-road engine applications. CSI also offers
ECS-branded DZ and EZ Purifier diesel oxidation catalysts
supported on a metallic substrate, which affords exceptionally
low exhaust restriction and resistance to vibration. CSIs
DZ series of diesel oxidation catalysts were the first in the
industry to feature quick release band clamps. This allows the
center body to be readily removed for periodic engine-out
opacity measurements or for purifier cleaning. The DZ Purifier
is also available with modular add-on DMS and DMXS silencers.
The EZ Purifier offers the same metallic substrate based
catalyst as the DZ Purifier but in an all-welded purifier to
afford the most compact size and lower cost.
Diesel
Particulate Filters
A diesel particulate filter is a device designed to remove
diesel particulate matter, or soot, from the exhaust of diesel
engines. Diesel particulate filters typically remove more than
85% to 90% of the soot found in diesel emissions. Diesel-powered
vehicles that are equipped with a diesel particulate filter emit
no visible black carbon emissions from the exhaust pipe and are
far less harmful to the environment and the general health of
people in the vicinity. Diesel particulate filter systems can
employ catalyst systems to passively oxidize accumulated soot as
well as active regeneration strategies where external energy
sources are employed to initiate thermal oxidation. CSI markets
both passively and actively regenerating diesel particulate
filters under the
Purifilter®,
Combifilter®,
Purifilter®
Plus and
Cattrap®
brand names.
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Purifilter®
was the first passively regenerating diesel particulate filter
to attain an industry-leading 90% particulate matter emissions
reduction credit value. CSI believes its
Purifilter®
is more efficient than competing products as it is manufactured
with silicon carbide substrates, which offer superior filtration
and durability compared to other diesel particulate filter
materials. The
Purifilter®
employs a base and precious metal catalyst impregnated onto the
silicon carbide diesel particulate filter surface to passively
oxidize accumulated particulate while complying with stringent
CARB limits on nitrogen dioxide emissions.
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Combifilter®
is an actively regenerated diesel particulate filter system that
typically removes over 90% of particulate matter while reducing
nitrogen dioxide emissions. The system is comprised of electric
heating elements integrated with a diesel particulate filter and
silencer assembly. Periodically the system is plugged into an
off-board regeneration control panel or station to energize the
electric elements when the engine is not in service. Unlike
passively regenerating diesel particulate filters that rely on
minimum exhaust temperature conditions to initiate the catalytic
oxidation of accumulated soot,
Combifilter®
equipped engines are simply plugged in when not in service to
heat the filter to a temperature where oxygen can directly
oxidize the soot.
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Purifilter®
Plus combines the benefits of
Combifilters®
active regeneration with
Purifilters®
passive operation to provide the combined benefits of both
products.
Purifilter®
Plus employs a passive
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Purifilter®
diesel particulate filter to allow extended periods of passive
operation with periodic active regeneration (i.e.,
weekly, biweekly, every preventative maintenance, etc.).
This combination increases
Purifilter®
tolerance of colder duty cycle variations and provides a
proactive fleet management tool that improves vehicle uptime and
insures low backpressure and fuel economy. Periodic active
regeneration via connection to a common off-board regeneration
station allows on-board filter service that virtually eliminates
the need to remove a diesel particulate filter except for
de-ashing at 1500 engine hour intervals. CSI believes that
Purifilter®
Plus is the perfect solution for high utilization fleets
(i.e., cargo handling at ports) or rental construction
fleets who need a quick way to insure the condition of diesel
particulate filters installed on rental equipment to a wide
variety of customers with different equipment uses.
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Cattrap®
is a passively regenerating diesel particulate filter designed
specifically for mining and other heavy industrial applications.
Cattrap®
employs an advanced base metal soot ignition catalyst system
which eliminates diesel particulate emissions in excess of 85%,
while actually reducing toxic nitrogen dioxide emissions.
Because it is listed on the United States Mine Safety Health
Administration (MSHA) Table 2 List of Diesel Particulate Matter
Control Technologies, CSIs ECS-branded
Cattrap®
can be employed in mining environments where most other diesel
particulate filters cannot.
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Alternative
Fuel Products
CSI designs and supplies products to address the emissions
issues of liquefied petroleum gas and compressed natural gas
fueled engines used in industrial applications such as
forklifts, aerial platforms, etc.
CSIs
TermiNOx®
system converts any open-loop liquefied petroleum gas or
compressed natural gas fueled off-road engine into a state of
the art, digitally programmable, closed-loop, 3-way controlled
engine that simultaneously reduces carbon monoxide, hydrocarbon
and nitrogen oxide emissions by a CARB-verified 85 to 90%. In
addition, the fuel efficiency of the vehicle typically improves
by as much as 20%.
TermiNOx®
upgrades uncontrolled spark ignited engines used in industrial
applications with
state-of-the-art,
electronic closed-loop fuel control and 3-way catalytic
emissions control to reduce: smog-causing emissions by over 90%,
toxic carbon monoxide emissions by over 85%, and fuel
consumption by 10 to 20%.
CSI also offers a 2-Way
Purimuffler®
product for liquefied petroleum gas, and gasoline industrial
engines. CSIs 2-Way
Purimuffler®
product features a built-in tube, referred to as a venturi,
which introduces additional air into the catalytic muffler to
insure high conversion of deadly carbon monoxide and reduction
of hydrocarbon odors over the catalyst while preventing
excessive exhaust temperatures.
Exhaust
Accessories and Miscellaneous Products
CSI manufactures a wide array of ECS-branded exhaust accessories
including connectors, elbows, mounting brackets, clamps, exhaust
stacks and guards, and intake air components. These exhaust
accessories are used as aftermarket replacement components or in
the installation of ECS-branded OEM and verified retrofit
products.
The
CombiClean®
system utilizes economical, safe and environmentally friendly
technology developed to clean diesel filters, whether it is a
passive filter, or active, cordierite or silicon carbide filter.
The cleaning process uses a gradual temperature increase with a
constant air supply during the regeneration process in order to
prevent damage to catalytic coatings and substrate materials.
These systems are typically contained within stand alone units
with protective enclosures to prevent injury due to accidental
contact with hot surfaces and to prevent employee exposure to
suspended air particles.
The Back Pressure Monitor and Logger provides onboard monitoring
of retrofitted emissions control systems, providing the operator
notification of required maintenance. The Back Pressure Monitor
and Logger also logs information for diagnostic purposes to
facilitate engine and emission control system maintenance and
reduce downtime.
90
In addition, CSI has a pipeline of new heavy duty diesel systems
products under development. CSI is working on the next
generation of current product offerings and in growing the
portfolio of systems products that incorporate its proprietary
MPC®
catalyst technology.
Catalyst
Division
CSIs Catalyst division produces catalyst formulations for
gasoline, diesel and natural gas induced emissions that offer
superior performance, proven durability and cost effectiveness
for multiple markets and a wide range of applications. The
Catalyst division products include catalysts for gasoline (light
duty vehicle) engines, diesel engines and for energy
applications.
Catalysts
for Gasoline (Light Duty Vehicle) Engines
CSIs technology for light duty vehicles significantly
improves catalytic performance, is highly durable and
cost-effective. CSI has developed unique nanostructures that are
extremely thermally stable and resistant to sintering. Catalytic
converters using CSIs technology have superior catalytic
performance, can cost substantially less as a result of
significantly reduced platinum group metal or zero- platinum
group metal loadings, have comparable or better durability and
are physically and operationally compatible with all existing
manufacturing processes and operating requirements. CSIs
solution is based on industry-leading, patent-protected
technology and a scalable manufacturing business model.
Catalysts
for Diesel Engines
Diesel engines are more durable and are more fuel efficient than
gasoline engines, but can pollute significantly more. Current
techniques for diesel engines to meet emissions standards
require the use of several methods, including diesel oxidation
catalysts, catalyzed diesel particulate filters and selective
catalytic reduction systems. CSI has been producing diesel
oxidation catalysts since 2000. In addition, CSI is working with
leading heavy duty diesel engine and substrate manufacturers to
develop diesel oxidation catalysts, catalyzed diesel particulate
filters and selective catalytic reduction systems utilizing its
catalyst technology to meet United States and European light and
heavy duty regulations with minimal or no platinum group metals.
CSI offers a full range of catalyst products for the control of
carbon monoxide, hydrocarbons, particulate matter and nitrogen
oxide in light and heavy duty applications.
Catalysts
for Energy Applications
CSI develops and manufactures catalysts for use in selective
catalytic reduction and carbon monoxide reduction systems, which
are used to reduce nitrogen oxide and carbon monoxide emissions
from major utility plants, industrial process plants, OEMs,
refineries, food processors, product manufacturers and
universities. CSIs customized catalysts provide design
flexibility and its proprietary
MPC®
coating technology allows for optimal temperature operation of
the plant and an overall superior system design when compared to
existing technologies. CSI has achieved this demonstrated
performance advantage by creating a catalyst using unique
nanostructures with superior stability under prolonged exposure
to high temperatures.
In addition to the portfolio of products already developed from
its proprietary
MPC®
technology platform CSI has a pipeline of new products under
development. CSI is working on the next generation of its
current product offerings and in growing the portfolio of
zero-platinum group metal products and verified technologies.
Research
and Development
CSIs research and development in catalyst technology has
resulted in a broad array of products for the light duty vehicle
and heavy duty diesel markets. CSIs greatest strength in
the catalyst business lies in the technical sophistication and
cost-to-performance
ratio of its products. Product development in its Heavy Duty
Diesel Systems division has resulted in a broad family of
verified products and systems, with additional products in the
pipeline. CSI credits its accomplishments to strong engineering
capabilities, an experienced team, streamlined product
development processes and solid experience in the verification
and approval process.
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CSI seeks to acquire competitive advantage through the use of
customized catalysts for its emission control systems. CSI spent
approximately $7.3 million and $8.9 million on
research and development activities in the years ended
December 31, 2009 and 2008, respectively.
Manufacturing
Operations
CSIs Heavy Duty Diesel Systems division engineers its
emissions control products to customer-specific applications.
CSI believes that this approach reduces installation or assembly
time and optimizes operating uptime. CSIs Heavy Duty
Diesel Systems division works as the customers partner to
deliver custom, industry leading solutions that address each
customers particular environmental mandates. CSIs
heavy duty diesel systems are designed and manufactured in
facilities located in Reno, Nevada, Thornhill, Ontario, and
Malmo, Sweden.
CSIs Catalyst division developed an innovative and
sophisticated manufacturing process for coating substrates using
its
MPC®
catalytic coatings. CSIs manufacturing process consists of
mixing specially formulated catalytic coatings, applying the
coatings to ceramic substrates, then firing the coated
substrates in a furnace. The process of mixing and applying the
various types of coatings onto high cell density substrates is
complex and requires sophisticated manufacturing technology. CSI
has been manufacturing automotive catalysts since 1999.
CSIs first generation manufacturing line, currently
producing coated substrates for several vehicles, has satisfied
all requirements for process control, accountability and quality
required by its automotive customers. CSIs second
generation line has process control up to three times better
than its first generation line and operates at significantly
higher throughput. CSIs manufacturing lines are designed
to provide a high level of quality control at every step of the
unique manufacturing process. CSI manufactures its catalysts in
its leased manufacturing facility in Oxnard, California.
CSI maintains ISO 9001:2000, ISO/TS 16949:2002 and ISO
14001:2004 certifications.
CSIs raw material requirements vary by division. The
Catalyst division purchases ceramic substrates which are coated
with specialty formulated catalysts comprised of platinum group
metals and various chemicals. Platinum group metals are either
provided on a consignment basis by the customers of the division
or are purchased by CSI on behalf of the customer. In all cases,
the risk of price fluctuations in these metals is borne by the
customer. The Heavy Duty Diesel Systems division purchases
filters, filters coated with catalysts and other materials to
manufacture its emission systems, which are purchased from third
party suppliers as well as internally from CSIs Catalyst
division.
Sales and
Marketing
CSI sells its catalysts and heavy duty diesel systems directly
worldwide, although CSIs Asian joint venture partnership
is responsible for manufacturing, sales and marketing of its
catalysts in the Asian market including China, Japan and South
Korea among other countries.
CSI sells its heavy duty diesel system products to customers
throughout the world using North American and European and
dealers and distributors. The dealers and distributors receive a
commission from CSI, which varies depending on the product sold.
Customers purchase these heavy duty diesel system products to
reduce emissions for either retrofit or OEM applications.
Retrofit applications generally involve funded projects that use
approved systems that are one-off in nature. Typical
retrofit end-user customers include school districts,
municipalities and other fleet operators. OEM customers include
manufacturers of heavy duty diesel equipment such as mining
equipment, vehicles, generator sets and construction equipment.
The catalyst industry is mainly comprised of a few suppliers
serving large, sophisticated customers such as automobile
manufacturers. Purchase cycles for catalysts tend to be long,
resulting in generally predictable and stable revenue streams.
Catalysts are technology intensive products that have a profound
effect on the performance of the large, expensive systems in
which they are embedded. Extensive interaction is required
between catalyst manufacturers and their customers in the course
of developing an effective, reliable catalyst for a particular
application. For this reason it would appear that even the
largest customers prefer to work with only two or three
preferred catalyst suppliers on a specific application. The
collaboration required for catalyst
92
development and the technical hurdles involved in making
effective and reliable catalysts create barriers to entry and
provide an opportunity for catalyst manufacturers to earn
attractive margins. CSI is an approved supplier of catalysts for
major automotive manufacturers, including Honda and Renault. In
addition, the Catalyst division targets large heavy duty diesel
engine manufacturers as potential buyers of its catalyst
products. CSIs Heavy Duty Diesel Systems division is also
a customer of CSI catalyst products.
Asian
Joint Venture
In February 2008, CSI entered into an agreement with Tanaka
Kikinzoku Kogyo Kabushiki Kaisha (TKK) to form a new joint
venture company, TC Catalyst Incorporated (TCC) to manufacture
and distribute catalysts in the Asia-Pacific territories
including China, Japan, South Korea and other Asian countries.
Under the terms of the agreement, CSI and TKK each originally
owned 50% of TCC. TKK provided TCC with $1.0 million in
equity and capital and $5.0 million in debt financing,
while CSI provided $1.0 million of equity and licensed
specific patents, and technology as well as intellectual
property for use in the defined territory royalty free to the
venture. In exchange for the licensed technology, TCC issued CSI
a promissory note for JPY 500 million (approximately
U.S. $4.7 million) that accrued interest at 2.8%, due
in March 2018.
In December of 2008, CSI entered into an agreement with TKK to
alter the Joint Venture Agreement. CSI sold 40% of its ownership
interest in TCC to TKK for $441,000, reducing its ownership
share of TCC from 50% to 30%. CSI agreed to sell and transfer
specific heavy duty diesel catalyst technology and intellectual
property to TKK for use in the defined territory for a total
selling price of $7.5 million. TKK agreed to provide that
intellectual property to TCC on a royalty free basis.
$5.0 million of the sale was completed and recognized as a
gain in 2008, with the balance of $2.5 million being
recognized in 2009. The promissory note from TCC was reduced
from JPY 500 million to JPY 250 million. As a result
of this sale, a gain of $5.0 million was recorded in fiscal
2008 and $2.5 million in fiscal 2009.
In December of 2009, CSI entered into another agreement with TKK
to further alter the Joint Venture Agreement. CSI sold 83% of
its remaining ownership of TCC to TKK for $108,000, reducing its
ownership share from 30% to 5%. CSI agreed to sell and transfer
specific three-way catalyst technology and intellectual property
for use in the defined territory for a total selling price of
$3.9 million. TKK agreed to provide that intellectual
property to TCC on a royalty-free basis. $3.9 million of
the sale was completed and the full amount was recognized as a
gain in January 2010. The promissory note with a remaining
balance of JPY 250 million was retired.
Competition
CSIs Heavy Duty Diesel Systems division competes directly
against other companies that market verified products.
Competitors with EPA verified products include: Donaldson
Company, Inc., Cummins Emissions Solutions, Johnson Matthey plc,
Caterpillar Inc. and BASF. Competitors with CARB verified
products include: Johnson Matthey plc, Donaldson Company, Inc.,
Cleaire Advanced Emission Controls, LLC, Huss LLC, DCL
International Inc., and Environmental Solutions Worldwide, Inc.
The catalyst industry is concentrated with a few major
competitors as a result of continuing consolidation through
acquisitions. The major competitors are diversified enterprises
with catalysts representing one of several lines of business.
CSI competes directly against BASF Gmbh and Johnson Matthey plc
in all of its catalyst markets. Other Catalyst division
competitors include, Umicore Limited Liability Company and
Haldor-Topsoe.
Intellectual
Property
CSIs intellectual property includes patent rights, trade
secrets and registered and common law trademarks. In the past,
CSI primarily protected its intellectual property, particularly
in the area of three way catalysts (and especially in the
automotive area) by maintaining its innovative technology as
trade secrets. CSI believes that the protection provided by
trade secrets for its intellectual property was the most
suitable
93
protection available for the automotive industry where its
business initially started and in which it currently sells its
commercial products. CSIs automotive competitors also
largely rely on trade secret protection for their innovative
technology.
Since CSI began pursuing additional catalyst markets, it has
sought patent protection in relation to any new industries and
new countries in which it expects to do business. CSI currently
has 15 issued patents and 45 pending applications covering the
following main technologies: fundamental catalyst formulations
based on perovskite mixed metal oxides applicable to all
catalyst markets, Mixed Phase Catalyst
(MPC®)
technology, platinum group metal-free catalysed diesel
particulate filter, selective catalytic reduction, diesel
oxidation catalyst, zero-platinum group metal three-way catalyst
formulations, and exhaust systems for diesel engines
incorporating particulate filters.
CSI now relies on a combination of trade secrets, know-how,
trademark registrations, employee and third-party nondisclosure
agreements, as well as patents in selective areas and other
protective measures to protect its intellectual property rights
pertaining to its products and technology.
CSI currently has registered trademarks for
CSI®,
CATALYTIC
SOLUTIONS®,
its logo,
MPC®,
BARETRAP®,
CATTRAP®,
COMBICLEAN®,
COMBIFILTER®,
PURIFILTER®,
PURIMUFFLER®,
TERMINOX®
and
UNIKAT®.
Regulation
CSI is committed to complying with all federal, state and
international environmental laws governing production, use,
transport and disposal of substances and control of emissions.
In addition to governing its manufacturing and other operations,
these laws often impact the development of CSI emissions control
products, including, but not limited to, required compliance
with emissions standards applicable to new product diesel,
gasoline and alternative fuel engines. These regulations include
those developed in Japan, in the United States by the EPA and
CARB and in the E.U. by the European Environment Agency.
Many of CSIs products must receive regulatory approval
prior to sale. In the United States, regulatory approval is
obtained from the EPA or CARB through a verification process.
The verification process includes a thorough technical review of
the technology as well as tightly controlled testing to quantify
statistically significant levels of emission reductions. For
example, the EPA verification process begins with a verification
application and a test plan. Once this is completed, the testing
phase begins and is then followed by a data analysis to
determine if the technology qualifies for verification. Once a
technology is placed on the verified technologies list and
500 units are sold, the manufacturer is responsible for
conducting in-use testing and reporting of results to the EPA.
Similar product approval schemes exist in other countries around
the world.
Employees
As of April 30, 2010, CSI had 150 full time employees and 2
part time employees. Among the full time employees, 14 were
senior management, 9 were in research and development, 23 were
in marketing and business development, 13 were in administration
and 91 were in manufacturing operations. Among the two part time
employees, one was in administration and the other was in
manufacturing operations.
Properties
CSI occupies approximately 2,700 square feet of office
space at 4567 Telephone Road, Suite 206, Ventura,
California, under a lease agreement that expires on
August 31, 2013 for its corporate headquarters.
CSIs heavy duty diesel division uses approximately
51,000 square feet of space in Ontario, Canada under a
lease agreement that expires on December 31, 2018 for
administrative, research and development, manufacturing, sales
and marketing functions; and approximately 54,000 square
feet of space in Reno, Nevada under a lease agreement that
expires on January 31, 2015 for sales and manufacturing
purposes. CSI also owns
94
a 6,700 square foot condominium in Malmö, Sweden used
for administrative, research and development and European sales
and marketing.
CSIs Catalyst division uses approximately
77,500 square feet of space in Oxnard, California under
four separate lease agreements that expire on December 31,
2011, March 31, 2012 and two on December 31, 2012 for
manufacturing and research and development. This space includes
a warehouse that is also used for shipping and receiving. The
Catalyst division also leases 624 square feet of office
space near Paris in Gif sur Yvette, France under a lease
agreement that provides for expiration as early as July 31,
2011, but no later than July 31, 2017, that is used for
sales.
CSI does not anticipate the need to acquire additional space in
the near future and considers its current capacity to be
sufficient for current operations and projected growth. As such,
CSI does not expect that its rental costs will increase
substantially from the amounts historically paid in 2009.
Legal
Proceedings
CSI is involved in legal proceedings from time to time in the
ordinary course of its business. CSI does not believe that any
of these claims and proceedings against it are likely to have,
individually or in the aggregate, a material adverse effect on
its consolidated financial condition or results of operations.
Other
Information
CSIs principal executive offices are located at 4567
Telephone Road, Suite 206, Ventura, California 93003.
CSIs website is located at www.catalyticsolutions.com. The
contents of CSIs website are not incorporated by reference
in this joint proxy statement/prospectus.
95
CSI
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of CSIs financial
condition and results of operations should be read in
conjunction with CSIs consolidated financial statements
and related notes appearing elsewhere in this joint proxy
statement/prospectus. This discussion contains forward-looking
statements, the accuracy of which involves risks and
uncertainties, see Cautionary Statement Concerning
Forward-Looking Statements. CSIs actual results
could differ materially from those anticipated in these
forward-looking statements for many reasons, as a result of many
important factors, including those set forth in the section
titled, Risk Factors in this joint proxy
statement/prospectus and elsewhere in this joint proxy
statement/prospectus.
Overview
CSI is a global manufacturer and distributor of emissions
control systems and products, focused in the heavy duty diesel
and light duty vehicle markets. CSIs emissions control
systems and products are designed to deliver high value to its
customers while benefiting the global environment through air
quality improvement, sustainability and energy efficiency.
Heavy Duty Diesel Systems Division: Through
its Heavy Duty Diesel Systems division, CSI designs and
manufactures verified exhaust emissions control solutions.
CSIs Heavy Duty Diesel Systems division offers a full
range of products for the original equipment manufacturer, or
OEM, occupational health driven and verified retrofit markets
that reduce exhaust emissions created by on-road, off-road and
stationary diesel and alternative fuel engines including propane
and natural gas. Revenues from CSIs Heavy Duty Diesel
Systems division accounted for approximately 51% of its total
consolidated revenues for the year ended December 31, 2009.
Catalyst Division: Through its Catalyst
division, CSI produces catalyst formulations for gasoline,
diesel and natural gas induced emissions that are offered for
multiple markets and a wide range of applications. A family of
unique high-performance catalysts has been developed
with base-metals or low platinum group metal and zero-platinum
group metal content to provide increased catalytic
function and value for technology-driven automotive industry
customers. CSIs technical and manufacturing competence in
the light duty vehicle market is aimed at meeting auto
makers most stringent requirements, and CSI has supplied
over nine million parts to light duty vehicle customers since
1996. In addition to auto makers, CSI also provides catalyst
formulations for its Heavy Duty Diesel Systems division.
Revenues from CSIs Catalyst division accounted for
approximately 49% of its total consolidated revenues for the
year ended December 31, 2009.
Sources
of Revenues and Expenses
Revenues
CSI generates revenues primarily from the sale of its emission
control systems and products. CSI generally recognize revenues
from the sale of its emission control systems and products upon
shipment of these products to its customers. However, for
certain customers, where risk of loss transfers at the
destination (typically the customers warehouse), revenue
is recognized when the products are delivered to the destination
(which is generally within five days of the shipment).
Cost
of revenues
CSIs cost of revenues consists primarily of its direct
costs for the manufacture of its emission control systems and
products, including cost of raw materials, costs of leasing and
operating manufacturing facilities and wages paid to personnel
involved in production, manufacturing quality control, testing
and supply chain management. In addition, cost of revenues
include normal scrap and shrinkage associated with the
manufacturing process and a reserve expense for obsolete and
slow moving inventory.
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Sales
and marketing expenses
CSIs sales and marketing expenses consist primarily of
compensation paid to sales and marketing personnel, and
marketing expenses.
Research
and development expenses
CSIs research and development expenses consist of costs
associated with research related to new product development and
product enhancement expenditures. Research and development costs
also include costs associated with getting its heavy duty diesel
systems verified and approved for sale by the United States
Environmental Protection Agency (EPA), the California Air
Resources Board (CARB) and other regulatory authorities.
General
and administrative expenses
CSIs general and administrative expenses consist primarily
of compensation paid to administrative personnel, legal and
professional fees, corporate expenses and regulatory and other
administrative expenses.
Total
other income (expense)
CSIs total other income (expense) primarily reflects
interest expense, but also includes interest income as well as
CSIs share of income and losses from its joint venture in
Japan and income or losses from sale of assets.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
United States generally accepted accounting principles requires
the use of estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses, and
related disclosures in the financial statements. Critical
accounting policies are those accounting policies that may be
material due to the levels of subjectivity and judgment
necessary to account for highly uncertain matters or the
susceptibility of such matters to change, and that have a
material impact on financial condition or operating performance.
While CSI bases its estimates and judgments on its experience
and on various other factors that it believes to be reasonable
under the circumstances, actual results may differ from these
estimates under different assumptions or conditions. CSI
believes the following critical accounting policies used in the
preparation of its financial statements require significant
judgments and estimates. For additional information relating to
these and other accounting policies, see Note 2 to
CSIs Consolidated Financial Statements, appearing
elsewhere in this joint proxy statement/prospectus.
Revenue
Recognition
CSI generally recognizes revenue when products are shipped and
the customer takes ownership and assumes risk of loss,
collection of the related receivable is reasonably assured,
persuasive evidence of an arrangement exists, and the sales
price is fixed or determinable. Where installation services, if
provided, are essential to the functionality of the equipment,
CSI defers the portion of revenue for the sale attributable to
installation until it has completed the installation. When terms
of sale include subjective customer acceptance criteria, CSI
defers revenue until the acceptance criteria are met. Concurrent
with the shipment of the product, CSI accrues estimated product
return reserves and warranty expenses. Critical judgments
include the determination of whether or not customer acceptance
criteria are perfunctory or inconsequential. The determination
of whether or not the customer acceptance terms are perfunctory
or inconsequential impacts the amount and timing of the revenue
that CSI recognizes. Critical judgments also include estimates
of warranty reserves, which are established based on historical
experience and knowledge of the product.
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Allowance
for Doubtful Accounts
The allowance for doubtful accounts involves estimates based on
managements judgment, review of individual receivables and
analysis of historical bad debts. CSI monitors collections and
payments from its customers and maintains allowances for
doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. CSI also
assesses current economic trends that might impact the level of
credit losses in the future. If the financial condition of
CSIs customers were to deteriorate, resulting in
difficulties in their ability to make payments as they become
due, additional allowances could be required, which would have a
negative effect on CSIs earnings and working capital.
Inventory
Valuation
Inventory is stated at the lower of cost or market. Cost is
determined on the
first-in,
first-out method. CSI writes down inventory for slow-moving and
obsolete inventory based on assessments of future demands,
market conditions and customers who are expected to reduce
purchasing requirements as a result of experiencing financial
difficulties. Such assessments required the exercise of
significant judgment by management. If these factors were to
become less favorable than those projected, additional inventory
write-downs could be required, which would have a negative
effect on CSIs earnings and working capital.
Accounting
for Income Taxes
CSIs income tax expense is dependent on the profitability
of its various international subsidiaries including those in
Canada and Sweden. These subsidiaries are subject to income
taxation based on local tax laws in these countries. CSIs
United States operations have continually incurred losses since
inception. CSIs annual tax expense is based on its income,
statutory tax rates and available tax planning opportunities in
the various jurisdictions in which it operates. Tax laws are
complex and subject to different interpretations by the taxpayer
and respective governmental taxing authorities. Significant
judgment is required in determining CSIs tax expense and
in evaluating its tax positions including evaluating
uncertainties. CSI reviews its tax positions quarterly and
adjusts the balances as new information becomes available. If
these factors were to become less favorable than those
projected, or if there are changes in the tax laws in the
jurisdictions in which CSI operates, there could be an increase
in tax expense and a resulting decrease in CSIs earnings
and working capital.
Deferred income tax assets represent amounts available to reduce
income taxes payable on taxable income in future years. Such
assets arise because of temporary differences between the
financial reporting and tax bases of assets and liabilities, as
well as from net operating loss and tax credit carry-forwards.
CSI evaluates the recoverability of these future tax deductions
by assessing the adequacy of future expected taxable income from
all sources, including reversal of taxable temporary
differences, forecasted operating earnings and available tax
planning strategies. These sources of income inherently rely on
estimates. To provide insight, CSI uses its historical
experience and its short and long-range business forecasts. CSI
believes it is more likely than not that a portion of the
deferred income tax assets may expire unused and have
established a valuation allowance against them. Although
realization is not assured for the remaining deferred income tax
assets, primarily related to foreign tax jurisdictions, CSI
believes it is more likely than not that the deferred tax assets
will be fully recoverable within the applicable statutory
expiration periods. However, deferred tax assets could be
reduced in the near term if CSIs estimates of taxable
income in certain jurisdictions are significantly reduced or
available tax planning strategies are no longer viable.
Business
Combinations
Under the purchase method of accounting, CSI allocates the
purchase price of acquired companies to the tangible and
identifiable intangible assets acquired and liabilities assumed
based on their estimated fair values. CSI records the excess of
purchase price over the aggregate fair values as goodwill. CSI
engages third-party appraisal firms to assist it in determining
the fair values of assets acquired and liabilities assumed.
These valuations require CSI to make significant estimates and
assumptions, especially with respect to intangible assets.
Critical estimates in valuing purchased technology, customer
lists and other identifiable intangible
98
assets include future cash flows that CSI expects to generate
from the acquired assets. If the subsequent actual results and
updated projections of the underlying business activity change
compared with the assumptions and projections used to develop
these values, CSI could experience impairment charges. In
addition, CSI has estimated the economic lives of certain
acquired assets and these lives are used to calculate
depreciation and amortization expense. If CSIs estimates
of the economic lives change, depreciation or amortization
expenses could be accelerated or slowed.
Goodwill
CSI tests goodwill for impairment at the reporting unit level at
least annually and more frequently upon the occurrence of
certain events. Only CSIs Heavy Duty Diesel Systems
reporting unit has goodwill subject to impairment review, which
totaled $4,223,000 at December 31, 2009. Goodwill
impairment testing requires CSI to estimate the fair value of
its reporting unit. The estimate of fair value is based on
internally developed assumptions approximating those that a
market participant would use in pricing the reporting unit. CSI
derived the estimated fair value of the Heavy Duty Diesel
Systems reporting unit primarily from a discounted cash flow
model. Significant assumptions used in deriving the fair value
of the reporting unit included: annual revenue growth over the
next eight years ranging from 10.5% to 15.7%, long-term revenue
growth of 3% and a discount rate of 25.3%. While the revenue
growth rates used are consistent with CSIs historical
growth patterns and consider future growth potential identified
by management, there is no assurance such growth will be
achieved. In addition, CSI considered the overall fair value of
its reporting units as compared to the fair value of the
enterprise. Because the estimated fair value of the reporting
unit exceeded its carrying value by 6%, CSI determined that no
goodwill impairment existed as of December 31, 2009;
however, it is reasonably possible that future results may
differ from the estimates made during 2009 and future impairment
tests may result in a different conclusion for the goodwill of
the Heavy Duty Diesel Systems reporting unit. In addition, the
use of different estimates or assumptions by management could
lead to different results. CSIs estimate of fair value of
the reporting unit is sensitive to certain factors, including
but not limited to the following: movements in CSIs share
price, changes in discount rates and CSIs cost of capital,
growth of the reporting units revenue, cost structure of
the reporting unit, successful completion of research and
development, capital expenditures, customer acceptance of new
products, competition, general economic conditions and approval
of the reporting units product by regulatory agencies.
Impairment
of Long-Lived Assets Other Than Goodwill
CSI evaluates long-lived assets, including intangible assets
other than goodwill, for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset
may not be recoverable. An impairment is considered to exist if
the total estimated future cash flows on an undiscounted basis
are less than the carrying amount of the assets. If an
impairment does exist, CSI measures the impairment loss and
records it based on discounted estimated future cash flows. In
estimating future cash flows, CSI groups assets at the lowest
level for which there are identifiable cash flows that are
largely independent of cash flows from other asset groups.
Considerable judgment is necessary to estimate the fair value of
the assets and accordingly, actual results could vary
significantly from such estimates. CSIs most significant
estimates and judgments relating to the long-lived asset
impairments include the timing and amount of projected future
cash flows, which is based upon, among other things, certain
assumptions about expected future operating performance, growth
rates and other factors. Although CSI believes the assumptions
and estimates it has made in the past have been reasonable and
appropriate, different assumptions and estimates could
materially affect its reported financial results. To the extent
additional events or changes in circumstances occur, CSI may
conclude that a non-cash impairment charge against earnings is
required, which could have an adverse effect on its financial
condition and results of operations.
Stock-Based
Compensation Expense
CSI accounts for share-based compensation using fair value
recognition and record stock-based compensation as a charge to
earnings net of the estimated impact of forfeited awards. As
such, CSI recognizes stock-
99
based compensation cost only for those stock-based awards that
are estimated to ultimately vest over their requisite service
period, based on the vesting provisions of the individual grants.
The process of estimating the fair value of stock-based
compensation awards and recognizing stock-based compensation
cost over their requisite service period involves significant
assumptions and judgments. CSI estimates the fair value of stock
option awards on the date of grant using a Monte Carlo
univariate pricing model for awards with market conditions and
the Black-Scholes option-valuation model for the remaining
awards, which requires that CSI make certain assumptions
regarding: (i) the expected volatility in the market price
of its common stock; (ii) dividend yield;
(iii) risk-free interest rates; and (iv) the period of
time employees are expected to hold the award prior to exercise
(referred to as the expected holding period). As a result, if
CSI revises its assumptions and estimates, its stock-based
compensation expense could change materially for future grants.
Legal
and Other Contingencies
CSI is subject to various claims and legal proceedings. Each
year, CSI reviews the status of each significant legal dispute
to which it is a party and assesses its potential financial
exposure, if any. If the potential financial exposure from any
claim or legal proceeding is considered probable and the amount
can be reasonably estimated, CSI records a liability and an
expense for the estimated loss. Significant judgment is required
in both the determination of probability and the determination
as to whether an exposure is reasonably estimable. Because of
uncertainties related to these matters, accruals are based only
on the best information available at the time. As additional
information becomes available, CSI reassesses the potential
liability related to its pending claims and litigation and
revise its estimates accordingly. Such revisions in the
estimates of the potential liabilities could have a material
effect on its results of operations and financial position.
Recent
Accounting Pronouncements
On July 1, 2009, the Financial Accounting Standards Board,
or FASB, released the FASB Accounting Standards
Codificationtm,
sometimes referred to as the Codification or
ASC. The Codification does not change how CSI
accounts for its transactions or the nature of related
disclosures made, and was made effective for periods ending on
or after September 15, 2009. Accordingly, CSI has updated
references in this joint proxy statement/prospectus to reflect
the Codification Topics as applicable.
In October 2009, the FASB updated its guidance regarding
accounting for multiple deliverable arrangements in order to
require vendors to account for products and services
(deliverables) separately rather than as a combined unit. These
changes are effective prospectively for revenue arrangements
entered into or materially modified in the fiscal years
beginning on or after June 15, 2010 and early adoption is
permitted. CSI does not expect the adoption of this accounting
update to have a significant impact on its financial statements.
In January 2010, the FASB issued guidance designed to improve
disclosures about fair value measurements as well as disclosures
related to significant transfers between each level and
additional information about Level 3 activity. This
guidance begins phasing in the first fiscal period after
December 15, 2009, and CSI is currently assessing the
effects on its financial statements.
For additional discussion regarding these, and other recent
accounting pronouncements, see Note 2 to CSIs
Consolidated Financial Statements, appearing elsewhere in this
joint proxy statement/prospectus.
Recent
Developments
Asian
Joint Venture Reduction of Ownership Interest to
5%
In February 2008, CSI entered into an agreement with Tanaka
Kikinzoku Kogyo Kabushiki Kaisha, or TKK, to form a new joint
venture company, TC Catalyst Incorporated, or TCC, to
manufacture and distribute catalysts in China, Japan, South
Korea and other Asian countries. Under the terms of the
agreement, CSI and TKK each originally owned 50% of TCC. TKK
provided TCC with $1.0 million in equity and capital and
$5.0 million in debt financing, while CSI provided
$1.0 million of equity and licensed specific patents, and
technology and intellectual property for use in the defined
territories royalty-free to the venture. In exchange
100
for the licensed technology, TCC issued CSI a promissory note
for JPY 500 million (U.S. $4.7 million) that
accrued interest at 2.8%, and was due in March 2018.
In December 2008, TKK and CSI agreed to modify the terms of the
joint venture whereby CSI sold 40% of its ownership interest in
TCC to TKK for $441,000, reducing its ownership share of TCC
from 50% to 30%. In addition, CSI agreed to sell and transfer
specific heavy duty diesel catalyst technology and intellectual
property for use in the defined territories for
$7.5 million to TKK and TKK agreed to provide that
intellectual property to TCC on a royalty-free basis. CSI
recognized $5.0 million as a gain in 2008 following
completion of the sale with the balance of $2.5 million
being recognized in 2009. The promissory note from TCC was
reduced from JPY 500 million to JPY 250 million.
In December 2009, TKK and CSI further modified the terms of the
joint venture agreement originally entered into in February
2008, whereby CSI sold 83% of its remaining ownership of TCC to
TKK for $108,000 reducing its ownership share from 30% to 5%.
CSIs investment in TCC is accounted for using the equity
method as CSI still has significant influence over TCC as a
result of having a seat on TCCs board. CSI agreed to sell
and transfer specific three-way catalyst technology and
intellectual property for use in the Asia-Pacific territories
for $3.9 million to TKK, and TKK agreed to provide that
intellectual property to TCC on a royalty-free basis. CSI
recognized a gain of $3.9 million in January 2010. The
promissory note with a remaining balance of JPY 250 million
was retired.
Sale
of Applied Utility Systems (Energy Systems
Division)
In August 2006, CSI acquired the assets of Applied Utility
Systems (Energy Systems division) a business engaged in the
engineering and installation of emission control systems for
natural gas fired boilers and process heaters in refineries and
manufacturing plants. In October 2009, CSI sold the assets of
this business to Johnson Matthey for $8.6 million of cash,
as well as the right to receive up to $1.4 million
additional consideration if a certain order was received and
warranties are met. Because a certain order was not received,
$0.5 million of the contingent consideration is no longer
payable to CSI. The remaining $0.9 million of contingent
consideration is payable to CSI through July 2013 if projected
contract warranties are met. CSI used the proceeds from this
sale to repay approximately $6.8 million in secured debt
(see Liquidity and Capital
Resources Description of Indebtedness below)
and for general working capital. The operations and sale of
Applied Utility Systems are reported as a discontinued operation
in CSIs financial statements for all periods represented.
Catalyst
Division Restructuring
Beginning in 2008 and continuing through 2009, CSI initiated a
series of restructuring activities as a result of a strategic
review of its Catalyst division. These activities included
reducing excess workforce and capacity, consolidating certain
functions, focusing its marketing and product development
strategies around heavy duty diesel catalysts and existing and
selected new customers in the light duty vehicle market. The
overall objectives of the restructuring activities were to lower
costs and position the Catalyst division to break even at lower
sales and to make this division profitable. To date, these
efforts have helped enhance CSIs ability to reduce
operating losses, retain and expand existing relationships with
existing customers and attract new business. The benefits of
this cost reduction were realized partially in the year ended
December 31, 2009 and the full effect of actions taken
during 2009 is expected to be realized in the year ended
December 31, 2010. In connection with these efforts, CSI
incurred $2.7 million of severance and recapitalization
charges in the year ended December 31, 2009. These charges
primarily included charges for severance payments for headcount
reduction and fees for strategic advisors. In the year ended
December 31, 2008, in concert with its strategic review,
CSI assessed the carrying value of its fixed assets in the
Catalyst division and recorded an impairment charge of
$4.9 million.
101
A reconciliation of CSIs accrued severance and related
expenses are as follows:
|
|
|
|
|
Accrued severance at December 31, 2008
|
|
$
|
187,000
|
|
Accrued severance expense during 2009
|
|
|
1,429,000
|
|
Paid severance expense during 2009
|
|
|
(946,000
|
)
|
|
|
|
|
|
Accrued severance at December 31, 2009
|
|
$
|
670,000
|
|
|
|
|
|
|
CSI may utilize similar measures in the future to realign its
operations to further increase its operating efficiencies, which
may materially affect its future operating results.
Results
of Operations
Comparison
of Year Ended December 31, 2009 to Year Ended
December 31, 2008
Revenue
The table below and the tables in the discussion that follows
are based upon the way CSI analyzes its business. See
Note 19 to CSIs Consolidated Financial Statements
appearing elsewhere in this joint proxy statement/prospectus for
additional information about CSIs division segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in millions)
|
|
|
Heavy duty diesel systems
|
|
$
|
25.9
|
|
|
|
51
|
%
|
|
$
|
27.1
|
|
|
|
52
|
%
|
|
$
|
(1.2
|
)
|
|
|
(4
|
)%
|
Catalyst
|
|
|
25.1
|
|
|
|
50
|
%
|
|
|
26.3
|
|
|
|
50
|
%
|
|
|
(1.2
|
)
|
|
|
(5
|
)%
|
Intercompany revenue
|
|
|
(0.5
|
)
|
|
|
(1
|
)%
|
|
|
(0.8
|
)
|
|
|
(2
|
)%
|
|
|
0.3
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
50.5
|
|
|
|
|
|
|
$
|
52.6
|
|
|
|
|
|
|
$
|
(2.1
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues for the year ended December 31, 2009 decreased
by $2.1 million, or 4%, to $50.5 million from
$52.6 million for the year ended December 31, 2008.
Revenues for CSIs Heavy Duty Diesel Systems division for
the year ended December 31, 2009 decreased
$1.2 million, or 4%, to $25.9 million, from
$27.1 million for the year ended December 31, 2008.
During the first half of 2009, this division was adversely
affected by the global economic crisis and the related budget
crisis in California. However, with a broad CARB and EPA
verified product portfolio CSI benefited from increased
California funding and spending for diesel emissions control
under the American Reconstruction and Recovery Act 2009
(commonly referred to as the Stimulus Bill) during the second
half of the year. In addition, sales in this division were
positively impacted during the second half due to an expansion
of CSIs distribution channel in the United States in the
latter part of 2008 and the first half of 2009. CSI expects the
benefits from increased United States government funding and its
expanded distribution capacity to continue in 2010.
Revenues for CSIs Catalyst division for the year ended
December 31, 2009 decreased $1.2 million, or 5%, to
$25.1 million, from $26.3 million for the year ended
December 31, 2008. The significant decline in worldwide
auto sales affected this division adversely; however, the full
year impact of sales to customers acquired in the latter part of
2008 helped to partially offset this decline. In addition, for
the year ended December 31, 2009, the division recorded
intercompany sales of $0.5 million, compared to
$0.8 million in the year ended December 31, 2008. This
decrease resulted from lower sales to CSIs former Energy
Systems division, which was sold in October 2009. Intercompany
sales by CSIs Catalyst division to its Heavy Duty Diesel
Systems division are eliminated in consolidation.
Cost of
revenues
Cost of revenues decreased by $5.8 million, or 13%, to
$38.5 million for the year ended December 31, 2009
compared to $44.3 million for the year ended
December 31, 2008. The primary reason for the decrease in
costs was the reduction in manufacturing costs achieved due to
the restructuring of the catalyst business coupled with a
reduction in cost due to the decline in revenue.
102
Gross
profit
The following table shows CSIs gross profit and gross
margin (gross profit as a percentage of revenues) by division
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
|
(Dollars in millions)
|
|
|
Heavy duty diesel systems
|
|
$
|
8.2
|
|
|
|
31.7
|
%
|
|
$
|
8.0
|
|
|
|
29.5
|
%
|
Catalyst
|
|
|
3.8
|
|
|
|
15.0
|
%
|
|
|
0.2
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
12.0
|
|
|
|
23.7
|
%
|
|
$
|
8.2
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit increased by $3.8 million, or 46%, to
$12.0 million for the year ended December 31, 2009,
from $8.2 million for the year ended December 31,
2008. The gross margin increased to 23.7% for the year ended
December 31, 2009 from 15.6% for the year ended
December 31, 2008 despite the decrease in sales. The
increase in gross profit is primarily a result of manufacturing
overhead cost reductions in CSIs Catalyst division and
changes in the mix of product sold by CSIs Heavy Duty
Diesel Systems division, partially offset by lower gross profit
from lower sales volumes. The increase in gross margin is
primarily a result of a larger reduction in cost of revenue
compared to the reduction in sales. Gross margin is expected to
benefit further from the cost reductions in the catalyst
business, as the full impact of the restructuring is realized in
2010.
Operating
expenses
The following table shows CSIs operating expenses and
operating expenses as a percentage of revenues for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in millions)
|
|
|
Sales and marketing
|
|
$
|
3.6
|
|
|
|
7.1
|
%
|
|
$
|
5.2
|
|
|
|
9.9
|
%
|
|
$
|
(1.6
|
)
|
|
|
(31
|
)%
|
Research and development
|
|
|
7.3
|
|
|
|
14.5
|
%
|
|
|
8.9
|
|
|
|
16.9
|
%
|
|
|
(1.6
|
)
|
|
|
(18
|
)%
|
General and administrative
|
|
|
8.9
|
|
|
|
17.6
|
%
|
|
|
10.6
|
|
|
|
20.2
|
%
|
|
|
(1.7
|
)
|
|
|
(16
|
)%
|
Gain on sale of intellectual property
|
|
|
(2.5
|
)
|
|
|
(4.9
|
)%
|
|
|
(5.0
|
)
|
|
|
(9.5
|
)%
|
|
|
2.5
|
|
|
|
(50
|
)%
|
Impairment, severance and other charges
|
|
|
2.7
|
|
|
|
5.3
|
%
|
|
|
5.2
|
|
|
|
9.9
|
%
|
|
|
(2.5
|
)
|
|
|
(48
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
20.0
|
|
|
|
39.6
|
%
|
|
$
|
24.9
|
|
|
|
47.3
|
%
|
|
$
|
(4.9
|
)
|
|
|
(20
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009, operating expenses
decreased by $4.9 million, or 20%, to $20.0 million
from $24.9 million for the year ended December 31,
2008. The primary reason for the decrease in operating expenses
was the expense reductions due to the restructuring of the
Catalyst division and overall cost management in the Heavy Duty
Diesel Systems division, which led to reductions in all
categories of operating expenses.
Sales and
marketing expenses
For the year ended December 31, 2009, sales and marketing
expenses decreased by $1.6 million, or 31%, to
$3.6 million, from $5.2 million for the year ended
December 31, 2008. This reduction in spending was a direct
result of CSIs ongoing cost containment initiatives and
restructuring activities in the Catalyst division (see
Recent Developments Catalyst
Division Restructuring above). These cost reduction
activities were a result of refocusing CSIs Catalyst
division marketing strategy to heavy duty diesel sales and
limiting light duty vehicle marketing efforts to existing
customers and select new customers. Sales and marketing expenses
as a percentage of sales decreased to 7.1% in the year ended
December 31, 2009 as compared to 9.9% in the year ended
December 31, 2008, despite the 4% sales decrease.
103
Research
and development expenses
For the year ended December 31, 2009, research and
development expenses decreased by $1.6 million, or 18%, to
$7.3 million from $8.9 million for the year ended
December 31, 2008. As a percentage of revenues, research
and development expenses were 14.5% in the year ended
December 31, 2009, compared to 16.9% in the year ended
December 31, 2008. The decrease in research and development
expenses was primarily attributable to cost reduction efforts in
CSIs Catalyst division (see Recent
Developments Catalyst
Division Restructuring above).
General
and administrative expenses
For the year ended December 31, 2009, general and
administrative expenses decreased by $1.7 million, or 16%,
to $8.9 million, from $10.6 million for the year ended
December 31, 2008. This reduction in spending was a result
of CSIs ongoing cost containment initiatives and
restructuring activities in its Catalyst division (see
Recent Developments Catalyst
Division Restructuring above), cost management in the
heavy duty systems division and corporate expense reductions.
General and administrative expenses as a percentage of sales
decreased to 17.6% in the year ended December 31, 2009 as
compared to 20.2% in the year ended December 31, 2008,
despite the 4% sales decrease.
Impairment,
severance and other charges
During the year ended December 31, 2009, CSI incurred
$2.7 million of severance and recapitalization charges.
These charges primarily included charges for severance payments
for headcount reduction and fees for strategic advisors in
connection with the restructuring of CSIs Catalyst
division (described above under Recent
Developments Catalyst
Division Restructuring). In addition, other charges
include fees payable to advisors hired to assist CSI in its
strategic review and its efforts to recapitalize the company. In
the year ended December 31, 2008, in concert with
CSIs strategic review, CSI assessed the carrying value of
its fixed assets in its Catalyst division and recorded an
impairment charge of $4.9 million.
Gain on
sale of intellectual property
As a result of the transaction with its Asian joint venture
partner TKK, (described above under Recent
Developments Asian Joint Venture-Reduction of
Ownership Interest to 5%) CSI sold certain intellectual
property for use in the joint venture territory for
$7.5 million in fiscal 2008. A gain of $5.0 million
was recognized in 2008 and a gain of $2.5 million was
recognized in the year ended December 31, 2009 after
delivery of the intellectual property and certain registration
conditions for the property were satisfied.
Non-operating
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
|
(Dollars in millions)
|
|
|
Interest income
|
|
$
|
|
|
|
|
|
|
|
$
|
0.3
|
|
|
|
0.6
|
%
|
Interest expense
|
|
|
(2.3
|
)
|
|
|
(4.6
|
)%
|
|
|
(2.2
|
)
|
|
|
(4.2
|
)%
|
Other income (expense)
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)%
|
|
|
(0.7
|
)
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expense, net
|
|
$
|
(2.6
|
)
|
|
|
(5.1
|
)%
|
|
$
|
(2.6
|
)
|
|
|
(4.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income and expense
In the year ended December 31, 2009, CSI incurred interest
expense of $2.3 million, compared to $2.2 million in
the year ended December 31, 2008. In the year ended
December 31, 2009, CSI recognized deferred financing
charges of approximately $0.3 million associated with a
term loan of $3.5 million that was repaid in October 2009,
approximately 39 months before the due date of the loan.
These charges were paid at the time of the origination of the
loan and were deferred over the life of the loan. Excluding the
deferred financing charges, interest expense decreased in 2009
compared to 2008. This decrease was attributable to the
104
reduction of $9.7 million of debt in the year ended
December 31, 2009. In the year ended December 31,
2009, CSI earned $18,000 of interest compared to $266,000 in the
year ended December 31, 2008.
Other
income (expense)
In the year ended December 31, 2009, CSIs share of
the TCC net loss was $1.3 million, which was offset by a
gain on the reduction in the liability to fund TCC of
$1.1 million, for a net of $216,000 compared to $988,000 in
the year ended December 31, 2008. In addition, CSI recorded
other expense of $75,000 for 2009 and a net gain of $345,000 in
the year ended December 31, 2008, relating to foreign
currency transactions and gains (loss) on sale of other assets.
Income
taxes
For continuing operations in the year ended December 31,
2009, CSI had an income tax benefit of $1.0 million,
compared to income tax expense of $0.6 million for the year
ended December 31, 2008. This decrease in taxes was a
result of a tax benefit generated in continuing operations as a
result of tax expense on the gain on sale of the assets in
discontinued operations and a decline in taxable income in
Sweden.
Discontinued
operations
Discontinued operations include the operations and sale of
Applied Utility Systems which comprised CSIs Energy
Systems division. In the year ended December 31, 2009, CSI
recorded net income from discontinued operations of
$1.5 million, including a pre-tax gain on disposal of
$3.7 million, compared to a net loss of $0.9 million
in the year ended December 31, 2008.
Net
loss
For the foregoing reasons, CSI had a net loss of
$8.0 million for the year ended December 31, 2009
compared to a net loss of $20.8 million for the year ended
December 31, 2008. Excluding income (loss) from
discontinued operations, CSI had a net loss from continuing
operations of $9.5 million for the year ended
December 31, 2009 compared to a net loss from continuing
operations of $19.9 million for the year ended
December 31, 2008.
Liquidity
and Capital Resources
CSI has suffered recurring losses and negative cash flows from
operations since inception, and CSIs working capital is
severely limited. During 2009, CSI has taken several actions to
improve its liquidity. These actions have included:
(i) reduction in cash used in operations through cost
reductions and improved working capital management;
(ii) sale of assets including the sale of the assets of
Applied Utility Systems and sale of intellectual property; and
(iii) repayment of debt. Notwithstanding these actions, CSI
is not currently in compliance with certain of its covenants
under its agreement with Fifth Third Bank (see
Description of Indebtedness below), and
as a result, this debt has been classified as current and due
and payable in 2010. CSI had $2.3 million in cash and cash
equivalents at December 31, 2009 compared to
$6.7 million at December 31, 2008, and total current
liabilities of $22.9 million at December 31, 2009
compared to $35.9 million at December 31, 2008. As of
December 31, 2009, CSI had an accumulated deficit of
approximately $149.3 million and a working capital deficit
of $4.4 million. CSIs access to working capital
continues to be limited and its debt service obligations and
projected operating costs for 2010 exceed its cash balance at
December 31, 2009. Failure to recapitalize or to
renegotiate payment terms for debt due will result in CSI not
having sufficient cash to operate.
These matters raise substantial doubt about CSIs ability
to continue as a going concern. In order to address this
uncertainty, in the first quarter of 2009, CSI retained a
U.S.-based
investment banking firm to act as a financial advisor to CSI in
exploring alternatives to recapitalize CSI. Alternatives under
consideration include the sale of CSI stock
and/or a
sale of CSIs assets, while negotiating with CSIs
lenders to modify loan terms in order to delay repayments while
alternative capital is secured. At this time CSI cannot provide
any assurances that it will be successful in its continuing
efforts to recapitalize the balance sheet or work with its
105
lenders on loan modifications. In the event that CSI is not
successful in the immediate future, CSI will be unable to
continue operations and may be required to file bankruptcy.
There can be no assurances that CSI will be able to reorganize
through bankruptcy and might be forced to effect a liquidation
of its assets. The consolidated financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
The following table summarizes CSIs cash flows for the
years ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in millions)
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(7.4
|
)
|
|
$
|
(15.1
|
)
|
|
$
|
7.7
|
|
|
|
(51
|
)%
|
Investing activities
|
|
|
13.4
|
|
|
|
3.6
|
|
|
|
9.8
|
|
|
|
272
|
%
|
Financing activities
|
|
|
(10.5
|
)
|
|
|
2.0
|
|
|
|
(12.5
|
)
|
|
|
NM
|
|
Cash used
in operating activities
CSIs largest source of operating cash flows is cash
collections from its customers following the sale of its
products and services. CSIs primary uses of cash for
operating activities are for purchasing inventory in support of
the products that it sells, personnel related expenditures,
facilities costs and payments for general operating matters.
Cash used in operating activities in fiscal 2009 was
$7.4 million, a decrease of $7.7 million from fiscal
2008, when CSIs operating activities used
$15.1 million of cash. This improvement was partially due
to a $4.2 million decrease in net loss from continuing
operations in fiscal 2009 as compared to fiscal 2008, after
giving consideration to non-cash operating items, including
depreciation and amortization, stock-based compensation,
deferred taxes, provisions for losses on accounts receivable,
gain on sale of intellectual property, among others for both
periods and impairment charges in 2008. The reduction in net
loss from continuing operations was in part driven by the cost
reduction actions already discussed. The improvement in cash
used in operating activities was also due to increased emphasis
on better working capital management during fiscal 2009,
resulting in a $2.6 million reduction in the change in net
operating assets and liabilities. There was reduction in cash
used due to the change in inventories of $2.4 million
driven by a focus on lean manufacturing techniques in CSIs
Heavy Duty Diesel Systems division and improved inventory
management in CSIs Catalyst division. There was an
increase in cash used due to the change in accounts receivables
due primarily to significant revenues in the fourth quarter of
2009 in CSIs Heavy Duty Diesel Systems division. This
increase in the change in receivables was partially offset by an
increase in the changes in accounts payable and accrued
expenses, as material purchases and other operating costs grew
in the fourth quarter, driven by the revenue growth. Cash
provided from operating activities associated with discontinued
operations increased to $0.2 million in 2009 compared to
usage of $0.9 million in 2008.
Cash
provided by investing activities
Changes in CSIs cash flows from investing activities
primarily relate to asset sales and acquisitions, investment in
its Asian joint venture as well as capital expenditures and
other assets to support its growth plans.
Net cash generated by investing activities was
$13.4 million in fiscal 2009, an increase of
$9.8 million as compared to the $3.6 million generated
by investing activities in fiscal 2008. In fiscal 2009, the
primary investing activities included $8.6 million of
proceeds from the sale of the assets of Applied Utility Systems
and $5.4 million of proceeds from the sale of intellectual
property and a share in the Asian joint venture to CSIs
joint venture partner TKK. This compared to $4.0 million of
proceeds from the sale of intellectual property and a share in
the Asian joint venture and $1.7 million in proceeds from
the sale of an office building in 2008. Cash used in investing
in its investment in the Asian joint venture decreased by
$1.0 million. In 2008, CSI made its initial capital
contribution and there were no capital calls in 2009. Also, in
fiscal 2009, CSI reduced capital expenditures by
$1.3 million to $0.6 million compared to
$1.9 million in 2008. CSI expects 2010 to have a similar
level of capital expense as 2009.
106
Cash
provided by (used in) financing activities
Since inception, CSI has financed its net operating cash usage
through a combination of financing activities such as issuance
of equity or debt and investing activities such as sale of
intellectual property or other assets. Changes in CSIs
cash flows from financing activities primarily relate to
borrowings and payments under debt obligations.
Net cash used in financing activities was $10.5 million in
fiscal 2009, a $12.5 million decrease as compared to net
cash provided by financing activity of $2.0 million in
fiscal 2008. During fiscal 2009 CSI reduced secured debt by
$9.7 million including $6.8 million in fixed term
loans and reduced borrowing under a line of credit of
$2.9 million. This compares to a net increase in borrowing
of $2.7 million in 2008, including a new secured loan of
$3.3 million, which was repaid in 2009, an increase of
$1.7 million in borrowings under CSIs Fifth Third
Bank line of credit, partially offset by the repayment of a
fixed term loan of $2.3 million. In addition, in 2008, CSI
incurred $0.7 million in debt issuance costs. The
difference between the $10.5 million of net cash used to
repay debt and the $9.7 million reduction of debt balance
during 2009 was a result of exchange rate movement between the
Canadian and U.S. dollar.
Description
of Indebtedness
CSIs outstanding borrowing at December 31, 2009 and
2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Line of credit
|
|
|
5,147
|
|
|
|
8,068
|
|
Consideration payable
|
|
|
3,000
|
|
|
|
3,000
|
|
Term loans
|
|
|
|
|
|
|
3,500
|
|
Cycad debt facility
|
|
|
|
|
|
|
3,300
|
|
Capital lease obligations
|
|
|
75
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
8,222
|
|
|
|
17,913
|
|
|
|
|
|
|
|
|
|
|
Fifth
Third Bank
In December 2007, CSI and its subsidiaries, including Engine
Control Systems, entered into borrowing agreements with Fifth
Third Bank as part of the cash consideration paid for CSIs
December 2007 purchase of Engine Control Systems. The borrowing
agreements initially provided for three facilities including a
revolving line of credit and two term loans. The line of credit
was a two-year revolving term operating loan up to a maximum
principal amount of $8.2 million (Canadian
$10 million), with availability based upon eligible
accounts receivable and inventory. The other facilities included
a five-year non-revolving term loan of up to $2.5 million,
which was paid off during 2008, and a non-revolving term loan of
$3.5 million which was paid off in October 2009.
At December 31, 2009, the line of credit consisted of a
Canadian $8.5 million demand revolving credit line, subject
to further reductions in the amount of availability during any
forbearance period. Borrowings under this credit line bear
interest at either (i) the U.S. Prime rate plus
between 2.50% for borrowings in U.S. dollars or
(ii) the Canadian prime rate plus between 2.50% for
borrowings in Canadian dollars. As of January 31, 2010, the
interest rates were increased as part of the forbearance
agreement to U.S. Prime plus 2.75% for U.S. dollar
borrowings and to Canadian Prime plus 2.75% for Canadian dollar
borrowings.
Under the terms of the Fifth Third Bank borrowing agreement,
CSIs Engine Control Systems subsidiary is restricted from
making any distributions to CSI, the parent company, other than
those for arms length transactions and management fees up to
$250,000. The credit facility also requires that CSI maintain
certain financial covenants and CSI has pledged as security for
its obligations under the facility, its assets including share
ownership and assets of principal subsidiaries. If CSIs
financial results do not reach the levels required by the
covenants and CSI is unable to obtain a waiver, the credit
facility would be in default and subject to acceleration. In
addition to the foregoing, the credit facility also includes a
material adverse change clause that
107
is exercisable if, in the opinion of Fifth Third Bank, there is
a material adverse change in the financial condition, ownership
or operation of CSI or its principal subsidiary (Engine Control
Systems). If Fifth Third Bank were to deem that such a material
adverse change had occurred it may terminate CSIs right to
borrow under the facility and demand payment of all amounts
outstanding.
On March 31, 2009, CSI failed to achieve two of the
covenants under its Fifth Third Bank credit facility. CSI failed
to achieve covenants related to the annualized EBITDA and the
funded debt to EBITDA ratio for its Engine Control Systems
subsidiary. Fifth Third Bank agreed to temporarily suspend its
rights until July 1, 2009 subject to CSI, in Fifth Third
Banks opinion, making reasonably satisfactory progress in
its efforts to recapitalize its balance sheet and the provision
of an audit report on the collateral pledged by CSI to Fifth
Third Bank. In July 2009, the bank extended its forbearance
until September 30, 2009, subject to similar terms. In
October 2009, on the repayment of the term loan of
$3.5 million, the bank extended its forbearance until
January 31, 2010, converted the revolving line to a demand
facility, reduced the credit limit to Canadian $8.5 million
and raised the interest charged to Prime plus 2.5%. In January
2010, the bank further extended forbearance until April 30,
2010 and further reduced the credit limit to Canadian
$7.5 million with a Canadian $100,000 reduction per month
for the forbearance period. The interest rate was further
increased to Prime plus 2.75%. Under the terms of the current
forbearance agreement, the revolving line of credit has become,
in effect, a demand facility. As such, the financial covenants
under the original loan agreement are no longer meaningful.
Although Fifth Third Bank has periodically agreed to temporarily
suspend its rights with respect to the breach of these two
covenants, there is no guarantee that it will continue to do so,
and the current forbearance period, which is subject to CSI, in
Fifth Third Banks opinion, making reasonably satisfactory
progress in its efforts to recapitalize its balance sheet and
the provision of an audit report on the collateral pledged by
CSI to Fifth Third Bank, ended on April 30, 2010. The audit
conducted by Fifth Third bank was completed in December 2009 and
no adjustments resulted. Although CSI is currently in
discussions with its lender to extend such forbearance agreement
and no demand for repayment has been made, CSI cannot guarantee
that Fifth Third Bank will further extend its forbearance.
For further information regarding CSIs credit agreement
with Fifth Third Bank, see Note 8 to CSIs
Consolidated Financial Statements appearing elsewhere in this
joint proxy statement/prospectus.
Cycad
Group, LLC
In June 2008, CSI put in place a debt facility with Cycad Group,
LLC that would allow a one-time draw down of up to
$3.3 million. In September 2008, CSI borrowed
$3.3 million under the debt facility. The debt was
collateralized by the accounts receivable at Applied Utility
Systems and the machinery and equipment of CSIs Catalyst
division. The debt was due on July 1, 2009 and interest was
paid at 18%. CSI was in default as of the due date and repaid
the loan in October 2009.
Consideration
payable
CSI has $3.0 million of consideration due to the seller as
part of the Applied Utility Systems acquisition. The
consideration was due August 28, 2009 and accrues interest
at 5.36%. At December 31, 2009, CSI had accrued $538,000 of
unpaid interest. CSI has claimed that the seller breached the
asset purchase agreement in addition to certain other related
agreements and has withheld payments pending the resolution of
arbitration proceedings. For more information relating to this
dispute, see Note 18 to CSIs Consolidated Financial
Statements appearing elsewhere in this joint proxy
statement/prospectus and under the caption CSIs
Business Legal Proceedings appearing elsewhere
in this joint proxy statement/prospectus.
Off-Balance
Sheet Arrangements
As of December 31, 2009, CSI had no off-balance sheet
arrangements.
108
Commitments
and Contingencies
As of December 31, 2009, other than office leases and
employment agreements with key executive officers, CSI had no
material commitments other than the liabilities reflected in
CSIs Consolidated Financial Statements.
Related-Party
Transactions
In June 2008, CSI put in place a debt facility with Cycad Group,
LLC (a significant shareholder of CSI). See
Description of Indebtedness Cycad
Group, LLC above. At the time of the establishment of the
debt facility, Mr. K. Leonard Judson, officer of Cycad
Group, LLC was also serving as a Non-Executive Director of CSI.
Mr. Judson resigned from CSIs Board of Directors in
January 2009. The debt facility was repaid in full on
October 1, 2009. For further details regarding the Cycad
Group, LLC debt facility, see Note 8 to CSIs
Consolidated Financial Statements appearing elsewhere in this
joint proxy statement/prospectus.
109
MANAGEMENT
FOLLOWING THE MERGER
Executive
Officers and Directors
Resignation
of Clean Diesels Current Executive Officers
Pursuant to the Merger Agreement, Charles W. Grinnell and John
B. Wynne, executive officers of Clean Diesel, will resign
immediately prior to the completion of the merger.
Executive
Officers and Directors of the Combined Company Following the
Merger
Clean Diesels board of directors is currently comprised of
six directors. Following the merger, the board of directors will
be comprised of seven directors, four from CSI
(Messrs. Call, Ellis, Engles and Cherry) and three from
Clean Diesel (Messrs. Asmussen, Gray and Park).
Following the merger, the management team of the combined
company is expected to be composed of the following members of
the current management team of CSI: Charles F. Call, Nikhil A.
Mehta and Stephen J. Golden Ph.D.; and Michael L. Asmussen, a
member of the current management team of Clean Diesel. The
following table lists the names and ages as of May 12, 2010
and positions of the individuals who are expected to serve as
executive officers, directors and other key employees of the
combined company upon completion of the merger:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Title(s)
|
|
Charles F. Call
|
|
|
62
|
|
|
Chief Executive Officer, Director
|
Nikhil A. Mehta
|
|
|
53
|
|
|
Chief Financial Officer
|
Stephen J. Golden, Ph.D.
|
|
|
48
|
|
|
Chief Technical Officer
|
Michael L. Asmussen
|
|
|
39
|
|
|
Chief Commercial Officer
|
Directors
of the Combined Company
Charles
F. Call, Director and Chief Executive Officer
(Age 62)
Mr. Call joined CSI as Chief Executive Officer and
Director in November 2004. Mr. Call has over 30 years
of broad management experience encompassing sales, marketing,
plant management, general management and executive management
roles in the automotive and electronics industries. His prior
experience includes seven years (from 1997 to 2004) at
Imperial Chemical Industries as General Manager of the
electronic materials group and later General Manager of the
specialty polymers and adhesives group. Mr. Call also
served as President of JPE Trim from 1996 to 1997, a
manufacturer of automotive exterior trim products supplying the
major automotive companies. Before JPE, he served as President
of Dexter Automotive Materials, a supplier of coatings,
adhesives and acoustical materials to the major automotive
companies. Mr. Call received a BS degree from Rochester
Institute of Technology, New York.
Bernard
H. (Bud) Cherry, Director (Age 70)
Mr. Cherry joined CSI as a Director in January 2008.
Mr. Cherry is the Principal Founder and Chief Executive
Officer of Energy 5.0 LLC, a privately held energy solutions
company established in November 2006, that develops, finances,
constructs and operates complex renewable energy production
facilities. He has over 40 years experience in the
energy sector. Mr. Cherry served as Executive Vice Chairman
of the Board of Northern Power Systems, Inc., a wind energy
company from August 2008 to July 2009 and Chief Executive
Officer from August 2008 to December 2008. In February 2007,
Mr. Cherry joined the Board of Directors of Distributed
Energy Systems Corporation (Nasdaq: DESC), a renewable energy
generation and technology equipment manufacturer, and became
Chairman of the Board in August 2007. In October 2007,
Mr. Cherry was named Chief Executive Officer and served
until August 2008, at which time he also left the Board.
Distributed Energy Systems Corporation filed for Chapter 11
bankruptcy protection in June 2008. Prior to that,
Mr. Cherry was Chief Executive Officer of the Foster
Wheeler Global Power Group, one of the two major business groups
of Foster Wheeler Limited (Nasdaq: FWLT), a provider of
construction and engineering
110
services, from November 2002 until June 2006. Prior to his
tenure at Foster Wheeler, Mr. Cherry was a member of the
senior management team of the Oxbow Group for 17 years.
Mr. Cherry was the President and Chief Operating Officer of
the Oxbow Energy and Minerals Group and played a key leadership
role in the creation and growth of Oxbows global energy
activities. Mr. Cherry began his career as a Nuclear
Engineer at United Nuclear Corporation and holds a BS degree in
Chemistry and MS degree in Nuclear Engineering, both earned at
the University of Illinois.
Alexander
(Hap) Ellis, III, Chairman
(Age 61)
Mr. Ellis has been a Director of CSI since June
2003, and was elected Chairman of CSIs Board in December
2004. Mr. Ellis has extensive operating experience in
electric power and renewable energy. He is a General Partner of
RockPort Capital Partners LLC, a leading venture capital firm
that partners with clean tech entrepreneurs around the world. He
has been a general partner in RockPort Capital since its
inception. He has primarily focused on renewables, electric grid
technologies, advanced materials and transportation and emission
control technologies. Prior to the formation of RockPorts
first fund, he joined RockPort Partners, a merchant bank
specializing in energy and environmental projects in 1998. In
addition to CSI, Mr. Ellis serves on the boards of Deerpath
Energy, EKA Systems, Inc. (owned by Cooper Industries
plc NYSE: CBE), ISE Corporation, Northern Power
Systems, Powerspan Corp., Second Rotation, Inc., Southwest
Windpower and William Gallagher Associates. In addition, he
represented RockPort on the board of Comverge, Inc. (Nasdaq:
COMV) from October 2004 to August 2007. Mr. Ellis received
a BA degree from Colorado College and an MBA from the Yale
School of Management.
Charles
R. Engles, Ph.D., Director (Age 62)
Dr. Engles has been a Director of CSI since January
2000. He has a total of 14 years of experience serving as a
board member for U.S. public companies and has also been a
board member of seven private companies. In 2008,
Dr. Engles served as Interim Chief Executive Officer of
ThermoCeramix, Inc., an advanced materials company focused on
electrical to thermal energy conversion. From 1997 to 2008,
Dr. Engles served as Chief Executive Officer of Cutanix
Corporation, a biopharmaceutical company focused on
dermatological drug discovery that he co-founded. From 1994 to
1997, he served as Chairman and Chief Executive Officer of
Stillwater Mining Company (NYSE: SWC) and, under his direction
it completed an IPO on NASDAQ in 1994. In 1992, he organized the
spin out from Johns-Manville Corporation (NYSE:BRK.A,BRK.B) and
Chevron Corporation (NYSE: CVX) of Stillwater Mining
Company, the only United States producer of platinum group
metals. From 1989 until 1994, Dr. Engles served as Senior
Vice President of Johns-Manville Corporation responsible for
corporate development and worldwide mining and minerals
operations. Dr. Engles holds a Ph.D. from Stanford
University in operations research and attended Oxford University
as a Rhodes Scholar.
Biographical information regarding Mr. Asmussen,
Mr. Park and Mr. Gray is set forth under Item 10
Directors, Executive Officers and Corporate
Governance in Clean Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated herein by
reference. Details concerning Clean Diesels
directors compensation are set forth under Item 11
Executive Compensation of Clean Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated herein by
reference.
CSIs Board of Directors has affirmatively determined that
Alexander Ellis, III, Dr. Charles Engles and Bernard
Cherry are each independent as that term is defined
in the Nasdaq listing rules. For independence of Clean
Diesels designees, see the material under heading
Director Independence in Item 13 Certain
Relationships and Related Party Transactions, and Director
Independence in Clean Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated herein by
reference.
111
Executive
Officers of the Combined Company
Charles
F. Call, Chief Executive Officer (Age 62)
For information regarding Mr. Calls business
experience and qualifications, see his biography included under
Directors of the Combined Company above.
Nikhil A.
Mehta, Chief Financial Officer (Age 53)
Mr. Mehta joined CSI as Chief Financial Officer in
July 2008 and was appointed Director in August 2008.
Mr. Mehta will serve as the combined companys Chief
Financial Officer. Mr. Mehta has more than 25 years of
financial management experience in high technology and medical
technology companies. His experience includes significant
operational finance management in manufacturing companies, fund
raising, several acquisitions and experience as Chief Financial
Officer for companies listed on Nasdaq as well as AIM in London.
Prior to joining CSI, from 2005 to 2008, he was Chief Financial
Officer of Spacelabs Healthcare, Inc., a medical technology
company and wholly owned subsidiary of OSI Systems, Inc.
(Nasdaq: OSIS). Mr. Mehta served as Vice President of
Corporate Development for OSI Systems, Inc. from 2002 to 2005,
where he participated in or led several acquisitions and the IPO
of Spacelabs on AIM. From 2000 to 2002, Mr. Mehta was Chief
Financial Officer of Advanced Tissue Sciences, Inc., a
previously listed Nasdaq biotechnology company. Advanced Tissue
Sciences, Inc. was the subject of a Liquidating Chapter 11
Plan of Reorganization in 2003. Mr. Mehta also spent over
15 years in several financial positions with Xerox
Corporation (NYSE: XRX). Mr. Mehta received an MBA degree
from The Wharton School, University of Pennsylvania and Bachelor
of Commerce from Bombay University.
Stephen
J. Golden, Ph.D., Chief Technology Officer
(Age 48)
Dr. Golden is the Chief Technology Officer of CSI
and has been a Director since 1996. Dr. Golden will serve
as the Chief Technology Officer of the combined company.
Dr. Golden is a co-founder of CSI and the developer of its
technology. From 1994 to late 1995, he was the Research Director
for Dreisbach Electromotive Incorporated, a developer of
advanced batteries based in Santa Barbara, California.
Dr. Golden received his doctorate in Material Science at
Imperial College of Science and Technology in London, England.
He did extensive post-doctoral work at the University of
California, Santa Barbara, and the University of
Queensland, Australia in ceramic oxide and mixed metal oxide
materials.
Michael
L. Asmussen, Chief Commercial Officer (Age 39)
Mr. Asmussen joined Clean Diesel Technologies in
September 2008 serving as President and Chief Executive Officer.
Prior to that, from 1996 to 2007, Mr. Asmussen held a
variety of positions at Eaton Corporation, a diversified power
management company with 2007 sales of $13 billion. Between
2005 and 2007, Mr. Asmussen managed the Mirror Controls
Division sales and marketing team where his primary focus was
driving global growth strategies, and during this time he helped
significantly increase sales. In 2007, he led the divestiture of
the Mirror Controls Division and became Vice President of Sales
and Marketing for Mirror Controls International, the
worlds largest automotive mirror actuator manufacturer. In
addition to assisting in the establishment of new organizational
structures, his broad scope of responsibilities included income
statement accountability, strategic market planning, and
leadership of the global sales and marketing organization. From
2002 to 2005, Mr. Asmussen was Strategy Manager for the
Specialty Controls Division of Eaton Automotive, a global leader
in critical automotive components to reduce emissions and fuel
consumption, and improve vehicle stability and performance. From
2000 to 2002, he served as Customer Manager for all North
American sales initiatives with Ford Motor Company.
Mr. Asmussen holds M.B.A. and Bachelor of Science degrees
from Michigan State University.
CSI
Summary Compensation Table
The following table sets forth compensation paid by CSI for the
years indicated to:
|
|
|
|
|
CSIs Chief Executive Officer during the year ended
December 31, 2009 and 2008;
|
112
|
|
|
|
|
CSIs Chief Financial Officer during the year ended
December 31, 2009 and 2008; and
|
|
|
|
CSIs Chief Technical Officer during the year ended
December 31, 2009 and 2008
|
These three individuals are expected to serve the combined
company in the same capacities after the closing of the merger
(except Mr. Mehta and Dr. Golden will not be
Directors) and are referred to elsewhere in this joint proxy
statement/prospectus as CSIs named executive
officers. For information regarding compensation paid to
Clean Diesels named executive officers who
will serve the combined company in the capacity noted above, see
Item 11 Executive Compensation of Clean
Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated herein by
reference.
|
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Non-Qualified
|
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Warrant
|
|
Non-Equity
|
|
Deferred
|
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|
and Option
|
|
Incentive Plan
|
|
Compensation
|
|
All Other
|
|
|
Name and
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
Principal Position(1)
|
|
Year
|
|
($)
|
|
($)
|
|
($)(2)
|
|
($)
|
|
($)
|
|
($)(3)(4)(5)
|
|
($)
|
|
Charles F. Call
|
|
|
2009
|
|
|
|
436,800
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,716
|
|
|
|
438,516
|
|
Director and Chief
|
|
|
2008
|
|
|
|
449,526
|
|
|
|
67,250
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,716
|
|
|
|
518,492
|
|
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nikhil A. Mehta
|
|
|
2009
|
|
|
|
275,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
26,600
|
|
|
|
301,600
|
|
Director and Chief
|
|
|
2008
|
|
|
|
130,096
|
|
|
|
0
|
|
|
|
211,729
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,300
|
|
|
|
348,125
|
|
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen J. Golden, Ph.D.
|
|
|
2009
|
|
|
|
289,326
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,704
|
|
|
|
291,030
|
|
Director and Chief
|
|
|
2008
|
|
|
|
296,494
|
|
|
|
51,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,704
|
|
|
|
349,198
|
|
Technical Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects principal positions held as of
[ ],
the date of this joint proxy statement/prospectus.
Messrs. Call, Mehta and Dr. Golden serve as executive
officers and as members of CSIs Board of Directors.
Messrs. Call, Mehta and Dr. Golden do not earn any
compensation for service on CSIs Board of Directors.
Mr. Mehta joined CSI as Chief Financial Officer in July
2008 and was appointed to CSIs Board in August 2008. |
|
(2) |
|
Represents the grant date fair value determined in accordance
with FASB ASC Topic 718 for the warrants and stock option awards
granted to CSIs named executive officers for the periods
presented. The 2006 Equity Compensation Plan contains a market
criteria for vesting in addition to a service requirement. Under
the market criteria, the shares are earned if CSIs common
stock trading price is equal or exceeds an amount equal to 120%
of the exercise price of the option for a period of ninety days
on which the stock is actually traded on the AIM of the London
Stock Exchange. For additional information regarding the
assumptions used in determining the fair value of option awards
using the Monte Carlo univariate pricing model, please see
Note 6 to CSIs Consolidated Financial Statements
included elsewhere in this joint proxy statement/prospectus. |
|
(3) |
|
For Mr. Mehta, represents a $2,000 per month housing
allowance per the terms of his employment agreement with CSI.
The January 2010 amount was paid in December 2009.
Mr. Mehta began receiving the housing allowance in October
2008. |
|
(4) |
|
Includes insurance premiums paid by CSI with respect to life and
AD&D insurance as follows: Mr. Call $53 per month;
Mr. Mehta $50 per month; and Dr. Golden $52 per month. |
|
(5) |
|
Includes monthly membership dues of $90 for each Mr. Call
and Dr. Golden to the Topa Tower Club. |
Narrative
Discussion of CSI Summary Compensation Table
In addition to salary, which is governed by the terms of each
executives respective employment agreement, CSIs
named executive officers also participate in CSIs
short-term incentive program. Under the short-term incentive
program, each named executive officer may receive up to a stated
percentage of his base salary depending on CSIs overall
performance achieving (or exceeding) certain financial targets
and such
113
executives achieving (or exceeding) certain non-financial
objectives. The relevant percentage for each of CSIs named
executive officers is as follows:
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Base Salary
|
Named Executive Officer
|
|
Achieve
|
|
Exceed
|
|
Charles F. Call
|
|
|
50
|
%
|
|
|
100
|
%
|
Nikhil A. Mehta
|
|
|
40
|
%
|
|
|
80
|
%
|
Stephen J. Golden, Ph.D.
|
|
|
40
|
%
|
|
|
80
|
%
|
CSI
Outstanding Equity Awards at December 31, 2009
The following table sets out outstanding CSI stock option awards
at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number of
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Unexercised
|
|
Option or
|
|
Option or
|
|
|
Options or
|
|
Options or
|
|
Options or
|
|
Warrant
|
|
Warrant
|
|
|
Warrants
|
|
Warrants
|
|
Warrants
|
|
Exercise
|
|
Expiration
|
Name
|
|
(#) Exercisable
|
|
(#) Unexercisable
|
|
(#) Unearned(1)
|
|
Price ($)
|
|
Date
|
|
Charles F. Call
|
|
|
1,002,000
|
|
|
|
|
|
|
|
|
|
|
|
1.67
|
|
|
|
11/15/2014
|
|
|
|
|
1,085,461
|
|
|
|
|
|
|
|
|
|
|
|
2.35
|
|
|
|
11/22/2016
|
|
Nikhil A. Mehta
|
|
|
|
|
|
|
|
|
|
|
450,000
|
|
|
|
0.86
|
|
|
|
09/15/2015
|
|
Stephen J. Golden
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
1.67
|
|
|
|
03/28/2012
|
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
1.67
|
|
|
|
01/24/2013
|
|
|
|
|
330,000
|
|
|
|
|
|
|
|
|
|
|
|
2.35
|
|
|
|
11/22/2016
|
|
|
|
|
(1) |
|
Mr. Mehtas shares were granted on September 15,
2008 and vested 33% on July 9, 2009 with the remainder
vesting quarterly over two years. As of December 31, 2009,
Mr. Mehta was vested in 187,500 shares; however the
shares are subject to stock price performance criteria and as of
December 31, 2009 were unexercisable. For addition
information pertaining to CSIs 2006 Equity Compensation
Plan performance criteria, please see Note 6 to CSIs
Consolidated Financial Statements included elsewhere in this
joint proxy statement/prospectus. |
Additional
CSI Narrative Disclosure
CSI does not currently offer a pension benefit plan or any
non-qualified deferred compensation plan. CSI executives have
the right to participate in such benefits as CSI may have in
place from time to time, including a contribution to health and
welfare benefits, as well as participation in CSIs 401(k)
plan, short and long-term disability insurance and life
insurance.
Agreements
with Executive Officers Following the Merger
Potential
Payments Upon Employment Termination and Change in Control
Events
CSIs three executive officers, Mr. Call, Chief
Executive Officer, Mr. Mehta, Chief Financial Officer and
Dr. Golden, Chief Technical Officer, are expected to
continue with Clean Diesel after the Merger pursuant to the
terms of their existing employment agreements with CSI, which
will be assumed by Clean Diesel at the effective time of the
Merger. Clean Diesels President, Mr. Asmussen, is
expected to continue with Clean Diesel through the Merger as
Chief Commercial Officer pursuant to an employment agreement
with Clean Diesel as discussed below. The following summarizes
the potential payments upon employment termination and change in
control events, if any, provided for in such agreements.
Charles F. Call. Subject to a limited
exception for violations of the non-compete covenant, and
covenants relating to confidentiality and CSIs
intellectual property in Mr. Calls employment
agreement, and the signing of a release, in the event
Mr. Call resigns for good reason (which does not include
resignation
114
following a change in control of CSI) or his employment is
terminated due to his disability, Mr. Call is entitled to a
severance payment equal to 6 months of his then annual base
salary (12 months in the event of resignation for good
reason), a pro rated bonus and 6 months of health and
welfare benefits (12 months in the event of resignation for
good reason). In the event of termination of employment without
cause, Mr. Call is entitled to 6 months notice and,
subject to a limited exception for violations of the non-compete
covenant, and covenants relating to confidentiality and
CSIs intellectual property in Mr. Calls
employment agreement, and the signing of a release,
Mr. Call is entitled to a severance payment equal to
6 months of his then annual base salary, and if termination
without cause is done without notice (or less than the required
6 months notice), Mr. Call is also entitled to salary,
a pro rated bonus and continuation of health and welfare
benefits for up to the
6-month
notice period. In the event of Mr. Calls death, his
heirs will receive cash payment equal to his pro rata bonus.
Mr. Call is not entitled to a tax
gross-up
payment in the event any payments from the company constitute an
excess parachute payment under Section 280G(b)
of the Internal Revenue Code.
Nikhil A.. Mehta. Subject to a limited
exception for violations of the non-compete covenant, and
covenants relating to confidentiality and CSIs
intellectual property in Mr. Mehtas employment
agreement, and the signing of a release, in the event
Mr. Mehta resigns for good reason (which does not include
resignation following a change in control of CSI) or his
employment is terminated due to his disability, Mr. Mehta
is entitled to a severance payment equal to 6 months of his
then annual base salary, a pro rated bonus and 6 months of
health and welfare benefits resignation for good reason. In the
event of termination of employment without cause, Mr. Mehta
is entitled to 6 months notice and, subject to a limited
exception for violations of the non-compete covenant, and
covenants relating to confidentiality and CSIs
intellectual property in Mr. Mehtas employment
agreement, and the signing of a release, Mr. Mehta is
entitled to a severance payment equal to 6 months of his
then annual base salary, and if termination without cause is
done without notice (or less than the required 6 months
notice), Mr. Mehta is also entitled to salary, a pro rated
bonus and continuation of health and welfare benefits for up to
the 6-month
notice period. In the event of Mr. Mehtas death, his
heirs will receive cash payment equal to his pro rata bonus.
Mr. Mehta is not entitled to a tax
gross-up
payment in the event any payments from the company constitute an
excess parachute payment under Section 280G(b)
of the Internal Revenue Code.
Stephen J. Golden. Subject to a limited
exception for violations of the non-compete covenant, and
covenants relating to confidentiality and CSIs
intellectual property in Dr. Goldens employment
agreement, and the signing of a release, in the event
Dr. Golden resigns for good reason (which does not include
resignation following a change in control of CSI) or his
employment is terminated due to his disability,
Dr. Goldens entitled to a severance payment equal to
6 months of his then annual base salary (24 months in
the event of resignation for good reason), a pro rated bonus and
6 months of health and welfare benefits (24 months in
the event of resignation for good reason). In the event of
termination of employment without cause, Dr. Golden is
entitled to 6 months notice and, subject to a limited
exception for violations of the non-compete covenant, and
covenants relating to confidentiality and CSIs
intellectual property in Dr. Goldens employment
agreement, and the signing of a release, Dr. Golden is
entitled to a severance payment equal to 18 months of his
then annual base salary, and if termination without cause is
done without notice (or less than the required 6 months
notice), Dr. Golden is also entitled to salary, a pro rated
bonus and continuation of health and welfare benefits for up to
the 6-month
notice period. In the event of Dr. Goldens death, his
heirs will receive cash payment equal to his pro rata bonus.
Dr. Golden is not entitled to a tax
gross-up
payment in the event any payments from the company constitute an
excess parachute payment under Section 280G(b)
of the Internal Revenue Code.
Michael J. Asmussen. Clean Diesels
President, Mr. Asmussen, has indicated his intention to
continue with Clean Diesel as its President through the
consummation of the Merger. CSI has indicated its desire that
Mr. Asmussen continue to serve Clean Diesel as its Chief
Commercial Officer subsequent to the effective time of the
Merger. It is expected that Clean Diesel and Mr. Asmussen
will discuss a mutually acceptable employment agreement to this
effect, but no assurances can be given that these discussions
will be successfully concluded. Any employment agreement entered
into prior to the effective time of the Merger would have to be
approved by CSI as well. Mr. Asmussens current
employment agreement is described under the heading
Employment Agreements; Severance Arrangements under
Item 11 Executive Compensation in Clean
115
Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated herein by
reference.
Except as provided in the current employment contracts of
Messrs. Call, Mehta, Asmussen and Dr. Golden, there
exists no plan or arrangement calling for compensation on the
resignation or termination of employment of any named executive
officers employment with Clean Diesel post-merger.
CSI
Director Compensation
The following table sets forth compensation for the members of
the Board of Directors of Catalytic Solutions, Inc. for the year
ended December 31, 2009 who are expected to serve the
combined company in the same capacity. Messrs. Call, Mehta
and Dr. Goldens compensation is reported in
Executive Compensation CSI Summary
Compensation Table above and accordingly
Messrs. Call, Mehta and Dr. Golden are not included in
the following tables. For information regarding compensation
paid to Clean Diesels Directors who will serve as
Directors of the combined company, see Director
Compensation under Item 11 Executive
Compensation in Clean Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated herein by
reference.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
Non-Equity
|
|
Non-Qualified
|
|
|
|
|
|
|
Earned or
|
|
|
|
|
|
Incentive
|
|
Deferred
|
|
|
|
|
|
|
Paid in
|
|
Stock
|
|
Option
|
|
Plan
|
|
Compensation
|
|
All Other
|
|
|
|
|
Cash(1)
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Alexander (Hap) Ellis, III, Chairman
|
|
|
139,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,139
|
|
Bernard H. (Bud) Cherry
|
|
|
92,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,759
|
|
Charles R. Engles
|
|
|
92,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,759
|
|
|
|
|
(1) |
|
No Directors fees were paid in 2009. Represents fees accrued for
services in 2009 and all fees are based on a fixed conversion
rate of $1.86 per GBP. |
As of December 31, 2009, CSIs non-employee directors
held the following outstanding restricted stock and option
awards:
|
|
|
|
|
|
|
|
|
|
|
Outstanding Awards
|
|
|
Stock
|
|
Option
|
Name
|
|
Awards(a)
|
|
Awards(b)
|
|
Alexander (Hap) Ellis, III
|
|
|
0
|
|
|
|
0
|
|
Bernard H. (Bud) Cherry
|
|
|
45,000
|
|
|
|
0
|
|
Charles R. Engles
|
|
|
0
|
|
|
|
48,000
|
|
|
|
|
(a) |
|
Mr. Cherry was granted 60,000 shares in 2008, which
are subject to a four-year repurchase option by CSI. The
repurchase option lapses 25% on each anniversary of the vesting
commencement date. At December 31, 2009, the repurchase
option had lapsed with respect to 15,000 of these shares. |
|
(b) |
|
Mr. Engles option award represents 48,000 fully vested
stock options at an exercise price of $1.67. The option awards
expire at various dates beginning in 2013 and ending in 2016. |
Narrative
Discussion of CSI Director Compensation
In 2008, CSIs Board of Directors waived the right to
receive any director fees effective July 1, 2008 and
continuing thereafter until reinstated by resolution. As such,
during the year ended December 31, 2009, CSI
116
did not pay any fees to its non-employee Directors. CSI accrued
Directors fees for 2009 in accordance with the following:
|
|
|
|
|
Position
|
|
Fee
|
|
Chairman
|
|
£
|
65,000
|
|
Director
|
|
£
|
35,000
|
|
Audit Committee Chair
|
|
£
|
10,000
|
|
Audit Committee Member
|
|
£
|
5,000
|
|
Remuneration and Nomination Committee Chair
|
|
£
|
10,000
|
|
Remuneration and Nomination Committee Member
|
|
£
|
5,000
|
|
CSI expects to pay these accrued fees when its resources permit.
CSI does not provide for the automatic grant of equity or other
awards to its Board members. Such awards, if any, are approved
on an ad hoc basis.
DESCRIPTION
OF CLEAN DIESEL CAPITAL STOCK
Authorized
Capital
As of May 13, 2010, the authorized capital stock of Clean
Diesel consists of 12,000,000 shares of common stock,
$0.01 par value, and 100,000 shares of preferred
stock, $0.01 par value.
Common
Stock
As
of ,
2010, there
were shares
of Clean Diesel common stock outstanding held of record by
approximately
stockholders. Holders of Clean Diesel common stock are entitled
to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to
any outstanding Clean Diesel preferred stock, the holders of
Clean Diesel common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by Clean
Diesels board of directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding
up of Clean Diesel, the holders of Clean Diesel common stock are
entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior liquidation rights of Clean
Diesel preferred stock, if any, then outstanding. The Clean
Diesel common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking
fund provisions applicable to the Clean Diesel common stock. All
outstanding shares of Clean Diesel common stock are fully paid
and non-assessable, and the shares of Clean Diesel common stock
to be outstanding upon consummation of the offering will be
fully paid and non-assessable.
Preferred
Stock
As of May 13, 2010, 100,000 shares of undesignated
Clean Diesel preferred stock were authorized, and no shares
outstanding. Clean Diesels board of directors has the
authority to issue the shares of Clean Diesel preferred stock in
one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any
unissued shares of preferred stock and to fix the number of
shares constituting any series and the designations of such
series, without any further vote or action by the stockholders.
Although it presently has no intention to do so, Clean
Diesels board of directors, without stockholder approval,
can issue preferred stock with voting and conversion rights
which could adversely affect the voting power of the holders of
Clean Diesel common stock. The issuance Clean Diesel preferred
stock may have the effect of delaying, deterring or preventing a
change in control of Clean Diesel.
Warrants
As of May 13, 2010, warrants to purchase
399,528 shares of Clean Diesel common stock were
outstanding. For a discussion of the common stock purchase
warrants to be issued as part of the Merger, see the section,
entitled, The Merger Agreement Warrants.
Rights
Agent; Transfer Agent
American Stock Transfer & Trust Company is the
transfer agent and registrar for Clean Diesels common
stock.
117
PRINCIPAL
STOCKHOLDERS OF CLEAN DIESEL
Information regarding Clean Diesels principal stockholders
is set forth in Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters of Clean Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated by reference
herein.
PRINCIPAL
SHAREHOLDERS OF CSI
The following table sets forth certain information regarding
beneficial ownership of CSIs common stock as of
April 30, 2010 the most recent practicable date,
(1) by each person who is known by CSI to own beneficially
more than 5% of CSIs outstanding common stock, (2) by
each of CSIs directors and director nominees, (3) by
each of CSIs named executive officer identified in the
table set forth under the heading Management following the
Merger CSI Summary Compensation Table, and
(4) by all of CSIs named executive officers and
directors (and director nominees) as a group. Information with
respect to beneficial ownership by 5% stockholders has been
based on information filed pursuant to the rules and regulations
of the AIM.
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership(b)
|
|
|
Number of
|
|
%
|
Name and Address of Beneficial Owner(a)
|
|
Shares
|
|
Owned
|
|
Duke Investments LLC
|
|
|
6,562,036
|
|
|
|
9.4
|
|
Aran Asset Management SA
|
|
|
6,106,913
|
|
|
|
8.8
|
|
Cycad Group LLC(c)
|
|
|
5,610,829
|
|
|
|
7.9
|
|
Rockport Capital Partners LLP(d)
|
|
|
4,898,123
|
|
|
|
7.0
|
|
Advent Energy Limited(e)
|
|
|
3,543,455
|
|
|
|
5.1
|
|
UBS
|
|
|
3,528,000
|
|
|
|
5.1
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
Charles F. Call(f)
|
|
|
2,108,737
|
|
|
|
3.0
|
|
Stephen J. Golden, PhD.(g)
|
|
|
1,695,324
|
|
|
|
2.4
|
|
Charles R. Engles, PhD.(h)
|
|
|
331,798
|
|
|
|
*
|
|
Bernard H. Cherry(i)
|
|
|
60,000
|
|
|
|
*
|
|
Alexander Ellis
|
|
|
|
|
|
|
*
|
|
Nikhil A. Mehta
|
|
|
|
|
|
|
*
|
|
All named directors and executive officers as a group
(6 persons total)(j)
|
|
|
4,195,859
|
|
|
|
6.0
|
|
|
|
|
* |
|
less than 1% |
|
(a) |
|
The address of Duke Investments LLC is 139 East Fourth Street,
5th Floor Atrium II, Cincinnati, Ohio 45202 ; of Aran Asset
Management SA is Bahnhofplatz, 6304 Zug, Switzerland; of Cycad
Group LLC is 6187 Carpinteria Avenue, Suite 300,
Carpinteria, California 93014; of Rockport Capital Partners LLP
is 160 Federal Street, 18th Floor, Boston, Massachusetts 02110;
of Advent Energy Limited is 75 State Street, 29th Floor, Boston,
Massachusetts, 02109; of UBS is Gessnerallee 3-5, CH-8001
Zurich, Switzerland; the address of Directors and Executive
Officers is
c/o Catalytic
Solutions, Inc., 4567 Telephone Road, Suite 206,
Ventura, California 93003. |
|
(b) |
|
To CSIs knowledge, the persons named in the table have
sole voting and investment power with respect to all shares of
CSIs common stock shown as beneficially owned by them,
subject to community property laws where applicable (or other
beneficial ownership shared with a spouse) and the information
contained in this table and these notes. |
|
|
|
|
|
Beneficial ownership has been determined in accordance with SEC
rules, which generally attribute beneficial ownership of
securities to each person who possesses, either solely or shared
with others, the power to vote or dispose of those securities.
These rules also treat as beneficially owned all shares that a
person |
118
|
|
|
|
|
would receive upon exercise of stock options or warrants held by
that person that are immediately exercisable or exercisable
within 60 days of the determination date, which in
CSIs case is April 30, 2010. |
|
|
|
Such shares are deemed to be outstanding for the purpose of
computing the number of shares beneficially owned and the
percentage ownership of the person holding such options or
warrants, but these shares are not treated as outstanding for
the purpose of computing the percentage ownership of any other
person. On April 30, 2010, there were
69,761,902 shares of CSIs common stock issued and
outstanding. |
|
|
|
(c) |
|
Includes 1,250,000 shares issuable upon exercise of
warrants. |
|
(d) |
|
Includes 3,475,723 securities held by Rockport Capital Partners,
LP and 1,422,400 securities held by RP Co-Investment
Fund I. Alexander (Hap) Ellis, III,
Director, is a general partner of RockPort Capital Partners LLC
and may be deemed to beneficially own such shares.
Mr. Ellis disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein. |
|
(e) |
|
Includes 3,518,652 securities held by Advent Energy II
Limited Partnership and 24,803 securities held by Advent
Partners II Limited Partnership. |
|
|
|
(f) |
|
Mr. Calls shares are held jointly with his spouse.
Includes 2,087,461 shares issuable upon exercise of stock
options. |
|
|
|
(g) |
|
Dr. Goldens shares are held in the Golden Family
Trust dated May 5, 2006. Includes 405,000 shares
issuable upon the exercise of stock options. |
|
(h) |
|
Includes 48,000 shares issuable upon exercise of stock
options. |
|
|
|
(i) |
|
Mr. Cherrys shares were granted as restricted stock
pursuant to CSIs 2006 Equity Compensation Plan. |
|
(j) |
|
Includes 2,540,461 shares issuable upon exercise of stock
options. |
119
PRINCIPAL
STOCKHOLDERS OF COMBINED COMPANY
The following table and the related notes present certain
information with respect to the beneficial ownership of the
combined company upon consummation of the Merger, by
(1) each person expected to be a director or executive
officer of the combined company, (2) each person or group
who is expected by the management of Clean Diesel and CSI to
become the beneficial owner of more than 5% of the common stock
of the combined company upon the consummation of the Merger and
(3) all persons expected to be directors or executive
officers of the combined company as a group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership(b)
|
|
|
% of Clean
|
|
% of CSI
|
|
% of Combined
|
|
|
Diesel Beneficially
|
|
Beneficially
|
|
Company
|
Name and Address of Beneficial Owner(a)
|
|
Owned
|
|
Owned
|
|
Beneficially Owned
|
|
Cycad Group LLC(c)
|
|
|
|
|
|
|
7.9
|
%
|
|
|
12.4
|
%
|
Rockport Capital Partners LLP(d)
|
|
|
|
|
|
|
7.0
|
%
|
|
|
12.1
|
%
|
Emerald Technology Ventures(e)
|
|
|
|
|
|
|
2.5
|
%
|
|
|
10.7
|
%
|
Enertech Capital Partners(f)
|
|
|
|
|
|
|
3.7
|
%
|
|
|
11.0
|
%
|
Allen & Company LLC(g)
|
|
|
|
|
|
|
|
|
|
|
8.1
|
%
|
Ruffer LLP(h)
|
|
|
14.6
|
%
|
|
|
|
|
|
|
5.0
|
%
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles F. Call (i)
|
|
|
|
|
|
|
3.0
|
%
|
|
|
*
|
|
Michael L. Asmussen
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Bernard H. Cherry
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Alexander Ellis
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Charles R. Engles, PhD
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Derek Gray (j)
|
|
|
2.3
|
%
|
|
|
|
|
|
|
1.2
|
%
|
Mungo Park (k)
|
|
|
3.3
|
%
|
|
|
|
|
|
|
3.8
|
%
|
Nikhil Mehta
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Stephen J. Golden, PhD. (l)
|
|
|
|
|
|
|
2.4
|
%
|
|
|
*
|
|
All named directors and executive officers as a group
(9 persons total)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.0
|
%
|
|
|
|
* |
|
less than 1% |
|
|
|
CSI designee |
|
|
|
Clean Diesel designee |
|
|
|
(a) |
|
The address of Cycad Group LLC is 6187 Carpinteria Avenue,
Suite 300, Carpinteria, California 93014; of Rockport
Capital Partners LLP is 160 Federal Street, 18th Floor, Boston,
Massachusetts 02110; the address of Emerald Technology Ventures
is Seefeldstrasse 215, CH-8008 Zurich, Switzerland; the address
of Enertech Capital Partners is 435 Devon Park Drive, 700
Building, Wayne, Pennsylvania 19087; the address of
Allen & Company LLC is 711 Fifth Avenue, New
York, New York 10022; the address of Ruffer LLP is 80 Queen
Victoria Street, London SW1E 52C, England; the address of the
CSI designees is
c/o Catalytic
Solutions, Inc., 4567 Telephone Road, Suite 206, Ventura,
California 93003. The address of the Clean Diesel designees is
c/o Clean
Diesel Technologies, Inc., 10 Middle Street, Suite 1100,
Bridgeport, Connecticut 06604. |
|
(b) |
|
To Clean Diesels and CSIs knowledge, unless
otherwise indicated in the footnotes to this table, Clean Diesel
and CSI believe that each of the persons named in the table have
sole voting and investment power with respect to all shares of
the combined company shown as beneficially owned by them,
subject to community property laws where applicable (or other
beneficial ownership shared with a spouse) and the information
contained in this table and these notes. |
|
|
|
Beneficial ownership for each of CSI, Clean Diesel and the
combined company has been determined in accordance with SEC
rules, which generally attribute beneficial ownership of
securities to each person who possesses, either solely or shared
with others, the power to vote or dispose of those securities.
These |
120
|
|
|
|
|
rules also treat as beneficially owned all shares that a person
would receive upon exercise of stock options or warrants held by
that person that are immediately exercisable or exercisable
within 60 days of the determination date, which is
April 30, 2010 for this purpose. |
|
|
|
Such shares are deemed to be outstanding for the purpose of
computing the number of shares beneficially owned and the
percentage ownership of the person holding such options or
warrants, but these shares are not treated as outstanding for
the purpose of computing the percentage ownership of any other
person. The percent of Clean Diesel beneficially owned is based
on 8,213,988 shares of Clean Diesel common stock issued and
outstanding on April 28, 2010 the percent of CSI
beneficially owned is based on 69,761,902 shares of CSI
common stock issued and outstanding on April 30, 2010. The
percent of the combined company beneficially owned is based on
an estimated aggregate [23,727,116] shares of Clean Diesel
common stock of the combined company outstanding immediately
after the effective time of the Merger and assumes that CSI
stockholders will own 60% of the combined company and Clean
Diesel stockholders will own 40% of the combined company, and
assumes that CSI issued 137,887,188 shares of Class B
common stock upon conversion of the convertible subordinated
notes issued in its interim capital raise immediately prior to
the Merger (which capital raise remains subject to definitive
agreements), and that Clean Diesel issues warrants to acquire
three million shares of common stock in the Merger, warrants to
acquire one million shares of common stock to CSIs
financial advisor and one million shares of common stock to
CSIs financial advisor. |
|
(c) |
|
Reflects conversion of 34,471,797 shares of Class B
common stock to be issued immediately prior to the Merger upon
the conversion of convertible subordinated notes expected to be
issued in the interim capital raise. Also reflects
85,186 shares of Clean Diesel common stock and warrants to
acquire Clean Diesel common stock issuable upon exercise of
warrants held as a result of assumption of its warrants to
acquire 1,250,000 shares of CSI common stock by Clean
Diesel in the Merger. Also reflects 237,038 shares of Clean
Diesel common stock issuable upon exercise of warrants to be
received in the Merger. |
|
(d) |
|
Reflects conversion of 34,471,797 shares of Class B
common stock to be issued immediately prior to the Merger upon
the conversion of convertible subordinated notes expected to be
issued in the interim capital raise. Reflects
146,837 shares of Clean Diesel common stock issuable upon
exercise of warrants to be received in the Merger held by
RockPort Capital Partners, LP and 60,091 shares of Clean
Diesel common stock issuable upon exercise of warrants to be
received in the Merger held by RP Co-Investment Fund I.
Alexander (Hap) Ellis, III, a CSI Director
designee, is a general partner of RockPort Capital Partners LLC
and may be deemed to beneficially own such shares.
Mr. Ellis disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein. |
|
(e) |
|
Reflects conversion of 34,471,797 shares of Class B
common stock to be issued immediately prior to the Merger upon
the conversion of convertible subordinated notes expected to be
issued in the interim capital raise. Reflects 74,495 shares
of Clean Diesel common stock issuable upon exercise of warrants
to be received in the Merger. |
|
|
|
(f) |
|
Reflects conversion of 34,471,797 shares of Class B
common stock to be issued immediately prior to the Merger upon
the conversion of convertible subordinated notes expected to be
issued in the interim capital raise. Reflects
108,804 shares of Clean Diesel common stock issuable upon
exercise of warrants to be received in the Merger. |
|
|
|
(g) |
|
Allen & Company LLC acted as CSIs financial
advisor in connection with the Merger and its interim capital
raise. Reflects one million shares of Clean Diesel common stock
and warrants to acquire one million shares of Clean Diesel
common stock expected to be beneficially owned by
Allen & Company LLC, which securities were issued as
compensation for services provided to CSI. |
|
(h) |
|
Reflects 8,090 shares of Clean Diesel common stock issuable
upon exercise of warrants. |
|
|
|
(i) |
|
Mr. Calls shares will be held jointly with his
spouse. Reflects 899 shares of Clean Diesel common stock
issuable upon exercise of warrants to be received in the Merger. |
|
(j) |
|
Reflects 50,000 shares to be issued in Clean Diesels
interim capital raise. Does not reflect 49,215 shares,
which are held by his adult children and as to which
Mr. Gray disclaims beneficial ownership. |
121
|
|
|
(k) |
|
At April 28, 2010, includes 283,974 shares held by
Innovator Capital Limited of which Mr. Park is a principal.
After the effective time of the Merger includes warrants to
purchase 96,774 shares assumed to be paid to Innovator
Capital for a fee associated with Clean Diesels capital
raising and 529,887 shares issued to Innovator Capital for
fees assumed to be paid in stock for services in connection with
the Merger. |
|
(l) |
|
Dr. Goldens shares will be held in the Golden Family
Trust dated May 5, 2006. Reflects 54,512 shares of
Clean Diesel common stock issuable upon exercise of warrants to
be received in the Merger. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Clean Diesels relationships and
related transactions is set forth in Item 13 Certain
Relationships and Related Transactions, and Director
Independence Information of Clean Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated by reference
herein.
COMPARISON
OF CLEAN DIESEL STOCKHOLDERS AND CSI SHAREHOLDERS
RIGHTS AND CORPORATE GOVERNANCE MATTERS
The rights of CSI shareholders are currently governed by the
California Corporations Code, its articles of incorporation, as
amended and restated, and the bylaws of CSI. The rights of Clean
Diesel stockholders are currently governed by the Delaware
General Corporation Law, the restated certificate of
incorporation, as amended, and the bylaws of Clean Diesel. If
the Merger is completed, CSI shareholders will become
stockholders of Clean Diesel, and their rights will be governed
by the Delaware General Corporation Law, and the restated
certificate of incorporation, as amended, and bylaws of Clean
Diesel.
The table below summarizes the material differences between the
rights of Clean Diesels stockholders and CSIs
shareholders pursuant to their respective articles or
certificate of incorporation, and bylaws, as amended and
currently in effect.
While Clean Diesel and CSI believe that the summary table covers
the material differences between the rights of their respective
stockholders and shareholders prior to the Merger, this summary
does not include a complete description of all differences among
the rights of Clean Diesels stockholders and CSIs
shareholders, nor does it include a complete description of the
specific rights of these respective stockholders and
shareholders. Furthermore, the identification of some of the
differences in the rights of these stockholders and shareholders
as material is not intended to indicate that other differences
that may be equally important do not exist.
You are urged to read carefully the articles and bylaws of CSI,
and the certificate of incorporation and bylaws of Clean Diesel.
See the section entitled, Where You Can Find More
Information. Copies of the certificate of incorporation
and bylaws of Clean Diesel are filed as exhibits to the reports
of Clean Diesel filed with the SEC.
|
|
|
|
|
|
|
Clean Diesel
|
|
CSI
|
|
Authorized Capital Stock
|
|
The authorized capital stock of Clean Diesel currently consists
of 12,000,000 shares of common stock, par value $0.01 per
share, and 100,000 shares of preferred stock, par value
$0.01 per share. The authorized capital stock is proposed to be
increased to [35,000,000] shares of common stock. All of
the Clean Diesel preferred shares are available for future
issuance in one or more series to be issued from time to time.
|
|
The authorized capital stock of CSI currently consists of
148,500,000 shares of common stock, no par value.
|
122
|
|
|
|
|
|
|
Clean Diesel
|
|
CSI
|
|
Preferred Stock
|
|
Clean Diesel board of directors is authorized to fix or alter
the rights, preferences, privileges, and restrictions granted to
or imposed upon wholly unissued series of preferred stock. There
are currently no outstanding shares of preferred stock.
|
|
CSI has not authorized any series of preferred stock.
|
|
|
|
|
|
Number of Directors
|
|
The board of directors shall consist of that number of directors
specified in the bylaws, the exact number to be fixed from time
to time exclusively by a resolution adopted by a majority of the
total number of authorized directors (whether or not any
vacancies exist at the time any such resolution is presented to
the board of directors for adoption). The current authorized
number of directors is seven (7).
|
|
The authorized number of directors shall be between five (5) and
nine (9). The board of directors or the shareholders may change
the number of directors from time to time by a bylaw amendment
duly adopted by the board of directors or the shareholders,
provided that the board of directors shall not consist of fewer
than three directors (unless the corporation has two or fewer
shareholders).
|
|
|
|
|
|
Pre-emptive rights
|
|
Stockholders of Clean Diesel do not have any pre-emptive rights
to purchase shares of Clean Diesel capital stock issued from
time to time.
|
|
CSIs articles of incorporation provide that its
shareholders will have pre-emptive rights to purchase a
proportionate share of any new equity securities issued by CSI,
subject to certain exceptions. These exceptions include:
issuances approved by shareholders; issuances for cash in any
calendar year which do not exceed 50% of CSIs outstanding
equity securities on a fully diluted basis; grants of options or
issuance of equity securities to employees, directors, officers,
consultants or advisers under the corporations equity
incentive plans or any stock option or incentive plan adopted by
the corporation; issuance of securities upon exercise of
currently outstanding warrants or options and upon conversion of
any convertible promissory notes or convertible preferred stock;
issuance of warrants or securities upon exercise of warrants,
provided that such warrants were granted in connection with
business transactions of CSI in the ordinary course and not in
connection with financing activities; issuance of securities as
a dividend or distribution payable in CSIs common stock
pro rata;
|
|
|
|
|
|
123
|
|
|
|
|
|
|
Clean Diesel
|
|
CSI
|
|
|
|
|
|
issuance of securities upon any subdivision or combination or
reclassification of CSIs common stock; issuance of
securities in connection with the purchase or acquisition of the
stock, business or assets of one or more other persons, or in
connection with a merger or similar business combination or
acquisition; the issuance of securities for cash by way of
rights in favor of holders of CSIs common stock; or the
issuance of securities which are to be paid up wholly or partly
otherwise in cash.
|
|
|
|
|
|
Cumulative Voting
|
|
Under the Delaware General Corporation Law, cumulative voting is
permitted if provided for in the certificate of incorporation.
Clean Diesels certificate of incorporation does not
provide for cumulative voting.
|
|
CSIs bylaws permit shareholders to exercise the right of
cumulative voting if the candidates name or the
candidates names have been placed in nomination prior to
the voting and the shareholder has given notice at the meeting
prior to the voting of the shareholders intention to
cumulate the shareholders votes. If any one shareholder
has given such notice, all shareholders may cumulate their votes
for such candidates in nomination.
|
|
|
|
|
|
Quorum
|
|
At any meeting of the stockholders, the holders of one-third
(1/3)
of all of the shares of the stock entitled to vote at the
meeting, present in person or by proxy, shall constitute a
quorum for all purposes, unless or except to the extent that the
presence of a larger number may be required by law.
|
|
At any meeting of the stockholders, the holders of one-third
(1/3)
of all of the shares of the stock entitled to vote at the
meeting, present in person or by proxy, shall constitute a
quorum for all purposes.
|
|
|
|
|
|
Voting Stock
|
|
Each stockholder has one vote for every share of stock entitled
to vote. Currently, there are no shares of any class outstanding
other than common stock.
|
|
Each shareholder has one vote for every share of stock entitled
to vote. CSIs articles of incorporation only authorize the
issuance of common stock.
|
|
|
|
|
|
Classification of Board of Directors
|
|
Clean Diesels articles of incorporation and bylaws do not
provide for classification of Clean Diesels board of
directors.
|
|
CSIs articles of incorporation and bylaws do not provide
for classification of CSIs board of directors.
|
|
|
|
|
|
Removal of Directors
|
|
Subject to the rights of holders of any series of preferred
stock then outstanding, any director, or the entire board of
directors, may be
|
|
The entire board of directors or any individual director may be
removed from office without cause by approval of the holders of
at
|
|
|
|
|
|
124
|
|
|
|
|
|
|
Clean Diesel
|
|
CSI
|
|
|
|
removed from office at any time, with or without cause, but
only by the affirmative vote of the holders of at least a
majority of the voting power of all of the then outstanding
shares of capital stock of Clean Diesel entitled to vote
generally in the election of directors, voting together as a
single class. Vacancies resulting from such removal may be
filled by a majority of the directors then in office, though
less than a quorum, or by the stockholders at a special meeting
held for that purpose. Directors so chosen shall hold office
until the next annual meeting of stockholders.
|
|
least a majority of the shares, provided that unless the entire
board of directors is removed, an individual director shall not
be removed when the votes cast against such removal, or not
consenting in writing to such removal, would be sufficient to
elect such director if voted cumulatively at an election of
directors at which the same total number of votes were cast, or,
if such action is taken by written consent, in lieu of a
meeting, all shares entitled to vote were voted, and the entire
number of directors authorized at the time of the
directors most recent election were then being elected. If
any or all directors are so removed, new directors may be
elected at the same meeting or by such written consent.
|
|
|
|
|
|
Vacancies on the Board of Directors
|
|
Vacancies on the board of directors for any reason and newly
created directorships resulting from an increase in the
authorized number of directors may be filled only by vote of a
majority of the remaining members of Clean Diesels board
of directors, although less than a quorum, at any meeting of the
board of directors. A person so elected by the board of
directors to fill a vacancy or newly created directorship shall
hold office until the next election and until his or her
successor shall have been duly elected and qualified.
|
|
In the interim between annual meetings of shareholders or of
special meetings of shareholders called for the election of
directors, any vacancies in the board of directors, including
vacancies resulting from an increase in the authorized number of
directors which have not been filled by the shareholders,
including any other vacancies which the California General
Corporation Law authorizes directors to fill, and including
vacancies resulting from the removal of directors which are not
filled at the meeting of shareholders at which any such removal
has been effected, if the articles of incorporation or a bylaw
adopted by the shareholders so provides, may be filled by the
vote of a majority of directors then in office or of the sole
remaining director, although less than a quorum exists. Any such
directors elected to fill vacancies shall hold office until the
next annual meeting of stockholders and until their successors
have been elected and qualified, or until their earlier
resignation, removal from office, or death.
|
|
|
|
|
|
125
|
|
|
|
|
|
|
Clean Diesel
|
|
CSI
|
|
Stockholder Action by Written Consent
|
|
Clean Diesels certificate of incorporation prohibits the
taking of any action by written consent of the stockholders in
lieu of a meeting.
|
|
CSIs articles of incorporation prohibit the taking of any
action by written consent of the shareholders in lieu of a
meeting.
|
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Amendment of the Articles or Certificate of Incorporation
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Clean Diesel reserves the right to amend, alter, change or
repeal any provision contained in the certificate of
incorporation.
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CSIs articles of incorporation may be amended in
accordance with the provisions of the California Corporations
Code.
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Amendment of Bylaws
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Clean Diesels certificate of incorporation confers the
power to adopt, amend, or repeal the bylaws upon the board of
directors and the stockholders.
Any
adoption, amendment, or repeal of the bylaws by the board of
directors requires the approval of a majority of the total
number of authorized directors. Any adoption, amendment, or
repeal of the bylaws by the stockholders requires the approval
of at least
662/3%
of the capital stock entitled to vote generally in the election
of directors, voting together as a single class.
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CSIs shareholders, exercising a majority of the voting
power, or its board of directors may amend, repeal or adopt new
bylaws, provided that the board of directors shall have no
control over any bylaw which fixes or changes the authorized
number of directors of the corporation. Any control of the
bylaws vested in the board of directors shall be subject to the
authority of the shareholders to amend or repeal the bylaws or
to adopt new bylaws. Any bylaw amendment or new bylaw which
changes the minimum number of directors to fewer than five
cannot be adopted if the votes cast against its adoption at a
meeting or the shares not consenting in writing in the case of
action by written consent are equal to more than sixteen and
two-thirds percent of the outstanding shares.
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Special Meeting of Stockholders or Shareholders
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Clean Diesels bylaws provide that special meetings of
stockholders may be called by the board of directors pursuant to
a resolution adopted by a majority of the total number of
authorized directors (whether or not any vacancies exist), or by
the holders of not less than 10% of all shares entitled to cast
votes at the meeting, voting together as a single class and
shall be held at such place, on such date, and at such time as
they shall fix.
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CSIs bylaws provide special meetings shall be held at such
place as the board of directors may, from time to time, fix. If
directors fail to fix such place, the meetings shall be held at
the principal executive office of CSI. Special meetings may be
called by the Board of Directors, the Chairman or President, or
by the holders of not less than 10% of all shares entitled to
cast votes at the meeting
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Notice of Stockholder or Shareholder Meeting
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Written notice must be given not less than ten, nor more than
60 days before the date on which the meeting is to be held.
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Written notice must be given not less than ten days (or not less
than any such other minimum period of days as may be prescribed
by the California Corporations Code) nor more than 60 days
before the date of the meeting.
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126
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Clean Diesel
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CSI
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Delivery and Notice Requirements of Stockholder or
Shareholder Nominations and Proposals
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Clean Diesels bylaws provide that in order for
stockholders to make a proposal such proposal must be received
by Clean Diesel not less than 120 calendar days in advance of
the date that Clean Diesels proxy statement was released
to stockholders in connection with the previous years
annual meeting of stockholders. If no annual meeting was held in
the previous year, or the date of the annual meetings has been
changed more than 30 calendar days from the date contemplated in
the previous years proxy statement, or in the event of a
special meeting, to be timely received, notice from the
stockholder must be received by Clean Diesel not later than the
close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public
disclosure is made.
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The articles of incorporation and bylaws of CSI do not provide
for procedures with respect to shareholder proposals or director
nominations.
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Notification Requirements
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Stockholders of Clean Diesel are subject to the requirement to
file a Schedule 13D or 13G with the U.S. Securities and Exchange
Commission if they acquire or are part of a group that acquires
beneficial ownership of 5% or more of Clean Diesels common
stock
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Shareholders of CSI are obligated under its articles of
incorporation to notify CSI if they acquire an interest in
shares of CSIs common stock that equals or exceeds 3% of
the outstanding shares of CSI common stock.
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Declaration and Payment of Dividends
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The bylaws of Clean Diesel provide that, subject to applicable
law, the board of directors may declare dividends from time to
time.
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CSIs articles of incorporation and bylaws are silent on
the issue of dividends. Declaration and payment of dividends are
subject to limitations provided by the California Corporations
Code.
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Indemnification of Directors and Officers; Advancement of
Expenses
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The certificate of incorporation of Clean Diesel provides for
the indemnification of current and former directors, officers,
and employees of Clean Diesel, to the fullest extent authorized
by Delaware law. Clean Diesels certificate of
incorporation provides that Clean Diesel may advance expenses to
directors and officers upon receipt of an undertaking by or on
behalf of such director or officer to repay an amount so
advanced if it should be
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The articles of incorporation and bylaws of CSI provide that CSI
may indemnify any director, officer, agent or employee as to
those liabilities and on those terms and conditions as are
specified in Section 317 of the California Corporations Code.
The bylaws of CSI are silent as to the advancement of expenses.
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127
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Clean Diesel
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CSI
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determined ultimately that such director or officer is not
entitled to be indemnified under the certificate of
incorporation or otherwise.
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Anti-Takeover Provisions
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Certain provisions of Clean Diesels certificate of
incorporation, bylaws, the Delaware General Corporation Law, and
Clean Diesels certain officers and directors of Clean
Diesel may be deemed to have an anti-takeover effect. Such
provisions may delay, deter or prevent a tender offer or
takeover attempt that a stockholder might consider to be in that
stockholders best interests, including attempts that might
result in a premium over the market price for the shares held by
stockholders.
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Clean Diesels board of directors may issue additional
shares of Clean Diesel common stock or establish one or more
classes or series of preferred stock, having the number of
shares (up to 100,000), designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and
limitations as determined by Clean Diesels board of
directors without stockholder approval.
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Clean Diesels certificate of incorporation and bylaws also
contain a number of provisions that could impede a takeover or
change in control of Clean Diesel, including but not limited to
the elimination of stockholders ability to take action by
written consent without a meeting and the elimination of
cumulative voting in the election of directors.
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In addition, Clean Diesel is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation
Law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in a business combination
with an interested stockholder for a period of three
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128
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Clean Diesel
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CSI
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years after the date of the transaction in which the person
became an interested stockholder, unless the business
combination is approved in a prescribed manner.
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Each of the foregoing may have the effect of preventing or
rendering more difficult or costly, the completion of a takeover
transaction that stockholders might view as being in their best
interests.
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Stock Trading Policy
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Clean Diesels insider trading policies forbid insider
trading. If you will be an employee of Clean Diesel or the
Surviving Subsidiary after the closing of the Merger, your
shares may be subject to these insider trading policies.
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129
THE CLEAN
DIESEL ANNUAL MEETING OF STOCKHOLDERS
General
Clean Diesel is sending you this joint proxy
statement/information statement and prospectus as part of the
solicitation of proxies by Clean Diesels board of
directors for use at Clean Diesels annual meeting of
stockholders and any adjournments or postponements of the
meeting. Clean Diesel is first mailing this joint proxy
statement/information statement and prospectus, including a
notice of the Clean Diesel annual meeting of stockholders and a
form of proxy on or about
[ ],
2010.
Date,
Time and Place of the Clean Diesel Annual Meeting
The Clean Diesel annual meeting is scheduled to be held
on ,
2010:
at a.m., local time
at the Holiday Inn Bridgeport
1070 Main Street
Bridgeport, CT 06604
Purpose
of the Clean Diesel Annual Meeting
At the Clean Diesel annual meeting Clean Diesel common
stockholders will be asked:
1. To elect five (5) directors;
2. To ratify the appointment of Eisner LLP as Clean
Diesels independent auditors for 2010;
3. To consider and vote upon a (i) proposal to approve
an amendment to Clean Diesels certificate of incorporation
to increase the authorized capital of Clean Diesel to
[35,100,000] shares, and effect a reverse split of
the issued and outstanding shares of Clean Diesel common stock,
to occur immediately before the closing of the proposed merger
transaction with CSI, at an exchange ratio of 3 to 1, and
(ii) a proposal to approve the issuance of new shares of
Clean Diesel common stock, par value $0.01 per share, and
warrants to purchase shares of Clean Diesel common stock, to
securityholders of CSI, in connection with the merger proposed
under the Agreement and Plan of Merger, dated as of May 13,
2010, by and among Clean Diesel, Catalytic Solutions, Inc., a
California corporation, and a wholly-owned subsidiary of Clean
Diesel, pursuant to which CSI will become a wholly-owned
subsidiary of Clean Diesel through a merger;
4. To consider and vote upon an adjournment of the Clean
Diesel annual meeting, if necessary, to solicit additional
proxies if there are not sufficient votes in favor of the
proposal described immediately above; and
To transact such other business that properly comes before the
meeting or any adjournment or postponement thereof.
CLEAN DIESELS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR EACH OF PROPOSALS NO. 1, 2, 3
AND 4.
Proposals
to be Voted on at the Clean Diesel Annual Meeting
Clean Diesel is asking you to vote for the election of five
(5) nominees as directors of Clean Diesel. The nominees
were recommended by the Compensation and Nominating Committee of
the Board. The term of office of each director is until the 2011
annual meeting or until a successor is duly elected or, if
before then, a director resigns, retires or is removed by the
stockholders. There are now six (6) directors and by
resolution of the Board, effective upon the election of
directors at the Meeting, the number of directors shall be
reduced to five (5).
130
The
Nominees
The nominees are Michael L. Asmussen, Derek R. Gray, Charles W.
Grinnell, David F. Merrion and Mungo Park. These nominees are
all incumbents. Biographical information is set out under
Item 10 Directors, Executive Officers and Corporate
Governance in Clean Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated herein by
reference. Details concerning directors compensation are
set out under Item 11 Executive Compensation of
Clean Diesels
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F and incorporated herein by
reference.
The following table sets forth certain information with respect
to each person nominated and recommended to be elected as a
director of Clean Diesel.
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Name
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Age
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Director Since
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Michael L. Asmussen
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39
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2009
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Derek R. Gray
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76
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1998
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Charles W. Grinnell
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73
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1994
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David F. Merrion
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73
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2006
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Mungo Park
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53
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2009
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Availability
The nominees have all consented to stand for election and to
serve, if elected. If the Merger takes place, it is expected
that Mr. Grinnell and Mr. Merrion will resign from the
board, and the remaining board members will elect Mr. Call,
Mr. Ellis, Dr. Engels and Mr. Cherry to fill the
vacancies. If one or more of the above nominees becomes
unavailable or declines to accept election as a director, votes
will be cast for a substitute nominee, if any, designated by the
Board on recommendation of the Compensation and Nominating
Committee. If no substitute nominee is designated prior to the
election, the individuals named as proxies on the enclosed proxy
card will exercise their judgment in voting the shares that they
represent, unless the Board reduces the number of directors and
eliminates the vacancy.
Plurality
Voting
A motion will be made at the Meeting for the election as
directors of the above mentioned five (5) nominees. Under
Delaware law and Clean Diesels By-Laws, a vote by a
plurality of the shares voting is required for the election of
directors. Under plurality voting, directors who receive the
most for votes are elected; there is no
against option and votes that are
withheld or not cast are disregarded in the count.
If a nominee receives a plurality of votes but does not,
however, receive a majority of votes, that fact will be
considered by the Compensation and Nominating Committee in any
future decision on nominations.
The affirmative vote of a plurality of the shares voting is
required to elect the nominees as directors. The Board
recommends a vote FOR each of the nominees.
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2.
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APPOINTMENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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The Audit Committee has reappointed the firm of Eisner LLP,
Certified Public Accountants (Eisner), to be Clean
Diesels independent registered public accounting firm for
the year 2010 and submits that reappointment to stockholders for
ratification. Eisner, an independent member firm of PKF
International Limited, was also engaged to perform that service
by the Audit Committee for the 2009 audit. A representative of
Eisner is expected to be present at the Meeting and will have
the opportunity to respond to appropriate questions and, if the
representative desires to do so, to make a statement.
131
Audit
Fees
Fees for professional services provided by Eisner LLP in the
last two fiscal years by category were:
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2009
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2008
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Audit Fees
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$
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165,300
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$
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224,500
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Audit-Related Fees
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1,300
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11,632
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Tax Fees
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All Other Fees
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$
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166,600
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$
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236,132
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Audit fees include fees for the audit of the financial
statements, quarterly reviews and Sarbanes-Oxley
Section 404 internal controls. Audit-related fees were for
services in connection with Clean Diesels filing with the
Securities and Exchange Commission of a registration statement
for the resale of Common Stock and Warrants in 2009 and a
registration statement for the shares reserved for sale under
the Clean Diesel Incentive Plan.
Pre-Approval
Policies and Procedures
The Clean Diesel Audit Committee policy is that it must approve
in advance an engagement of its independent registered public
accounting firm for any audit or non-audit service. All fees
were pre-approved by the Audit Committee.
The affirmative vote of a majority of the shares voting is
required for the approval of this proposal. The Board recommends
a vote FOR this proposal.
Report
of the Audit Committee
Management is responsible for Clean Diesels internal
controls and its financial reporting. Eisner, the independent
registered public accountant, is responsible for performing an
audit of Clean Diesels consolidated financial statements
for the year ended December 31, 2009 (Financial
Statements) in accordance with the standards of the United
States Public Company Accounting Oversight Board and for
expressing an opinion on the Financial Statements based on their
audit. In connection with the 2009 audit, the Audit Committee
reviewed the scope of the audit plans of the internal auditors
and Eisner. The Audit Committee then evaluated and discussed
with Management and the internal auditors the results of the
audit performed by the internal auditors and their report, both
as to accounting issues and internal controls. Management has
represented that Clean Diesels 2009 consolidated financial
statements were prepared in accordance with accounting
principles generally accepted in the United States of America.
Management has also represented that Clean Diesels
internal controls were effective at December 31, 2009.
The Committee has discussed with Eisner the matters required to
be discussed by the Statement on Auditing Standards No. 61
(Communication with Audit Committees), as amended. The
Committee has received the written disclosures and the
representation letter from Eisner required by Independence
Standards Board Standard No. 1 (Independence Discussions
with Audit Committees), as amended, and has discussed with
the independent auditors their independence.
Based on the representations and the reviews and discussions
referred to above, the Committee recommended to the Board that
the Financial Statements be included in Clean Diesels
Annual Report on
Form 10-K
for the year ended December 31, 2009 and filed with the
Securities and Exchange Commission.
This report has been provided by the following members of the
Audit Committee: J. A. de Havilland, D. R. Gray, Chairman.
PROPOSAL NO. 3 APPROVAL OF PROPOSAL
(I) TO AMEND CLEAN DIESELS CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK AND EFFECT A REVERSE STOCK SPLIT AND
(II) APPROVE THE ISSUANCE
132
OF NEW SHARES OF CLEAN DIESEL COMMON STOCK AND WARRANTS
TO PURCHASE SHARES OF CLEAN DIESEL COMMON STOCK IN
CONNECTION WITH THE MERGER
The Merger Agreement provides that Clean Diesels
stockholders must approve an amendment to Clean Diesels
certificate of incorporation to effect the reverse stock split
of Clean Diesel common stock as described in this joint proxy
statement/prospectus. If approved, the reverse stock split will
be effective immediately before the effective time of the
merger. Upon the effectiveness of the amendment to Clean
Diesels restated certificate of incorporation effecting
the reverse stock split, referred to herein as the split
effective time, each three Clean Diesel shares immediately
before the split effective time will be combined into one.
If Clean Diesel Proposal No. 3 is approved, and if the
reverse stock split is effected in connection with the closing
of the merger, the reverse stock split would become effective
upon the filing of a certificate of amendment to Clean
Diesels restated certificate of incorporation with the
Delaware Secretary of State.
The Clean Diesel board of directors will effect the reverse
stock split, if it is approved by the stockholders, only if the
proposal to approve the issuance of shares of Clean Diesel
common stock to CSI stockholders pursuant to the Merger
Agreement, and the other proposals that the Merger Agreement
requires be approved, are also approved, and only in connection
with the closing of the Merger.
The amendment to Clean Diesels restated certificate of
incorporation to effect the reverse stock split will effect the
reverse stock split and will increase the number of authorized
shares of Clean Diesel common stock but not the par value of
Clean Diesel common stock.
By approving the certificate of amendment to Clean Diesels
restated certificate of incorporation effecting the reverse
stock split, stockholders will be approving the combination of
three shares of common stock shares into one share.
Reasons
for the Reverse Stock Split
The primary purpose of the reverse stock split is to cause the
outstanding Clean Diesel shares to trade in a range above the
minimum $4 per share required to list shares on the NASDAQ Stock
Market.
Principal
Effects of the Reverse Stock Split
The amendment to Clean Diesels restated certificate of
incorporation effecting the increase in the number of shares of
authorized common stock and the reverse stock split is attached
hereto as Annex B.
The reverse stock split, if effected, will occur simultaneously
for all outstanding shares of Clean Diesel common stock. The
reverse stock split will affect all of Clean Diesels
stockholders uniformly and will not affect any
stockholders percentage ownership interests in Clean
Diesel. The reverse stock split will not affect CSI stockholders
that receive Clean Diesel stock in the merger, as their shares
will be issued on a formula basis after the reverse split
occurs. Common stock issued pursuant to the reverse stock split
will remain fully paid and non-assessable. The reverse stock
split will not affect Clean Diesels continuing to be
subject to the periodic reporting requirements of the Exchange
Act.
If a reverse stock split is implemented, some stockholders may
consequently own less than one hundred shares of common stock. A
purchase or sale of less than one hundred shares, referred to as
an odd lot transaction, may result in incrementally
higher trading costs through certain brokers, particularly
full service brokers. Therefore, those stockholders
who own less than one hundred shares of common stock following
the reverse stock split may be required to pay higher
transaction costs if they sell their shares.
Clean Diesel has outstanding certain stock options and warrants
to purchase shares of common stock. Under the terms of the
outstanding stock options and warrants, a reverse stock split
will effect a reduction in the number of shares of common stock
issuable upon exercise of such stock options and warrants in
proportion to the exchange ratio of the reverse stock split and
will effect a proportionate increase in the exercise price of
such outstanding stock options and warrants, so that the
aggregate dollar amount payable for the purchase of the shares
subject to the options will remain unchanged. In connection with
a reverse stock split, the number
133
of shares of common stock issuable upon exercise or conversion
of outstanding stock options and warrants will be rounded to the
nearest whole share, and no cash payment will be made in respect
of such rounding.
Procedure
for Effecting Reverse Stock Split and Exchange of Stock
Certificates
If Clean Diesels stockholders approve the amendment to
Clean Diesels restated certificate of incorporation
effecting the reverse stock split, Clean Diesel will file the
certificate of amendment with the Delaware Secretary of State in
connection with the closing of the merger transaction. Beginning
at the split effective time, each certificate representing
pre-split shares will be deemed for all corporate purposes to
evidence ownership of post-split shares.
As soon as practicable after the split effective time,
stockholders will be notified that the reverse stock split has
been effected. Clean Diesel expects that Clean Diesels
transfer agent will act as exchange agent for purposes of
implementing the exchange of stock certificates. Holders of
pre-split shares will be asked to surrender to the exchange
agent certificates representing pre-split shares in exchange for
certificates representing post-split shares in accordance with
the procedures to be set forth in a letter of transmittal to be
sent by Clean Diesel. No new certificates will be issued to a
stockholder until such stockholder has surrendered such
stockholders outstanding certificate(s) together with the
properly completed and executed letter of transmittal to the
exchange agent. Any pre-split shares submitted for transfer,
whether pursuant to a sale or other disposition, or otherwise,
will automatically be exchanged for post-split shares.
Stockholders should not destroy any stock certificate(s) and
should not submit any certificate(s) unless and until requested
to do so.
Fractional
Shares
No fractional shares will be issued in connection with the
reverse stock split. Stockholders of record who otherwise would
be entitled to receive fractional shares because they hold a
number of pre-split shares not evenly divisible by the number of
pre-split shares for which each post-split share is to be
reclassified (after aggregating fractional shares), will be
entitled, upon surrender to the exchange agent of certificates
representing such shares, to receive a whole share of Clean
Diesel common stock.
Accounting
Matters
The reverse stock split will not affect the stockholders
equity on Clean Diesels balance sheet. However, because
the par value of Clean Diesel common stock will remain unchanged
on the effective date of the split, the components that make up
the common stock capital account will change by offsetting
amounts. The stated capital component will be reduced to
approximately $27,000 from its present amount, and the
additional paid-in capital component will be increased with the
amount by which the stated capital is reduced. The per share net
income or loss and net book value of Clean Diesel will be
increased because there will be fewer shares of Clean Diesel
common stock outstanding. Prior periods per share amounts
will be restated to reflect the reverse stock split.
No
Dissenters Rights
Under the Delaware General Corporation Law, Clean Diesel
stockholders are not entitled to dissenters rights with
respect to the reverse stock split or the Merger.
Certain
Federal Income Tax Considerations
The following discussion describes certain material United
States federal income tax considerations of the reverse stock
split. This discussion is based upon the Internal Revenue Code
of 1986, as amended, existing treasury regulations and current
administrative rulings and court decisions, all of which are
subject to change, possibly with retroactive effect, and to
differing interpretations. No ruling from the Internal Revenue
Service or opinion of tax counsel with respect to the matters
discussed herein has been requested, and there is no assurance
that the Internal Revenue Service would agree with the
conclusions set forth in this discussion. All stockholders
should consult with their own tax advisors.
134
This discussion may not address certain federal income tax
consequences that may be relevant to particular stockholders in
light of their personal circumstances or to certain types of
stockholders who may be subject to special treatment under the
federal income tax laws. This discussion assumes that
stockholders do not constructively own any shares of common
stock as a result of attribution from related persons or
entities. This discussion also does not address any tax
consequences under state, local, or foreign laws. It does not
address the consequences of the reverse stock split to holders
of options or warrants.
STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE REVERSE STOCK SPLIT,
INCLUDING THE APPLICABILITY OF ANY STATE, LOCAL, OR FOREIGN TAX
LAWS, OR ANY CHANGES IN APPLICABLE TAX LAWS.
Tax Consequences to Clean Diesel. Clean Diesel
will not recognize any gain or loss solely as a result of the
reverse stock split.
Tax Consequence to Clean Diesel Stockholders
Generally. No gain or loss should be recognized
by a stockholder who receives only shares of common stock as a
result of the reverse stock split.
Stockholders Tax Basis in Shares Received upon the
Reverse Stock Split. Except with respect to cash
received in lieu of fractional shares, the aggregate tax basis
of the shares of Clean Diesel common stock held by a stockholder
following the reverse stock split will equal the
stockholders aggregate basis in the shares of common stock
held immediately before the reverse stock split.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
REVERSE STOCK SPLIT AND DOES NOT PURPORT TO BE A COMPLETE
ANALYSIS OR DISCUSSION OF ALL OF THE REVERSE STOCK SPLITS
POTENTIAL TAX EFFECTS. HOLDERS OF CLEAN DIESEL COMMON STOCK ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE REVERSE STOCK SPLIT AND THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER
APPLICABLE TAX LAWS.
The
Merger
The Merger is described in the beginning of this joint proxy
statement/information statement and prospectus. Under NASDAQ
Marketplace Rules, a company listed on NASDAQ is required to
obtain stockholder approval prior to the issuance of common
stock, among other things, in connection with the acquisition of
another companys stock, if the number of shares of common
stock to be issued is in excess of 20% of the number of shares
of common stock then outstanding. The newly issued shares of
Clean Diesel common stock to be issued in the Merger exceed the
20% threshold under the NASDAQ Marketplace Rules and are
expected to represent approximately 60% of Clean Diesels
common stock following the Merger. Accordingly, in order to
ensure compliance with NASDAQ Marketplace Rules, Clean Diesel
must obtain the approval of Clean Diesel stockholders for the
issuance of these securities in the transaction.
Vote
Required; Recommendation of Board of Directors
The affirmative vote of the holders of a majority of the shares
of Clean Diesel common stock having voting power outstanding on
the record date for the Clean Diesel annual meeting is required
to approve the certificate of amendment to Clean Diesels
restated certificate of incorporation as amended to effect a
reverse stock split of Clean Diesel common stock. If the merger
with CSI is not completed for any reason, the board of directors
expects that this proposal will not be implemented.
THE CLEAN DIESEL BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT CLEAN DIESELS STOCKHOLDERS VOTE FOR CLEAN
DIESEL PROPOSAL NO. 3 TO AMEND CLEAN DIESELS
RESTATED CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK
SPLIT OF CLEAN DIESEL COMMON STOCK.
135
Proposal No. 4:
Adjournment
To consider and vote upon an adjournment of the annual meeting,
if necessary, to solicit additional proxies if there are not
sufficient votes in favor of Proposal No. 3;
CLEAN DIESELS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR PROPOSAL NO. 4.
Record
Date; Clean Diesel Stockholders Entitled to Vote
Clean Diesels board of directors has fixed
[ ],
2010 as the record date for the Clean Diesel annual meeting.
Only stockholders of record at the close of business on that
date will receive notice of and be able to vote at the Clean
Diesel annual meeting. At the close of business on the record
date, there were
[ ] shares
of Clean Diesel common stock outstanding held by approximately
[ ]
record holders.
As of the record date, the directors and executive officers of
Clean Diesel beneficially owned approximately
[ ] shares
of Clean Diesel common stock, entitling them to exercise
approximately [ ]% of the voting
power of the Clean Diesel common stock.
Quorum
The required quorum for the approval of the Proposals is
one-third (1/3) of the shares of Clean Diesels common
stock issued and outstanding as of the Clean Diesel record date.
Shares voted FOR, AGAINST or
WITHHELD from a matter voted upon by the
stockholders at the annual meeting will be treated as being
present at the annual meeting for purposes of establishing a
quorum for the transaction of business, and will also be treated
as shares represented and voting at the annual
meeting (the Votes Cast) with respect to any such
matter.
Proxies;
Abstentions and Broker Non-Votes
You should complete and return the accompanying proxy card or
vote your proxy by telephone or the Internet, whether or not you
plan to attend the Clean Diesel annual meeting in person. All
properly executed proxies received by Clean Diesel before the
Clean Diesel annual meeting that are not revoked will be voted
at the Clean Diesel annual meeting in accordance with the
instructions indicated on the proxies or, if no direction is
indicated, FOR approval of the Proposals. Properly executed
proxies, other than proxies voting against Proposal 2, also
will be voted for any adjournment or postponement of the Clean
Diesel annual meeting for the purpose of soliciting additional
votes to approve Proposal 1, if necessary.
Properly executed proxies marked Abstain will not be
voted at the Clean Diesel annual meeting. Abstentions will be
counted for purposes of determining both (i) the presence
or absence of the quorum for the approval of the Proposals, and
(ii) the total number of Votes Cast with respect to a
proposal. Accordingly, abstentions will have the same effect as
a vote against a proposal submitted for consideration of the
stockholders.
If your shares of Clean Diesel common stock are held in
street name by your broker, you must follow the
directions your broker provides to you regarding how to instruct
your broker to vote your shares of Clean Diesel common stock.
You cannot vote shares of Clean Diesel common stock held in
street name by returning a proxy card to Clean
Diesel. In addition, a broker cannot vote shares of Clean Diesel
common stock it holds in street name for the
beneficial owners without specific instructions from the
beneficial owner. Broker non-votes will be counted for purposes
of determining the presence or absence of a quorum for the
approval of the Proposals, but will not be counted for purposes
of determining the number of Votes Cast with respect to a
proposal. Broker non-votes include shares for which
a bank, broker or other nominee holder has not received voting
instructions from the beneficial owner and for which the nominee
holder does not have discretionary power to vote on a particular
matter.
136
Clean Diesels board of directors is not currently aware of
any business to be brought before the annual meeting other than
the Proposals. However, if any other matters are properly
brought before the annual meeting, the proxies named in the
proxy card will have discretion to vote the shares represented
by duly executed proxies in their sole discretion.
Clean Diesels board of directors urges you to complete,
date and sign the accompanying proxy card and return it promptly
in the enclosed, pre-paid envelope or to alternatively vote your
proxy via the telephone or Internet voting instructions on your
card. If your shares of Clean Diesel common stock are held in
street name by your broker, you must follow the
directions your broker provides to you regarding how to instruct
your broker to vote your shares of Clean Diesel common stock.
You cannot vote shares of Clean Diesel common stock held in
street name by returning a proxy card to Clean
Diesel.
Voting
and Revocation of Proxies
Voting by
Mail
By signing and returning the proxy card in the enclosed prepaid
and addressed envelope, you are authorizing individuals named on
the proxy card (each, a proxy) to vote your shares
at the meeting in the manner you indicate. Clean Diesel
encourages you to sign and return the proxy card even if you
plan to attend the meeting. In this way, your shares will be
voted if you are unable to attend the meeting. If you received
more than one proxy card, it is an indication that your shares
are held in multiple accounts. Please sign and return all proxy
cards to ensure that all of your shares are voted.
Voting by
Telephone
To vote by telephone, please follow the instructions included
with your proxy card. If you vote by telephone, you do not need
to complete and mail your proxy card.
Voting
over the Internet
To vote over the Internet, please follow the instructions
included with your proxy card. If you vote over the Internet,
you do not need to complete and mail your proxy card.
Voting in
Person
If you plan to attend the meeting and vote in person, Clean
Diesel will provide you with a ballot at the meeting. If your
shares are registered directly in your name, that is, you hold a
share certificate, you are considered the shareholder of record
and you have the right to vote in person at the meeting. If your
shares are held in the name of your broker or other nominee, you
are considered the beneficial owner of shares held in street
name. As a beneficial owner, if you wish to vote at the meeting,
you will need to bring with you to the meeting a legal proxy
from your broker or other nominee authorizing you to vote such
shares. Contact your broker or other record holder of the shares
for assistance if this applies to you.
Your grant of a proxy on the enclosed proxy card does not
prevent you from voting in person or otherwise revoking your
proxy at any time before it is voted at the Clean Diesel annual
meeting. To revoke your proxy, either:
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Deliver a signed notice of revocation or a properly executed new
proxy card bearing a later date to:
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In the United States:
Clean Diesel Technologies, Inc.
10 Middle Street, Suite 1100
Bridgeport, CT 06604
(203) 416-5290
137
In Europe:
Capital IRG
Foreign Department
The Registry
34 Beckenham Road
Beckenham, Kent BR3 4TU
(0) 208639 2236
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Attend the Clean Diesel annual meeting and vote your shares in
person.
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Attendance at the Clean Diesel annual meeting will not, in and
of itself, have the effect of revoking your proxy.
Appraisal
Rights and Dissenters Rights
Clean Diesel common stockholders are not entitled to
dissenters rights or appraisal rights under the Delaware
General Corporation Law in connection with the Merger.
Interests
of Certain Person in Matters to be Acted Upon
Certain directors and executive officer of Clean Diesel has
interests in the Proposals that differ from, or are in addition
to, their interests as Clean Diesel common stockholders.
Specifically:
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Innovator Capital, an investment banking firm of which Clean
Diesels non-executive Chairman is a principal and
chairman, is advising Clean Diesel with respect to its capital
raising and the merger, and will receive a fee in respect of
those activities.
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Three of the directors of Clean Diesel, Mr. Park,
Mr. Gray and Mr. Asmussen, are expected to continue as
directors of Clean Diesel after the merger. Two of the directors
of Clean Diesel, Mr. Grinnell and Mr. Merrion are
expected to resign.
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Clean Diesels President, Mr. Asmussen, is expected to
continue with Clean Diesel after the Merger as Chief Commercial
Officer pursuant to the terms of his existing Employment
Agreement.
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Mr. Park is the chairman of Innovator Capital Limited, a
financial services company of London, England, which firm has
provided services to Clean Diesel (see below). Mr. Park is
not an independent director within the meaning of NASDAQ
Rule 5605(a)(2) and, as such, is and will not be a member
of the Audit or the Compensation and Nominating Committees of
the Board of Clean Diesel.
Innovator
Capital
Clean Diesel has retained the services of Innovator and have
incurred costs as summarized in the following table:
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Years Ended December 31,
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2009
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2008
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2007
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(In thousands)
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Financial advisory fees
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$
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30
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$
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268
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$
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207
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Merger and acquisition fees
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14
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Private placement fees
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986
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Total
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$
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44
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$
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268
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$
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1,193
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Innovator provided financial advice to Clean Diesel from 2006
through January 2009 and compensation for such advice, along
with travel and other expenses, charged to expense was $30,000,
$268,000 and $207,000 in the years ended December 31, 2009,
2008 and 2007, respectively. In addition, as compensation for
its financial advisory services to Clean Diesel, Innovator
received and holds warrants to purchase 283,974 shares of
common stock of Clean Diesel at exercise prices from $8.4375 to
$15.625 which expire
138
from December 29, 2011 through December 29, 2012.
Further, Clean Diesel paid Innovator $986,000 for fund raising
services which amount was charged to stockholders equity
as a reduction of proceeds received from investors.
On November 20, 2009, Clean Diesel entered into an
engagement letter with Innovator to provide financing and merger
and acquisition services. The engagement letter has a three
month term during which Innovator will (i) act for Clean
Diesel in arranging a private placement financing of
$3 million to $4 million from the sale of Clean
Diesels common stock and warrants and (ii) assist
Clean Diesel in merger and acquisition activities. The
engagement letter was subsequently extended, and the target
private placement financing reduced to $1 million to
$1.5 million.
For its financing services, Innovator will receive (i) a
placing commission of five percent (5%) of all monies received
by Clean Diesel and (ii) financing warrants to acquire
shares of common stock of Clean Diesel equal in value to fifteen
percent (15%) of the total gross proceeds received by Clean
Diesel in the financing, such financing warrants to be
exercisable at a price equal to a ten percent (10%) premium to
the price per share of common stock in the financing.
For its merger and acquisition services, Innovator will receive
monthly retainer fees of $10,000 and success fees as a
percentage of transaction value of five percent (5%) on the
first $10 million, four percent (4%) on the next
$3 million, three percent (3%) on the next $2 million,
and two percent (2%) on amounts above $15 million in
connection with possible merger and acquisition transactions.
Success fees are payable in cash or shares or a combination of
cash or shares as determined by the Board of Clean Diesel. In
2009, Clean Diesel incurred $14,000 for the monthly retainer to
Innovator.
The engagement letter further provides that retainer fees may be
deducted from success fees, that Innovator shall be reimbursed
for its ordinary and necessary out of pocket expenses, that the
engagement letter is subject to Delaware law, and that disputes
between the parties are subject to arbitration.
Solicitation
of Proxies and Expenses
The cost of soliciting proxies will be borne by Clean Diesel.
Clean Diesel may reimburse brokerage firms, banks and other
persons representing the beneficial owners of shares for their
expenses in forwarding solicitation materials to such beneficial
owners. Solicitation of proxies by mail may be supplemented by
telephone, telegram, facsimile or personal solicitation by Clean
Diesel directors, officers or regular employees without
additional compensation.
THE CSI
SPECIAL MEETING OF SHAREHOLDERS
CSI is furnishing this joint proxy statement/information
statement and prospectus to its shareholders in order to provide
important information regarding the matters to be considered at
the CSI special meeting of shareholders and at any adjournment
or postponement of the CSI special meeting. CSI first mailed
this joint proxy statement/information statement and prospectus
and the accompanying form of proxy to its shareholders on or
about
[ ],
2010.
Date,
Time and Place of the CSI Special Meeting
The CSI special meeting is scheduled to be held on:
at a.m., local time
at CSIs Oxnard Facility
1621 Fiske Place
Oxnard, CA 93033
139
Matters
to be Considered at the CSI Special Meeting
At the CSI special meeting, shareholders of CSI will be asked to
consider and vote upon the following four proposals:
Proposal No. 1:
The Merger Proposal
To consider and vote upon a proposal to adopt the Agreement and
Plan of Merger, dated May 13, 2010, by and among CSI, Clean
Diesel Technologies, Inc., a Delaware corporation, and Merger
Sub, pursuant to which CSI will become a wholly-owned subsidiary
of Clean Diesel through a merger
The CSI board of directors unanimously recommends that CSI
shareholders vote FOR Proposal No. 1 to adopt the
Merger Agreement.
Proposal No. 2:
The Authorized Share Capital Increase Proposal
To consider and vote upon a proposal to amend CSIs
articles of incorporation to designate CSIs current
outstanding shares of common stock as Class A
common stock, to create a new class of common stock to be
designated as Class B common stock, and to
increase CSIs authorized shares of common stock from
148,500,000 shares to
[ ] shares,
such that the total number of shares of all classes of capital
stock that CSI shall have authority to issue is
148,500,000 shares of Class A common stock having no
par value and
[ ] shares
of common stock having no par value;
Background
of the Proposed Amendment
The precise number of shares of Clean Diesel common stock that
CSI stockholders will receive in the Merger is a function of
CSIs and Clean Diesels cash position at the earlier
of closing or June 30, 2010. If CSI has less than a
$2,000,000 cash position, then its shareholders ownership
of Clean Diesel will be reduced pursuant to the formula set out
in the Merger Agreement, subject to having a minimum cash
position of $1,000,000 in order to complete the Merger, all as
described elsewhere in this joint proxy statement/information
statement and prospectus. In order to finance current operations
and meet the necessary cash thresholds set out in the Merger
Agreement, the Merger Agreement contemplates, and CSI is
undertaking, an interim capital raise. Although the interim
capital raise is still subject to definitive agreement between
CSI and its accredited investors, it is currently anticipated
that CSI will sell an aggregate $4,000,000 of convertible
subordinated debentures at par to a group of accredited
investors, $2,000,000 of which is expected to be sold by CSI in
four equal installments prior to the CSI special meeting of
shareholders, and the remaining $2,000,000 of which is expected
to be sold after shareholder approval of the merger and
necessary approvals under CSIs articles of incorporation
(such as this Proposal No. 2 and Proposal No. 3) but prior to
the effective time of the Merger. The conversion feature of such
convertible subordinated notes is expected to be made expressly
contingent upon receiving necessary shareholder approvals under
CSIs articles of incorporation to provide for sufficient
available common stock and waiver of pre-emption rights (among
other items). If such necessary shareholder approvals are not
received, CSI is not expected to be able to sell the second
$2,000,000 tranche of convertible subordinated notes to the
accredited investor group, and the initial $2,000,000 tranche is
anticipated to be required to be repaid at a 3x penalty rate
(e.g., $6,000,000) and, as it will be unconverted it would be
treated as outstanding indebtedness and count against CSIs
cash position required for the closing of the Merger.
In addition, because the accredited investors have agreed that
the warrants to purchase 3,000,000 shares of Clean Diesel common
stock to be issued by Clean Diesel as part of the merger
consideration are to go to holders of CSIs current
outstanding shares of common stock, and not to holders of shares
of common stock to be issued upon conversion of the convertible
subordinated notes, CSIs Board of Directors is proposing
to create two classes of common stock. By designating the
current authorized shares of common stock as Class A common
stock, and the shares to be issued upon conversion of the
convertible subordinated notes as Class B common stock,
this will preserve the rights of holders of CSIs current
outstanding shares of common stock (or shares issuable upon
exercise of outstanding options and warrants to acquire shares
of CSIs common stock) to receive the warrants to be issued
by Clean Diesel as part of the merger consideration.
140
As of April 30, 2010, there were approximately
69,761,902 shares of CSIs common stock issued and
outstanding. If Proposal No. 2 is approved, all of
these outstanding shares will be redesignated as shares of
Class A common stock. As of April 30, 2010, there were
approximately 8,600,642 shares of CSIs common stock
subject to issuance pursuant to presently issued and outstanding
options, warrants and similar rights (or 1,250,000 shares
of CSI common stock excluding out of the money options and
warrants). If Proposal No. 2 is approved, all of these
options, warrants and similar rights will be exercisable for
shares to be redesignated as shares of Class A common
stock. Thus, as of April 30, 2010, assuming full exercise
of all outstanding options and warrants, CSI would have
approximately 78,362,544 shares of common stock issued and
outstanding (or 71,011,902 shares of common stock excluding
out of the money options and warrants), all of which will be
redesignated as shares of Class A common stock if
Proposal No. 2 is approved.
In addition, as of effective time of the Merger, and as a result
of CSIs interim capital raise, it is anticipated that
there will be approximately 68,943,594 shares of CSIs
common stock subject to issuance pursuant to then issued and
outstanding convertible subordinated notes, as well as an
additional 68,943,594 shares of CSIs common stock
subject to issuance pursuant to convertible subordinated notes
to be issued immediately prior to the effective time of the
Merger. The conversion rights of these convertible subordinated
notes are expected to be contingent upon there being sufficient
authorized shares of common stock (this Proposal No. 2) and
waiver of
pre-emption
rights (Proposal No. 3) among other items. If
Proposal No. 2 is approved, the aggregate
approximately 137,887,188 million shares of CSI common
stock potentially issuable upon conversion of these notes would
be newly created shares of Class B common stock.
Management of CSI believes that the proposed amendment would
benefit CSI by facilitating the conversion of the convertible
subordinated notes, and permitting the sale of the second
tranche of $2,000,000 convertible subordinated notes as
contemplated by the terms of the interim capital raise, thereby
providing CSI the ability to meet the $2,000,000 cash position
threshold provided in the Merger Agreement to acquire at least
60% of Clean Diesel. For these reasons, CSIs Board of
Directors is seeking shareholder approval of the proposed
amendment to CSIs articles of incorporation.
If the amendment is approved, and subject to the approval of
Proposal No. 3 regarding disapplication of shareholder
pre-emptive rights, generally no shareholder approval would be
necessary for the issuance of all or any portion of the shares
of Class B common stock upon conversion of the convertible
subordinated notes, or any of the remaining unissued but
authorized Class A common stock, unless required by law or
any rules or regulations to which CSI is subject, including upon
conversion of the outstanding convertible securities.
If the shareholders do not approve the amendment to the articles
of incorporation, CSI will not likely be able to meet the
minimum cash position condition to complete the Merger. As such,
absent waiver from Clean Diesel, it is not likely that the
Merger would occur. In such event, CSIs operations and
financial condition will be materially and adversely affected
because the CSI presently does not have sufficient cash reserves
or revenues from operations to pay its operating expenses.
Adoption of the proposal to approve the amendment to CSIs
articles of incorporation requires consent of a majority of the
holders of the outstanding common stock. If approved by the
shareholders, the proposed amendment would become effective upon
the filing with the Secretary of State of the State of
California of the Certificate of Amendment to the Articles of
Incorporation setting forth such increase.
The CSI board of directors unanimously recommends that CSI
shareholders vote FOR Proposal No. 2 to amend
CSIs articles of incorporation to designate CSIs
current outstanding shares of common stock as
Class A common stock, to create a new class of
common stock to be designated as Class B common
stock, and to increase its authorized share capital.
Proposal No. 3:
The Disapplication of Pre-Emptive Rights Proposal
To consider and vote upon a proposal to disapply the pre-emptive
rights provided in Article IV of CSIs articles of
incorporation with respect to the issuance of equity securities
for cash without the requirement that such securities first be
offered to existing shareholders in proportion to their
respective shareholdings, in order
141
to permit the conversion of up to $4,000,000 convertible
subordinated notes proposed to be issued at par to investors in
CSIs capital raise that would be convertible into up to
137,887,188 shares of CSI common stock (to be designated as
Class B common stock if Proposal No. 2 is
approved).
Background
of the Proposal
Article IV of CSIs articles of incorporation limits
the amount of new securities (which term is defined therein to
be Equity Securities as defined in Section 168
of the California Corporations Code) that may be issued for cash
in any calendar year to 50% of CSIs outstanding equity
securities on a fully diluted basis without requiring that such
securities first be offered to existing shareholders in
proportion to their respective shareholdings. These pre-emptive
rights may be disapplied upon the affirmative vote of a majority
of CSIs outstanding shares entitled to vote thereon. The
issuance of securities convertible into common stock of CSI, as
such as the convertible subordinated notes to be issued in
CSIs interim capital raise, is subject to these
pre-emptive rights.
As described above in Proposal No. 2, in the interim
capital raise, CSI is expected to issue to certain accredited
investors an aggregate $4,000,000 of convertible subordinated
debentures at par to a group of accredited investors, $2,000,000
of which is expected to be sold by CSI in four equal
installments prior to the CSI special meeting of shareholders,
and the remaining $2,000,000 of which is expected to be sold
after shareholder approval of the merger and prior the effective
time of the Merger. The conversion feature of such convertible
subordinated notes is expected to be made expressly contingent
upon receiving necessary shareholder approvals under CSIs
articles of incorporation to disapply such pre-emption rights
(and there being sufficient authorized share capital, among
other items (Proposal No. 2)). If CSIs shareholders
do not disapply the pre-emption rights, CSI is not expected to
be able to sell the second $2,000,000 tranche of convertible
subordinated notes to the accredited investor group, and the
initial $2,000,000 tranche is anticipated to be required to be
repaid at a 3x penalty rate (e.g., $6,000,000) and, as it will
be unconverted it would be treated as outstanding indebtedness
and count against CSIs cash position required for the
closing of the Merger
Management of CSI believes that the proposed amendment would
benefit CSI by facilitating the conversion of the convertible
subordinated notes, and permitting the sale of the second
tranche of $2,000,000 convertible subordinated notes as
contemplated by the terms of the interim capital raise, thereby
providing CSI the ability to meet the $2,000,000 cash position
threshold provided in the Merger Agreement to acquire at least
60% of Clean Diesel. For these reasons, CSIs Board of
Directors is seeking shareholder approval of the proposed
disapplication of the pre-emption rights provided by
Article IV of CSIs articles of incorporation.
If the shareholders do not approve the disapplication of the
shareholder pre-emptive rights, CSI will not likely be able to
meet the minimum cash position condition to complete the Merger.
As such, absent waiver from Clean Diesel, it is not likely that
the Merger would occur. In such event, CSIs operations and
financial condition will be materially and adversely affected
because the CSI presently does not have sufficient cash reserves
or revenues from operations to pay its operating expenses.
Adoption of the proposal to approve the disapplication of the
shareholder pre-emptive rights provided in CSIs articles
of incorporation requires consent of a majority of the holders
of the outstanding common stock. If approved by the
shareholders, the proposed amendment would become effective
immediately.
The CSI board of directors unanimously recommends that CSI
shareholders vote FOR Proposal No. 3 to disapply
shareholder pre-emptive rights.
Proposal No. 4:
The Adjournment Proposal
To vote upon an adjournment of the special meeting, if
necessary, if a quorum is present, to solicit additional proxies
if there are not sufficient votes in favor of the foregoing
Proposals No. 1, No. 2 and No. 3.
The CSI board of directors unanimously recommends that CSI
shareholders vote FOR Proposal No. 4 to adjourn the
special meeting, if necessary, if a quorum is present, to
solicit additional proxies if there are not sufficient votes in
favor of Proposals No. 1, No. 2 and
No. 3.
142
No other matters than those proposals described above will be
brought before the CSI special meeting.
Record
Date; CSI Shareholders Entitled to Vote
The record date for determining the CSI shareholders entitled to
vote at the CSI special meeting is
[ ],
2010. Holders of record of CSI common stock at the close of
business on that date are entitled to vote at the CSI special
meeting. On the CSI record date, there were issued and
outstanding
[ ] shares
of CSI common stock.
As of the CSI record date, the directors and executive officers
of CSI and their affiliates held
[ ] shares
of CSI common stock, representing approximately
[ ]% of the outstanding shares of
CSI common stock.
Voting
and Revocation of Proxies
General
Shares represented by a properly signed and dated proxy will be
voted at the CSI special meeting in accordance with the
instructions indicated on the proxy. Proxies that are properly
signed but that do not contain voting instructions will be voted
FOR Proposal No. 1 to adopt the Merger Agreement and
FOR Proposal No. 2 to amend CSIs articles of
incorporation designate CSIs current outstanding shares of
common stock as Class A common stock, to create
a new class of common stock to be designated as
Class B common stock, and to increase its
authorized share capital and FOR Proposal No. 3 to
disapply shareholder pre-emptive rights and FOR
Proposal No. 4 to adjourn the CSI special meeting, if
necessary, to solicit additional proxies if there are not
sufficient votes in favor of the foregoing
Proposals No. 1, No. 2 and No. 3.
Abstentions
CSI will count a properly executed proxy marked ABSTAIN with
respect to a particular proposal as present for purposes of
determining whether a quorum is present, but the shares
represented by that proxy will not be voted at the CSI special
meeting with respect to such proposal. Because approval of each
of Proposals No. 1, No. 2 and No. 3 requires
the affirmative vote of a majority of the outstanding shares
entitled to vote, abstentions on these proposals will have the
same effect as a vote AGAINST Proposals No. 1,
No. 2 and No. 3, as the case may be. Abstentions have
no effect on the determination of whether
Proposal No. 4 has received the vote of a majority of
the shares of common stock present or represented by proxy and
voting at the meeting. However, abstentions could prevent the
approval of Proposal No. 4 where the number of
affirmative votes, though a majority of the votes represented
and cast, does not constitute a majority of the required quorum.
Broker
Non-Votes
If your CSI shares are held by your broker, your broker will
vote your shares for you only if you provide instructions to
your broker on how to vote. You should follow the directions
provided by your broker regarding how to instruct your broker to
vote your shares. Your broker cannot vote your shares of CSI
common stock without specific instructions from you. Failure to
instruct your broker how to vote on Proposals No. 1,
No. 2
and/or
No. 3, will have the same effect as a vote AGAINST
Proposals No. 1, No. 2
and/or
No. 3, as the case may be. Broker non-votes have no effect
on the determination of whether Proposal No. 4 has
received the vote of a majority of the shares of common stock
present or represented by proxy and voting at the meeting.
However, broker non-votes could prevent the approval of
Proposal No. 4 where the number of affirmative votes,
though a majority of the votes represented and cast, does not
constitute a majority of the required quorum.
Voting
Shares in Person that are Held Through Brokers
If your CSI shares are held of record by your broker, bank or
another nominee and you wish to vote those shares in person at
the CSI special meeting, you must obtain from the nominee
holding your shares a
143
properly executed legal proxy identifying you as a CSI
shareholder, authorizing you to act on behalf of the nominee at
the CSI special meeting and identifying the number of shares
with respect to which the authorization is granted.
Revocation
of Proxies
If you submit a proxy, you may revoke it at any time before it
is voted by:
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|
|
delivering to the Secretary of CSI a written notice, dated later
than the proxy you wish to revoke, stating that the proxy is
revoked;
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|
|
submitting to the Secretary of CSI a new, signed proxy with a
later date than the proxy you wish to revoke; or
|
|
|
|
attending the CSI special meeting and voting in person (your
attendance alone will not revoke your proxy).
|
Notices to the Secretary of CSI should be addressed to Catalytic
Solutions, Inc., 4567 Telephone Road, Suite 206, Ventura,
CA 93003, Attention: Secretary.
If you have instructed your broker to vote your shares, you must
follow directions received from your broker to change those
instructions.
Required
Shareholder Vote; Quorum
In order to conduct business at the CSI special meeting, a
quorum must be present. The holders of a majority of the votes
entitled to be cast by holders of common stock at the CSI
special meeting, present in person or represented by proxy,
constitute a quorum under CSIs bylaws. CSI will treat
shares of common stock represented by a properly signed and
returned proxy, including abstentions and broker non-votes, as
present at the CSI special meeting for the purposes of
determining the existence of a quorum.
With respect to any matter submitted to a vote of the CSI
shareholders, each holder of CSI common stock will be entitled
to one vote, in person or by proxy, for each share of CSI common
stock held in his, her or its name on the books of CSI on the
record date.
Approval of Proposals No. 1, No. 2 and
No. 3, requires the affirmative vote of a majority of the
shares of CSI common stock outstanding on the CSI record date.
Approval of Proposal No. 4 requires the affirmative
vote of holders of a majority of the votes of the outstanding
shares of CSI common stock present in person or represented by
proxy at the CSI special meeting that are voted for or against
proposal No. 4, provided that the shares voting
affirmatively also constitute at least a majority of the
required quorum.
Board of
Directors Unanimous Recommendations
After careful consideration, the CSI board of directors has
determined that the Merger Agreement, the increase in authorized
share capital and the disapplication of shareholder pre-emptive
rights are advisable and in the best interests of CSI and its
shareholders. The CSI board of directors unanimously
recommends that CSI shareholders vote FOR
Proposal No. 1 to adopt the Merger Agreement and FOR
Proposal No. 2 to amend CSIs articles of
incorporation to designate CSIs current outstanding shares
of common stock as Class A common stock, to
create a new class of common stock to be designated as
Class B common stock, and to increase its
authorized share capital and FOR Proposal No. 3 to
disapply shareholder pre-emption rights and FOR
Proposal No. 4 to adjourn the special meeting, if
necessary, if a quorum is present, to solicit additional proxies
if there are not sufficient votes in favor of
Proposals No. 1, No. 2 and No. 3.
The matters to be considered at the CSI special meeting are of
great importance to the shareholders of CSI. Accordingly, CSI
urges its shareholders to read and carefully consider the
information presented in this joint proxy statement/information
statement and prospectus, and to properly complete and submit
the proxy.
144
CSI shareholders should not submit any stock certificates at
this time. A transmittal form with instructions for the
surrender of stock certificates for CSI stock will be mailed to
CSI shareholders as soon as practicable after completion of the
Merger.
Solicitation
of Proxies
The proxy accompanying this joint proxy statement/information
statement and prospectus is solicited on behalf of the CSI board
of directors for use at the CSI special meeting. CSI will pay
for the cost of soliciting proxies from its shareholders. In
addition to solicitation by mail, the directors, officers,
employees and agents of CSI may solicit proxies from CSI
shareholders by personal interview, telephone, telegram or
otherwise. Arrangements may also be made with brokerage firms
and other custodians, nominees and fiduciaries who are record
holders of CSI common stock for the forwarding of solicitation
materials to the beneficial owners of CSI common stock to
reimburse these brokers, custodians, nominees and fiduciaries
for the reasonable
out-of-pocket
expenses they incur in connection with the forwarding of
solicitation materials.
CSI shareholders are advised to thoroughly read all available
documents and materials regarding the Merger, including the
sections entitled The Merger Interests of CSI
Directors and Executive Officers in the Merger and
The Merger Appraisal Rights and
Dissenters Rights in this joint proxy
statement/information statement and prospectus.
WHERE YOU
CAN FIND MORE INFORMATION
Clean
Diesel
Clean Diesel files annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and
copy these reports, statements or other information filed by
Clean Diesel at the SECs Public Reference Room at
100 F Street, N.E., N.W., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information regarding the public reference rooms.
The SEC filings of Clean Diesel are also available to the public
from commercial document retrieval services and at the website
maintained by the SEC at
http://www.sec.gov.
Clean Diesel stockholders may request a copy of such documents
in writing or by calling Clean Diesel at
(203) 416-5290,
emailing Clean Diesel
at
or writing to Clean Diesel Technologies, Inc., 10 Middle Street,
Suite 1100, Bridgeport, CT 06604, Attention: Investor
Relations.
Clean Diesel is filing this joint proxy statement/information
statement and prospectus as part of a registration statement on
Form S-4
regarding the Merger with the SEC. This joint proxy
statement/information statement and prospectus constitutes a
prospectus of Clean Diesel, in addition to being a proxy
statement of Clean Diesel and an information statement of CSI
for their respective stockholder and shareholder meetings. The
registration statement, including the attached annexes, exhibits
and schedules, contains additional relevant information about
Clean Diesel, Clean Diesel common stock and CSI. Investors and
securityholders are urged to read the joint proxy
statement/information statement and prospectus because it will
contain important information about Clean Diesel and CSI and the
proposed transaction. As allowed by the SEC rules, this joint
proxy statement/information statement and prospectus does not
contain all the information you can find in the registration
statement or the exhibits to the registration statement.
Clean Diesel incorporates by reference: (i) the Merger
Agreement attached to this joint proxy statement/information
statement and prospectus as Annex A; (ii) the
amendment to the Clean Diesel Certificate of Incorporation as
Annex B; (iii) the Written Opinion of Ardour
Capital Investments, LLC attached to this joint proxy
statement/information statement and prospectus as
Annex C; (iv) the Written Opinion of
Marshall & Stevens, Inc. attached to this joint proxy
statement/information statement and prospectus as
Annex D; (v) the Clean Diesel
Form 10-K
for the year ended December 31, 2009, as amended, attached
to this joint proxy statement/information statement and
prospectus as Annex F; (vi) the Clean Diesel
Form 10-Q
for the three months ended March 31, 2010 attached to this
joint proxy statement/information statement and prospectus as
Annex G and (vii) the form of Warrant
Certificate attached to this joint proxy information statement
and prospectus as Annex I.
145
Clean Diesel is incorporating by reference certain information
that it has filed with the Commission under the informational
requirements of the Exchange Act. The information contained in
the documents it is incorporating by reference is considered to
be part of this prospectus. Clean Diesel is incorporating by
reference:
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its Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009;
|
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|
|
its Amendment No. 1 to its Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, filed on
April 30, 2010;
|
|
|
|
its Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010, filed on May 14,
2010, as amended on May 14, 2010; and
|
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|
|
its Current Reports on
Form 8-K,
dated February 2, 2010, April 23, 2010, and
May 14, 2010.
|
Documents incorporated by reference are available from Clean
Diesel without charge, excluding any exhibits to those
documents, unless the exhibit is specifically incorporated by
reference in this joint proxy statement/information statement
and prospectus. Clean Diesel stockholders may request a copy of
such documents by calling Clean Diesel at
(203) 416-5290,
emailing Clean Diesel
at
or writing to Clean Diesel Technologies, Inc., 10 Middle Street,
Suite 1100, Bridgeport, CT 06604, Attention: Investor
Relations.
Clean Diesel has supplied all information contained in this
joint proxy statement/information statement and prospectus
relating to Clean Diesel, and CSI has supplied all information
contained in this joint proxy statement/information statement
and prospectus relating to CSI. Clean Diesel is not
incorporating the contents of its website, the website of CSI,
the website of the SEC, or any other website into this joint
proxy statement/information statement and prospectus.
IN ORDER FOR YOU TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN
ADVANCE OF CLEAN DIESELS ANNUAL MEETING OF STOCKHOLDERS OR
CSIS SPECIAL MEETING OF SHAREHOLDERS, CLEAN DIESEL SHOULD
RECEIVE YOUR REQUEST NO LATER THAN [FIVE BUSINESS DAYS BEFORE
CLEAN DIESELS MEETING], AND CSI SHOULD RECEIVE YOUR
REQUEST NO LATER THAN [FIVE BUSINESS DAYS BEFORE CSI
MEETING].
Other
Information
The joint proxy statement/information statement and prospectus
will be mailed to stockholders of Clean Diesel and shareholders
of CSI. Investors and securityholders may obtain a free copy of
the definitive joint proxy statement/information statement and
prospectus and other documents when filed with the SEC at the
SECs website at
http://www.sec.gov.
The joint proxy statement/information statement and prospectus
and other relevant documents may also be obtained free of charge
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from Clean Diesel: by calling Clean Diesel at
(203) 416-5290,
emailing Clean Diesel
at
or writing to Clean Diesel Technologies, Inc., 10 Middle Street,
Suite 1100, Bridgeport, CT 06604, Attention: Investor
Relations, or
|
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from CSI: by calling CSI at
(805) 639-9458,
emailing CSI at irinfo@catsolns.com or writing to Catalytic
Solutions, Inc. 4567 Telephone Road, Suite 206, Ventura, CA
93003, Attention: Investor Relations.
|
Clean Diesel has not authorized anyone to give any information
or make any representation about the Merger or Clean Diesel or
CSI that is different from, or in addition to, that contained in
this joint proxy statement/information statement and prospectus.
Therefore, if anyone does give you information of this kind, you
should not rely on it. If you are in a jurisdiction where offers
to exchange or sell, or solicitations of offers to exchange or
purchase, the securities offered by this joint proxy
statement/information statement or prospectus or the
solicitation of proxies is unlawful, or if you are a person to
whom it is unlawful to direct these types of activities, then
the offer presented in this joint proxy statement/information
statement and prospectus does not extend to you. The information
contained in this joint proxy statement/information
146
statement and prospectus is accurate only as of the date of this
joint proxy statement/information statement and prospectus
unless the information specifically indicates that another date
applies.
LEGAL
MATTERS
The validity of the shares of Clean Diesel common stock and
warrants to purchase Clean Diesel common stock being offered by
this proxy statement/prospectus will be passed upon for Clean
Diesel by Finn Dixon & Herling LLP.
EXPERTS
The consolidated financial statements of Clean Diesel
Technologies, Inc. as of December 31, 2009 and 2008 and for
each of the three years in the period ended December 31,
2009 and the related financial statement schedule included in
this joint proxy statement/information statement and prospectus,
have been audited by Eisner LLP, an independent registered
public accounting firm, as stated in their report and is
included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of Catalytic Solutions,
Inc. as of December 31, 2009 and 2008, and for the years
then ended, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent
registered public accounting firm, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and
auditing. The audit report covering the December 31, 2009,
consolidated financial statements contains an explanatory
paragraph that states that CSI has suffered recurring losses
from operations and has an accumulated deficit that raise
substantial doubt about CSIs ability to continue as a
going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of
that uncertainty.
147
CATALYTIC
SOLUTIONS, INC.
INDEX TO
FINANCIAL STATEMENTS
F-1
CSI
AUDITED FINANCIAL STATEMENTS
The Board of Directors
Catalytic Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of
Catalytic Solutions, Inc. and subsidiaries (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity and
comprehensive loss, and cash flows for the years then ended.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. 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 consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 financial
position of Catalytic Solutions, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended in
conformity with U.S. generally accepted accounting
principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1b to the consolidated
financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit that raise
substantial doubt about its ability to continue as a going
concern. Managements plans in regard to these matters are
also described in Note 1b. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ KPMG LLP
Los Angeles, California
May 4, 2010, except for Note 20, as to
which the date is May 14, 2010
F-2
|
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|
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|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
|
|
|
|
As Adjusted
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,336
|
|
|
|
6,726
|
|
Trade accounts receivable, less allowance for doubtful accounts
of $313 and $123 at December 31, 2009 and 2008, respectively
|
|
|
8,066
|
|
|
|
10,667
|
|
Inventories
|
|
|
6,184
|
|
|
|
8,919
|
|
Prepaid expenses and other current assets
|
|
|
2,010
|
|
|
|
4,494
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,596
|
|
|
|
30,806
|
|
Property and equipment, net
|
|
|
2,897
|
|
|
|
2,882
|
|
Intangible assets, net
|
|
|
4,445
|
|
|
|
6,486
|
|
Goodwill
|
|
|
4,223
|
|
|
|
6,319
|
|
Promissory note from unconsolidated affiliate
|
|
|
|
|
|
|
2,767
|
|
Other assets
|
|
|
82
|
|
|
|
454
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
30,243
|
|
|
|
49,714
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
5,147
|
|
|
|
8,068
|
|
Current portion of long-term debt
|
|
|
3,000
|
|
|
|
9,812
|
|
Accounts payable
|
|
|
4,967
|
|
|
|
7,325
|
|
Deferred revenue
|
|
|
195
|
|
|
|
2,942
|
|
Accrued salaries and benefits
|
|
|
1,294
|
|
|
|
1,451
|
|
Accrued expenses
|
|
|
2,990
|
|
|
|
4,816
|
|
Deferred gain on sale of intellectual property
|
|
|
1,900
|
|
|
|
|
|
Accrued professional and consulting fees
|
|
|
2,375
|
|
|
|
1,085
|
|
Income taxes payable
|
|
|
1,081
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
22,949
|
|
|
|
35,853
|
|
Long-term debt, excluding current portion
|
|
|
75
|
|
|
|
33
|
|
Deferred tax liability
|
|
|
1,336
|
|
|
|
2,415
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
24,360
|
|
|
|
38,301
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 9 and 18)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par value. Authorized 148,500,000 shares;
issued and outstanding 69,761,902 shares at
December 31, 2009 and 2008
|
|
|
156,216
|
|
|
|
158,019
|
|
Treasury stock at cost (60,000 shares)
|
|
|
(100
|
)
|
|
|
(100
|
)
|
Accumulated other comprehensive loss
|
|
|
(889
|
)
|
|
|
(2,867
|
)
|
Accumulated deficit
|
|
|
(149,344
|
)
|
|
|
(143,639
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
5,883
|
|
|
|
11,413
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
|
30,243
|
|
|
|
49,714
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
|
|
|
|
As Adjusted
|
|
|
Revenues
|
|
|
50,514
|
|
|
|
52,563
|
|
Cost of revenues
|
|
|
38,547
|
|
|
|
44,346
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
11,967
|
|
|
|
8,217
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,577
|
|
|
|
5,165
|
|
Research and development
|
|
|
7,257
|
|
|
|
8,942
|
|
General and administrative
|
|
|
8,903
|
|
|
|
10,611
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
4,928
|
|
Severance expense
|
|
|
1,429
|
|
|
|
234
|
|
Recapitalization expense
|
|
|
1,258
|
|
|
|
|
|
Gain on sale of intellectual property
|
|
|
(2,500
|
)
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,924
|
|
|
|
24,880
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,957
|
)
|
|
|
(16,663
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18
|
|
|
|
266
|
|
Interest expense
|
|
|
(2,304
|
)
|
|
|
(2,224
|
)
|
Other
|
|
|
(291
|
)
|
|
|
(643
|
)
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(2,577
|
)
|
|
|
(2,601
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(10,534
|
)
|
|
|
(19,264
|
)
|
Income tax (benefit) expense from continuing operations
|
|
|
(1,036
|
)
|
|
|
624
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(9,498
|
)
|
|
|
(19,888
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued Energy Systems
division (including gain on disposal of $3.7 million in
2009)
|
|
|
2,554
|
|
|
|
(915
|
)
|
Income tax expense from discontinued operations
|
|
|
1,032
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
|
1,522
|
|
|
|
(916
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7,976
|
)
|
|
|
(20,804
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Net loss from continuing operations per share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding (000s):
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
69,762
|
|
|
|
69,701
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Net
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Gain/(Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
US $000
|
|
|
|
|
|
US $000
|
|
|
US $000
|
|
|
US $000
|
|
|
US $000
|
|
|
Balance at December 31, 2007
|
|
|
69,756,461
|
|
|
|
156,562
|
|
|
|
(60,000
|
)
|
|
|
(100
|
)
|
|
|
427
|
|
|
|
(122,612
|
)
|
|
|
34,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting for patent costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223
|
)
|
|
|
(223
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,804
|
)
|
|
|
(20,804
|
)
|
Unrealized loss on foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,294
|
)
|
|
|
|
|
|
|
(3,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,098
|
)
|
Stock based compensation
|
|
|
|
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
821
|
|
Issuance of warrants
|
|
|
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
614
|
|
Issuance of restricted stock
|
|
|
60,000
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
Cashless exercise of stock options
|
|
|
5,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
69,821,902
|
|
|
|
158,019
|
|
|
|
(60,000
|
)
|
|
|
(100
|
)
|
|
|
(2,867
|
)
|
|
|
(143,639
|
)
|
|
|
11,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting for warrants
|
|
|
|
|
|
|
(2,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,271
|
|
|
|
(223
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,976
|
)
|
|
|
(7,976
|
)
|
Unrealized gain on foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,978
|
|
|
|
|
|
|
|
1,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,998
|
)
|
Stock based compensation
|
|
|
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
69,821,902
|
|
|
|
156,216
|
|
|
|
(60,000
|
)
|
|
|
(100
|
)
|
|
|
(889
|
)
|
|
|
(149,344
|
)
|
|
|
5,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
|
|
|
|
As Adjusted
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7,976
|
)
|
|
|
(20,804
|
)
|
(Income) loss from discontinued operations (including gain on
sale of discontinued operations of $3.7 million)
|
|
|
(1,522
|
)
|
|
|
916
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,394
|
|
|
|
3,012
|
|
Provision for (recovery of) doubtful accounts, net
|
|
|
11
|
|
|
|
(35
|
)
|
Amortization of deferred financing
|
|
|
686
|
|
|
|
923
|
|
Stock-based compensation
|
|
|
691
|
|
|
|
821
|
|
Change in fair value of liability-classified warrants
|
|
|
(221
|
)
|
|
|
|
|
Loss on unconsolidated affiliate
|
|
|
1,271
|
|
|
|
988
|
|
Gain on sale of interest in unconsolidated affiliate
|
|
|
(1,165
|
)
|
|
|
(428
|
)
|
Impairment of long-lived assets
|
|
|
|
|
|
|
4,928
|
|
Deferred income taxes
|
|
|
(1,347
|
)
|
|
|
93
|
|
Loss on disposal of property and equipment
|
|
|
60
|
|
|
|
476
|
|
Loss (gain) on foreign currency transaction
|
|
|
655
|
|
|
|
(8
|
)
|
Gain on sale of intellectual property
|
|
|
(2,500
|
)
|
|
|
(5,000
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(3,041
|
)
|
|
|
641
|
|
Inventories
|
|
|
3,184
|
|
|
|
763
|
|
Prepaid expenses and other assets
|
|
|
1,036
|
|
|
|
(959
|
)
|
Accounts payable
|
|
|
1,662
|
|
|
|
(1,523
|
)
|
Deferred revenue
|
|
|
|
|
|
|
2,937
|
|
Accrued expenses
|
|
|
(820
|
)
|
|
|
(2,015
|
)
|
Income taxes payable
|
|
|
377
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities of continuing operations
|
|
|
(7,565
|
)
|
|
|
(14,275
|
)
|
Cash provided by (used in) operating activities of discontinued
operations
|
|
|
195
|
|
|
|
(866
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(7,370
|
)
|
|
|
(15,141
|
)
|
|
|
|
|
|
|
|
|
|
F-6
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Continued)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
|
|
|
|
As Adjusted
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment in unconsolidated affiliate
|
|
|
|
|
|
|
(986
|
)
|
Purchases of property and equipment
|
|
|
(629
|
)
|
|
|
(1,896
|
)
|
Purchase of ECS, net of cash
|
|
|
|
|
|
|
475
|
|
Proceeds from sale of interest in unconsolidated affiliate
|
|
|
108
|
|
|
|
441
|
|
Proceeds from sale of intellectual property
|
|
|
5,400
|
|
|
|
4,000
|
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
1,702
|
|
Proceeds from sale of discontinued Energy Systems division
|
|
|
8,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities of continuing operations
|
|
|
13,429
|
|
|
|
3,736
|
|
Cash provided by (used in) investing activities of discontinued
operations
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
13,429
|
|
|
|
3,627
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under line of credit
|
|
|
1,721
|
|
|
|
4,790
|
|
Proceeds from issuance of debt
|
|
|
30
|
|
|
|
3,345
|
|
Repayment of line of credit
|
|
|
(5,424
|
)
|
|
|
(3,506
|
)
|
Repayment of long-term debt
|
|
|
(6,800
|
)
|
|
|
(1,889
|
)
|
Payments for debt issuance costs
|
|
|
(14
|
)
|
|
|
(713
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(10,487
|
)
|
|
|
2,027
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
38
|
|
|
|
(1,231
|
)
|
Net change in cash and cash equivalents
|
|
|
(4,390
|
)
|
|
|
(10,718
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
6,726
|
|
|
|
17,444
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
2,336
|
|
|
|
6,726
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
1,390
|
|
|
|
1,222
|
|
Income taxes
|
|
|
528
|
|
|
|
809
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Warrants issued for long-term debt
|
|
|
|
|
|
|
614
|
|
See accompanying notes to consolidated financial statements.
F-7
Notes to
Consolidated Financial Statements
|
|
a.
|
Description
of Business
|
Catalytic Solutions, Inc. (the Company) is a global manufacturer
and distributor of emissions control systems and products,
focused in the heavy duty diesel and light duty vehicle markets.
The Companys emissions control systems and products are
designed to deliver high value to our customers while benefiting
the global environment through air quality improvement,
sustainability and energy efficiency. Catalytic Solutions, Inc.
is listed on AIM of the London Stock Exchange (AIM: CTS and
CTSU) and currently has operations in the USA, Canada, France,
Japan and Sweden as well as an Asian joint venture.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
Therefore, the consolidated financial statements contemplate the
realization of assets and liquidation of liabilities in the
ordinary course of business. The Company has suffered recurring
losses and negative cash flows from operations since its
inception, resulting in an accumulated deficit of
$149.3 million at December 31, 2009. The Company has
funded its operations through equity sales, convertible debt and
bank borrowings. In addition, due to non-compliance with certain
loan covenants (described below) and per the repayment
obligations under the Companys loan agreements,
substantially all the debt of the Company has been classified as
current at December 31, 2009. As a result of this
classification, the Company has a working capital deficit of
$4.4 million. The covenants are almost exclusively based on
the performance of the Companys Engine Control Systems
subsidiary. As of March 31, 2009, the Company had failed to
achieve two of the covenants under the bank loan agreement with
Fifth Third Bank (see Note 8 for a discussion of the Fifth
Third Bank loan agreement). The covenants that the Company
failed to achieve are those related to the annualized EBITDA and
the funded debt to EBITDA ratio for the Engine Control Systems
subsidiary. The bank agreed to temporarily suspend its rights
with respect to the breach of these two covenants under a
Forbearance Agreement that expired on April 30, 2010. The
Company is currently in discussion with the bank regarding an
extension to the forbearance; however, the Company cannot
provide assurance that it will be successful in these efforts.
At December 31, 2009 the Company had $2.3 million in
cash. The Companys access to working capital is limited
and its debt service obligations and projected operating costs
for 2010 exceed its cash balance at December 31, 2009.
Failure to renegotiate payment terms for debt due will result in
the Company not having sufficient cash to operate.
These matters raise substantial doubt about the Companys
ability to continue as a going concern. In order to address this
uncertainty, in the first quarter of 2009, the Company retained
a U.S.-based
investment banking firm to act as a financial advisor to the
Company in exploring alternatives to recapitalize the Company.
Alternatives under consideration include the sale of Company
stock and/or
a sale of the Companys assets, while negotiating with the
Companys lenders to modify loan terms in order to delay
repayments while alternative capital is secured. At this time
the Company cannot provide any assurances that it will be
successful in its continuing efforts to recapitalize the balance
sheet or work with its lenders on loan modifications. In the
event that the Company is not successful in the immediate
future, the Company will be unable to continue operations and
may be required to file bankruptcy. There can be no assurances
that the Company will be able to reorganize through bankruptcy
and might be forced to effect a liquidation of its assets. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
|
|
c.
|
Preparation
based on U.S. Generally Accepted Accounting Principles (U.S.
GAAP)
|
The consolidated financial statements and accompanying notes are
presented in U.S. dollars and have been prepared in
accordance with U.S. GAAP.
F-8
Notes to
Consolidated Financial
Statements (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies
|
|
|
a.
|
Principles
of Consolidation
|
The consolidated financial statements include the financial
statements of Catalytic Solutions, Inc. and its wholly owned
subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
For the periods presented below, certain customers accounted for
10% or more of the Companys revenues as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
Customer
|
|
2009
|
|
|
2008
|
|
|
A
|
|
|
24
|
%
|
|
|
30
|
%
|
B
|
|
|
22
|
%
|
|
|
7
|
%
|
The customers above are automotive OEMs and relate to sales
within the Catalyst segment.
For the periods presented below, certain customers accounted for
10% or more of the Companys accounts receivable balance as
follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
Customer
|
|
2009
|
|
|
2008
|
|
|
A
|
|
|
18
|
%
|
|
|
7
|
%
|
B
|
|
|
15
|
%
|
|
|
|
|
C
|
|
|
14
|
%
|
|
|
|
|
Customer A above is an automotive OEM, and customers B and C are
diesel distributors.
For the periods presented below, certain vendors accounted for
10% or more of the Companys raw material purchases as
follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
Vendor
|
|
2009
|
|
|
2008
|
|
|
A
|
|
|
16
|
%
|
|
|
12
|
%
|
B
|
|
|
14
|
%
|
|
|
11
|
%
|
C
|
|
|
11
|
%
|
|
|
19
|
%
|
Vendor A above is a catalyst supplier, vendor B is a precious
metals supplier and vendor C is a substrate supplier.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management of the Company to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Areas where significant judgments are made include, but
are not limited to the following: impairment of long-lived
assets, stock-based compensation and instruments, allowance for
doubtful accounts, inventory valuation, taxes and contingent and
accrued liabilities. Actual results could differ from those
estimates. These estimates and assumptions are based on the
Companys best estimates and judgment. The Company
evaluates its estimates and assumptions on an ongoing basis
using historical experience and other factors, including the
F-9
Notes to
Consolidated Financial
Statements (Continued)
current economic environment, which it believes to be reasonable
under the circumstances. Estimates and assumptions are adjusted
when facts and circumstances dictate. Illiquid credit markets,
volatile equity, foreign currency, and declines in customer
spending have combined to increase the uncertainty inherent in
such estimates and assumptions. As future events and their
effects cannot be determined with precision, actual results
could differ from these estimates. Changes in estimates
resulting from continuing changes in the economic environment
will be reflected in the financial statements in future periods.
|
|
d.
|
Cash
and Cash Equivalents
|
Cash and cash equivalents of $2.3 million and
$6.7 million at December 31, 2009 and 2008,
respectively, consist of cash balances and money market mutual
funds. For purposes of the consolidated statements of cash
flows, the Company considers the money market funds and all
highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
|
|
e.
|
Trade
Accounts Receivable
|
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is
the Companys best estimate of the amount of probable
credit losses in the Companys existing accounts
receivable. The Company determines the allowance based on
historical write off experience and past due balances over
60 days that are reviewed individually for collectability.
Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for
recovery is considered remote. The Company does not have any off
balance sheet credit exposure related to its customers.
Inventories are stated at the lower of cost (FIFO method) or
market (net realizable value). Finished goods inventory includes
materials, labor and manufacturing overhead.
|
|
g.
|
Property
and Equipment
|
Property and equipment are stated at cost. Property and
equipment under capital leases are stated at the present value
of the minimum lease payments. Depreciation and amortization
have been provided using the straight line method over the
following estimated useful lives:
|
|
|
Machinery and equipment
|
|
2 10 years
|
Furniture and fixtures
|
|
2 5 years
|
Computer hardware and software
|
|
2 5 years
|
Vehicles
|
|
2 5 years
|
When an asset is sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts
and any resulting gain or loss is recognized. Repairs and
maintenance are charged to expense as incurred and major
replacements or betterments are capitalized. Property and
equipment held under capital leases and leasehold improvements
are amortized straight-line over the shorter of the lease term
or estimated useful life of the asset. Total depreciation for
continuing operations for the years ended December 31, 2009
and 2008 was $0.6 million and $2.3 million,
respectively.
Goodwill is recorded when the purchase price of an acquisition
exceeds the estimated fair value of the net identified tangible
and intangible assets acquired and is recorded in the reporting
unit that will benefit from acquired intangible and tangible
assets. Goodwill is tested for impairment on an annual basis and
written down to its implied fair value when impaired. The
Company performed the annual goodwill impairment testing as of
October 31, 2009. The Companys Heavy Duty Diesel
(HDD) Systems reporting unit, which is
F-10
Notes to
Consolidated Financial
Statements (Continued)
also a reporting segment, has all of the Companys
allocated goodwill. The Company performed Step I of the annual
impairment test and it was determined that the fair value of the
Companys reporting unit (as determined using the expected
present value of future cash flows) was greater than the
carrying amount of the respective reporting unit, including
goodwill, and Step II of the annual impairment test was not
necessary; therefore, there was no impairment to the carrying
amount of the reporting unit.
|
|
i.
|
Purchased
Intangible Assets
|
Purchased intangible assets are carried at cost, less
accumulated amortization. Amortization is computed on a
straight-line basis over the estimated useful lives of the
respective assets, ranging from 1 to 20 years. Intangible
assets consist of trade names, acquired patents and technology,
and customer relationships.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. A valuation allowance against deferred tax
assets is required if, based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The valuation
allowance should be sufficient to reduce the deferred tax asset
to the amount that is more likely than not to be realized. The
Company recognizes the effect of income tax positions only if
those positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. The Company
records interest and penalties related to unrecognized tax
benefits in income tax expense.
The Company generally recognizes revenue when products are
shipped and the customer takes ownership and assumes risk of
loss, collection of the relevant receivable is reasonably
assured, persuasive evidence of an arrangement exists, and the
sales price is fixed or determinable. There are certain
customers where risk of loss transfers at destination point and
revenue is recognized when product is delivered to the
destination. For these customers, revenue is recognized upon
receipt at the customers warehouse. This generally occurs
within five days from shipment date.
The HDD Systems division has certain sales with associated
installation. For such sales, revenue is recognized upon
completion of installation.
|
|
l.
|
Research
and Development
|
Research and development costs are generally expensed as
incurred.
|
|
m.
|
Recapitalization
Expense
|
Recapitalization expense includes fees paid to outside advisors
hired to assist the Company it its strategic review and its
efforts to recapitalize the balance sheet.
Assets such as property, plant, and equipment and amortizable
intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may
F-11
Notes to
Consolidated Financial
Statements (Continued)
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
or asset group to estimated undiscounted future cash flows
expected to be generated by the asset or asset group. If the
carrying amount of an asset or asset group exceeds its estimated
future cash flows, an impairment charge is recognized for the
amount by which the carrying amount of the asset or asset group
exceeds the fair value of the asset or asset group. Assets to be
disposed of would be separately presented in the balance sheet
and reported at the lower of the carrying amount or fair value
less costs to sell and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale
would be presented separately in the appropriate asset and
liability sections of the balance sheet.
The Company recognizes compensation expense ratably over the
vesting period based on the estimated grant date fair value
method using the Black-Scholes option-valuation model. The
Companys Plan allows for the grant of awards with market
conditions. These awards are valued using a Monte Carlo
univariate options pricing model.
The functional currency of the HDD Systems division is the
Canadian Dollar, while that of its subsidiary Engine Control
Systems Europe AB in Sweden is the Swedish Krona. The functional
currency of the Companys Japanese branch office and TCC
joint venture is the Japanese Yen. Assets and liabilities of the
foreign locations are translated into U.S. dollars at
period-end exchange rates. Revenue and expense accounts are
translated at the average exchange rates for the period. The
resulting adjustments are charged or credited directly to
accumulated comprehensive income (loss) within
Stockholders Equity. All realized and unrealized
transaction adjustments are included in other income (loss).
On January 1, 2009, the Company adopted
EITF 07-05,
Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entitys Own Stock, included in
Accounting Standards Codification (ASC) topic 815.
EITF 07-05
provides guidance on determining what types of instruments or
embedded features in an instrument held by a reporting entity
can be considered indexed to its own stock. Upon adoption of the
EITF, the Company reclassified certain of its warrants from
equity to liabilities. See further discussion in Note 7.
The Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements
(SFAS 157) included in ASC Topic 820, for all assets
and liabilities effective January 1, 2008 except for
nonfinancial assets and liabilities that are recognized or
disclosed at fair value on a non-recurring basis where the
adoption was January 1, 2009. The adoption of this standard
did not have a material effect on the Companys
consolidated financial statements. ASC 820 prioritizes the
inputs used in measuring fair value into the following hierarchy:
|
|
|
|
|
Level 1: Quoted prices (unadjusted) in active markets for
identical assets or liabilities.
|
|
|
|
Level 2: Inputs other than quoted prices included within
Level 1 that are either directly or indirectly observable.
|
|
|
|
Level 3: Unobservable inputs in which little or no market
activity exists, therefore requiring an entity to develop its
own assumptions about the assumptions that market participants
would use in pricing.
|
Goodwill impairment testing requires the Company to estimate the
fair value of its reporting unit. The Companys estimate of
fair value of its reporting unit involves level 3 inputs.
The estimated fair value of the HDD Systems reporting unit was
derived primarily from a discounted cash flow model utilizing
significant unobservable inputs including expected cash flows
and discount rates. In addition, the Company considered the
overall fair values of its reporting units as compared to the
market capitalization of the Company. The
F-12
Notes to
Consolidated Financial
Statements (Continued)
Company determined that no goodwill impairment existed as of
December 31, 2009; however, it is reasonably possible that
future impairment tests may result in a different conclusion for
the goodwill of the HDD Systems reporting unit. The estimate of
fair value of the reporting units is sensitive to certain
factors including but not limited to the following: movements in
the Companys share price, changes in discount rates and
the Companys cost of capital, growth of the reporting
units revenue, cost structure of the reporting unit,
successful completion of research and development and customer
acceptance of new products and approval of the reporting
units product by regulatory agencies.
During 2009, the Company elected to change its accounting policy
for legal costs incurred during the registration of patents to
expense such costs as incurred. Previously, the Company
capitalized such costs when they concluded such costs resulted
in probable future benefits. Due to the administrative
difficulties in documenting support for the future benefit of
such costs as a result of uncertainty of ultimate patent
approval, the Company concluded the new method of accounting was
preferable. The 2008 financial statements have been adjusted to
reflect these changes.
The Company recorded a cumulative effect of the change as an
increase to accumulated deficit on January 1, 2008 totaling
$0.2 million. The adjustments to the Companys balance
sheet and statement of operations as of and for the year ended
December 31, 2008, respectively, were not material and
include: (i) reductions to intangible assets, total assets,
and total stockholders equity and an increase to
accumulated deficit at December 31, 2008 of
$0.4 million, and (ii) increases to general and
administrative expense, net loss from continuing operations and
net loss for the year ended December 31, 2008 of
$0.2 million.
Loss per share, loss from continuing operations per share and
cash flow from operations for the year ended December 31,
2008 remained unchanged.
The adjustments to the Companys balance sheet and
statement of operations as of and for the six months ended
June 30, 2009 and 2008, respectively, were not material and
include: (i) reductions to intangible assets, total assets,
and total stockholders equity and an increase to
accumulated deficit at June 30, 2009 and 2008 of
$0.6 million and $0.5 million, respectively, and
(ii) increases to general and administrative expenses and
net loss for the six months ended June 30, 2009 and 2008 of
$0.1 million and $0.1 million, respectively. Loss per
share and cash flows from operations for the six months ended
June 30, 2009 would have been $0.01 greater and unchanged,
respectively. Loss per share and cash flows from operations for
the six months ended June 30, 2008 would have been
unchanged.
In June 2009, the FASB issued SFAS No. 168, The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162, included in
ASC Topic 105, Generally Accepted Accounting
Principles (ASC 105). ASC 105 establishes the FASB
Accounting Standards Codification as the source of authoritative
accounting principles recognized by the FASB to be applied by
non-governmental entities in the preparation of financial
statements in conformity with U.S. GAAP. ASC 105 was
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company
adopted this standard and included the new references in its
consolidated financial statements effective with the year ending
December 31, 2009.
|
|
r.
|
Fair
Value of Financial Instruments
|
The fair values of the Companys cash and cash equivalents,
trade accounts receivable, prepaid expenses and other current
assets, accounts payable, accrued salaries and benefits and
accrued expenses approximate carrying values due to the short
maturity of these instruments. The fair values of the
Companys debt and off-balance sheet commitments are less
than their carrying values as a result of deteriorating credit
quality of the Company and, therefore, expected higher interest
rates that would be available currently to the Company.
It is not practical to estimate the fair value of these
instruments as the Companys debt is not publicly traded
and the Companys current financial position and the recent
credit crisis experienced by financial institutions have caused
current financing options to be limited.
F-13
Notes to
Consolidated Financial
Statements (Continued)
|
|
3.
|
Trade
Accounts Receivable
|
Trade accounts receivable at December 31, 2009 and 2008
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Non-contract trade accounts receivable
|
|
|
8,379
|
|
|
|
4,521
|
|
Completed contracts
|
|
|
|
|
|
|
178
|
|
Contracts in progress
|
|
|
|
|
|
|
6,091
|
|
Less allowance for doubtful accounts
|
|
|
(313
|
)
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
8,066
|
|
|
|
10,667
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, there were no amounts included in
receivables under retainage provisions in contracts.
The Companys revolving credit facility is collateralized
by inventory and receivables. At December 31, 2009 and
2008, the collateralized receivables were $6.0 million and
$2.8 million, respectively.
In December 2005, the Company fully reserved an accounts
receivable balance from Delphi in the amount of
$0.4 million. The $0.4 million represents the amount
owed to the Company at the time of Delphis filing for
bankruptcy protection in October 2005. The entire balance was
reserved when the Company determined it was unlikely that Delphi
would improve the priority of the debt beyond those of general
creditors and a probable loss would be incurred by the Company.
In 2007, the Company sold its interest in the receivable at
102.5% of value; however, the Company did not reverse its
reserve as the buyer had the ability to demand a refund if
Delphi refused the Companys claim. In 2009, the Company
released the reserve and recorded a $0.4 million gain in
other income as a result of Delphi exiting bankruptcy.
Inventories at December 31, 2009 and 2008 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Finished goods
|
|
|
2,221
|
|
|
|
4,735
|
|
Work in progress
|
|
|
1,255
|
|
|
|
1,127
|
|
Raw materials
|
|
|
2,708
|
|
|
|
3,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,184
|
|
|
|
8,919
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property
and Equipment
|
Property and equipment at December 31, 2009 and 2008
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
US $000
|
|
US $000
|
|
Buildings and land
|
|
|
679
|
|
|
|
511
|
|
Furniture and fixtures
|
|
|
2,354
|
|
|
|
2,175
|
|
Computer hardware and software
|
|
|
1,351
|
|
|
|
1,335
|
|
Machinery and equipment
|
|
|
11,544
|
|
|
|
11,376
|
|
Vehicles
|
|
|
59
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,987
|
|
|
|
15,470
|
|
Less accumulated depreciation
|
|
|
(13,090
|
)
|
|
|
(12,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,897
|
|
|
|
2,882
|
|
|
|
|
|
|
|
|
|
|
F-14
Notes to
Consolidated Financial
Statements (Continued)
During the year ending December 31, 2008, the Company
conducted an assessment for the impairment of certain property,
plant and equipment within the catalyst segment as a result of
the significant slow-down in the automotive sector during 2008
and the anticipated pace of recovery of the Companys
business in the light duty vehicle catalyst segment. During this
assessment, certain long-lived assets of the light duty vehicle
catalyst segment were deemed to be impaired and a write-down to
fair value was considered necessary. An impairment charge of
$4.9 million was recorded during the year ending
December 31, 2008, due to projected cash flows not being
able to support the asset base. The Company uses a
probability-weighted discounted cash flow model to determine
fair market value. The allocation of the impairment to asset
groups is shown below:
|
|
|
|
|
|
|
2008
|
|
|
US $000
|
|
Furniture and fixtures
|
|
|
278
|
|
Computer hardware and software
|
|
|
1,127
|
|
Machinery and equipment
|
|
|
3,515
|
|
Vehicles
|
|
|
8
|
|
|
|
|
|
|
|
|
|
4,928
|
|
|
|
|
|
|
The Company has two stock option plans (the 1997 Plan and the
2006 Plan) for the benefit of employees, officers, directors and
consultants of the Company. The 1997 Plan expired on
December 31, 2006 and as of December 31, 2009, there
were 2,283,150 shares outstanding. Under the 2006 Plan, a
total of 4,200,000 shares of the Companys common
stock are reserved for issuance. Options granted under the plans
are generally exercisable for a period between seven and ten
years from the date of grant at an exercise price that is not
less than the fair market value of the common stock on the date
of grant. Options granted under the 1997 Plan generally vest
over a period of four years and those granted under the 2006
Plan generally vest over a period of three years. Vested stock
options may be exercised and paid for by cash, check,
net-exercise or by other means as approved by the Remuneration
Committee of the Companys Board of Directors. The fair
market value is determined by using the last reported sale price
as listed on the AIM of the London Stock Exchange as of the date
of exercise or (if there were no trades on that date) the latest
preceding date upon which a sale was reported. All common stock
issued from exercises are newly issued shares that have been
reserved for under the respective Plans.
Under the 2006 Plan, the Company granted stock options that
include a market condition. Such options become exercisable if
the Companys common stock trading price is equal to or
exceeds an amount equal to 120% of the exercise price of the
option for a period of ninety days on which the stock is
actually traded on the AIM of the London Stock Exchange. The
fair value of these awards is determined using the Monte Carlo
univariate pricing model.
There were no options granted during the year ended
December 31, 2009.
The per share weighted average fair value of each option granted
during the year ended December 31, 2008 was $0.44. The 2006
market-based Plan was valued using a Monte Carlo univariate
option pricing model with the following weighted average
assumptions:
|
|
|
|
|
|
|
2008
|
|
Expected volatility
|
|
|
59.9
|
%
|
Risk-free interest rate
|
|
|
2.8
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Expected life in years
|
|
|
5.0
|
|
Forfeiture rate
|
|
|
6.0
|
%
|
F-15
Notes to
Consolidated Financial
Statements (Continued)
As the stock of the Company became publicly traded in November
2006 and has traded for a relatively short period time, it is
not practicable for management to estimate the expected
volatility of share price because there is not sufficient
historical information about volatility. Therefore, the Company
utilized an estimate based upon a portfolio of peer companies.
The expected life was derived via the Monte Carlo model.
The following summarizes the stock option transactions under the
Companys stock option plans during the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Shares
|
|
Exercise Price
|
|
|
|
|
$
|
|
Options outstanding at December 31, 2007
|
|
|
5,305,151
|
|
|
|
1.95
|
|
Granted
|
|
|
728,000
|
|
|
|
0.81
|
|
Exercised
|
|
|
(30,000
|
)
|
|
|
1.07
|
|
Forfeited
|
|
|
(129,000
|
)
|
|
|
2.44
|
|
Expired
|
|
|
(556,740
|
)
|
|
|
1.96
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2008
|
|
|
5,317,411
|
|
|
|
1.78
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(220,620
|
)
|
|
|
1.98
|
|
Expired
|
|
|
(455,848
|
)
|
|
|
2.16
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2009
|
|
|
4,640,943
|
|
|
|
1.73
|
|
At December 31, 2009, the range of exercise prices and
weighted average remaining contractual life of outstanding
options was $0.42 $2.74 and 4.87 years,
respectively.
The following table details the options outstanding at
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
Options
|
|
Currently
|
|
Options Vested or
|
|
|
Outstanding
|
|
Exercisable
|
|
Expected to Vest
|
|
Number of shares
|
|
|
4,640,943
|
|
|
|
3,682,861
|
|
|
|
4,456,739
|
|
Weighted average exercise price
|
|
$
|
1.73
|
|
|
$
|
1.91
|
|
|
$
|
1.75
|
|
Aggregate intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term
|
|
|
4.87
|
|
|
|
4.74
|
|
|
|
4.90
|
|
The total compensation cost of non-vested options expected to
vest is $281,035, with a weighted average period to recognize of
0.7 years.
There was no cash received from option exercises under any
share-based payment arrangements for the years ended
December 31, 2009 or 2008.
The Companys 2006 Plan allows for the issuance of stock
awards to Non-Executive Directors. As of December 31, 2009,
the Company had issued two restricted stock awards in accordance
with the Plan, totaling 120,000 shares.
In June 2008, the Company issued warrants to purchase
1,250,000 shares of common stock as part of the
consideration for a debt facility with Cycad Group, LLC.
In December 2007, The Company issued warrants to purchase
3,117,115 shares of common stock to Capital Works, LLC as
part of the consideration to acquire Engine Control Systems.
F-16
Notes to
Consolidated Financial
Statements (Continued)
The exercisable warrants and their associated exercise prices
are shown below at December 31, 2009 and 2008:
|
|
|
|
|
Warrants exercisable into common stock (issued in USD)
|
|
|
37,500
|
|
Exercise price
|
|
$
|
1.67
|
|
Warrants exercisable into common stock (issued in GBX)
|
|
|
4,367,115
|
|
Weighted average exercise price
|
|
$
|
1.02
|
|
The Company adopted
EITF 07-05
on January 1, 2009. With the adoption of
EITF 07-05,
the warrants to Cycad Group, LLC and Capital Works, LLC were
determined not to be solely linked to the stock price of the
Company and, therefore, require classification as liabilities.
As a result of the adoption on January 1, 2009, the Company
recorded a cumulative effect of change in accounting principle
of $2.3 million directly as a reduction of accumulated
deficit representing the decline in fair value between the
issuance and adoption date. The fair value of the warrants was
calculated using the Black-Scholes option-valuation model. The
model utilized a volatility of 60% and a risk free rate of 1.4%.
The years to maturity are 4.4 and 2.8 for the Cycad Group, LLC
and Capital Works, LLC warrants, respectively, which corresponds
to the remaining term of the warrants. For the year ended
December 31, 2009, the application of
EITF 07-05
resulted in an increase to other income of $0.2 million
resulting from a decline in fair value of the warrants during
the period.
In June 2008, the Company put in place a debt facility with
Cycad Group, LLC that would allow a one-time draw down of up to
$3.3 million. In September 2008, the Company borrowed
$3.3 million under the debt facility. The debt was
collateralized by the accounts receivable at the Energy Systems
division and the machinery and equipment of the Catalyst
division. As of May 31, 2009, the Company was out of
compliance with a covenant in the loan agreement with Cycad
Group, LLC. The non-compliance resulted from the Companys
failure to achieve covenants under the bank loan agreement with
Fifth Third Bank, as described below. The Company paid off the
debt and all accrued interest and fees on October 1, 2009.
In December 2007, the Company and its subsidiaries including
Engine Control Systems entered into borrowing agreements with
Fifth Third Bank as part of the cash consideration paid for the
purchase of Engine Control Systems on December 20, 2007.
The borrowing agreements provided for three facilities including
a revolving line of credit and two term loans. The line of
credit is a demand facility loan up to a maximum principal
amount of Canadian $8.5 million, with availability based
upon eligible accounts receivable and inventory. At
December 31, 2009, the outstanding balance in
U.S. dollar was $5.1 million with $3.0 million
available for borrowings by Engine Control Systems in Canada.
The other facilities included a five-year non-revolving term
loan of up to $2.5 million, which was paid off during 2008,
and a non-revolving term loan of $3.5 million that was paid
off in October 2009. The loans are collateralized by the assets
of the Company. The interest rate on the line of credit is
variable based upon Canadian and U.S. Prime Rates. As of
December 31, 2009, the weighted average borrowing rate on
the line of credit was 4.48% compared to 6.36% as of
December 31, 2008. The Company is also subject to covenants
on minimum levels of tangible capital funds, fixed charge
coverage, earnings before income tax, depreciation and
amortization, funded
debt-to-earnings
before income tax and depreciation and amortization. In the
event of default, the bank may demand payment on all amounts
outstanding immediately. The Company is also restricted from
paying corporate distributions in excess of $250,000. The loan
agreement also includes a material adverse change clause,
exercisable if, in the opinion of the bank, there is a material
adverse change in the financial condition, ownership or
operation of Engine Control Systems or the Company. If the bank
deems that a material adverse change has occurred, the bank may
terminate the Companys right to borrow under the agreement
and demand payment of all amounts outstanding under the
agreement. As of March 31, 2009, the Company had failed to
achieve two of the covenants under the bank loan agreement with
Fifth Third Bank. The covenants that the Company failed to
achieve are those related to the annualized EBITDA and the
funded debt to EBITDA ratio for the Engine
F-17
Notes to
Consolidated Financial
Statements (Continued)
Control Systems subsidiary. The bank agreed to temporarily
suspend its rights with respect to the breach of these two
covenants under a Forbearance Agreement that expired on
April 30, 2010.
The Company has $3.0 million of consideration due to the
seller as part of the Applied Utility Systems acquisition. The
consideration was due August 28, 2009 and accrues interest
at 5.36%. At December 31, 2009 the Company had accrued
$538,000 of unpaid interest. The Company is currently in
arbitration with seller on payment of the consideration.
Long term debt at December 31, 2009 and 2008 is summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
US $000
|
|
US $000
|
|
Line of credit
|
|
|
5,147
|
|
|
|
8,068
|
|
Consideration payable
|
|
|
3,000
|
|
|
|
3,000
|
|
Term loans
|
|
|
|
|
|
|
3,500
|
|
Cycad debt facility
|
|
|
|
|
|
|
3,300
|
|
Capital lease obligation
|
|
|
75
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,222
|
|
|
|
17,913
|
|
Less current portion
|
|
|
(8,147
|
)
|
|
|
(17,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Annual scheduled principal payments of long-term debt are
$8.1 million and $0.1 million for the years ended
December 31, 2009 and 2012, respectively.
|
|
9.
|
Commitments
and Contingencies
|
The Company leases certain equipment and facilities under
operating leases that expire through December 2018. Minimum
future payments at December 31, 2009 are as follows:
|
|
|
|
|
|
|
US $000
|
|
Years ending December 31:
|
|
|
|
|
2010
|
|
|
1,261
|
|
2011
|
|
|
1,107
|
|
2012
|
|
|
1,049
|
|
2013
|
|
|
646
|
|
2014
|
|
|
641
|
|
Thereafter
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
5,854
|
|
|
|
|
|
|
Rent expense during 2009 and 2008 totaled $1.5 million and
$1.3 million, respectively.
F-18
Notes to
Consolidated Financial
Statements (Continued)
The Company has taken actions to reduce its cost base beginning
in 2008 and continuing into 2009. As a result of these actions,
the Company has accrued severance costs as follows:
|
|
|
|
|
|
|
US $000
|
|
|
Accrued severance at December 31, 2007
|
|
|
|
|
Accrued severance expense
|
|
|
234
|
|
Paid severance expense
|
|
|
(47
|
)
|
|
|
|
|
|
Accrued severance at December 31, 2008
|
|
|
187
|
|
Accrued severance expense
|
|
|
1,429
|
|
Paid severance expense
|
|
|
(946
|
)
|
|
|
|
|
|
Accrued severance at December 31, 2009
|
|
|
670
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
include the following components:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
U.S.-based
operations
|
|
|
(11,678
|
)
|
|
|
(21,396
|
)
|
Non
U.S.-based
operations
|
|
|
1,144
|
|
|
|
2,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,534
|
)
|
|
|
(19,264
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) attributable to loss from
continuing operations is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
|
US $000
|
|
|
US $000
|
|
|
US $000
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
(47
|
)
|
|
|
|
|
|
|
(47
|
)
|
State and local
|
|
|
56
|
|
|
|
|
|
|
|
56
|
|
Foreign
|
|
|
522
|
|
|
|
93
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
531
|
|
|
|
93
|
|
|
|
624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
(560
|
)
|
|
|
(258
|
)
|
|
|
(818
|
)
|
State and local
|
|
|
(150
|
)
|
|
|
(70
|
)
|
|
|
(220
|
)
|
Foreign
|
|
|
1,021
|
|
|
|
(1,019
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
311
|
|
|
|
(1,347
|
)
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Notes to
Consolidated Financial
Statements (Continued)
Income taxes attributable to loss from continuing operations
differ from the amounts computed by applying the
U.S. federal statutory rate of 34% to loss from continuing
operations before income taxes as shown below:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Expected tax benefit
|
|
|
(3,582
|
)
|
|
|
(6,550
|
)
|
Net tax effects of:
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
|
|
(643
|
)
|
|
|
(1,374
|
)
|
Research credits
|
|
|
(153
|
)
|
|
|
(103
|
)
|
Other
|
|
|
(245
|
)
|
|
|
209
|
|
Change in deferred tax asset valuation allowance
|
|
|
3,587
|
|
|
|
8,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,036
|
)
|
|
|
624
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Research and development credits
|
|
|
3,895
|
|
|
|
3,758
|
|
Other credits
|
|
|
366
|
|
|
|
354
|
|
Operating loss carry forwards
|
|
|
34,509
|
|
|
|
27,727
|
|
Warrant expense
|
|
|
84
|
|
|
|
84
|
|
Inventories
|
|
|
601
|
|
|
|
960
|
|
Allowance for doubtful accounts
|
|
|
105
|
|
|
|
36
|
|
Depreciation
|
|
|
566
|
|
|
|
1,112
|
|
Deferred research and development expenses for income tax
|
|
|
6,882
|
|
|
|
8,557
|
|
Non-cash compensation
|
|
|
681
|
|
|
|
482
|
|
Other
|
|
|
3,800
|
|
|
|
3,264
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
51,489
|
|
|
|
46,334
|
|
Valuation allowance
|
|
|
(48,536
|
)
|
|
|
(44,949
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
2,953
|
|
|
|
1,385
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
(2,749
|
)
|
|
|
(2,030
|
)
|
Other identifiable intangibles
|
|
|
(1,540
|
)
|
|
|
(1,770
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(4,289
|
)
|
|
|
(3,800
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
(1,336
|
)
|
|
|
(2,415
|
)
|
|
|
|
|
|
|
|
|
|
The Company had approximately $89.8 million and
$70.5 million of federal and state income tax net operating
loss carry forwards at December 31, 2009, respectively. The
federal and state income tax net operating loss carry forwards
expire starting in 2017 and 2012, respectively.
In assessing the potential realization of deferred tax assets,
consideration is given to whether it is more likely than not
that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is
dependent upon the Company attaining future taxable income
during the periods in which those temporary differences become
deductible. In addition, the utilization of net operating loss
carry forwards may be limited due to restrictions imposed under
applicable federal and state tax laws due to a change in
ownership. Based upon the level of historical operating losses
and future projections, management
F-20
Notes to
Consolidated Financial
Statements (Continued)
believes it is more likely than not that the Company will not
realize a significant portion of the deferred tax assets.
Future utilization of the net operating losses and credit carry
forwards may be subject to a substantial annual limitation due
to ownership change limitations as required by Sections 382
and 383 of the Internal Revenue Code of 1986, as amended (the
Code), as well as similar state limitations. The
Company is in the process of performing a study to assess
whether an ownership change has occurred that would materially
impact the future utilization of the Companys net
operating losses and credits. The preliminary results do not
indicate a material limitation has occurred with respect to any
of the Companys net operating losses and credits. A future
change at the Companys current market capitalization would
severely limit the annual use of the net operating losses and
credits and could result in the expiration of all or a portion
of the net operating losses and credits prior to utilization.
The following changes occurred in the amount of Unrecognized Tax
Benefits (including related interest and penalties) during the
year:
|
|
|
|
|
|
|
US $000
|
|
|
Balance as of January 1, 2009
|
|
|
268
|
|
Additions for current year tax positions
|
|
|
127
|
|
Reductions for prior year tax positions
|
|
|
(34
|
)
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
361
|
|
|
|
|
|
|
As of December 31, 2009, the Company had $76,000 accrued
for payment of interest and penalties related to unrecognized
tax benefits.
The Company operates in multiple tax jurisdictions, both within
and outside of the United States. The following tax years remain
open to examination by the major domestic taxing jurisdictions
to which we are subject:
|
|
|
|
|
|
|
Open Tax Years
|
|
United States Federal
|
|
|
2006 - 2009
|
|
United States State
|
|
|
2005 - 2009
|
|
Canada
|
|
|
2004 - 2009
|
|
Sweden
|
|
|
2008 - 2009
|
|
The Company has exposure to multiple currencies. The primary
exposure is between the U.S. dollar, the Canadian dollar,
the Euro and Swedish Krona. The Company recorded foreign
exchange loss of $1.1 million and gain of $0.2 million
in the years ended December 31, 2009 and 2008,
respectively, included in other expense on the accompanying
Consolidated Statements of Operations.
|
|
13.
|
Net
Earnings per Share (EPS)
|
Basic net loss per share is computed using the weighted average
number of common shares outstanding during the period. Diluted
net loss per share is computed using the weighted average number
of common shares and dilutive potential common shares. Diluted
net loss per share excludes certain dilutive potential common
shares outstanding, as their effect is anti-dilutive on loss
from continuing operations. Dilutive potential common shares
consist of employee stock options and other warrants that are
convertible into the Companys common stock.
Because the Company incurred losses in the years ended
December 31, 2009 and 2008, the effect of dilutive
securities totaling 9,045,558 and 9,782,000 equivalent shares,
respectively, has been excluded in the
F-21
Notes to
Consolidated Financial
Statements (Continued)
computation of net loss per share and net loss from continuing
operations per share as their impact would be anti-dilutive.
In February 2008, the Company entered into an agreement with
Tanaka Kikinzoku Kogyo K.K. (TKK) to form a new joint venture
company, TC Catalyst Incorporated (TCC), a Japanese corporation.
The joint venture is part of the Catalyst division. The Company
entered the joint venture in order to improve its presence in
Japan and Asia and strengthen its business flow into the Asian
market.
In December 2008, the Company agreed to sell and transfer
specific heavy duty diesel catalyst technology and intellectual
property to TKK for use in the defined territory for a total
selling price of $7.5 million. TKK will provide that
intellectual property to TCC on a royalty-free basis. The
Company also sold shares in TCC to TKK reducing its ownership to
30%. $5.0 million of the sale was completed and recognized
in 2008 with $2.5 million recognized in 2009.
In December 2009, the Company agreed to sell and transfer
specific three-way catalyst and zero PGM patents to TKK for use
in specific geographic regions. The patents were sold for
$3.9 million. TKK paid the Company $1.9 million in
2009 and $2.0 million in the first quarter of 2010. As the
Company had not delivered the technology as of December 31,
2009, the Company will recognize the sale of the patents in
2010. As part of the transaction, the Company also sold shares
in TCC, bringing its ownership in the joint venture down to 5%.
As the Company is contractually obligated to fund its portion of
the losses of the joint venture based on its ownership
percentage, the Company recognized a gain of $1.1 million
during the year ended December 31, 2009 as a result of the
decrease in ownership and the related decrease it its obligation
to fund losses. The gain is included in other income.
The Companys investment in TCC is accounted for using the
equity method as the Company still has significant influence
over TCC as a result of having a seat on TCCs board. The
Companys share of the TCC net loss for the year ended
December 31, 2009 was $1.3 million and TKKs
share is the balance. At December 31, 2009, the
Companys interest in the accumulated deficit of TCC is
reflected as an accrued liability of $0.2 million as the
Company is contractually obligated to fund its portion of the
deficit. TCC operates with a March 31 fiscal year-end. Financial
information for TCC as of and for the twelve months ended
December 31, 2009 is as follows:
|
|
|
|
|
|
|
2009
|
|
|
|
US $000
|
|
|
Assets
|
|
|
6,928
|
|
Liabilities
|
|
|
10,980
|
|
Deficit
|
|
|
(4,052
|
)
|
Net sales
|
|
|
745
|
|
Gross Margin
|
|
|
(213
|
)
|
Net earnings
|
|
|
(4,379
|
)
|
|
|
15.
|
Sale of
Energy Systems Division
|
On October 1, 2009 the Company sold all significant assets
of Applied Utility Systems, Inc., which comprised the
Companys Energy Systems division, for up to
$10.0 million, including $8.6 million in cash and
contingent consideration of $1.4 million. Of the contingent
consideration, $0.5 million was contingent upon Applied
Utility Systems being awarded certain projects and
$0.9 million is retention against certain project and
contract warranties and other obligations. The Company has not
recognized any of the contingent consideration as of
December 31, 2009 and will only do so if the contingencies
are resolved favorably. The $0.5 million of contingent
consideration that was contingent on the award of certain
projects was not earned and is not likely to be paid. The income
statement of the Energy Systems division is presented as
discontinued
F-22
Notes to
Consolidated Financial
Statements (Continued)
operations. Basic and diluted income from discontinued
operations per share was $0.02 and loss from discontinued
operations per share was $0.01 for the years ended
December 31, 2009 and 2008, respectively. Revenue included
within discontinued operations was $14.0 million and
$10.4 million for the years ended December 31, 2009
and 2008, respectively.
|
|
16.
|
Related-party
Transactions
|
In June 2008, the Company put in place a debt facility with
Cycad Group, LLC (a significant shareholder of the Company) that
would allow a one-time draw down of up to $3.3 million. To
avoid any conflict of interest, Mr. K. Leonard Judson,
officer of Cycad Group, LLC and Non-Executive Director of the
Company, recused himself from all Board of Directors discussions
and voting pertaining to the debt facility. Further details
regarding the debt facility are disclosed in the long-term debt
discussion in Note 8. Mr. Judson resigned from the
Board of Directors of the Company in January 2009. The debt
facility was repaid in full on October 1, 2009.
In October 2008, the Companys Board of Directors
unanimously adopted a resolution to waive the Non-Executive
Directors right to receive, and the Companys
obligation to pay, any director fees with respect to
participation in Board and Committee meetings and other matters
with effect from July 1, 2008 and continuing thereafter
until the Directors elect to adopt resolutions reinstating such
fees. On May 1, 2009, the Directors adopted a resolution to
reinstate the accrual of director fees effective January 1,
2009, with a payment schedule to be determined at a later date.
As of December 31, 2009 an amount of $406,000 was accrued
for Directors fees and was due and payable to the Directors.
|
|
17.
|
Goodwill
and Intangible Assets
|
The changes in the carrying amount of goodwill for the years
ended December 31, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
US $000
|
|
|
Balance at December 31, 2007
|
|
|
7,753
|
|
Goodwill adjustments related to acquisition of Engine Control
Systems
|
|
|
54
|
|
Tax valuation adjustment
|
|
|
(489
|
)
|
Effect of translation adjustment
|
|
|
(999
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
6,319
|
|
Sale of Energy Systems division
|
|
|
(2,600
|
)
|
Effect of translation adjustment
|
|
|
504
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
4,223
|
|
|
|
|
|
|
Intangible assets as of December 31, 2009 and 2008 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Trade name
|
|
|
15-20 years
|
|
|
|
738
|
|
|
|
2,151
|
|
Non-compete agreement
|
|
|
3 years
|
|
|
|
|
|
|
|
111
|
|
Patents and know-how
|
|
|
5-10 years
|
|
|
|
3,792
|
|
|
|
4,919
|
|
Acquired contract
work-in-progress
|
|
|
1.4 years
|
|
|
|
|
|
|
|
353
|
|
Customer relationships
|
|
|
8 years
|
|
|
|
1,206
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,736
|
|
|
|
8,628
|
|
Less accumulated amortization
|
|
|
|
|
|
|
(1,291
|
)
|
|
|
(2,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,445
|
|
|
|
6,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
Notes to
Consolidated Financial
Statements (Continued)
Aggregate amortization for amortizable intangible assets, using
the straight-line amortization method, for the years ended
December 31, 2009 and 2008 was $0.8 million and
$0.6 million, respectively. Estimated amortization expense
for existing intangible assets for the next five years is
$546,000 in each year.
In connection with the Companys acquisition of the assets
of Applied Utility Systems, Inc., Applied Utility Systems
entered into a Consulting Agreement with M.N. Mansour, Inc.
(Mansour, Inc.), pursuant to which Mansour, Inc. and
Dr. M.N. Mansour (Dr. Mansour) agreed to
perform consulting services for Applied Utility Systems. As
further discussed in Note 15, the income statement of
Applied Utility Systems is presented as discontinued operations.
During February 2008, Applied Utility Systems terminated the
Consulting Agreement for cause and alleged that Mansour, Inc.
and Dr. Mansour had breached their obligations under the
Consulting Agreement. The matter was submitted to binding
arbitration in Los Angeles, California. The arbitration was held
during February 2009. During May 2009 the Arbitrator rendered an
Interim Award (a) finding that the Consulting Agreement was
properly terminated by the Company on February 27, 2008,
(b) excusing the Company from any obligation to make any
further payments under the Consulting Agreement and
(c) excusing Mansour, Inc. from any obligation to repay to
the Company any of the amounts previously paid to it under the
Consulting Agreement. In the Interim Award, the Arbitrator
requested that the parties schedule a date for a hearing on the
award of attorneys fees and the correction of any aspects
of the award, without rearguing the merits of the case. The
Consulting Agreement provides that, on termination of the
Consulting Agreement by the Company, Mansour, Inc. shall repay
to the Company 75% of the amounts previously paid to it under
the Consulting Agreement. The hearing was held on
February 17, 2010. At the hearing, the Company sought the
award of its attorneys fees and the correction of the
award to require such payment by Mansour, Inc. The Arbitrator
took the matter under submission and did not render a decision
at the hearing. A final hearing on the award of attorneys
fees is scheduled for May 10, 2010. Included in accrued
liabilities at December 31, 2009, is an accrual for the
consulting fees under this arrangement through the date of the
interim award totaling $1.5 million. Should a final binding
award be rendered on terms that are consistent with the interim
award, the Company would reverse the accrued liability and
record income from discontinued operations.
The Company has $3.0 million of consideration due to the
seller under the Applied Utility Systems Asset Purchase
Agreement dated August 28, 2006. The consideration was due
August 28, 2009 and accrues interest at 5.36%. At
December 31, 2009 the Company had accrued $538,000 of
unpaid interest. The Company has not paid the foregoing amount.
The Company has certain claims against the seller under the
terms of the Asset Purchase Agreement. At this time, the Company
intends to vigorously assert its claims against seller under the
Asset Purchase Agreement and to defend against any action or
arbitration by seller to collect on the consideration. The
seller commenced an action in California Superior Court for
collection of the consideration. Such action was dismissed by
the court and the seller was directed to pursue any collection
action through arbitration. Seller has commenced arbitration
proceedings to collect the amounts payable under the
consideration. Arbitration dates for this action have not been
determined. This arbitration is in the preliminary stages and it
is impossible to predict the outcome of the arbitration. Under
the terms of the Fifth Third forbearance agreement described in
Note 8, the Company is prohibited from making any payment
to unsecured creditors, including seller, until the conditions
of the forbearance agreement have been met.
In connection with the Companys acquisition of the assets
of Applied Utility Systems, Inc., Mansour, Inc. and
Dr. Mansour entered into an Agreement Not to Compete
pursuant to which they agreed to refrain from taking certain
actions that would be competitive with the business of Applied
Utility Systems, Inc. acquired by the Company. The Company
believes that Mansour, Inc. and Dr. Mansour have breached
their obligations under such Agreement and has commenced suit in
California Superior Court for Orange County, California, to
enjoin any continuing breaches and to recover damages for the
alleged breaches. Mansour, Inc. and Dr. Mansour have
demurred to the Complaint. A hearing on the demurrer is
scheduled for May 10, 2010. The suit is in the preliminary
stages and it is not possible to predict the outcome of the suit.
F-24
Notes to
Consolidated Financial
Statements (Continued)
On September 30, 2008, Applied Utility Systems, Inc.
(AUS), a former subsidiary of the Company, filed a
complaint against Benz Air Engineering, Inc. (Benz
Air). The complaint was amended on January 16, 2009,
and asserts claims against Benz Air for breach of contract,
common counts and slander. AUS seeks $183,000 in damages, plus
interest, costs and applicable penalties. In response to the
complaint, Benz Air filed a cross-complaint on November 17,
2008, which named both AUS and the Company as defendants. The
cross-complaint asserts claims against AUS and the Company for
breach of oral contract, breach of express warranty, breach of
implied warranty, negligent misrepresentation and intentional
misrepresentation and seeks not less than $300,000 in damages,
plus interest, costs and punitive damages. The case is set for
trial on June 14, 2010. The Company assumed the benefits
and obligations of this claim when it sold AUS.
See Note 20 for subsequent events.
The Company has two division segments based on the products it
delivers:
Heavy Duty Diesel (HDD) Systems
division The HDD Systems division
includes retrofit of legacy diesel fleets with emissions control
systems and the emerging opportunity for new engine emissions
controls for on- and off-road vehicles. In 2007, the Company
acquired Engine Control Systems (ECS), an Ontario, Canada-based
company focused on a variety of heavy duty vehicle applications.
This environmental business segment specializes in the design
and manufacture of verified exhaust emissions control solutions.
Globally, the HDD Systems division offers a range of products
for the OEM, aftermarket and retrofit markets in order to reduce
exhaust emissions created by on-road, off-road and stationary
diesel, gasoline and alternative fuel engines including propane
and natural gas. The retrofit market in the U.S. is driven
in particular by state and municipal environmental regulations
and incentive funding for voluntary early compliance. The HDD
Systems division derives significant revenues from retrofit with
a portfolio of solutions verified by the California Air
Resources Board and the United States Environmental Protection
Agency.
Catalyst division The Catalyst
division is the original part of the Catalytic Solutions (CSI)
business behind the Companys proprietary Mixed Phase
Catalyst
(MPC®)
technology enabling the Company to produce catalyst formulations
for gasoline, diesel and natural gas induced emissions that
offer performance, proven durability and cost effectiveness for
multiple markets and a wide range of applications. A family of
unique catalysts has been developed with base-metals
or low platinum group metal (PGM) and zero-PGM
content to provide increased catalytic function and
value for technology-driven automotive industry customers.
Corporate The Corporate office
includes cost for personnel, insurance and public company
expenses such as legal, audit and taxes that are not allocated
down to the operating divisions. During 2009, the Company
changed its internal reporting to the Companys chief
operational decision makers to report corporate expenses
separately from the Catalyst division. The 2008 data has been
restated to reflect this change.
Discontinued operations In
2006, the Company purchased Applied Utility Systems, Inc., a
provider of cost-effective, engineered solutions for the clean
and efficient utilization of fossil fuels. Applied Utility
Systems, referred to as the Companys Energy Systems
division, provided emissions control and energy systems
solutions for industrial and utility boilers, process heaters,
gas turbines and generation sets used largely by major
utilities, industrial process plants, OEMs, refineries, food
processors, product manufacturers and universities. The Energy
Systems division delivered integrated systems built for
customers specific combustion processes. As discussed in
Note 15, this division was sold on October 1, 2009.
F-25
Notes to
Consolidated Financial
Statements (Continued)
Summarized financial information for our reportable segments as
of, and for the years ended December 31, 2009 and 2008 is
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
HDD Systems
|
|
|
25,916
|
|
|
|
27,126
|
|
Catalyst
|
|
|
25,074
|
|
|
|
26,311
|
|
Corporate
|
|
|
|
|
|
|
|
|
Eliminations(1)
|
|
|
(476
|
)
|
|
|
(874
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
50,514
|
|
|
|
52,563
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
HDD Systems
|
|
|
1,942
|
|
|
|
1,923
|
|
Catalyst(2)
|
|
|
(5,730
|
)
|
|
|
(14,146
|
)
|
Corporate
|
|
|
(4,169
|
)
|
|
|
(4,440
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(7,957
|
)
|
|
|
(16,663
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
HDD Systems
|
|
|
1,143
|
|
|
|
1,061
|
|
Catalyst
|
|
|
251
|
|
|
|
1,951
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,394
|
|
|
|
3,012
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
HDD Systems
|
|
|
28,181
|
|
|
|
26,357
|
|
Catalyst
|
|
|
29,231
|
|
|
|
43,635
|
|
Discontinued operations
|
|
|
532
|
|
|
|
11,537
|
|
Eliminations
|
|
|
(27,701
|
)
|
|
|
(31,815
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
30,243
|
|
|
|
49,714
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
HDD Systems
|
|
|
294
|
|
|
|
526
|
|
Catalyst
|
|
|
335
|
|
|
|
1,370
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
629
|
|
|
|
1,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Elimination of Catalyst revenue related to sales to HDD Systems. |
|
(2) |
|
Included in Catalyst operating income (loss) in 2008 are
impairment losses of $4.9 million (see Note 5). |
Interest expense for HDD Systems was $0.3 million and
$0.6 million for 2009 and 2008, respectively, and interest
expense for Catalyst was $2.0 million and $1.7 million
for 2009 and 2008, respectively.
F-26
Notes to
Consolidated Financial
Statements (Continued)
Net sales by geographic region based on location of sales
organization for the years ended December 31, 2009 and 2008
is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
United States
|
|
|
27,671
|
|
|
|
29,721
|
|
Canada
|
|
|
18,247
|
|
|
|
13,250
|
|
Europe
|
|
|
4,596
|
|
|
|
9,592
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
50,514
|
|
|
|
52,563
|
|
|
|
|
|
|
|
|
|
|
Net fixed assets and net assets by geographic region as of
December 31, 2009 and 2008 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Fixed Assets
|
|
|
Net Assets
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
US $000
|
|
|
US $000
|
|
|
US $000
|
|
|
US $000
|
|
|
United States
|
|
|
1,316
|
|
|
|
1,533
|
|
|
|
10,333
|
|
|
|
31,299
|
|
Canada
|
|
|
1,313
|
|
|
|
1,043
|
|
|
|
16,016
|
|
|
|
14,507
|
|
Europe
|
|
|
268
|
|
|
|
306
|
|
|
|
3,894
|
|
|
|
3,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,897
|
|
|
|
2,882
|
|
|
|
30,243
|
|
|
|
49,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has evaluated subsequent events from the balance
sheet date through May 5, 2010, the date at which the
financial statements were originally issued. Upon the inclusion
of the financial statements in an
S-4 filing
of Clean Diesel Technologies, Inc., the Company considered
disclosures of additional matters through the date of filing on
May 14, 2010.
In the arbitration with Dr. Mansour on the consulting
services contract, the Arbitrator has rendered a Final Award
(a) finding that the Consulting Agreement was properly
terminated by the Company on February 27, 2008,
(b) excusing the Company from any obligation to make any
further payments under the Consulting Agreement,
(c) obligating Mansour, Inc. to pay the Company an amount
equal to 75% of all amounts paid to Mansour Inc. by the Company
under Sections 2.1 and 2.2 of the Consulting Agreement, and
(d) awarding the Company attorneys fees in the amount
of $450,000. Included in accrued liabilities at
December 31, 2009, is an accrual for the consulting fees
under this arrangement through the date of the interim award
totaling $1.5 million. The Company will be reversing such
liability and recording the associated gain it its second
quarter 2010 financial statements, which represents the period
in which the Company was legally released from its liability.
The Company continues the initial stages of the arbitration on
the $3.0 million of consideration due to the seller of
Applied Utility Systems. Seller has commenced arbitration
proceedings to collect the foregoing amount and the amount of
any earn-out payable under the Asset Purchase Agreement. The
Asset Purchase Agreement provides that the Company would pay the
seller an earn-out amount based on the revenues and net profits
of Applied Utility Systems over a period of ten years beginning
January 1, 2009. In connection with the arbitration
proceedings, the seller is seeking a writ of attachment with
respect to the foregoing amounts. The Company intends to
vigorously oppose the granting of any writ of attachment.
Arbitration dates for this action have not been determined. This
arbitration is in the preliminary stages and it is impossible to
predict the outcome of the arbitration. Under the terms of the
Fifth Third forbearance agreement described in Note 8, the
Company is prohibited from making any payment to unsecured
creditors, including seller, until the conditions of the
forbearance agreement have been met.
F-27
Notes to
Consolidated Financial
Statements (Continued)
On May 13, 2010, the Company agreed to a Merger Agreement
with Clean Diesel Technologies, Inc. (CDTI) whereby all
outstanding shares of the Company would be exchanged for shares
of CDTI and the Company will become a wholly-owned subsidiary of
CDTI. The Merger Agreement is subject to approval by the
shareholders of both the Company and CDTI and other conditions
precedent prior to closing. The Company expects that the
transaction will be accounted for as a reverse merger whereby
the Company would be considered the acquirer for accounting
purposes.
F-28
Annex A
AGREEMENT
AND PLAN OF MERGER
Among
CLEAN
DIESEL TECHNOLOGIES, INC.,
CDTI
MERGER SUB, INC.
And
CATALYTIC
SOLUTIONS, INC.
Dated as
of May 13, 2010
A-1
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
ARTICLE I THE MERGER
|
|
|
A-5
|
|
Section 1.1
|
|
The Merger
|
|
|
A-5
|
|
Section 1.2
|
|
Closing
|
|
|
A-5
|
|
Section 1.3
|
|
Effective Time
|
|
|
A-5
|
|
Section 1.4
|
|
Effects of the Merger
|
|
|
A-5
|
|
Section 1.5
|
|
Articles of Incorporation and By-Laws.
|
|
|
A-6
|
|
Section 1.6
|
|
Directors and Officers
|
|
|
A-6
|
|
Section 1.7
|
|
Subsequent Actions
|
|
|
A-6
|
|
ARTICLE II MERGER CONSIDERATION; EXCHANGE PROCEDURES
|
|
|
A-6
|
|
Section 2.1
|
|
Effect on Common Stock of the Company
|
|
|
A-6
|
|
Section 2.2
|
|
Determination of Cash Position.
|
|
|
A-8
|
|
Section 2.3
|
|
No Fractional Shares; Treasury Stock and Parent-Owned Company
Common Stock
|
|
|
A-10
|
|
Section 2.4
|
|
Dissenting Shares.
|
|
|
A-10
|
|
Section 2.5
|
|
Treatment of Options and Other Equity-Based Awards.
|
|
|
A-10
|
|
Section 2.6
|
|
Treatment of Outstanding Warrants of the Company
|
|
|
A-11
|
|
Section 2.7
|
|
Exchange Agent
|
|
|
A-11
|
|
Section 2.8
|
|
Exchange Procedures
|
|
|
A-11
|
|
Section 2.9
|
|
Capital Stock of Merger Sub
|
|
|
A-13
|
|
Section 2.10
|
|
Payment of Investment Banking Fee
|
|
|
A-13
|
|
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
|
|
|
A-13
|
|
Section 3.1
|
|
Organization
|
|
|
A-13
|
|
Section 3.2
|
|
Capitalization.
|
|
|
A-13
|
|
Section 3.3
|
|
Subsidiaries.
|
|
|
A-14
|
|
Section 3.4
|
|
Authority
|
|
|
A-14
|
|
Section 3.5
|
|
Consents and Approvals; No Violations.
|
|
|
A-15
|
|
Section 3.6
|
|
Books and Records
|
|
|
A-15
|
|
Section 3.7
|
|
AIM-Related Matters; Financial Statements.
|
|
|
A-15
|
|
Section 3.8
|
|
Absence of Company Material Adverse Effect
|
|
|
A-17
|
|
Section 3.9
|
|
Employees; Employee Benefit Plans
|
|
|
A-17
|
|
Section 3.10
|
|
Labor Matters
|
|
|
A-18
|
|
Section 3.11
|
|
Contracts.
|
|
|
A-19
|
|
Section 3.12
|
|
Litigation
|
|
|
A-20
|
|
Section 3.13
|
|
Compliance with Laws.
|
|
|
A-20
|
|
Section 3.14
|
|
Taxes and Tax Returns.
|
|
|
A-20
|
|
Section 3.15
|
|
Environmental Matters.
|
|
|
A-21
|
|
Section 3.16
|
|
State Takeover Statutes
|
|
|
A-21
|
|
Section 3.17
|
|
Intellectual Property
|
|
|
A-22
|
|
Section 3.18
|
|
Absence of Indemnifiable Claims, etc
|
|
|
A-22
|
|
Section 3.19
|
|
Insurance
|
|
|
A-22
|
|
Section 3.20
|
|
Title to Property
|
|
|
A-23
|
|
Section 3.21
|
|
Customers and Suppliers
|
|
|
A-23
|
|
Section 3.22
|
|
Opinion of Financial Advisor
|
|
|
A-23
|
|
A-2
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
Section 3.23
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Board Approval
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A-23
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Section 3.24
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Voting Requirements
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A-23
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Section 3.25
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Brokers and Finders
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A-23
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Section 3.26
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Related Party Transactions
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A-23
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Section 3.27
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Information Supplied
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A-24
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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB
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A-24
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Section 4.1
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Organization
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A-24
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Section 4.2
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Capitalization.
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A-24
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Section 4.3
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Subsidiaries.
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A-25
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Section 4.4
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Authority
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A-25
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Section 4.5
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Consents and Approvals; No Violations.
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A-26
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Section 4.6
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Books and Records
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A-26
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Section 4.7
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SEC Reports; Financial Statements.
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A-26
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Section 4.8
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Absence of Parent Material Adverse Effect
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A-28
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Section 4.9
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Employees; Employee Benefit Plans
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A-29
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Section 4.10
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Labor Matters
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A-30
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Section 4.11
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Contracts.
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A-30
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Section 4.12
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Litigation
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A-31
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Section 4.13
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Compliance with Laws.
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A-31
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Section 4.14
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Taxes and Tax Returns.
|
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A-32
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Section 4.15
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Environmental Matters.
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A-32
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Section 4.16
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State Takeover Statutes
|
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A-33
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Section 4.17
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Intellectual Property.
|
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A-33
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Section 4.18
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Absence of Indemnifiable Claims, etc
|
|
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A-34
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Section 4.19
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Insurance
|
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A-34
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Section 4.20
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Title to Property
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A-34
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Section 4.21
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Customers and Suppliers
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A-34
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Section 4.22
|
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Opinion of Financial Advisor
|
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A-34
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Section 4.23
|
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Board Approval
|
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A-35
|
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Section 4.24
|
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Voting Requirements
|
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A-35
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Section 4.25
|
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Brokers and Finders
|
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A-35
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ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS
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A-35
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Section 5.1
|
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Conduct of Businesses Prior to the Effective Time
|
|
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A-35
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Section 5.2
|
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Forbearances
|
|
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A-35
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ARTICLE VI ADDITIONAL AGREEMENTS
|
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A-37
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Section 6.1
|
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Regulatory Matters
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A-37
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Section 6.2
|
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Access to Information
|
|
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A-38
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Section 6.3
|
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Stockholders Approvals
|
|
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A-39
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Section 6.4
|
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Legal Conditions to Merger
|
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A-39
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Section 6.5
|
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Stock Exchange Listing
|
|
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A-39
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Section 6.6
|
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Employee Benefit Plans
|
|
|
A-39
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Section 6.7
|
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Indemnification; Directors and Officers Insurance
|
|
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A-40
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Section 6.8
|
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Additional Agreements
|
|
|
A-41
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Section 6.9
|
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Advice of Changes
|
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|
A-41
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A-3
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|
|
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Page
|
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Section 6.10
|
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Officers following Effective Time
|
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A-41
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Section 6.11
|
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Board of Directors
|
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A-41
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Section 6.12
|
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Acquisition Proposals
|
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A-42
|
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Section 6.13
|
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Reverse Stock Split by Parent
|
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A-43
|
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Section 6.14
|
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Headquarters
|
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A-44
|
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Section 6.15
|
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Section 16 Matters
|
|
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A-44
|
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Section 6.16
|
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AIM Delisting
|
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A-44
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ARTICLE VII CONDITIONS PRECEDENT
|
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|
A-44
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Section 7.1
|
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Conditions to Each Partys Obligation To Effect the Merger
|
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A-44
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Section 7.2
|
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Conditions to Obligations of Parent
|
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A-45
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Section 7.3
|
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Conditions to Obligations of the Company
|
|
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A-45
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ARTICLE VIII TERMINATION AND AMENDMENT
|
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A-46
|
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Section 8.1
|
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Termination
|
|
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A-46
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Section 8.2
|
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Effect of Termination
|
|
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A-47
|
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Section 8.3
|
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Amendment
|
|
|
A-48
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Section 8.4
|
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Extension; Waiver
|
|
|
A-49
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ARTICLE IX GENERAL PROVISIONS
|
|
|
A-49
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Section 9.1
|
|
Nonsurvival of Representations, Warranties and Agreements
|
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A-49
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Section 9.2
|
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Expenses
|
|
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A-49
|
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Section 9.3
|
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Notices
|
|
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A-49
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Section 9.4
|
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Interpretation
|
|
|
A-50
|
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Section 9.5
|
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Counterparts
|
|
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A-50
|
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Section 9.6
|
|
Entire Agreement
|
|
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A-50
|
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Section 9.7
|
|
Governing Law
|
|
|
A-50
|
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Section 9.8
|
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Publicity
|
|
|
A-50
|
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Section 9.9
|
|
Assignment; Third Party Beneficiaries
|
|
|
A-50
|
|
Section 9.10
|
|
Specific Performance
|
|
|
A-51
|
|
|
|
|
Exhibits
|
|
|
|
Exhibit A
|
|
Definitions
|
Exhibit B-1
|
|
Form of Company Warrant
|
Exhibit B-2
|
|
Form of Parent Warrant
|
Exhibit B-3
|
|
Form of Company Advisor Warrant
|
A-4
AGREEMENT
AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of
May , 2010 (this Agreement),
is among Clean Diesel Technologies, Inc., a Delaware corporation
(the Parent), CDTI Merger Sub, Inc., a
California corporation and a wholly owned subsidiary of Parent
(Merger Sub), and Catalytic Solutions, Inc.,
a California corporation (the Company).
Certain capitalized terms used in this Agreement are defined in
Exhibit A.
RECITALS
A. The Boards of Directors of each of Parent, the Company
and Merger Sub have (i) determined that the merger of
Merger Sub with and into the Company would be advisable and fair
to, and in the best interests of, their respective shareholders
and (ii) approved the Merger, upon the terms and subject to
the conditions set forth in this Agreement, pursuant to the
Delaware General Corporation Law (the DGCL)
and the California General Corporation Law (the
CGCL).
B. For U.S. federal income tax purposes, it is
intended that the Merger will qualify as a reorganization within
the meaning of Section 368(a) of the Code, and that this
Agreement is intended to be, and hereby is, adopted as a plan of
reorganization within the meaning of Sections 354 and 361
of the Code.
AGREEMENT
In consideration of the foregoing and the mutual covenants and
agreements herein contained, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The
Merger. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with
the CGCL, on the Closing Date, Merger Sub shall be merged with
and into the Company at the Effective Time (the
Merger). Following the Merger, the separate
corporate existence of Merger Sub shall cease and the Company
shall continue as the surviving corporation (the
Surviving Corporation) and shall succeed to
and assume all the rights, properties, liabilities and
obligations of Merger Sub in accordance with the CGCL.
Section 1.2 Closing. The
closing of the Merger (the Closing) shall
take place at 10:00 a.m., Pacific time, on a date to be
specified by the parties (the Closing Date),
which shall be no later than the third business day after
satisfaction or waiver (to the extent permitted hereunder) of
all of the conditions set forth in Article VII of
this Agreement, other than those conditions that by their nature
cannot be satisfied until the Closing (but subject to the
satisfaction of those conditions at the Closing), at the offices
of Reed Smith LLP, 101 Second Street, San Francisco,
California, unless another time, date or place is agreed to in
writing by the parties hereto.
Section 1.3 Effective
Time. Concurrently with the Closing, the
parties hereto shall file this Agreement together with the
related officers certificates required by
Section 1103 of the CGCL, in a customary form (the
Certificate of Merger), with the Secretary of
State of the State of California (the Secretary of
State). The parties hereto shall make all other
filings, recordings or publications required by the CGCL in
connection with the Merger. The Merger shall become effective at
the time specified in the Certificate of Merger (the time at
which the Merger becomes effective being the Effective
Time).
Section 1.4 Effects
of the Merger. The Merger shall have the
effects set forth in Section 1107 of the CGCL. From and
after the Effective Time, the Surviving Corporation shall
possess all rights, privileges, immunities, powers and
franchises and be subject to all of the obligations,
restrictions, disabilities, liabilities, debts and duties of the
Company and Merger Sub.
A-5
Section 1.5 Articles
of Incorporation and By-Laws.
(a) At the Effective Time, the articles of incorporation of
the Company, as in effect immediately prior to the Effective
Time, shall be amended and restated in their entirety to reflect
the terms of the articles of incorporation of Merger Sub as in
effect immediately prior to the Effective Time (except that
Article I thereof shall provide that the name of the
Surviving Corporation shall be Catalytic Solutions,
Inc.), until duly amended as provided therein or by
applicable Law.
(b) At the Effective Time, the by-laws of Merger Sub, as in
effect immediately prior to the Effective Time, shall be the
by-laws of the Surviving Corporation, until duly amended as
provided therein or by applicable Law.
Section 1.6 Directors
and Officers. From and after the Effective
Time, (a) the directors of Merger Sub serving immediately
prior to the Effective Time shall be the directors of the
Surviving Corporation, until the earlier of their resignation or
removal or until their respective successors are duly elected
and qualified, as the case may be and (b) the officers of
the Company serving immediately prior to the Effective Time
shall be the officers of the Surviving Corporation until the
earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the
case may be.
Section 1.7 Subsequent
Actions. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised
that any deeds, bills of sale, assignments, assurances or any
other actions or things are necessary or desirable to vest,
perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of
the rights, properties or assets of either the Company or Merger
Sub acquired or to be acquired by the Surviving Corporation as a
result of or in connection with the Merger or otherwise to carry
out this Agreement, the officers and directors of the Surviving
Corporation shall be authorized to execute and deliver, in the
name of and on behalf of either the Company or Merger Sub, all
such deeds, bills of sale, assignments and assurances and to
take and do, in the name and on behalf of each of such
corporations or otherwise, all such other actions and things as
may be necessary or desirable to vest, perfect or confirm any
and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise
to carry out this Agreement.
ARTICLE II
MERGER
CONSIDERATION; EXCHANGE PROCEDURES
Section 2.1 Effect
on Common Stock of the Company. At the
Effective Time, by virtue of the Merger and without any action
on the part of the holder of any shares of the capital stock of
the Company, each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time
(specifically including any Merger Related Company Stock, but
excluding any Dissenting Shares), shall be converted into
(a) a number of shares of Parents common stock,
$0.01 par value (Parent Common Stock),
equal to the quotient obtained by dividing (i) the
Aggregate Class A Consideration by (ii) the number of
Outstanding CSI Shares; and
(b) Company Warrants to acquire a number of shares of
Parent Common Stock equal to the quotient obtained by dividing
(i) 3,000,000 by (ii) the number of Outstanding CSI
Shares.
The shares of Parent Common Stock referred to in clause (a)
and the Company Warrants referred to in clause (b) of this
Section 2.1 are sometimes collectively referred to
as the Class A Merger Consideration.
At the Effective Time, by virtue of the Merger and without any
action on the part of the holder of any shares of the capital
stock of the Company, each share of the Companys
Class B common stock, no par value (Company
Class B Stock) issued and outstanding immediately
prior to the Effective Time shall be converted into a number of
shares of Parent Common Stock equal to the quotient obtained by
dividing (i) the Aggregate Class B Consideration by
(ii) the number of Outstanding Company Class B Shares
(the Class B Merger Consideration and,
together with the Class A Merger Consideration, the
Merger Consideration).
A-6
As used in this Section 2.1,
Adjusted Ratio means the quotient obtained by
dividing (i) the CSI Percentage by (ii) the CDTI
Percentage; provided that in no event shall the Adjusted Ratio
exceed 9.0 or be less than 0.923077.
Aggregate Class A Consideration means
the difference obtained by subtracting (a) the Aggregate
Class B Consideration from (b) the Aggregate CSI Stock
Consideration.
Aggregate Class B Consideration means
that portion of the Aggregate CSI Stock Consideration that,
pursuant to the terms of the Company Convertible Notes, is to be
allocated to the holders of the Outstanding Company Class B
Shares upon the consummation of the Merger.
Aggregate CSI Stock Consideration means
(x) the product of (A) the Outstanding CDTI Shares and
(B) the Adjusted Ratio minus (y) the number of shares
of Company Advisor Parent Common Stock.
CDTI Percentage means 40 minus the CDTI
Percentage Penalty, if any, plus the CSI Percentage Penalty, if
any.
CDTI Percentage Penalty means the quotient
obtained, rounded downward to the next whole integer, by
dividing the amount by which the Parent Cash Position is less
than $4,500,000, by $116,666.66. For example, if the Parent Cash
Position is $4,300,000, the CDTI Percentage Penalty would be 1
($200,000 divided by $116,666.66, or 1.7143, rounded downward to
the next whole integer, or 1).
Company Advisor means Allen & Co.,
the Companys Financial Advisor with respect to the Merger
and the Company Financing.
Company Advisor Parent Common Stock means the
1,000,000 shares of Parent Common Stock being issued to the
Company Advisor at the Effective Time (before giving effect to
the Reverse Stock Split) pursuant to Section 2.10;
provided, however, that the aforesaid 1,000,000 number assumes
an Adjusted Ratio of 1.5, and, in the event that the Adjusted
Ratio is greater or less than 1.5, the number of shares of
Company Advisor Parent Common Stock shall be increased (if the
Adjusted Ratio is greater than 1.5) or decreased (if the
Adjusted Ratio is less than 1.5) by the same proportion that the
Aggregate Class A Consideration will be increased or
decreased by such difference.
Company Advisor Warrants means warrants to
acquire up to 1,000,000 shares of Parent Common Stock
(before giving effect to the Reverse Stock Split) that may be
issued to the Companys investment banker in connection
with the Merger or the Company Financing, which warrants shall
be in the form of
Exhibit B-3
hereto.
Company Common Stock means the Companys
common stock, no par value, as it may be redesignated as
Class A common stock prior to the Effective Time.
Company Convertible Notes means an aggregate
of $4,000,000 of the Companys secured convertible notes
that shall have been issued prior to the Effective Time in
connection with the Company Financing.
Company Warrants means warrants substantially
in the form set forth in
Exhibit B-1,
to acquire shares of Parent Common Stock.
CSI Percentage means 60 minus the CSI
Percentage Penalty, if any, plus the CDTI Percentage Penalty, if
any.
CSI Percentage Penalty means the quotient
obtained, rounded downward to the next whole integer, by
dividing the amount by which the Company Cash Position is less
than $2,000,000 (if the Company Cash Position is less than
$2,000,000), by $166,666.66. For example, if the Company Cash
Position is $1,800,000, the CSI Percentage Penalty would be 1
($200,000 divided by $166,666.66, or 1.2, rounded downward to
the next whole integer, or 1).
Merger Related Company Stock means shares of
Company Common Stock issued by the Company in connection with
the Merger, including, inter alia, any shares of Company Common
Stock issued upon exercise or conversion of any securities that
may be issued in connection with the Company Financing other
than
A-7
Company Class B Stock. Merger Related Company stock does
not include Company Warrants or Company Advisor Warrants or any
securities that may be issued upon exercise of the Company
Warrants or Company Advisor Warrants.
Outstanding CDTI Shares means the number of
shares of Parent Common Stock that are issued and outstanding
immediately preceding the Effective Time after giving effect to
the Reverse Stock Split and specifically including (a) any
Parent Common Stock that was issued or that is issuable upon
exercise or conversion of any securities that may be issued in
connection with the Parent Financing and (b) any Parent
Common Stock that was issued or that is issuable upon the
exercise of warrants or other securities that may be issued to
the Parents investment banker in connection with either
the Parent Financing or the Merger, but, notwithstanding the
foregoing, shall not include the Parent Warrants or the
1,000,000 shares of Parent Common Stock that may be issued
upon exercise thereof.
Outstanding Company Class B Shares means
the number of shares of Company Class B Stock that are
issued and outstanding immediately preceding the Effective Time.
Outstanding CSI Shares means the number of
shares of Company Common Stock that are issued and outstanding
immediately preceding the Effective Time and specifically
including (a) any Company Common Stock that was issued or
that is issuable upon exercise or conversion of any securities
that may be issued in connection with the Company Financing and
(b) any Company Common Stock that was issued or that is
issuable upon the exercise of (x) the Cycad Warrants or
(y) warrants or other securities that may be issued to the
Companys investment banker in connection with either the
Company Financing or the Merger, but, notwithstanding the
foregoing, shall not include the Company Warrants or the Company
Advisor Warrants. For purposes of clarification, the Company
Class B Stock is not included within the Outstanding CSI
Shares.
Parent Financing means Parents
financing for a number of shares of Parent Common Stock with an
aggregate value of $1,000,000 and the related issuance of the
Parent Warrants.
Parent Warrants means warrants, substantially
in the form set forth in
Exhibit B-2,
to acquire up to 1,000,000 shares of Parent Common
Stock(before giving effect to the Reverse Stock Split) that may
be issued in connection with the Parent Financing.
The Merger Consideration shall be appropriately and equitably
adjusted to reflect fully the effect of any stock split, reverse
stock split (including the Reverse Stock Split),
reclassification, recapitalization, consolidation, exchange or
like change with respect to Parent Common Stock or Company
Common Stock or any extraordinary dividend or distribution with
respect to Parent Common Stock, in each case, occurring (or
having a record date) after the date of this Agreement and prior
to the Effective Time.
Section 2.2 Determination
of Cash Position.
(a) Company Cash Position.
(i) No later than the first to occur of
(i) July 6, 2010 and (ii) seven (7) Business
Days prior to the relevant stockholders meeting, the Company
will cause to be prepared and delivered to Parent a good faith
estimate of the Company Cash Position. The Companys
estimate of Company Cash Position shall (A) accurately
reflect the Company Cash Position as of June 30, 2010,
(B) be based upon balance sheet line items and accounts of
the Company calculated in accordance with U.S. GAAP applied
consistently with respect to the accounting policies, practices
and procedures used in the preparation of the Company Balance
Sheet and (C) otherwise be prepared in accordance with this
Agreement.
(ii) If Parent disagrees in good faith with any item within
the Companys estimate of Company Cash Position delivered
pursuant to Section 2.2(a)(i), Parent may, within two
(2) Business Days after delivery of the documents referred
to in Section 2.2(a)(i), deliver a notice to the Company
setting forth, in reasonable detail and to the extent
practicable, each item or amount so disputed by Parent,
Parents calculation of such item or amount and
Parents good faith estimate of Company Cash Position
(Uncontested Company Cash Position). Upon
delivery of any such notice, Parent shall be deemed to have
agreed with all other items and amounts set forth in the
estimate of Company Cash Position delivered pursuant to Section
2.2(a)(i) that are not specifically the subject of dispute in
any notice delivered by Parent as provided above.
A-8
(iii) If Parent disagrees in good faith with the
Companys estimate of Company Cash Position, Parent and the
Company shall, during the period between the delivery of such
estimate and ending three (3) Business Days thereafter, use
commercially reasonable efforts to reach agreement on the
disputed items or amounts in order to determine the Company Cash
Position. If, during such period, Parent and the Company are
unable to reach such agreement, and if the Uncontested Company
Cash Position is less than $2,000,000, then not later than one
Business Day thereafter, Parent may deliver to the Company
written notice of Parents election to invoke the Dispute
Resolution Procedure.
(b) Parent Cash Position.
(i) No later than the first to occur of
(i) July 6, 2010 and (ii) seven (7) Business
Days prior to the Parent Meeting, Parent will cause to be
prepared and delivered to the Company a good faith estimate of
Parent Cash Position. The Parents estimate of Parent Cash
Position shall (A) accurately reflect Parent Cash Position
as of June 30, 2010, (B) be based upon balance sheet
line items and accounts of Parent calculated in accordance with
U.S. GAAP applied consistently with respect to the
accounting policies, practices and procedures used in the
preparation of Parent Balance Sheet and (C) otherwise be
prepared in accordance with this Agreement.
(ii) If the Company disagrees in good faith with any item
within Parents estimate of Parent Cash Position delivered
pursuant to Section 2.2(b)(i), the Company may, within two
(2) Business Days after delivery of the documents referred
to in Section 2.2(b)(i), deliver a notice to Parent setting
forth, in reasonable detail and to the extent practicable, each
item or amount so disputed by the Company, the Companys
calculation of such item or amount and the Companys good
faith estimate of Parent Cash Position (Uncontested
Parent Cash Position). Upon delivery of any such
notice, the Company shall be deemed to have agreed with all
other items and amounts set forth in the estimate of Parent Cash
Position delivered pursuant to Section 2.2(b)(i) that are
not specifically the subject of dispute in any notice delivered
by the Company as provided above.
(iii) If the Company disagrees in good faith with
Parents estimate of Parent Cash Position, the Company and
Parent shall, during the period between the delivery of such
estimate and ending three (3) Business Days thereafter, use
commercially reasonable efforts to reach agreement on the
disputed items or amounts in order to determine Parent Cash
Position. If, during such period, the Company and Parent are
unable to reach such agreement, and if the Uncontested Parent
Cash Position is less than $4,500,000, then not later than one
Business Day thereafter, the Company may deliver to Parent
written notice of the Companys election to invoke the
Dispute Resolution Procedure.
(c) Mediator. Not later than thirty
(30) days after the date of this Agreement, Parent and the
Company shall jointly select an independent auditor (the
Mediator) to resolve any disagreements that
may arise as to the method of calculation or amount of Company
Cash Position or Parent Cash Position, as the case may be, in
the event that Parent elects under Section 2.2(a)(iii) or
the Company elects under Section 2.2(b)(iii) to invoke its
right to have the dispute resolved in the manner set forth in
this Section 2.2(c) (the Dispute Resolution
Procedure). If the Company or Parent shall have timely
given notice of its or their election to invoke the Dispute
Resolution Procedure, each of the Company and Parent shall
promptly but in no event less than two business days deliver to
the Mediator the work papers and
back-up
materials used in preparing its estimate of Company Cash
Position or Parent Cash Position, as the case may be. The
Company and Parent shall be afforded the opportunity to present
to the Mediator any material related to the unresolved disputes
and to discuss the issues with the Mediator; provided,
however, that no such presentation or discussion shall occur
without the presence of a representative of each of the Company
and Parent. The determination of the Mediator shall be limited
to the disagreements submitted to the Mediator. The
determination by the Mediator as to any disputed amounts used in
the computation of Company Cash Position or Parent Cash
Position, as the case may be, shall be deemed to have been
finally determined for purposes of this Agreement. The finally
determined amounts shall be considered along with the previously
agreed upon amounts in the final determination , and shall
represent, the Company Cash Position or the Parent Cash
Position, as the case may be, for purposes of this Agreement.
(d) Effect of Invoking Dispute Resolution
Procedure. If the Closing is delayed as a result
of either party invoking the Dispute Resolution Procedure,
(i) the Parties shall not be entitled to rely upon
Section 7.2(a) or 7.3(a), as the case may be, with respect
to any circumstance or event occurring from and after the
originally
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anticipated Closing Date, and (ii) the date set forth in
Section 8.1(c) shall be automatically amended and extended
to that date which is five (5) Business Days subsequent to
the date on which the Dispute Resolution Procedure shall have
concluded.
Section 2.3 No
Fractional Shares; Treasury Stock and Parent-Owned Company
Common Stock.
(a) Notwithstanding any other provision of this Agreement,
no certificates for fractional shares of Parent Common Stock
shall be issued in the Merger. Each holder of Company Common
Stock who otherwise would have been entitled to a fraction of a
share of Parent Common Stock shall receive in lieu thereof cash
(without interest) in an amount determined by multiplying the
fractional share interest to which such holder would otherwise
be entitled (after taking into account all shares of Company
Common Stock owned by such holder at the Effective Time) by the
Parent Closing Share Price, rounded up or down to the nearest
$0.01. No such holder shall be entitled to dividends, voting
rights or any other rights in respect of any fractional share.
(b) Notwithstanding any other provision of this Agreement,
all shares of Company Common Stock that are (i) held by the
Company as treasury shares or (ii) owned by Parent or any
Subsidiary of Parent, in each case immediately prior to the
Effective Time, shall be cancelled and retired and shall cease
to exist, and no securities of Parent or other consideration
shall be delivered in exchange therefor.
Section 2.4 Dissenting
Shares.
(a) Notwithstanding anything in this Agreement to the
contrary, in the event that the applicable requirements of
Section 1300(b) of the CGCL have been satisfied, shares of
Company Common Stock that were outstanding on the date for the
determination of shareholders entitled to vote on the Merger and
that were voted against the Merger and the holders of which have
demanded that the Company purchase such shares at their fair
market value in accordance with Section 1301 of the CGCL
and have not otherwise failed to perfect or shall not have
effectively withdrawn or lost their rights to have the Company
purchase such shares for cash under the CGCL (the
Dissenting Shares) shall not be converted
into the Merger Consideration, but, instead, the holders thereof
shall be entitled to have their shares purchased by the Company
for cash at the fair market value of such Company Dissenting
Shares as agreed upon or determined in accordance with the
provisions of Section 1300 et seq. of the CGCL;
provided, however, that if any such holder shall
have failed to perfect or shall have effectively withdrawn or
lost his, her or its right to payment under the CGCL, such
holders shares of Company Common Stock shall thereupon be
deemed to have been converted, at the Effective Time of the
Merger, into the Merger Consideration set forth in
Section 2.1 hereof, without any interest thereon.
(b) The Company shall give Parent (i) prompt notice of
any demands pursuant to Section 1300 et seq. of the CGCL
received by the Company, withdrawals of such demands and any
other instruments served pursuant to the CGCL and received by
the Company and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands under
Section 1300 et seq. of the CGCL. The Company shall not,
except with the prior written consent of Parent, make any
payment with respect to any such demands for appraisal or offer
to settle or settle any such demands.
Section 2.5 Treatment
of Options and Other Equity-Based Awards.
(a) During the thirty (30) day period prior to the
Closing, each holder of outstanding options to purchase shares
of Company Common Stock granted under the Companys 1997
Stock Option Plan (the 1997 Plan), whether or
not then vested or exercisable by its terms, shall have the
opportunity to exercise his or her Company Stock Options as
provided in the 1997 Plan upon payment of the exercise price in
accordance with the terms of the 1997 Plan. As provided in the
1997 Plan, such Company Stock Option exercises shall be deemed
effective as of immediately prior to, and conditioned upon, the
occurrence of the Closing. All written communications
distributed generally to employees by or on behalf of the
Company regarding such exercises will be mutually acceptable to
Parent and the Company. Each outstanding Company Stock Option
granted under the 1997 Plan that is not exercised prior to the
Closing in accordance with this Section 2.5 shall
expire, effective immediately prior to and conditioned upon the
occurrence of to the Closing and no consideration shall be paid
therefor.
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(b) In respect of outstanding options to purchase shares of
Company Common Stock granted under the Companys 2006
Equity Compensation Plan (the 2006 Plan and,
together with the 1997 Plan, the Company Stock
Plans), prior to the Closing, the Company shall obtain
the consent of each of the Companys directors and
executive officers who has options outstanding under the 2006
Plan and will use commercially reasonable efforts to obtain the
consent of the holder of any option, grant or other right
thereunder to the termination of such option, grant or other
right (each being sometimes referred to as a 2006 Plan
Award) as of the Effective Time and to terminate the
2006 Plan. Any 2006 Plan Award that shall not have been
terminated prior to the Closing shall remain outstanding and
exercisable in accordance with its terms, provided that the
Surviving Corporation and Parent shall use commercially
reasonable efforts to settle in cash any purported exercise of a
2006 Plan Award that may occur following the Closing.
(c) Each share of restricted stock granted under the
Company Stock Plans that is outstanding immediately prior to the
Closing shall automatically vest and be settled in Company
Common Stock effective as of, and conditioned upon, the
occurrence of the Closing and converted in accordance with
Section 2.1.
(d) Effective on the Closing, each of the Company Stock
Plans shall be terminated in accordance with their respective
terms.
(e) In connection with the termination of the Company Stock
Plans, following the Effective Time, no holder of Company Stock
Options or any participant in or beneficiary of the Company
Stock Plans, will have any right to acquire or receive any
equity securities of the Surviving Corporation or any Subsidiary
thereof or any consideration other than as contemplated pursuant
to this Section 2.5.
Section 2.6 Treatment
of Outstanding Warrants of the Company. From
and after the Effective Time, Parent shall assume the
Companys obligations under the Cycad Warrants and the
Capital Works Warrants in accordance with the terms thereof,
including without limitation the obligation to deliver, upon
exercise of such warrant, the number of shares of Parent Common
Stock that the holder would have received is such warrant had
been exercised for Company Common Stock immediately prior to the
merger. The Company will commercially reasonable efforts to
obtain the consent of the holder of the SVB Warrants to
(a) a cancellation of the SVB Warrants or (b) an
assumption of the Companys obligations thereunder in the
manner referred to in the prior sentence.
Section 2.7 Exchange
Agent. Parent shall appoint an agent (the
Exchange Agent), for the purpose of
exchanging certificates that immediately prior to the Effective
Time evidenced shares of Company Common Stock (the
Company Certificates) for the Merger
Consideration. At or promptly after the Effective Time, Parent
shall deposit, or shall cause to be deposited, with the Exchange
Agent, for the benefit of the holders of Company Certificates,
for exchange in accordance with this Article II,
certificates representing the shares of Parent Common Stock and
the Company Warrants and an estimated amount of cash sufficient
to pay any cash that may be payable in lieu of any fractional
shares (such cash and certificates for shares of Parent Common
Stock and the Company Warrants, together with any dividends or
distributions with respect thereto, being hereinafter referred
to as the Exchange Fund).
Section 2.8 Exchange
Procedures.
(a) As soon as reasonably practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of
a Company Certificate a form of letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss
and title to the Company Certificates shall pass, only upon
delivery of the Company Certificates to the Exchange Agent) and
instructions for use in effecting the surrender of the Company
Certificates in exchange for certificates representing the
shares of Parent Common Stock, certificates representing Company
Warrants and cash in lieu of fractional shares of Parent Common
Stock, if any, into which the shares of Company Common Stock
represented by such Company Certificate or Company Certificates
shall have been converted pursuant to this Agreement. Upon
proper surrender of a Company Certificate for exchange and
cancellation to the Exchange Agent, together with a properly
completed letter of transmittal, duly executed, the holder of
such Company Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of
shares of Parent Common Stock (if any) and a certificate
representing the Company Warrants (if any) to which such former
holder of Company Common Stock shall
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have become entitled pursuant to the provisions of this
Article II, a check representing the amount of cash
(if any) payable in lieu of fractional shares of Parent Common
Stock that such former holder has the right to receive in
respect of the Company Certificate surrendered pursuant to the
provisions of this Article II, and any dividends or
other distributions to which such holder shall have become
entitled, and the Company Certificate so surrendered shall
forthwith be cancelled. No interest will be paid or accrued on
the cash payable in lieu of fractional shares.
(b) No dividends or other distributions with respect to
Parent Common Stock with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Company
Certificate until the holder thereof shall surrender such
Company Certificate in accordance with this
Article II. After the surrender of a
Company Certificate in accordance with this
Article II, the record holder thereof shall be
entitled to receive any such dividends or other distributions,
without any interest thereon, with a record date after the
Effective Time and that theretofore had become payable with
respect to whole shares of Parent Common Stock represented by
such Company Certificate.
(c) If any certificate representing shares of Parent Common
Stock or Company Warrants is to be issued in the name of a
person other than the registered holder of the Company
Certificate surrendered in exchange therefor, it shall be a
condition of the issuance thereof that the Company Certificate
so surrendered shall be properly endorsed (or accompanied by an
appropriate instrument of transfer) and otherwise in proper form
for transfer, and that the person requesting such exchange shall
pay to the Exchange Agent in advance any applicable stock
transfer or other Taxes or shall establish to the reasonable
satisfaction of the Exchange Agent that such Taxes have been
paid or are not payable.
(d) At and after the Effective Time, there shall be no
transfers on the stock transfer books of the Company of the
shares of Company Common Stock that were issued and outstanding
immediately prior to the Effective Time. If, after the Effective
Time, Company Certificates representing such shares are
presented for transfer to Parent, the Surviving Corporation or
the Exchange Agent, they shall be cancelled and exchanged for
the Merger Consideration as provided in this
Article II.
(e) Any portion of the Exchange Fund that remains unclaimed
by the shareholders of the Company for twelve months after the
Effective Time shall be paid, at the request of Parent, to
Parent. Any shareholders of the Company who have not theretofore
complied with this Article II shall thereafter look
only to Parent for payment of the Merger Consideration and
unpaid dividends and distributions on the Parent Common Stock
deliverable in respect of each share of Company Common Stock
held by such shareholder at the Effective Time as determined
pursuant to this Agreement, in each case, without any interest
thereon. Notwithstanding anything to the contrary contained
herein, none of Parent, the Company, the Surviving Corporation,
the Exchange Agent or any other person shall be liable to any
former holder of shares of Company Common Stock for any amount
properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(f) In the event any Company Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such Company Certificate to be
lost, stolen or destroyed and, if required by Parent, the
posting by such person of a bond in such amount as Parent may
determine is reasonably necessary as indemnity against any claim
that may be made against it with respect to such Company
Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Company Certificate the Merger
Consideration deliverable in respect thereof pursuant to this
Agreement.
(g) Parent or the Exchange Agent will be entitled to deduct
and withhold from the consideration otherwise payable pursuant
to this Agreement to any holder of Company Common Stock such
amounts as Parent or the Exchange Agent is required to deduct
and withhold with respect to the making of such payment under
the Code, or any applicable provision of any other
U.S. federal, state, local or
non-U.S. tax
Law. To the extent that such amounts are properly withheld by
Parent or the Exchange Agent, such withheld amounts will be
treated for all purposes of this Agreement as having been paid
to the holder of Company Common Stock in respect of whom such
deduction and withholding were made by Parent or the Exchange
Agent.
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Section 2.9 Capital
Stock of Merger Sub. No shares of Merger Sub
stock will be issued directly or indirectly in the Merger. Each
share of Merger Sub issued and outstanding immediately prior to
the Effective Time shall be converted into and become one fully
paid and nonassessable share of common stock, no par value per
share of the Surviving Corporation.
Section 2.10 Payment
of Investment Banking Fee. Immediately
subsequent to the Effective Time, Parent will, on behalf of
Company, pay the Companys investment banking fee incurred
to the Company Advisor in connection with the Merger and the
Company Financing by issuing to the Company Advisor (a) the
Company Advisor Parent Common Stock, and (b) the Company
Advisor Warrants. Such payment will be conditioned upon the
Company Advisor signing mutually agreeable documentation
confirming that such payment satisfies all obligations of Parent
and Company to said firm arising out of the Merger and the
Company Financing and making appropriate and customary private
placement representations to Parent.
ARTICLE III
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedule delivered by the
Company to Parent dated as of the date hereof (the
Company Disclosure Schedule), which Company
Disclosure Schedule identifies the Section (or, if applicable,
subsection) to which such exception relates (provided that any
disclosure in the Company Disclosure Schedule relating to one
section or subsection shall also apply to other sections and
subsections to the extent that it is reasonably apparent that
such disclosure would also apply to or qualify such other
sections or subsections), the Company represents and warrants to
Parent and Merger Sub as follows:
Section 3.1 Organization. The
Company (i) is a corporation duly incorporated and validly
existing and in good standing under the Laws of the State of
California, (ii) has all corporate power and authority to
own, lease and operate its properties and assets and to carry on
its business as currently conducted and (iii) is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the
property owned, leased or operated by it or the nature of its
activities makes such qualification necessary, except where the
failure to be so qualified has not had, and would not be
reasonably likely to have, individually or in the aggregate, a
Company Material Adverse Effect. The Company has made available
to Parent complete and correct copies of its articles of
incorporation and by-laws and all the amendments thereto, as
currently in effect.
Section 3.2 Capitalization.
(a) The authorized capital stock of the Company consists of
148,500,000 shares of Company Common Stock. As of
April 30, 2010, (i) 69,761,902 shares of Company
Common Stock were issued and outstanding,
(ii) 4,196,027 shares of Company Common Stock were
reserved for issuance pursuant to outstanding Company Stock
Options, (iii) 60,000 shares of Company Common Stock
were issued and outstanding pursuant to restricted stock awards
under the 2006 Plan, (iv) an additional
1,752,373 shares of Company Common Stock were reserved for
issuance under the Company Stock Plans,
(v) 4,405,615 shares of Company Common Stock were
reserved for issuance pursuant to outstanding warrants, and
(vi) 0 shares of Company Common Stock were reserved
for issuance in connection with the Company Financing. No shares
of capital stock of the Company are owned by any Subsidiary of
the Company. All of the outstanding shares of capital stock of
the Company have been duly authorized and validly issued and are
fully paid and nonassessable and free of preemptive and similar
rights. Except as set forth above, there are no outstanding
(i) shares of capital stock, debt securities or other
voting securities of or ownership interests in the Company,
(ii) securities of the Company or any of its Subsidiaries
convertible into or exchangeable for shares of capital stock,
debt securities or voting securities of or ownership interests
in the Company, (iii) subscriptions, calls, Contracts,
commitments, understandings, restrictions, arrangements, rights,
warrants, options or other rights to acquire from the Company or
any Subsidiary of the Company, or obligations of the Company or
any Subsidiary of the Company to issue, any capital stock, debt
securities, voting securities or other ownership interests in,
or any securities convertible into or exchangeable or
exercisable for any capital stock, voting securities, debt
securities or ownership interests in, the Company, or
obligations of the Company or any Subsidiary of the Company to
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grant, extend or enter into any such agreement or commitment or
(iv) obligations of the Company or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any outstanding
securities of the Company, or to vote or to dispose of any
shares of capital stock of the Company.
(b) There are no voting trusts or other agreements or
understandings to which the Company or any of its Subsidiaries
is a party with respect to the voting of the shares of any
capital stock of the Company or any of its Subsidiaries. No
agreement or other document grants or imposes on any shares of
the capital stock of the Company any right, preference,
privilege or transfer restrictions with respect to the
transactions contemplated by this Agreement (including any
rights of first refusal).
Section 3.3 Subsidiaries.
(a) Each Subsidiary of the Company is a corporation duly
incorporated or an entity duly organized and is validly existing
and in good standing under the Laws of its jurisdiction of
incorporation or organization, has all corporate or other power
and authority to own, lease and operate its properties and
assets and to carry on its business as now conducted and is duly
qualified to do business and is in good standing in each
jurisdiction where the character of the property owned, leased
or operated by it or the nature of its activities makes such
qualification or licensing necessary, except where the failure
to be so qualified or licensed would not be reasonably likely to
have, individually or in the aggregate, a Company Material
Adverse Effect. The Company has made available to Parent
complete and correct copies of the certificate of incorporation
and by-laws (or similar organizational documents) of each
Subsidiary, and all amendments thereto, as currently in effect.
(b) All of the outstanding shares of capital stock of, or
other ownership interests in, each Subsidiary of the Company
have been duly authorized, validly issued and are fully paid and
nonassessable and free of preemptive or similar rights. Except
as set forth in Section 3.3(b) of the Company
Disclosure Schedule, all of the outstanding capital stock or
securities of, or other ownership interests in, each of the
Subsidiaries of the Company, is owned, directly or indirectly,
by the Company, and is owned free and clear of any Lien and free
of any other limitation or restriction (including any limitation
or restriction on the right to vote, sell, transfer or otherwise
dispose of the stock or other ownership interests). There are no
outstanding (i) shares of capital stock, debt securities or
voting securities or other ownership interests of any Subsidiary
of the Company, (ii) securities of the Company or any of
its Subsidiaries convertible into or exchangeable for shares of
capital stock, debt securities or voting securities or ownership
interests in any Subsidiary of the Company,
(iii) subscriptions, calls, Contracts, commitments,
understandings, restrictions, arrangements, rights, warrants,
options or other rights to acquire from the Company or any of
its Subsidiaries, or obligations of the Company or any of its
Subsidiaries to issue, any capital stock, debt securities,
voting securities or other ownership interests in, or any
securities convertible into or exchangeable or exercisable for
any capital stock, voting securities, debt securities or
ownership interests in, any Subsidiary of the Company, or
obligations of the Company or any of its Subsidiaries to grant,
extend or enter into any such agreement or commitment or
(iv) obligations of the Company or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any outstanding
securities or other ownership interests of any Subsidiary of the
Company, or to vote or to dispose of any shares of the capital
stock or other ownership interests of any Subsidiary of the
Company.
(c) Section 3.3(c) of the Company Disclosure
Schedule lists (i) each Subsidiary of the Company,
(ii) its jurisdiction of incorporation or organization and
(iii) the location of its principal executive office.
Except for the capital stock of its Subsidiaries and as set
forth on Section 3.3(c) of the Company Disclosure
Schedule, the Company does not own, directly or indirectly, any
capital stock or other ownership interest in any entity.
Section 3.4 Authority. The
Company has all requisite corporate power and authority to
execute and deliver this Agreement. The execution, delivery and
performance of this Agreement and the consummation by the
Company of the Merger and the other transactions contemplated
hereby have been duly authorized by all necessary corporate
action on the part of the Company and no other corporate
proceedings on the part of the Company are necessary to
authorize this Agreement or to consummate such transactions,
other than, with respect to the Merger, the approval of the
principal terms of this Agreement and the Merger by the holders
of a majority of the outstanding shares of Company Common Stock
(the Company Shareholder Approval). This
Agreement has been duly executed and delivered by the Company
and, assuming the due authorization, execution and delivery by
Parent and Merger Sub, constitutes a valid and binding
obligation of the Company,
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enforceable against the Company in accordance with its terms,
subject to bankruptcy, insolvency, reorganization, moratorium
and similar Laws of general applicability relating to or
affecting creditors rights and to general equity
principles (the Bankruptcy and Equity
Exception).
Section 3.5 Consents
and Approvals; No Violations.
(a) The execution and delivery by the Company of this
Agreement do not, the execution and delivery by the Company of
any instrument required hereby to be executed and delivered at
the Closing will not, and the performance of the agreements of,
and obligations under, this Agreement by the Company will not,
require any consent, approval, order, license, authorization,
registration, declaration or permit of, or filing with or
notification to, any Governmental Entity, except (i) such
clearances, consents, approvals, orders, licenses,
authorizations, registrations, declarations, permits, filings
and notifications as may be required under applicable
U.S. federal and state or foreign securities Laws,
(ii) the filing of the Certificate of Merger or other
documents as required by the CGCL, (iii) any filings or
notices required under the rules and regulations of the AIM, and
(iv) such other consents, approvals, orders, registrations,
declarations, permits, filings or notifications that, if not
obtained or made, would not be reasonably likely to have a
Company Material Adverse Effect.
(b) Subject to the approval of the principal terms of this
Agreement and the Merger by the holders of a majority of the
outstanding shares of Company Common Stock, and except as set
forth in Section 3.5(b) of the Company Disclosure
Schedule, the execution and delivery by the Company of this
Agreement do not, the execution and delivery by the Company of
any instrument required hereby to be executed and delivered by
the Company at the Closing will not, and the performance by the
Company of its agreements and obligations under this Agreement
will not, (i) conflict with or result in any breach of any
provision of the articles of incorporation or by-laws of the
Company or any similar organizational documents of any of its
Subsidiaries, (ii) violate, conflict with, require consent
pursuant to, result in a breach of, constitute a default (with
or without due notice or lapse of time or both) under, or give
rise to a right of, or result in, the termination, cancellation,
modification, acceleration or the loss of a benefit under, or
result in the creation of any Lien upon any of the properties or
assets of the Company or any of its Subsidiaries under, any of
the terms, conditions or provisions of any agreement,
understanding, contract, note, bond, deed, mortgage, lease,
sublease, license, sublicense, instrument, undertaking or other
binding obligation, whether written or oral (a
Contract), to which the Company or any of its
Subsidiaries is a party or by which any of its properties or
assets may be bound or (iii) violate any Law applicable to
the Company, any of its Subsidiaries or any of their properties
or assets, except, in the case of clauses (ii) and
(iii) above, for any violation, conflict, consent, breach,
default, termination, cancellation, modification, acceleration,
loss or creation that would not be reasonably likely to have,
either individually or in the aggregate, a Company Material
Adverse Effect.
Section 3.6 Books
and Records. The Companys and its
Subsidiaries books, accounts and records are, and have
been, in all material respects, maintained in the Companys
and its Subsidiaries usual, regular and ordinary manner,
in accordance with accounting principles generally accepted in
the United States (US GAAP), as applicable,
and all material transactions to which the Company or any of its
Subsidiaries is or has been a party are properly reflected
therein.
Section 3.7 AIM-Related
Matters; Financial Statements.
(a) The Company has complied in all material respects with
the requirements of the AIM Rules for Companies as promulgated
by the London Stock Exchange plc from time to time relating to
notification (as such term is referred to therein). Complete
copies of all notifications made by the Company since the
admission of its shares to trading on AIM together with its
annual report and accounts published since such date
(collectively, the Companys AIM
Reports) are available on the Companys website
or have been provided to Parent. Except as is set forth in the
Companys AIM Reports or Section 3.7(a) of the
Company Disclosure Schedule, the Company does not have knowledge
of any current fact that has specific application to the Company
(other than general economic or industry conditions) and that
may materially and adversely affect the assets, business,
financial condition or results of operations of the Company.
(b) The Company has delivered to Parent true and complete
copies of the following financial statements and related
materials, which are attached as Section 3.7(b) of
the Company Disclosure Schedule audited
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consolidated balance sheets of the Company and its Subsidiaries
as of December 31, 2009 and December 31, 2008 and the
related audited consolidated statements of income,
shareholders equity and cash flows for the years ended
December 31, 2009 and December 31, 2008, together with
all related notes and schedules thereto (collectively, the
Company Financial Statements), accompanied by
the reports thereon of the Company by KPMG LLP. The Company has
delivered or made available to Parent true and complete copies
of all management letters and other correspondence received from
the Companys independent auditors since January 1,
2008 relating to the foregoing financial statements, accounting
controls of the Company and all related matters. The
consolidated balance sheet of the Company and its Subsidiaries
as of December 31, 2009, together with all related notes
and schedules thereto, is herein referred to as the
Company Balance Sheet. Each of the Company
Financial Statements (x) is accurate, complete and
consistent with the books and records of the Company and its
Subsidiaries for the time therein presented; (y) has been
prepared in conformity with US GAAP on a basis consistent with
prior accounting periods; and (z) fairly presents the
consolidated financial position, results of operations and
changes in financial position of the Company and its
Subsidiaries as of the dates and for the periods indicated
therein.
(c) Neither the Company nor any of its Subsidiaries has any
liabilities or obligations of any nature (accrued, absolute,
contingent or otherwise), whether known or unknown, except for
any liabilities or obligations (i) that are fully reflected
or reserved against in the Company Balance Sheet, or are not
otherwise required to be reflected or reserved against in the
Company Balance Sheet under US GAAP, (ii) that will be
transaction expenses, or (iii) that are or were incurred
since the date of the Company Balance Sheet in the ordinary
course of business and consistent with past practice, that were
for capital expenditures and are set forth in
Section 3.7(c) of the Company Disclosure Schedule or
that otherwise do not exceed $50,000 individually or $100,000 in
the aggregate. Except as disclosed in the Company Financial
Statements, neither the Company nor any of its Subsidiaries
is a guarantor, indemnitor, surety or other obligor of any
indebtedness of any other Person. Section 3.7(c) of
the Company Disclosure Schedule sets forth (i) all
indebtedness and other similar obligations to the Company or its
Subsidiaries of the shareholders, directors, officers or
employees of each of the Company and its Subsidiaries, or any of
their respective Affiliates, together with all amounts owed by
such Persons in respect thereof; and (ii) all outstanding
liabilities of each of the Company and its Subsidiaries with
respect to any of their current or former shareholders,
directors, officers, employees or consultants, or any of their
respective Affiliates (other than ordinary course liabilities
relating to salary and compensation for the current pay period,
reimbursement of travel expenses, and director and officer
indemnity agreements otherwise made available to Parent).
(d) Section 3.7(d) of the Company Disclosure
Schedule sets forth all outstanding Debt as of the date of this
Agreement, in the aggregate and with respect to each Person
entitled to payment of a portion of such Debt (with reference to
the Contract pursuant to which such Debt is owed).
(e) Except as set forth in Section 3.7(e) of
the Company Disclosure Schedule, the Company and its
Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with
managements general or specific authorization;
(ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with US GAAP
and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with managements
general or specific authorization; (iv) the recorded
accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with
respect to any differences; and (v) the Companys and
its Subsidiaries obligations are satisfied in a timely
manner and as required under the terms of any Contract. The
Company has no unremedied significant deficiencies or material
weaknesses in the design or operation of internal control
over financial reporting (as defined in
Rule 13a-15(f)
of the Exchange Act). Except as otherwise disclosed in the
Company Financial Statements or as required by US GAAP,
the Company has not made any material change in any method of
accounting, accounting practice or policy or any internal
control over financial reporting since January 1, 2008.
(f) Neither the Company nor any of its Subsidiaries has
identified any incident of fraud since July 1, 2008 that
involves any current or former directors, officers or employees
of the Company who have a role in the preparation of financial
statements or the internal accounting controls utilized by the
Company and its Subsidiaries.
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(g) Section 3.7(g) of the Company Disclosure
Schedule lists all services currently being performed, or that
have been performed within the last three fiscal years, by KPMG
LLP for the Company and any persons currently employed by the
Company in any accounting or finance function or position that
were employed by KPMG LLP during the previous three fiscal years.
(h) The Company has delivered to Parent complete and
accurate copies of notices received from its independent auditor
of any significant deficiencies or material weaknesses in the
Companys internal control over financial reporting since
January 1, 2008 and any other management letter or similar
correspondence from any independent auditor of the Company or
any of its Subsidiaries received since January 1, 2008.
Section 3.8 Absence
of Company Material Adverse Effect. Since
January 1, 2010 through the date hereof, there have not
been any events that have had, or are reasonably likely to have,
individually or in the aggregate, a Company Material Adverse
Effect.
Section 3.9 Employees;
Employee Benefit Plans.
(a) Each (i) employee benefit plan (within
the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended
(ERISA), including multiemployer plans within
the meaning of ERISA Section 3(37)) (an ERISA
Employee Benefit Plan) and (ii) stock purchase,
stock incentive, severance, employment, loan,
change-in-control,
fringe benefit, collective bargaining, bonus, incentive,
deferred compensation and all other employee benefit plans,
agreements, programs, policies or other arrangements, whether
written or not, whether or not subject to ERISA (including any
funding mechanism therefor now in effect or required in the
future as a result of the transactions contemplated by this
Agreement or otherwise) under which, in either case of
clause (i) or (ii), (x) any current or former
employee, officer, director, consultant or independent
contractor of the Company or any of its Subsidiaries
(Company Employees) has any present or future
right to benefits and that are, or within the past eighteen
(18) months have been, contributed to, sponsored by or
maintained by the Company or any of its Subsidiaries or
(y) under which the Company or any of its ERISA Affiliates
has any present or future liability shall be collectively
referred to as the Company Plans.
Section 3.9(a) of the Company Disclosure
Schedule contains a true and complete list of all Company Plans,
other than those Company Plans that are for the benefit of only
one individual (e.g., individuals employment
agreements).
(b) With respect to each material Company Plan, the Company
has delivered to Parent a current, accurate and complete copy
thereof and, to the extent applicable: (i) any related
trust agreement or other funding instrument; and (ii) the
most recent determination letter, if applicable.
(c) Except as has not had and would not reasonably be
expected to have, individually or in the aggregate, a Company
Material Adverse Effect, (i) each Company Plan has been
established and administered in all respects in accordance with
its terms, and in all respects in compliance with the applicable
provisions of ERISA, the Code and other applicable Laws;
(ii) no prohibited transaction (as such term is
defined in Section 406 of ERISA and Section 4975 of
the Code) has occurred with respect to any Company Plan; and
(iii) each nonqualified deferred compensation
plan (as defined in Section 409A(d)(1) of the Code)
has been operated in good faith compliance with
Section 409A of the Code and the guidance promulgated
thereunder by the Department of Treasury.
(d) Each Company Plan that is intended to be qualified
within the meaning of Section 401(a) of the Code has
received a favorable determination letter or opinion letter as
to its qualification, and nothing has occurred, whether by
action or failure to act, that could reasonably be expected to
cause the loss of such qualification.
(e) No Company Plan is a multiemployer plan (within the
meaning of Section 4001(a)(3) of ERISA), and no Company
Plan is subject to Title IV of ERISA.
(f) With respect to any Company Plan, except as has not had
and would not reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect, (i) no
actions, suits or claims (other than routine claims for benefits
in the ordinary course) are pending or, to the knowledge of the
Company, threatened, and (ii) no administrative
investigation, audit or other administrative proceeding by the
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Department of Labor, the Department of Treasury, the Internal
Revenue Service or other governmental agencies are pending or,
to the knowledge of the Company, threatened.
(g) Except as set forth in Section 3.9(g) of
the Company Disclosure Schedule, no material Company Plan exists
that would reasonably be expected to (i) result in the
payment to any present or former Company Employee of any money
or other property, (ii) accelerate or provide any other
rights or benefits to any present or former Company Employee or
(iii) require the funding of any trust for the benefit of
any present or former Company Employee, in each case as a result
of the transactions contemplated by this Agreement (whether
alone or in connection with any subsequent event(s)). There is
no Company Plan that, individually or collectively, would
reasonably be expected to give, or that has given, rise to the
payment of any amount that would not be deductible pursuant to
the terms of Section 280G in connection with the
transactions contemplated under this Agreement.
(h) No communication, disclosure or representation has been
made to any current or former employee of the Company (or any
beneficiary or dependent thereof) that, at the time made, did
not accurately reflect the material terms and operations of any
material Company Plan.
(i) With respect to each material Company Plan, all
required, declared or discretionary (in accordance with
historical practices) payments, premiums, contributions,
reimbursements or accruals for all periods ending prior to or as
of the Closing Date have been made or properly accrued on the
Company Balance Sheet or with respect to accruals properly made
after the date of the Company Balance Sheet, on the books and
records of the Company
and/or its
Subsidiaries. Except as set forth in Section 3.9(i)
of the Company Disclosure Schedule, there is no material
unfunded Liability relating to any Company Plan that is not
reflected on the Company Balance Sheet or with respect to
accruals properly made after the date of the Company Balance
Sheet, on the books and records of the Company
and/or its
Subsidiaries.
(j) For purposes of this Agreement, ERISA
Affiliate means any (if any) corporation, trade or
business (whether or not incorporated) that is under common
control with the Company or Parent, as applicable, pursuant to
section 414(b) and (c) of the Code.
Section 3.10 Labor
Matters. Except as set forth in
Section 3.10 of the Company Disclosure Schedule,
neither the Company nor any of its Subsidiaries is a party to or
is bound by or is currently negotiating any collective
bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization. Neither
the Company nor any of its Subsidiaries is the subject of a
proceeding asserting that it or any such Subsidiary has
committed an unfair labor practice (within the meaning of the
National Labor Relations Act) or seeking to compel the Company
or any such Subsidiary to bargain with any labor organization as
to wages or conditions of employment, nor, to the Companys
knowledge, is any such proceeding threatened, and there is no
strike or other material labor dispute or disputes involving it
or any of its Subsidiaries pending, or to the Companys
knowledge, threatened. To the knowledge of the Company, there is
no activity involving its or any of its Subsidiaries
employees involving an attempt to certify a collective
bargaining unit or other organizational activity. No material
action, suit, arbitration, proceeding or, to the Companys
knowledge, claim or investigation by or before any court,
governmental agency, administrative agency or commission brought
by or on behalf of any employee, prospective employee, former
employee, retiree, labor organization or other representative of
the Company or any of its Subsidiaries employees is
pending or, to the knowledge of the Company, threatened. The
Company and its Subsidiaries are in material compliance with all
applicable laws, agreements, contracts, and policies relating to
employment, employment practices, wages, hours, and terms and
conditions of employment, and each individual who is treated by
the Company or its Subsidiaries as an exempt employee under any
federal or state law, or as an independent contractor, is
properly so treated under applicable law. As of the date hereof,
neither the Company nor any of its Subsidiaries have closed any
plant or facility or effectuated any layoffs of employees, nor
has any such action or program been announced for the future,
that would reasonably be expected to give rise to any material
liability under the Worker Adjustment and Retraining
Notification Act or any similar state or local law or regulation.
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Section 3.11 Contracts.
(a) Section 3.11(a) of the Company Disclosure
Schedule contains a complete and accurate list of (each, a
Company Material Contract) (i) all
Contracts (other than vendor agreements and purchase orders with
vendors entered into in the ordinary course of business) to
which the Company or any of its Subsidiaries is currently a
party or by which the Company or any of its Subsidiaries is
currently bound providing for potential payments by or to the
Company or any of its Subsidiaries in excess of $150,000 per
annum, (ii) each Contract relating to Debt of the Company
or its Subsidiaries with a principal amount in excess of
$75,000, and (iii) all other Contracts that are material to
the Company.
(b) All Contracts to which the Company or any of its
Subsidiaries is a party are valid, binding and enforceable in
accordance with their terms against the Company or its
Subsidiaries, as the case may be, and each other party thereto
and are in full force and effect (subject only to the effect, if
any, of applicable bankruptcy and other similar laws affecting
the rights of creditors generally and rules of law governing
specific performance, injunctive relief and other equitable
remedies). The Company or its Subsidiaries, as the case may be,
has performed all obligations required to have been performed by
it under all Company Material Contracts, and neither the
Company, its Subsidiaries, nor to the Knowledge of the Company,
any other party thereto is in breach or violation of, or default
under (including any such breach, violation or default caused by
a violation of a noncompetition, nonsolicitation or exclusivity
provision contained therein), nor is there any event that with
notice or lapse of time, or both, would constitute a breach,
violation or default by the Company, its Subsidiaries, or any
other party thereunder, nor has the Company or any of its
Subsidiaries received any claim of any such breach, violation or
default. There is not now and has not been within the past
24 months any disagreement or dispute with any other party
to any Company Material Contract, nor is there any pending
request or process for renegotiation of any Company Material
Contract. Further, there is not now and has not been within the
past 24 months any disagreement or dispute of any nature
whatsoever with any other party to any Contract having or
reasonably likely to have a Company Material Adverse Effect.
True and complete copies of each such written Company Material
Contract (or written summaries of the terms of any such oral
Company Material Contract) have been delivered or been made
available to Parent. The Company has no reason to believe that
any obligation that remains under any Company Material Contract
cannot be fulfilled by the Company or its Subsidiaries, as the
case may be, and has no notice or Knowledge that any party to a
Company Material Contract listed on Section 3.11(a)
of the Company Disclosure Schedule intends to cancel, terminate,
refuse to perform or refuse to renew such Company Material
Contract (if such Company Material Contract is renewable).
(c) Except for the Company Material Contracts listed in
Section 3.11(a) of the Company Disclosure Schedule,
neither the Company nor any of its Subsidiaries has any other
Contract:
(i) with a remaining term of greater than one year from the
date of this Agreement (which, for purposes of clarity, shall be
determined based on the term of the primary subject matter of
such Contract, and not incidental obligations such as
non-disclosure, post-termination indemnity, etc.) that cannot be
canceled by the Company or its Subsidiaries, as the case may be,
with no more than 60 days notice without liability,
penalty or premium (other than non-disclosure agreements);
(ii) with a noncompetition, nonsolicitation,
most-favored-nations pricing or exclusivity
agreement or other arrangement that would prevent, restrict or
limit in any way the Company from carrying on its business in
any manner or in any geographic location, other than
restrictions in Intellectual Property Agreements;
(iii) for a joint venture or any other similar arrangement
that involves a sharing of profits or revenue with other Persons
or that provides for the payment of referral fees or bounties;
(iv) relating to any interest rate, currency or commodity
derivatives or hedging transaction;
(v) with any Governmental Entity;
(vi) in which the Company or any of its Subsidiaries agrees
to provide indemnification that may result in liability in
excess of $100,000; and
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(vii) except as set forth in Section 3.11(c) of
the Company Disclosure Schedule, granting a power of attorney,
agency or similar authority to another Person.
Section 3.12 Litigation. Except
as set forth in Section 3.12 of the Company
Disclosure Schedule, there is no suit, claim, action,
proceeding, arbitration or investigation pending before any
Governmental Entity or, to the Companys Knowledge,
threatened within the three year period prior to the date hereof
against the Company or any of its Subsidiaries or their
respective assets or properties. Neither the Company nor any of
its Subsidiaries is subject to any outstanding Order or Orders.
There is no suit, claim, action, proceeding, arbitration or
investigation pending or, to the Companys Knowledge,
threatened against the Company or any of its Subsidiaries, that
seeks to, or could reasonably be expected to, restrain, enjoin
or delay the consummation of the Merger or any of the other
transactions contemplated hereby or that seeks damages in
connection therewith, and no injunction of any type has been
entered or issued.
Section 3.13 Compliance
with Laws.
(a) The Company and each of its Subsidiaries is and has
been in compliance with all federal, state, local and foreign
laws, rules, regulations, ordinances, decrees and orders
applicable to it, to its business, operations and employees, or
to the Real Property and the Personal Property (including laws
prohibiting false, fraudulent, deceptive or misleading
advertising or trade practices). Neither the Company nor any of
its Subsidiaries has received any notification, nor does the
Company have any Knowledge of, any asserted present or past
unremedied failure by the Company or its Subsidiaries to comply
with any of such laws, rules, regulations, ordinances, decrees
or orders.
(b) The matters covered in Section 3.15
regarding Environmental Matters are specifically addressed in
that section and, notwithstanding anything to the contrary set
forth herein, are not covered by the representations made in the
foregoing paragraph (a).
Section 3.14 Taxes
and Tax Returns.
(a) The Company and each of its Subsidiaries has timely
filed (or has had timely filed on its behalf) with all
appropriate Tax Authorities all material Tax Returns required to
be filed by the Company and each of its Subsidiaries, and such
Tax Returns are true, correct, and complete in all material
respects.
(b) All material Taxes for which the Company or any of its
Subsidiaries is liable in respect of taxable periods (or
portions thereof) ending on or before the Closing Date have been
timely paid, or in the case of Taxes not yet due and payable, an
adequate accrual in accordance with US GAAP for the payment of
all such Taxes (exclusive of deferred tax assets and deferred
tax liabilities or similar items that reflect timing differences
between tax and financial accounting principles) has been
established on the Company Financial Statements. All
liabilities for Taxes attributable to the period commencing on
January 1, 2010 were incurred in the ordinary course of
business.
(c) There are no liens for Taxes upon any property or
assets of the Company or any of its Subsidiaries, except for
liens for real and personal property Taxes not yet due and
payable.
(d) Except as set forth in Section 3.14(d) of
the Company Disclosure Schedule, no Federal, state, local or
foreign Audits are presently pending with regard to any Taxes or
Tax Returns of the Company and its Subsidiaries and to the
Knowledge of the Company, no such Audit is threatened.
(e) There are no outstanding requests, agreements, consents
or waivers to extend the statutory period of limitations
applicable to the assessment of any material Taxes or
deficiencies against the Company or any of its Subsidiaries, and
no power of attorney granted by the Company or any of its
Subsidiaries with respect to any Taxes is currently in force.
(f) Neither the Company nor any of its Subsidiaries is a
party to any agreement providing for the allocation,
indemnification, or sharing of material Taxes other than any
such agreement to which the Company or any of its Subsidiaries
and Parent or any of its Subsidiaries are the exclusive parties.
(g) Neither the Company nor any of its Subsidiaries has
(i) been a member of an affiliated group (within the
meaning of Section 1504 of the Code) or an affiliated,
combined, consolidated, unitary, or similar group
A-20
for state, local or foreign Tax purposes, other than the group
of which the Company is the common parent or (ii) any
liability for or in respect of the Taxes of, or determined by
reference to the Tax liability of, another Person (other than
the Company or any of its Subsidiaries) under Treasury
Regulation Section 1.1502-6
(or any similar provision of state, local or foreign Law), as a
transferee or successor, by Contract or otherwise.
(h) Neither the Company nor any of its Subsidiaries has
constituted either a distributing corporation or a
controlled corporation in a distribution of stock
qualifying for tax-free treatment under Section 355 of the
Code (x) in the two (2) years prior to the date of
this Agreement or (y) in a distribution that could
otherwise constitute part of a plan or series
of related transactions (within the meaning of
Section 355(e) of the Code) in conjunction with the Merger.
(i) Neither the Company nor any of its Subsidiaries has
agreed or is required to include in income any material
adjustment under either Section 481(a) or Section 482
of the Code (or an analogous provision of state, local or
foreign Law) by reason of a change in accounting method or
otherwise.
(j) Neither the Company nor any of its Subsidiaries has
participated in any listed transaction within the
meaning of Treasury
Regulation Section 16011-4.
Section 3.15 Environmental
Matters.
(a) The Company and each of its Subsidiaries is in
compliance, in all material respects, with all Environmental
Laws, which compliance includes the possession by the Company
and each of its Subsidiaries of all permits and other
governmental authorizations required under any Environmental
Laws and compliance with the terms and conditions thereof.
Neither the Company nor any of its Subsidiaries has received any
communication, whether from a governmental authority, citizens
group, employee or otherwise, that alleges that the Company or
any of its Subsidiaries is not in such compliance, in all
material respects, with any Environmental Laws, and, to the
Companys Knowledge, there are no circumstances that could
reasonably be expected to prevent or interfere with such
compliance in the future.
(b) There is no material Environmental Claim pending or
threatened against the Company or any of its Subsidiaries or
against any person or entity whose liability for any
Environmental Claim either the Company or any of its
Subsidiaries has retained or assumed either contractually or by
operation of law.
(c) Except as would not be reasonably likely to result,
either individually or in the aggregate, in a Company Material
Adverse Effect, there are no past or present actions,
activities, circumstances, conditions, events or incidents,
including the Release or threatened Release of any Material of
Environmental Concern, that could reasonably be expected to form
the basis of any Environmental Claim against the Company or any
of its Subsidiaries or against any person or entity whose
liability for any Environmental Claim the Company or any of its
Subsidiaries has retained or assumed either contractually or by
operation of law.
(d) The Company has made available to Parent and Merger Sub
all material environmental assessments, reports, data, results
of investigations, audits and other material documents in the
possession or control of the Company or any of its Subsidiaries
regarding environmental matters pertaining to the environmental
condition of any real properties owned or operated by the
Company or any of its Subsidiaries, any Environmental Claims
respecting the Company or any of its Subsidiaries, or the
noncompliance by the Company or any of its Subsidiaries with any
Environmental Laws.
(e) To the Knowledge of the Company, neither the Company
nor any of its Subsidiaries is required by virtue of the
transactions contemplated hereby, or as a condition to the
effectiveness of any transactions contemplated hereby, to
perform a site assessment for Materials of Environmental Concern.
Section 3.16 State
Takeover Statutes. No fair price,
business combination, moratorium,
control share acquisition or other similar
antitakeover statute is applicable to the Merger, except for
such statutes or regulations as to which all necessary action
has been taken by the Company and its board of directors, to
permit the consummation of the Merger in accordance with the
terms hereof.
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Section 3.17 Intellectual
Property.
(a) To the Companys Knowledge, the Company owns or
has the right to use all Intellectual Property that is necessary
for the conduct of the business of the Company and its
Subsidiaries as currently conducted, except where the failure of
the foregoing to be true and correct would not reasonably be
expected to have, individually or in the aggregate, a Company
Material Adverse Effect. Section 3.17(a) of the
Company Disclosure Schedule contains a true and complete list of
all patents and registered trademarks of the Company.
(b) Except as would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse
Effect, all registrations of Owned Company IP are currently in
good standing.
(c) To the Companys Knowledge, the Companys and
its Subsidiaries title in all Owned Company IP is valid,
subsisting and enforceable, except where the failure to be so
valid, subsisting and enforceable would not reasonably be
expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
(d) The Company or one of its Subsidiaries owns all right,
title and interest in each item of Owned Company IP, free and
clear of all Encumbrances other than Permitted Encumbrances. No
additional material license fees in respect of any Owned Company
IP that is owned by any Person jointly with the Company or its
Subsidiaries will be payable the Company or any of its
Subsidiaries following the Closing to any such Person for the
use or exploitation of such Owned Company IP as a result of the
transactions contemplated by the Agreement.
(e) The Company and each of its Subsidiaries has taken all
commercially reasonable steps to protect and preserve the
secrecy and confidentiality of all Trade Secrets that are
included in the Owned Company IP, except where the failure to
take such actions would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse
Effect.
(f) To the Knowledge of the Company, as of the date hereof,
no Person or any of such Persons products or services,
Intellectual Property or other operation of such Persons
business is infringing upon, violating or misappropriating any
Owned Company IP, except where any such infringement,
misappropriation or violation would not reasonably be expected
to have, individually or in the aggregate, a Company Material
Adverse Effect.
(g) As of the date hereof, there is no Action pending or,
to the Knowledge of the Company, threatened with respect to:
(i) any alleged infringement, misappropriation or violation
of the Intellectual Property of any Person by the Company or any
of its Subsidiaries or any of its or their current products or
services; (ii) any claim challenging the validity or
enforceability of any Owned Company IP, or the ownership by the
Company or the respective Subsidiary of such Owned Company IP;
or (iii) any claim contesting the Companys or any of
its Subsidiaries rights with respect to any Licensed
Company IP, except in the case of clauses (i), (ii) and
(iii), for any of the foregoing, that would not reasonably be
expected to have, individually or in the aggregate, a Company
Material Adverse Effect. As of the date of this Agreement, the
Company and its Subsidiaries are not subject to any order,
judgment or decree that restricts or impairs the use of any
Company IP, except (x) for any such order, judgment or
decree that is generally applicable to Persons engaged in the
businesses engaged in by the Company and its Subsidiaries or
(y) where compliance with such order, judgment or decree
would not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
Section 3.18 Absence
of Indemnifiable Claims, etc. There are no
pending claims and, to the Companys Knowledge, no facts
that would reasonably entitle any director or officer of the
Company or its Subsidiaries to indemnification by the Company or
its Subsidiaries under applicable Law, the articles of
incorporation or by-laws of the Company or its Subsidiaries, any
insurance policy maintained by the Company or its Subsidiaries
or any indemnity agreements of the Company or similar agreements
to which the Company or any of its Subsidiaries is a party or by
which any of its properties or assets is or may be bound.
Section 3.19 Insurance. Complete
and accurate copies of all insurance policies maintained by the
Company or any Subsidiary of the Company or that pertain to the
Companys or any of its Subsidiaries assets,
employees or operations have previously been made available to
Parent. Neither the Company nor any of its Subsidiaries has
taken any action or failed to take any action that (with or
without lapse of time or
A-22
notice or both) would constitute a material breach or default,
or permit termination or modification of any such insurance
policy. All such policies are in full force and effect, are
valid and enforceable, all premiums due thereunder have been
paid, and the Company and its Subsidiaries are in compliance in
all material respects with the terms and conditions of all such
policies. As of the date hereof, neither the Company nor any of
its Subsidiaries has received notice of cancellation, lapse or
invalidation of any such insurance policies, other than notices
received in connection with renewals in the ordinary course of
business.
Section 3.20 Title
to Property. Except as set forth on
Section 3.20 of the Company Disclosure Schedule, the
Company and its Subsidiaries do not currently own any real
property. Section 3.11(a) of the Company Disclosure
Schedule lists, among other Company Material Contracts, the
Companys material lease agreements for leased real
property. The Company or one of its Subsidiaries holds a valid
leasehold estate (either for a term or as a holdover) in each
material leased real property subject only to performance of the
terms of the applicable lease. Except as would not reasonably be
expected, individually or in the aggregate, to have a Company
Material Adverse Effect, each of the Company and its
Subsidiaries has (A) good and valid title to all of its
owned properties, assets and other rights that constitute
personal property free and clear of all Liens, and
(B) valid contractual rights to use all of the assets,
tangible and intangible, used by its business that the Company
does not own, in each case, such as are necessary to permit the
Company and its Subsidiaries to conduct their respective
businesses as currently conducted. This Section 3.20
does not relate to Company IP, which is the subject of
Section 3.17.
Section 3.21 Customers
and Suppliers. Neither the Company nor any of
its Subsidiaries has received any notice or otherwise has any
reason to believe that any of its ten largest customers or ten
largest suppliers intends, or is reasonably likely, to
terminate, reduce or materially modify its business with the
Company
and/or any
of its Subsidiaries. Neither the Company nor its Subsidiaries
has experienced and, to the Companys Knowledge, there does
not exist, any material quality control or similar problems with
any of the products
and/or
services currently being supplied to the Company or any of its
Subsidiaries by any of its ten largest suppliers.
Section 3.22 Opinion
of Financial Advisor. The Company has
received the opinion of Marshall & Stevens (the
Company Financial Advisor), dated
May , 2010, to the effect that, as of such, the
Merger Consideration is fair to the Companys shareholders
from a financial point of view.
Section 3.23 Board
Approval. The Board of Directors of the
Company, at a meeting duly called and held, has, by unanimous
vote of those directors present, (a) subject to the terms
of Section 6.12 hereof, determined that this
Agreement and the Merger and the other transactions contemplated
hereby and thereby are advisable, fair to and in the best
interests of the Company and its shareholders, (b) approved
this Agreement, and (c) subject to the terms of
Section 6.12 hereof, determined to recommend that
the principal terms of this Agreement and the Merger be approved
by the holders of Company Common Stock.
Section 3.24 Voting
Requirements. The affirmative vote of holders
of a majority of the outstanding Company Common Stock at the
Company Meeting or any adjournment or postponement thereof to
approve the principal terms of this Agreement and the Merger is
the only vote of the holders of any class or series of capital
stock of the Company necessary to adopt this Agreement and
approve the transactions contemplated hereby.
Section 3.25 Brokers
and Finders. No broker, investment banker,
financial advisor or other Person, other than the Company
Financial Advisor and Allen & Co., the fees and
expenses of which will be paid by the Company (as reflected in
an agreement between such firm and the Company, a copy of which
has been delivered to Parent), is entitled to any brokers,
finders, financial advisors or other similar fee or
commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of
the Company.
Section 3.26 Related
Party Transactions. Except as set forth in
Section 3.26 of the Company Disclosure Schedule, there are
no transactions with related persons that would be required to
be reported by the Company pursuant to Item 404 of
Regulation S-K
promulgated by the SEC.
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Section 3.27 Information
Supplied. None of the information supplied or
to be supplied by or on behalf of the Company or its
Subsidiaries specifically for inclusion or incorporation by
reference in the
Form S-4
to be filed with the SEC by Parent in connection with the
issuance of shares of Parent Common Stock in the Merger will, at
the time the
Form S-4
is filed with the SEC and at the time it becomes effective under
the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading.
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth in the disclosure schedule delivered by
Parent to Company dated as of the date hereof (the
Parent Disclosure Schedule), which Parent
Disclosure Schedule identifies the Section (or, if applicable,
subsection) to which such exception relates (provided that any
disclosure in Parent Disclosure Schedule relating to one section
or subsection shall also apply to other sections and subsections
to the extent that it is reasonably apparent that such
disclosure would also apply to or qualify such other sections or
subsections), Parent and Merger Sub represent and warrant to the
Company as follows:
Section 4.1 Organization. Each
of Parent and Merger Sub (i) is a corporation duly
incorporated and validly existing and in good standing under the
jurisdiction of its organization, (ii) has all corporate
power and authority to own, lease and operate its properties and
assets and to carry on its business as currently conducted and
(iii) is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where
the character of the property owned, leased or operated by it or
the nature of its activities makes such qualification necessary,
except where the failure to be so qualified has not had, and
would not be reasonably likely to have, individually or in the
aggregate, a Parent Material Adverse Effect. Parent has made
available to Company complete and correct copies of its
certificate of incorporation and by-laws and all the amendments
thereto, and the articles of incorporation and by-laws of Merger
Sub, each as currently in effect.
Section 4.2 Capitalization.
(a) The authorized capital stock of Parent consists of
12,000,000 shares of Parent Common Stock and
100,000 shares of preferred stock, $0.01 par value
(Parent Preferred Stock). As of
April 30, 2010, (i) 8,213,988 shares of Parent
Common Stock were issued and outstanding,
(ii) 768,744 shares of Parent Common Stock were
reserved for issuance pursuant to outstanding Parent Options,
(iii) 40,000 shares of Parent Common Stock were issued
and outstanding pursuant to restricted stock awards under the
Incentive Plan, (iv) an additional 441,316 shares of
Parent Common Stock were reserved for issuance under the
Incentive Plan, (v) 407,473 shares of Parent Common
Stock were reserved for issuance pursuant to outstanding
warrants, and as of May 11, 2010 (vi) an additional
838,926 shares of Parent Common Stock were reserved for
issuance at Closing pursuant to the Parent Financing,
(vii) an additional 1,000,000 shares of Parent Common
Stock were reserved for issuance pursuant to the Parent Warrants
to be issued at Closing pursuant to the Parent Financing,
(viii) an additional 2,958,650 shares of Parent Common
Stock were reserved for issuance pursuant to the Company
Warrants to be issued at Closing and 145,705 shares of
Parent Common Stock were reserved for issuance pursuant to
Company Warrants to be reserved at Closing for issuance upon
exercise of the Cycad Warrants, the SVB Warrants and the Capital
Works Warrants, and (ix) no shares of Parent Preferred
Stock were issued and outstanding. No shares of capital stock of
Parent are owned by any Subsidiary of Parent. All of the
outstanding shares of capital stock of Parent have been duly
authorized and validly issued and are fully paid and
nonassessable and free of preemptive and similar rights. Except
as set forth above, there are no outstanding (i) shares of
capital stock, debt securities or other voting securities of or
ownership interests in Parent, (ii) securities of Parent or
any of its Subsidiaries convertible into or exchangeable for
shares of capital stock, debt securities or voting securities of
or ownership interests in Parent, (iii) subscriptions,
calls, Contracts, commitments, understandings, restrictions,
arrangements, rights, warrants, options or other rights to
acquire from Parent or any Subsidiary of Parent, or obligations
of Parent or any Subsidiary of Parent to issue any capital
stock, debt securities, voting securities or other ownership
interests in, or any securities convertible into or exchangeable
or exercisable for any capital stock, voting securities, debt
securities or ownership interests in, Parent, or obligations of
Parent or any Subsidiary of Parent to grant, extend or enter
into any such
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agreement or commitment or (iv) obligations of Parent or
any of its Subsidiaries to repurchase, redeem or otherwise
acquire any outstanding securities of Parent, or to vote or to
dispose of any shares of capital stock of Parent.
(b) The authorized capital stock of Merger Sub is set forth
in Section 4.2(b) of the Parent Disclosure Schedule.
All of the issued and outstanding capital stock of Merger Sub
is, and at the Effective Time will be, owned by Parent. Merger
Sub has not conducted any business prior to the date of this
Agreement and has no, and prior to the Effective Time will have
no, assets, liabilities or obligations of any nature other than
those incident to its formation and pursuant to this Agreement
and the Merger and the other transactions contemplated by this
Agreement.
(c) There are no voting trusts or other agreements or
understandings to which Parent or any of its Subsidiaries is a
party with respect to the voting of the shares of any capital
stock of Parent or any of its Subsidiaries. No agreement or
other document grants or imposes on any shares of the capital
stock of Parent any right, preference, privilege or transfer
restrictions with respect to the transactions contemplated by
this Agreement (including any rights of first refusal).
Section 4.3 Subsidiaries.
(a) Each Subsidiary of Parent is a corporation duly
incorporated or an entity duly organized and is validly existing
and in good standing under the Laws of its jurisdiction of
incorporation or organization, has all corporate or other power
and authority to own, lease and operate its properties and
assets and to carry on its business as now conducted and is duly
qualified to do business and is in good standing in each
jurisdiction where the character of the property owned, leased
or operated by it or the nature of its activities makes such
qualification or licensing necessary, except where the failure
to be so qualified or licensed would not be reasonably likely to
have, individually or in the aggregate, a Parent Material
Adverse Effect. Parent has made available to Company complete
and correct copies of the certificate of incorporation and
by-laws (or similar organizational documents) of each
Subsidiary, and all amendments thereto, as currently in effect.
(b) All of the outstanding shares of capital stock of, or
other ownership interests in, each Subsidiary of Parent have
been duly authorized, validly issued and are fully paid and
nonassessable and free of preemptive or similar rights. All of
the outstanding capital stock or securities of, or other
ownership interests in, each of the Subsidiaries of Parent, is
owned, directly or indirectly, by Parent, and is owned free and
clear of any Lien and free of any other limitation or
restriction (including any limitation or restriction on the
right to vote, sell, transfer or otherwise dispose of the stock
or other ownership interests). There are no outstanding
(i) shares of capital stock, debt securities or voting
securities or other ownership interests of any Subsidiary of
Parent, (ii) securities of Parent or any of its
Subsidiaries convertible into or exchangeable for shares of
capital stock, debt securities or voting securities or ownership
interests in any Subsidiary of Parent, (iii) subscriptions,
calls, Contracts, commitments, understandings, restrictions,
arrangements, rights, warrants, options or other rights to
acquire from Parent or any of its Subsidiaries, or obligations
of Parent or any of its Subsidiaries to issue, any capital
stock, debt securities, voting securities or other ownership
interests in, or any securities convertible into or exchangeable
or exercisable for any capital stock, voting securities, debt
securities or ownership interests in, any Subsidiary of Parent,
or obligations of Parent or any of its Subsidiaries to grant,
extend or enter into any such agreement or commitment or
(iv) obligations of Parent or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any outstanding
securities or other ownership interests of any Subsidiary of
Parent, or to vote or to dispose of any shares of the capital
stock or other ownership interests of any Subsidiary of Parent.
(c) Section 4.3(c) of Parent Disclosure
Schedule lists (i) each Subsidiary of Parent, (ii) its
jurisdiction of incorporation or organization and (iii) the
location of its principal executive office. Except for the
capital stock of its Subsidiaries and as set forth on
Section 4.3(c) of Parent Disclosure Schedule, Parent
does not own, directly or indirectly, any capital stock or other
ownership interest in any entity.
Section 4.4 Authority. Each
of Parent and Merger Sub has all requisite corporate power and
authority to execute and deliver this Agreement. The execution,
delivery and performance of this Agreement and the consummation
by Parent and Merger Sub of the Merger and the other
transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of Parent and Merger
Sub and no other
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corporate proceedings on the part of Parent or Merger Sub are
necessary to authorize this Agreement or to consummate such
transactions, other than, (i) with respect to the Reverse
Stock Split, the approval of the amendment of Parents
certificate of incorporation by a majority of the outstanding
shares of Parent Common Stock and (ii) with respect to the
issuance of Parent Common Stock pursuant to the Merger, a
majority of the shares voting at a Parent Meeting, assuming that
a quorum is present. This Agreement has been duly executed and
delivered by Parent Merger Sub and, assuming the due
authorization, execution and delivery by Company, constitutes a
valid and binding obligation of Parent and Merger Sub,
enforceable against Parent and Merger Sub in accordance with its
terms, subject to the Bankruptcy and Equity Exception.
Section 4.5 Consents
and Approvals; No Violations.
(a) The execution and delivery by Parent and Merger Sub of
this Agreement do not, the execution and delivery by Parent or
Merger Sub of any instrument required hereby to be executed and
delivered at the Closing will not, and the performance of the
agreements of, and obligations under, this Agreement by Parent
or Merger Sub will not, require any consent, approval, order,
license, authorization, registration, declaration or permit of,
or filing with or notification to, any Governmental Entity,
except (i) the filing with the SEC of (A) the
Form S-4
in accordance with the Securities Act, (B) a proxy
statement relating to the approval by the stockholders of Parent
of the issuance of the Parent Common Stock in connection with
the Merger and the Reverse Stock Split and (C) such reports
under the Exchange Act as may be required in connection with
this Agreement and the transactions contemplated by this
Agreement, (ii) such clearances, consents, approvals,
orders, licenses, authorizations, registrations, declarations,
permits, filings and notifications as may be required under
applicable U.S. federal and state or foreign securities
Laws or blue sky Laws, (iii) the filing of the
Certificate of Merger and the filing of the Parent Certificate
or other documents as required by the CGCL and the DGCL
(iv) any listing applications, filings or notices required
under the rules and regulations of The NASDAQ Stock Market, and
(v) such other consents, approvals, orders, registrations,
declarations, permits, filings or notifications that, if not
obtained or made, would not be reasonably likely to have a
Parent Material Adverse Effect.
(b) Subject to the Parent Shareholder Approval, the
execution and delivery by Parent or Merger Sub of this Agreement
do not, the execution and delivery by Parent or Merger Sub of
any instrument required hereby to be executed and delivered by
Parent or Merger Sub at the Closing will not, and the
performance by each of Parent and Merger Sub of its agreements
and obligations under this Agreement will not, (i) conflict
with or result in any breach of any provision of the articles of
incorporation or by-laws of Parent or any similar organizational
documents of any of its Subsidiaries, (ii) violate,
conflict with, require consent pursuant to, result in a breach
of, constitute a default (with or without due notice or lapse of
time or both) under, or give rise to a right of, or result in,
the termination, cancellation, modification, acceleration or the
loss of a benefit under, or result in the creation of any Lien
upon any of the properties or assets of Parent or any of its
Subsidiaries under, any of the terms, conditions or provisions
of any Contract to which Parent or any of its Subsidiaries
is a party or by which any of its properties or assets may be
bound or (iii) violate any Law applicable to Parent, any of
its Subsidiaries or any of their properties or assets, except,
in the case of clauses (ii) and (iii)above, for any
violation, conflict, consent, breach, default, termination,
cancellation, modification, acceleration, loss or creation that
would not be reasonably likely to have, either individually or
in the aggregate, a Parent Material Adverse Effect.
Section 4.6 Books
and Records. Parents and its
Subsidiaries books, accounts and records are, and have
been, in all material respects, maintained in Parents and
its Subsidiaries usual, regular and ordinary manner, in
accordance with US GAAP, as applicable, and all material
transactions to which Parent or any of its Subsidiaries is or
has been a party are properly reflected therein.
Section 4.7 SEC
Reports; Financial Statements.
(a) Parent has filed all forms, reports and documents
required to be filed by it with the SEC since January 1,
2008 (collectively, SEC Reports). As of its
filing date or, in the case of SEC Reports that are registration
statements filed pursuant to the requirements of the Securities
Act, its effective date, each SEC Report complied as to form in
all material respects with the applicable requirements of the
Securities Act and the Exchange Act, and the applicable rules
and regulations promulgated thereunder, as the case may be, each
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as in effect on the date such SEC Report was filed. As of its
filing date (or, if amended or superseded by a filing prior to
the date of this Agreement, on the date of such amended or
superseded filing), each SEC Report filed pursuant to the
Exchange Act did not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to
make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each
SEC Report that is a registration statement, as amended or
supplemented, if applicable, filed pursuant to the Securities
Act, as of the date such registration statement or amendment
became effective, did not contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements made
therein not misleading. The information supplied by Parent,
Merger Sub or their Affiliates to Company for inclusion in the
Joint Proxy Statement/Prospectus or other documents to be filed
with the SEC in connection herewith will not on the dates that
the Joint Proxy Statement/Prospectus is first mailed to the
shareholders of Company contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are
made, not misleading. There are no outstanding or unresolved
comments in comment letters received from the SEC with respect
to the SEC Reports. To the Knowledge of Parent, none of the SEC
Reports is the subject of ongoing SEC review. None of the
Subsidiaries of Parent is required to file or furnish reports
with the SEC pursuant to the Exchange Act.
(b) Parent has delivered to Company true and complete
copies of the following financial statements and related
materials, which are attached as Section 4.7(b) of
the Parent Disclosure Schedule audited consolidated balance
sheets of Parent and its Subsidiaries as of December 31,
2009 and December 31, 2008 and the related audited
consolidated statements of income, shareholders equity and
cash flows for the years ended December 31, 2009 and
December 31, 2008, together with all related notes and
schedules thereto (collectively, the Parent Financial
Statements), accompanied by the reports thereon of
Parent by Eisner LLP. Parent has delivered or made available to
Company true and complete copies of all management letters and
other correspondence received from Parents independent
auditors since January 1, 2008 relating to the foregoing
financial statements, accounting controls of Parent and all
related matters. The consolidated balance sheet of Parent and
its Subsidiaries as of December 31, 2009, together with all
related notes and schedules thereto, is herein referred to as
the Parent Balance Sheet. Each of the Parent
Financial Statements (x) is accurate, complete and
consistent with the books and records of Parent and its
Subsidiaries for the time therein presented; (y) has been
prepared in conformity with US GAAP on a basis consistent with
prior accounting periods; and (z) fairly presents the
consolidated financial position, results of operations and
changes in financial position of Parent and its Subsidiaries as
of the dates and for the periods indicated therein.
(c) Neither Parent nor any of its Subsidiaries has any
liabilities or obligations of any nature (accrued, absolute,
contingent or otherwise), whether known or unknown, except for
any liabilities or obligations (i) that are fully reflected
or reserved against in Parent Balance Sheet, or are not
otherwise required to be reflected or reserved against in Parent
Balance Sheet under US GAAP, (ii) that will be Transaction
Expenses, or (iii) that are or were incurred since the date
of Parent Balance Sheet in the ordinary course of business and
consistent with past practice, that were for capital
expenditures and are set forth in Section 4.7(c) of
the Parent Disclosure Schedule or that otherwise do not exceed
$50,000 individually or $100,000 in the aggregate. Except as
disclosed in the Parent Financial Statements, neither Parent nor
any of its Subsidiaries is a guarantor, indemnitor, surety or
other obligor of any indebtedness of any other Person.
Section 4.7(c) of the Parent Disclosure Schedule
sets forth (i) all indebtedness and other similar
obligations to Parent or its Subsidiaries of the shareholders,
directors, officers or employees of each of Parent and its
Subsidiaries, or any of their respective Affiliates, together
with all amounts owed by such Persons in respect thereof; and
(ii) all outstanding liabilities of each of Parent and its
Subsidiaries with respect to any of their current or former
shareholders, directors, officers, employees or consultants, or
any of their respective Affiliates (other than ordinary course
liabilities relating to salary and compensation for the current
pay period, reimbursement of travel expenses, and director and
officer indemnity agreements otherwise made available to
Company).
(d) Section 4.7(d) of the Parent Disclosure
Schedule sets forth all outstanding Debt as of the date of this
Agreement, in the aggregate and with respect to each Person
entitled to payment of a portion of such Debt (with reference to
the Contract pursuant to which such Debt is owed).
A-27
(e) Parent and its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance
with managements general or specific authorization;
(ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with US GAAP
and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with managements
general or specific authorization; (iv) the recorded
accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with
respect to any differences; and (v) Parents and its
Subsidiaries obligations are satisfied in a timely manner
and as required under the terms of any Contract. Parent has no
unremedied significant deficiencies or material weaknesses in
the design or operation of internal control over financial
reporting (as defined in
Rule 13a-15(f)
of the Exchange Act). Except as otherwise disclosed in the
Parent Financial Statements or as required by US GAAP, Parent
has not made any material change in any method of accounting,
accounting practice or policy or any internal control over
financial reporting since January 1, 2008.
(f) Neither Parent nor any of its Subsidiaries has
identified any incident of fraud since July 1, 2008 that
involves any current or former directors, officers or employees
of Parent who have a role in the preparation of financial
statements or the internal accounting controls utilized by
Parent and its Subsidiaries.
(g) Section 4.7(g) of the Parent Disclosure
Schedule lists all services currently being performed, or that
have been performed within the last three fiscal years, by
Eisner LLP for Parent and any persons currently employed by
Parent in any accounting or finance function or position that
were employed by Eisner LLP during the previous three fiscal
years.
(h) Parent is in compliance in all material respects with
all of the provisions of the Sarbanes-Oxley Act, and the
provisions of the Exchange Act and the Securities Act relating
thereto, which are applicable to Parent.
(i) Parent has delivered to Parent complete and accurate
copies of notices received from its independent auditor of any
significant deficiencies or material weaknesses in Parents
internal control over financial reporting since January 1,
2008 and any other management letter or similar correspondence
from any independent auditor of Parent or any of its
Subsidiaries received since January 1, 2008. Parent has
implemented such programs and taken such steps as it believes
are necessary to effect compliance with all provisions of
Section 404 of the Sarbanes-Oxley Act that are applicable
to Parent and has not received, orally or in writing, any
notification that its independent auditor (i) believes that
Parent will not be able to complete its assessment before the
reporting deadline, or, if completed, that it will not be
completed in sufficient time for the independent auditor to
complete its assessment or (ii) will not be able to issue
unqualified attestation reports with respect thereto.
(j) Each of the principal executive officer of Parent and
the principal financial officer of Parent (or each former
principal executive officer of Parent and each former principal
financial officer of Parent, as applicable) has made all
certifications required by
Rule 13a-14
or 15d-14
under the Exchange Act or Sections 302 and 906 of the
Sarbanes-Oxley Act and the rules and regulations of the SEC
promulgated thereunder with respect to Parent SEC Documents. For
purposes of the preceding sentence, principal executive
officer and principal financial officer shall
have the meanings given to such terms in the Sarbanes-Oxley Act.
Neither Parent nor any of its Subsidiaries has outstanding, or
has arranged any outstanding, extensions of credit
to directors or executive officers within the meaning of
Section 402 of the Sarbanes-Oxley Act. Parent has
established and maintains disclosure controls and procedures and
internal control over financial reporting (as such terms are
defined in paragraphs (e) and (f), respectively, of
Rule 13a-15
under the Exchange Act) as required by
Rule 13a-15
under the Exchange Act. Parents disclosure controls and
procedures are reasonably designed to ensure that all material
information required to be disclosed by Parent in the reports
that it files or furnishes under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC, and that all such
material information is accumulated and communicated to
Parents management as appropriate to allow timely
decisions regarding required disclosure and to make the
certifications required pursuant to Sections 302 and 906 of
the Sarbanes-Oxley Act.
Section 4.8 Absence
of Parent Material Adverse Effect. Since
January 1, 2010 through the date hereof, there have not
been any events that have had, or are reasonably likely to have,
individually or in the aggregate, a Parent Material Adverse
Effect.
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Section 4.9 Employees;
Employee Benefit Plans.
(a) Each (i) ERISA Employee Benefit Plan and
(ii) stock purchase, stock incentive, severance,
employment, loan,
change-in-control,
fringe benefit, collective bargaining, bonus, incentive,
deferred compensation and all other employee benefit plans,
agreements, programs, policies or other arrangements, whether
written or not, whether or not subject to ERISA (including any
funding mechanism therefor now in effect or required in the
future as a result of the transactions contemplated by this
Agreement or otherwise) under which, in either case of
clause (i) or (ii), (x) any current or former
employee, officer, director, consultant or independent
contractor of Parent or any of its Subsidiaries (Parent
Employees) has any present or future right to benefits
and that are, or within the past eighteen (18) months have
been, contributed to, sponsored by or maintained by Parent or
any of its ERISA Affiliates or (y) under which Parent or
any of its Subsidiaries has any present or future liability
shall be collectively referred to as the Parent
Plans. Section 4.9(a) of the Parent
Disclosure Schedule contains a true and complete list of all
Parent Plans, other than those Parent Plans that are for the
benefit of only one individual (e.g., individuals
employment agreements).
(b) With respect to each material Parent Plan, Parent has
delivered to Company a current, accurate and complete copy
thereof and, to the extent applicable: (i) any related
trust agreement or other funding instrument; and (ii) the
most recent determination letter, if applicable.
(c) Except as has not had and would not reasonably be
expected to have, individually or in the aggregate, a Material
Adverse Effect on Parent, (i) each Parent Plan has been
established and administered in all respects in accordance with
its terms, and in all respects in compliance with the applicable
provisions of ERISA, the Code and other applicable Laws;
(ii) no prohibited transaction (as such term is
defined in Section 406 of ERISA and Section 4975 of
the Code) has occurred with respect to any Parent Plan; and
(iii) each nonqualified deferred compensation
plan (as defined in Section 409A(d)(1) of the Code)
has been operated in good faith compliance with
Section 409A of the Code and the guidance promulgated
thereunder by the Department of Treasury.
(d) Each Parent Plan that is intended to be qualified
within the meaning of Section 401(a) of the Code has
received a favorable determination letter or opinion letter as
to its qualification, and nothing has occurred, whether by
action or failure to act, that could reasonably be expected to
cause the loss of such qualification.
(e) No Parent Plan is a multiemployer plan (within the
meaning of Section 4001(a)(3) of ERISA), and no Parent Plan
is subject to Title IV of ERISA.
(f) With respect to any Parent Plan, except as has not had
and would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect on Parent, (i) no
actions, suits or claims (other than routine claims for benefits
in the ordinary course) are pending or, to the knowledge of
Parent, threatened, and (ii) no administrative
investigation, audit or other administrative proceeding by the
Department of Labor, the Department of Treasury, the Internal
Revenue Service or other governmental agencies are pending or,
to the knowledge of Parent, threatened.
(g) Except as set forth in Section 4.9(g) of
the Parent Disclosure Schedule, no material Parent Plan exists
that would reasonably be expected to (i) result in the
payment to any present or former Parent Employee of any money or
other property, (ii) accelerate or provide any other rights
or benefits to any present or former Parent Employee or
(iii) require the funding of any trust for the benefit of
any present or former Parent Employee, in each case as a result
of the transactions contemplated by this Agreement (whether
alone or in connection with any subsequent event(s)). There is
no Parent Plan that, individually or collectively, would
reasonably be expected to give, or that has given, rise to the
payment of any amount that would not be deductible pursuant to
the terms of Section 280G in connection with the
transactions contemplated under this Agreement.
A-29
(h) No communication, disclosure or representation has been
made to any current or former employee of Parent (or any
beneficiary or dependent thereof) that, at the time made, did
not accurately reflect the material terms and operations of any
material Parent Plan.
(i) With respect to each material Parent Plan, all
required, declared or discretionary (in accordance with
historical practices) payments, premiums, contributions,
reimbursements or accruals for all periods ending prior to or as
of the Closing Date have been made or properly accrued on the
Parent Balance Sheet or with respect to accruals properly made
after the date of the Parent Balance Sheet, on the books and
records of Parent
and/or its
Subsidiaries. There is no material unfunded Liability relating
to any Parent Plan that is not reflected on the Parent Balance
Sheet or with respect to accruals properly made after the date
of the Parent Balance Sheet, on the books and records of Parent
and/or its
Subsidiaries.
Section 4.10 Labor
Matters. Neither Parent nor any of its
Subsidiaries is a party to or is bound by or is currently
negotiating any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor
organization. Neither Parent nor any of its Subsidiaries is the
subject of a proceeding asserting that it or any such Subsidiary
has committed an unfair labor practice (within the meaning of
the National Labor Relations Act) or seeking to compel Parent or
any such Subsidiary to bargain with any labor organization as to
wages or conditions of employment, nor, to Parents
knowledge, is any such proceeding threatened, and there is no
strike or other material labor dispute or disputes involving it
or any of its Subsidiaries pending, or to Parents
knowledge, threatened. To the knowledge of Parent, there is no
activity involving its or any of its Subsidiaries
employees involving an attempt to certify a collective
bargaining unit or other organizational activity. No material
action, suit, arbitration, proceeding or, to Parents
knowledge, claim or investigation by or before any court,
governmental agency, administrative agency or commission brought
by or on behalf of any employee, prospective employee, former
employee, retiree, labor organization or other representative of
Parent or any of its Subsidiaries employees is pending or,
to the knowledge of Parent, threatened. Parent and its
Subsidiaries are in material compliance with all applicable
laws, agreements, contracts, and policies relating to
employment, employment practices, wages, hours, and terms and
conditions of employment, and each individual who is treated by
Parent or its Subsidiaries as an exempt employee under any
federal or state law, or as an independent contractor, is
properly so treated under applicable law. As of the date hereof,
neither Parent nor any of its Subsidiaries have closed any plant
or facility or effectuated any layoffs of employees, nor has any
such action or program been announced for the future, that would
reasonably be expected to give rise to any material liability
under the Worker Adjustment and Retraining Notification Act or
any similar state or local law or regulation.
Section 4.11 Contracts.
(a) Section 4.11(a) of the Parent Disclosure
Schedule contains a complete and accurate list of (each, a
Parent Material Contract) (i) all
Contracts (other than vendor agreements and purchase orders with
vendors entered into in the ordinary course of business) to
which Parent or any of its Subsidiaries is currently a party or
by which Parent or any of its Subsidiaries is currently bound
providing for potential payments by or to Parent or any of its
Subsidiaries in excess of $150,000 per annum, (ii) each
Contract relating to the Debt with a principal amount in excess
of $75,000, and (iii) all other Contracts that are material
to Parent.
(b) All Contracts to which Parent or any of its
Subsidiaries is a party are valid, binding and enforceable in
accordance with their terms against Parent or its Subsidiaries,
as the case may be, and each other party thereto and are in full
force and effect (subject only to the effect, if any, of
applicable bankruptcy and other similar laws affecting the
rights of creditors generally and rules of law governing
specific performance, injunctive relief and other equitable
remedies). Parent or its Subsidiaries, as the case may be, has
performed all obligations required to have been performed by it
under all Parent Material Contracts, and neither Parent, its
Subsidiaries, nor to the Knowledge of Parent, any other party
thereto is in breach or violation of, or default under
(including any such breach, violation or default caused by a
violation of a noncompetition, nonsolicitation or exclusivity
provision contained therein), nor is there any event that with
notice or lapse of time, or both, would constitute a breach,
violation or default by Parent, its Subsidiaries, or any other
party thereunder, nor has Parent or any of its Subsidiaries
received any claim of any such breach, violation or default.
There is not now and has not been within the past 24 months
any disagreement or dispute with any
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other party to any Parent Material Contract, nor is there any
pending request or process for renegotiation of any Parent
Material Contract. Further, there is not now and has not been
within the past 24 months any disagreement or dispute of
any nature whatsoever with any other party to any Contract
having or reasonably likely to have a Material Adverse Effect.
True and complete copies of each such written Parent Material
Contract (or written summaries of the terms of any such oral
Parent Material Contract) have been delivered or been made
available to Company. Parent has no reason to believe that any
obligation that remains under any Parent Material Contract
cannot be fulfilled by Parent or its Subsidiaries, as the case
may be, and has no notice or Knowledge that any party to a
Parent Material Contract listed on Section 4.11(a)
of the Parent Disclosure Schedule intends to cancel, terminate,
refuse to perform or refuse to renew such Parent Material
Contract (if such Parent Material Contract is renewable).
(c) Except for the Parent Material Contracts listed in
Section 4.11(a) of the Parent Disclosure Schedule,
neither Parent nor any of its Subsidiaries has any other
Contract:
(i) with a remaining term of greater than one year from the
date of this Agreement (which, for purposes of clarity, shall be
determined based on the term of the primary subject matter of
such Contract, and not incidental obligations such as
non-disclosure, post-termination indemnity, etc.) that cannot be
canceled by Parent or its Subsidiaries, as the case may be, with
no more than 60 days notice without liability,
penalty or premium (other than non-disclosure agreements);
(ii) with a noncompetition, nonsolicitation,
most-favored-nations pricing or exclusivity
agreement or other arrangement that would prevent, restrict or
limit in any way Parent from carrying on its business in any
manner or in any geographic location, other than restrictions in
Intellectual Property Agreements;
(iii) for a joint venture or any other similar arrangement
that involves a sharing of profits or revenue with other Persons
or that provides for the payment of referral fees or bounties;
(iv) relating to any interest rate, currency or commodity
derivatives or hedging transaction;
(v) with any Governmental Entity;
(vi) in which Parent or any of its Subsidiaries agrees to
provide indemnification that may result in liability in excess
of $100,000; and
(vii) granting a power of attorney, agency or similar
authority to another Person.
Section 4.12 Litigation. Except
as set forth in Section 4.12 of the Parent
Disclosure Schedule there is no suit, claim, action, proceeding,
arbitration or investigation pending before any Governmental
Entity or, to Parents Knowledge, threatened within the
three year period prior to the date hereof against Parent or any
of its Subsidiaries or their respective assets or properties.
Neither Parent nor any of its Subsidiaries is subject to any
outstanding Order or Orders. There is no suit, claim, action,
proceeding, arbitration or investigation pending or, to
Parents Knowledge, threatened against Parent or any of its
Subsidiaries, that seeks to, or could reasonably be expected to,
restrain, enjoin or delay the consummation of the Merger or any
of the other transactions contemplated hereby or that seeks
damages in connection therewith, and no injunction of any type
has been entered or issued.
Section 4.13 Compliance
with Laws.
(a) Except as set forth in Section 4.13(a) of
the Parent Disclosure Schedule Parent and each of its
Subsidiaries is and has been in compliance with all federal,
state, local and foreign laws, rules, regulations, ordinances,
decrees and orders applicable to it, to its business, operations
and employees, or to the Real Property and the Personal Property
(including laws prohibiting false, fraudulent, deceptive or
misleading advertising or trade practices). Neither Parent nor
any of its Subsidiaries has received any notification, nor does
Parent have any Knowledge of, any asserted present or past
unremedied failure by Parent or its Subsidiaries to comply with
any of such laws, rules, regulations, ordinances, decrees or
orders.
(b) The matters covered in Section 4.7(a)
regarding SEC Reports and Section 4.15 regarding
Environmental Matters are specifically addressed in those
sections and, notwithstanding anything to the contrary set forth
herein, are not covered by the representations made in the
foregoing paragraph (a).
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Section 4.14 Taxes
and Tax Returns.
(a) Parent and each of its Subsidiaries has timely filed
(or has had timely filed on its behalf) with all appropriate Tax
Authorities all material Tax Returns required to be filed by
Parent and each of its Subsidiaries, and such Tax Returns are
true, correct, and complete in all material respects.
(b) All material Taxes for which Parent or any of its
Subsidiaries is liable in respect of taxable periods (or
portions thereof) ending on or before the Closing Date have been
timely paid, or in the case of Taxes not yet due and payable, an
adequate accrual in accordance with US GAAP for the payment of
all such Taxes (exclusive of deferred tax assets and deferred
tax liabilities or similar items that reflect timing differences
between tax and financial accounting principles) has been
established on the Parent Financial Statements. All liabilities
for Taxes attributable to the period commencing on
January 1, 2010 were incurred in the ordinary course of
business.
(c) There are no liens for Taxes upon any property or
assets of Parent or any of its Subsidiaries, except for liens
for real and personal property Taxes not yet due and payable.
(d) No Federal, state, local or foreign Audits are
presently pending with regard to any Taxes or Tax Returns of
Parent and its Subsidiaries and to the Knowledge of Parent, no
such Audit is threatened.
(e) There are no outstanding requests, agreements, consents
or waivers to extend the statutory period of limitations
applicable to the assessment of any material Taxes or
deficiencies against Parent or any of its Subsidiaries, and no
power of attorney granted by Parent or any of its Subsidiaries
with respect to any Taxes is currently in force.
(f) Neither Parent nor any of its Subsidiaries is a party
to any agreement providing for the allocation, indemnification,
or sharing of material Taxes other than any such agreement to
which Parent or any of its Subsidiaries and Company or any of
its Subsidiaries are the exclusive parties.
(g) Neither Parent nor any of its Subsidiaries has
(i) been a member of an affiliated group (within the
meaning of Section 1504 of the Code) or an affiliated,
combined, consolidated, unitary, or similar group for state,
local or foreign Tax purposes, other than the group of which
Parent is the common Company or (ii) any liability for or
in respect of the Taxes of, or determined by reference to the
Tax liability of, another Person (other than Parent or any of
its Subsidiaries) under Treasury
Regulation Section 1.1502-6
(or any similar provision of state, local or foreign Law), as a
transferee or successor, by Contract or otherwise.
(h) Neither Parent nor any of its Subsidiaries has
constituted either a distributing corporation or a
controlled corporation in a distribution of stock
qualifying for tax-free treatment under Section 355 of the
Code (x) in the two (2) years prior to the date of
this Agreement or (y) in a distribution that could
otherwise constitute part of a plan or series
of related transactions (within the meaning of
Section 355(e) of the Code) in conjunction with the Merger.
(i) Neither Parent nor any of its Subsidiaries has agreed
or is required to include in income any material adjustment
under either Section 481(a) or Section 482 of the Code
(or an analogous provision of state, local or foreign Law) by
reason of a change in accounting method or otherwise.
(j) Neither Parent nor any of its Subsidiaries has
participated in any listed transaction within the
meaning of Treasury
Regulation Section 16011-4.
Section 4.15 Environmental
Matters.
(a) Parent and each of its Subsidiaries is in compliance,
in all material respects, with all Environmental Laws, which
compliance includes the possession by Parent and each of its
Subsidiaries of all permits and other governmental
authorizations required under any Environmental Laws and
compliance with the terms and conditions thereof. Neither Parent
nor any of its Subsidiaries has received any communication,
whether from a governmental authority, citizens group, employee
or otherwise, that alleges that Parent or any of its
Subsidiaries is not in such compliance, in all material
respects, with any Environmental Laws, and, to Parents
Knowledge, there are no circumstances that could reasonably be
expected to prevent or interfere with such compliance in the
future.
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(b) There is no material Environmental Claim pending or
threatened against Parent or any of its Subsidiaries or against
any person or entity whose liability for any Environmental Claim
either Parent or any of its Subsidiaries has retained or assumed
either contractually or by operation of law.
(c) Except as would not be reasonably likely to result,
either individually or in the aggregate, in a Parent Material
Adverse Effect, there are no past or present actions,
activities, circumstances, conditions, events or incidents,
including the Release or threatened Release of any Material of
Environmental Concern, that could reasonably be expected to form
the basis of any Environmental Claim against Parent or any of
its Subsidiaries or against any person or entity whose liability
for any Environmental Claim Parent or any of its Subsidiaries
has retained or assumed either contractually or by operation of
law.
(d) Parent has made available to Company and Merger Sub all
material environmental assessments, reports, data, results of
investigations, audits and other material documents in the
possession or control of Parent or any of its Subsidiaries
regarding environmental matters pertaining to the environmental
condition of any real properties owned or operated by Parent or
any of its Subsidiaries, any Environmental Claims respecting
Parent or any of its Subsidiaries, or the noncompliance by
Parent or any of its Subsidiaries with any Environmental Laws.
(e) To the Knowledge of Parent, neither Parent nor any of
its Subsidiaries is required by virtue of the transactions
contemplated hereby, or as a condition to the effectiveness of
any transactions contemplated hereby, to perform a site
assessment for Materials of Environmental Concern.
Section 4.16 State
Takeover Statutes. No fair price,
business combination, moratorium,
control share acquisition or other similar
antitakeover statute is applicable to the Merger, except for
such statutes or regulations as to which all necessary action
has been taken by Parent and its board of directors, to permit
the consummation of the Merger in accordance with the terms
hereof.
Section 4.17 Intellectual
Property.
(a) To Parents Knowledge, Parent owns or has the
right to use all Intellectual Property that is necessary for the
conduct of the business of Parent and its Subsidiaries as
currently conducted, except where the failure of the foregoing
to be true and correct would not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse
Effect. Section 4.17(a) of the Parent Disclosure Schedule
contains a true and complete list of all patents and registered
trademarks of Parent.
(b) Except as would not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse
Effect, all registrations of Owned Parent IP are currently in
good standing.
(c) To Parents Knowledge, Parents and its
Subsidiaries title in all Owned Parent IP is valid,
subsisting and enforceable, except where the failure to be so
valid, subsisting and enforceable would not reasonably be
expected to have, individually or in the aggregate, a Parent
Material Adverse Effect.
(d) Parent or one of its Subsidiaries owns all right, title
and interest in each item of Owned Parent IP, free and clear of
all Encumbrances other than Permitted Encumbrances. No
additional material license fees in respect of any Owned Parent
IP that is owned by any Person jointly with Parent or its
Subsidiaries will be payable Parent or any of its Subsidiaries
following the Closing to any such Person for the use or
exploitation of such Owned Parent IP as a result of the
transactions contemplated by the Agreement.
(e) Parent and each of its Subsidiaries has taken all
commercially reasonable steps to protect and preserve the
secrecy and confidentiality of all Trade Secrets that are
included in the Owned Parent IP, except where the failure to
take such actions would not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse
Effect.
(f) To the Knowledge of Parent, as of the date hereof, no
Person or any of such Persons products or services,
Intellectual Property or other operation of such Persons
business is infringing upon, violating or misappropriating any
Owned Parent IP, except where any such infringement,
misappropriation or violation would not reasonably be expected
to have, individually or in the aggregate, a Parent Material
Adverse Effect.
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(g) As of the date hereof, there is no Action pending or,
to the Knowledge of Parent, threatened with respect to:
(i) any alleged infringement, misappropriation or violation
of the Intellectual Property of any Person by Parent or any of
its Subsidiaries or any of its or their current products or
services; (ii) any claim challenging the validity or
enforceability of any Owned Parent IP, or the ownership by
Parent or the respective Subsidiary of such Owned Parent IP; or
(iii) any claim contesting Parents or any of its
Subsidiaries rights with respect to any Licensed Parent
IP, except in the case of clauses (i), (ii) and (iii), for
any of the foregoing, that would not reasonably be expected to
have, individually or in the aggregate, a Parent Material
Adverse Effect. As of the date of this Agreement, Parent and its
Subsidiaries are not subject to any order, judgment or decree
that restricts or impairs the use of any Parent IP, except
(x) for any such order, judgment or decree that is
generally applicable to Persons engaged in the businesses
engaged in by Parent and its Subsidiaries or (y) where
compliance with such order, judgment or decree would not
reasonably be expected to have, individually or in the
aggregate, a Parent Material Adverse Effect.
Section 4.18 Absence
of Indemnifiable Claims, etc. There are no
pending claims and, to Parents Knowledge, no facts that
would reasonably entitle any director or officer of Parent or
its Subsidiaries to indemnification by Parent or its
Subsidiaries under applicable Law, the certificate of
incorporation or by-laws of Parent or its Subsidiaries, any
insurance policy maintained by Parent or its Subsidiaries or any
indemnity agreements of Parent or similar agreements to which
Parent or any of its Subsidiaries is a party or by which any of
its properties or assets is or may be bound.
Section 4.19 Insurance. Complete
and accurate copies of all insurance policies maintained by
Parent or any Subsidiary of Parent or that pertain to
Parents or any of its Subsidiaries assets, employees
or operations have previously been made available to the
Company. Neither Parent nor any of its Subsidiaries has taken
any action or failed to take any action that (with or without
lapse of time or notice or both) would constitute a material
breach or default, or permit termination or modification of any
such insurance policy. All such policies are in full force and
effect, are valid and enforceable, all premiums due thereunder
have been paid, and Parent and its Subsidiaries are in
compliance in all material respects with the terms and
conditions of all such policies. As of the date hereof, neither
Parent nor any of its Subsidiaries has received notice of
cancellation, lapse or invalidation of any such insurance
policies, other than notices received in connection with
renewals in the ordinary course of business.
Section 4.20 Title
to Property. Parent and its Subsidiaries do
not currently own any real property. Section 4.11(a)
of the Parent Disclosure Schedule lists, among other Parent
Material Contracts, Parents material lease agreements for
leased real property. Parent or one of its Subsidiaries holds a
valid leasehold estate (either for a term or as a holdover) in
each material leased real property subject only to performance
of the terms of the applicable lease. Except as would not
reasonably be expected, individually or in the aggregate, to
have a Parent Material Adverse Effect, each of Parent and its
Subsidiaries has (A) good and valid title to all of its
owned properties, assets and other rights that constitute
personal property free and clear of all Liens, and
(B) valid contractual rights to use all of the assets,
tangible and intangible, used by its business that Parent does
not own, in each case, such as are necessary to permit Parent
and its Subsidiaries to conduct their respective businesses as
currently conducted. This Section 4.20 does not
relate to Parent IP, which is the subject of
Section 4.17.
Section 4.21 Customers
and Suppliers. Neither Parent nor any of its
Subsidiaries has received any notice or otherwise has any reason
to believe that any of its ten largest customers or ten largest
suppliers intends, or is reasonably likely, to terminate, reduce
or materially modify its business with Parent
and/or any
of its Subsidiaries. Neither Parent nor its Subsidiaries has
experienced and, to the Parents Knowledge, there does not
exist, any material quality control or similar problems with any
of the products
and/or
services currently being supplied to Parent or any of its
Subsidiaries by any of its ten largest suppliers.
Section 4.22 Opinion
of Financial Advisor. Parent has received the
opinion of Ardour Capital Investments, LLC (the Parent
Financial Advisor), dated the date of this Agreement,
to the effect that, as of the date of this Agreement, the Merger
Consideration is fair to Parents shareholders from a
financial point of view.
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Section 4.23 Board
Approval. The Board of Directors of Parent,
at a meeting duly called and held, has, by unanimous vote of
those directors present, (a) subject to the terms of
Section 6.12 hereof, determined that this Agreement
and the Merger and the other transactions contemplated hereby
and thereby are advisable, fair to and in the best interests of
Parent and its shareholders, (b) approved this Agreement,
and (c) subject to the terms of Section 6.12
hereof, determined to recommend that the principal terms of this
Agreement (including the adoption of the Parent Certificate and
the Reverse Stock Split) be approved by the holders of Parent
Common Stock.
Section 4.24 Voting
Requirements. The only votes of the holders
of any class or series of capital stock of Parent necessary to
adopt this Agreement and approve the transactions contemplated
hereby at the Parent Meeting or any adjournment or postponement
thereof are (i) with respect to the Reverse Stock Split,
the approval of the Parent Certificate by a majority of the
outstanding shares of Parent Common Stock and (ii) with
respect to the issuance of Parent Common Stock pursuant to the
Merger, a majority of the shares voting at the Parent Meeting,
assuming that a quorum is present (together, the Parent
Shareholder Approval).
Section 4.25 Brokers
and Finders. No broker, investment banker,
financial advisor or other Person, other than Parent Financial
Advisor, the fees and expenses of which will be paid by Parent
(as reflected in an agreement between such firm and Parent, a
copy of which has been delivered to Company), is entitled to any
brokers, finders, financial advisors or other
similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by
or on behalf of Parent.
ARTICLE V
COVENANTS
RELATING TO CONDUCT OF BUSINESS
Section 5.1 Conduct
of Businesses Prior to the Effective
Time. (a) During the period from the date
hereof to the Effective Time, except as expressly contemplated
or permitted by this, each of Parent and the Company shall, and
shall cause each of their respective Subsidiaries to, (i)
conduct its business in the ordinary course, (ii) use reasonable
best efforts to maintain and preserve intact its business
organization, employees and advantageous business relationships
and retain the services of its key officers and key employees,
and (iii) take no action that would reasonably be expected to
adversely affect or delay the ability of either Parent or the
Company to obtain any necessary approvals of any Governmental
Entity required for the transactions contemplated hereby or to
perform its covenants and agreements under this Agreement or to
consummate the transactions contemplated hereby.
(b) Without in any way limiting the scope of
Section 5.1(a) above, Parent and the Company agree that
they will not, outside the ordinary course of business,
(i) accelerate the collection of their respective accounts
receivable, (ii) decelerate the payment of their respective
accounts payable, or (iii) take any other action designed
to, or having the purpose of, increasing the Parent Cash
Position or the Company Cash Position, as the case may be,
beyond increases in the Parent Cash Position or the Company Cash
Position arising from improvements in or normal operations of
Parents business or the Companys business, as the
case may be.
Section 5.2 Forbearances. During
the period from the date hereof to the Effective Time, except as
expressly contemplated or permitted by this Agreement, neither
Parent nor the Company shall, and neither Parent nor the Company
shall permit any of their respective Subsidiaries to, without
the prior written consent of the other party to this Agreement:
(a) incur any indebtedness for borrowed money (other than
indebtedness of the Company or any of its Subsidiaries to the
Company or any of its Subsidiaries, on the one hand, or of
Parent or any of its Subsidiaries to Parent or any of its
Subsidiaries, on the other hand) or assume, guarantee, endorse
or otherwise as an accommodation become responsible for the
obligations of any other individual, corporation or other
entity, or make any loan or advance, other than, (i) in the
case of the Company, (A) the extension, modification or
refinancing of the Fifth Third Facility on terms and conditions
reasonably acceptable to Parent and (B) the Company
Financing, on substantially the terms and conditions previously
described by Company to Parent, provided that any debt shall be
repaid, extinguished or converted into
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equity on or before the Closing Date and (ii) in the case
of Parent, borrowings under the ARSR Credit Facility;
(b) (i) adjust, split, combine or reclassify any
capital stock; (ii) make, declare or pay any dividend, or
make any other distribution on, or directly or indirectly
redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible (whether
currently convertible or convertible only after the passage of
time or the occurrence of certain events) into or exchangeable
for any shares of its capital stock (except (A) dividends
paid by any of the Subsidiaries of each of Parent and the
Company to Parent or the Company or any of their wholly-owned
Subsidiaries, respectively of each of Parent and the Company,
and (B) the acceptance of shares of the Company Common
Stock or Parent Common Stock, as the case may be, as payment for
the exercise price of stock options or warrants or for
withholding taxes incurred in connection with the exercise of
stock options or warrants or the vesting of restricted stock, in
each case in accordance with past practice and the terms of the
applicable award agreements); (iii) grant any stock
appreciation rights, performance shares, restricted stock units
or other equity-based interests, or grant any individual,
corporation or other entity any right to acquire any shares of
its capital stock; or (iv) issue any additional shares of
capital stock except pursuant to the exercise of stock options
or warrants outstanding as of the date hereof, or in the case of
the Company except the Company Financing, provided that any debt
shall be repaid, extinguished or converted into equity on or
before the Closing Date;
(c) sell, transfer, mortgage, encumber or otherwise dispose
of any of its material properties or assets to any individual,
corporation or other entity other than a Subsidiary, or cancel,
release or assign any indebtedness owed to or from any such
person or any claims by or against any such person, in each case
other than in the ordinary course of business consistent with
past practices or pursuant to contracts or agreements in force
at the date hereof, other than, in the case of the Company,
(i) the extension, modification or refinancing of the Fifth
Third Facility on terms and conditions reasonably acceptable to
Parent and (ii) the Company Financing, provided that any
debt shall be repaid, extinguished or converted into equity on
or before the Closing Date;
(d) except for transactions in the ordinary course of
business consistent with past practices or pursuant to contracts
or agreements in force at the date hereof or otherwise permitted
by this Agreement, make any material investment either by
purchase of stock or securities, contributions to capital,
property transfers, or purchase of any property or assets of any
other individual, corporation or other entity other than a
Subsidiary thereof;
(e) except for transactions in the ordinary course of
business consistent with past practices, terminate, or waive any
material provision of, any Company Material Contract or Parent
Material Contract, as the case may be, or make any change in any
instrument or agreement governing the terms of any of its
securities, or material lease or contract, other than normal
renewals of contracts and leases without material adverse
changes of terms with respect to the Company or Parent, as the
case may be;
(f) except as set forth on Schedule 5.2(f),
increase in any manner the compensation or fringe benefits of
any of its employees or pay any pension or retirement allowance
not required by any existing plan or agreement to any such
employees or become a party to, amend or commit itself to any
pension, retirement, profit-sharing or welfare benefit plan or
agreement or employment agreement with or for the benefit of any
employee other than in the ordinary course of business, or
accelerate the vesting of, or the lapsing of restrictions with
respect to, any stock options or other stock-based compensation
(except to the extent required under the terms of the applicable
plan or related award agreement);
(g) settle any material claim, action or proceeding, except
in the ordinary course of business consistent with past
practices;
(h) other than the Reverse Stock Split, amend its articles
of incorporation, its bylaws or comparable governing documents;
(i) take any action that is intended or expected to result
in any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect at
any time prior to the
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Effective Time, or in any of the conditions to the Merger set
forth in Article VII not being satisfied or in a
violation of any provision of this Agreement, except, in every
case, as may be required by applicable law;
(j) implement or adopt any change in its accounting
principles, practices or methods, other than as may be required
by US GAAP;
(k) make any change in or to the terms or conditions of the
Company Financing or the Parent Financing, as the case may
be; or
(l) agree to take, make any commitment to take, or adopt
any resolutions of its board of directors in support of, any of
the actions prohibited by this Section 5.2.
ARTICLE VI
ADDITIONAL
AGREEMENTS
Section 6.1 Regulatory
Matters.
(a) As promptly as practicable after the date of this
Agreement, the Parties shall prepare and cause to be filed with
the SEC a joint proxy statement/prospectus, in definitive form,
relating to the Company Meeting and the Parent Meeting, the
related proxy and notices of meeting, and soliciting material
used in connection therewith (referred to herein collectively as
the Joint Proxy Statement/Prospectus), and
Parent shall prepare and cause to be filed with the SEC a
registration statement on
Form S-4
in connection with the issuance of shares of Parent Common Stock
in the Merger (the
Form S-4
Registration Statement), in which the Joint Proxy
Statement/Prospectus will be included as a prospectus. Each of
the Parties shall use commercially reasonable efforts to cause
the
Form S-4
Registration Statement and the Joint Proxy Statement/Prospectus
to comply with the applicable rules and regulations promulgated
by the SEC, to respond promptly to any comments of the SEC or
its staff and to have the
Form S-4
Registration Statement declared effective under the Securities
Act as promptly as practicable after it is filed with the SEC.
Each of the Parties shall use commercially reasonable efforts to
cause the Joint Proxy Statement/Prospectus to be mailed to the
Companys and Parents stockholders as promptly as
practicable after the
Form S-4
Registration Statement is declared effective under the
Securities Act. Each Party shall promptly furnish to the other
Party all information concerning such Party and such
Partys subsidiaries and such Partys stockholders
that may be required or reasonably requested in connection with
any action contemplated by this Section 6.1. If any
event relating to the Company occurs, or if the Company becomes
aware of any information, that should be disclosed in an
amendment or supplement to the
Form S-4
Registration Statement or the Joint Proxy Statement/Prospectus,
then the Company shall promptly inform Parent thereof and shall
cooperate with Parent in filing such amendment or supplement
with the SEC and, if appropriate, in mailing such amendment or
supplement to the stockholders of the Company.
(b) Prior to the Effective Time, Parent shall use
commercially reasonable efforts to obtain all regulatory
approvals needed to ensure that the Parent Common Stock and
Company Warrants to be issued in the Merger and Parent Common
Stock to be issued upon exercise of the Company Warrants will
(to the extent required) be registered or qualified or exempt
from registration or qualification under the securities law of
every jurisdiction of the United States in which any registered
holder of Company Common Stock has an address of record on the
record date for determining the stockholders entitled to notice
of and to vote at the Company Meeting; provided,
however, that Parent shall not be required: (i) to
qualify to do business as a foreign corporation in any
jurisdiction in which it is not now qualified; or (ii) to
file a general consent to service of process in any
jurisdiction. Parent shall also use its commercially reasonable
efforts to obtain all necessary state securities law or
Blue Sky permits and approvals required to carry out
the transactions contemplated by this Agreement, and the Company
shall furnish all information concerning the Company and the
holders of the Company Common Stock as may be reasonably
requested in connection with any such action.
(c) The parties hereto shall cooperate with each other and
use their commercially reasonable efforts to promptly prepare
and file all necessary documentation, to effect all
applications, notices, petitions and filings,
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to obtain as promptly as practicable all permits, consents,
approvals and authorizations of all third parties and
Governmental Entities that are necessary or advisable to
consummate the transactions contemplated by this Agreement
(including, without limitation, the Merger), and to comply with
the terms and conditions of all such permits, consents,
approvals and authorizations of all such Governmental Entities.
Parent and the Company shall have the right to review in
advance, and, to the extent practicable, each will consult the
other on, in each case subject to applicable laws relating to
the exchange of information, all the information relating to the
Company or Parent, as the case may be, and any of their
respective Subsidiaries, which appear in any filing made with,
or written materials submitted to, any third party or any
Governmental Entity in connection with the transactions
contemplated by this Agreement. In exercising the foregoing
right, each of the parties hereto shall act reasonably and as
promptly as practicable. The parties hereto agree that they will
consult with each other with respect to the obtaining of all
permits, consents, approvals and authorizations of all third
parties and Governmental Entities necessary or advisable to
consummate the transactions contemplated by this Agreement and
each party will keep the other apprised of the status of matters
relating to completion of the transactions contemplated herein.
(d) Parent and the Company shall, upon request, furnish
each other with all information concerning themselves, their
Subsidiaries, directors, officers and stockholders and such
other matters as may be reasonably necessary or advisable in
connection with the Joint Proxy Statement/Prospectus or any
other statement, filing, notice or application made by or on
behalf of Parent, the Company or any of their respective
Subsidiaries to any Governmental Entity in connection with the
Merger and the other transactions contemplated by this Agreement.
(e) Parent and the Company shall promptly advise each other
upon receiving any communication from any Governmental Entity
whose consent or approval is required for consummation of the
transactions contemplated by this Agreement that causes such
party to believe that there is a reasonable likelihood that any
Requisite Regulatory Approval will not be obtained or that the
receipt of any such approval will be materially delayed.
Section 6.2 Access
to Information.
(a) Upon reasonable notice and subject to the matters set
forth in the Company Disclosure Schedule and the Parent
Disclosure Schedule and to all antitrust laws, each of Parent
and the Company, for the purposes of verifying the
representations and warranties of the other and preparing for
the Merger and the other matters contemplated by this Agreement,
shall, and shall cause each of their respective Subsidiaries to,
afford to the officers, employees, accountants, counsel and
other representatives of the other party, access, during normal
business hours during the period prior to the Effective Time, to
all its properties, books, contracts, commitments and records,
and, during such period, each of Parent and the Company shall,
and shall cause their respective Subsidiaries to, make available
to the other party (i) a copy of each report, schedule,
registration statement and other document filed or received by
it during such period pursuant to the requirements of federal
securities laws (other than reports or documents that Parent or
the Company, as the case may be, is not permitted to disclose
under applicable law) and (ii) all other information
concerning its business, properties and personnel as such party
may reasonably request. Neither Parent nor the Company nor any
of their respective Subsidiaries shall be required to provide
access to or to disclose information where (x) such access
or disclosure would violate or prejudice the rights of
Parents or the Companys, as the case may be,
customers, (y) jeopardize the attorney-client privilege of
the institution in possession or control of such information or
(z) contravene any law, rule, regulation, order, judgment,
decree, fiduciary duty or binding agreement entered into prior
to the date hereof. The parties hereto will make appropriate
substitute disclosure arrangements under circumstances in which
the restrictions of the preceding sentence apply.
(b) Each of Parent and the Company shall hold all
information furnished by or on behalf of the other party or any
of such partys Subsidiaries or representatives pursuant to
Section 6.2(a) in confidence to the extent required
by, and in accordance with, the provisions of the Confidential
Disclosure Agreement, dated September 24, 2009, by and
between the Company and Parent, as supplemented as of
September 24, 2009 (the Confidentiality
Agreement).
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(c) No investigation by either of the parties or their
respective representatives shall affect the representations and
warranties of the other set forth herein.
Section 6.3 Stockholders
Approvals. Each of Parent and the Company
shall call a meeting of its stockholders (the Parent
Meeting and Company Meeting,
respectively) to be held as soon as reasonably practicable after
the
Form S-4
Registration Statement is declared effective for the purpose of
voting upon the requisite stockholder approvals required in
connection with this Agreement and the Merger and, if so desired
and mutually agreed, upon other matters of the type customarily
brought before an annual meeting of shareholders, and each shall
use its commercially reasonable best efforts to cause such
meetings to occur as soon as reasonably practicable and on the
same date. The Board of Directors of each of Parent and the
Company will recommend to its respective stockholders, subject
to Section 6.12 below, to vote in favor of the
approval of this Agreement (which shall include the approval of
the filing of the Parent Certificate) required by the DGCL and
the CGCL, as applicable, to consummate the transactions
contemplated hereby. Each of Parent and the Company, through its
respective Board of Directors, shall not, except as contemplated
under Section 6.12, withdraw, modify or change such
recommendation and shall use its reasonable best efforts to
obtain the Parent Shareholder Approval and the Company
Shareholder Approval, respectively. Notwithstanding anything to
the contrary contained in this Agreement, Parent shall adjourn
or postpone the Parent Meeting,
and/or the
Company shall adjourn or postpone the Company Meeting, in either
case to the extent necessary to ensure that any necessary
supplement or amendment to the Joint Proxy Statement/Prospectus
is provided to Parents stockholders or Companys
stockholders, as the case may be, in advance of a vote on the
matters described above, or, if, as of the time for which such
meeting is originally scheduled there are insufficient shares of
Parent Common Stock or Company Common Stock, as the case may be,
represented (either in person or by proxy) to constitute a
quorum necessary to conduct the business of such meeting, or if
in the reasonable good faith determination of Parent or Company
additional time is needed to solicit an affirmative stockholder
vote by the Parent stockholders or Company stockholders, as the
case may be, in order to obtain the requisite vote for the
foregoing matters; provided that Parent shall notify the
Company, or Company shall notify Parent, as the case may be, at
least three business days prior to any such adjournment or
postponement, of the potential adjournment or postponement and
shall consult with the Company or Parent, as the case may be,
regarding the necessity of such adjournment or postponement.
Notwithstanding anything to the contrary herein, unless this
Agreement has been terminated, this Agreement shall be submitted
to the stockholders of Parent and the Company at the Parent
Meeting and the Company Meeting, respectively, for the purpose
of voting on the approval of this Agreement and the other
matters contemplated hereby, and nothing contained herein shall
be deemed to relieve either Parent or the Company of such
obligation.
Section 6.4 Legal
Conditions to Merger. Each of Parent and the
Company shall, and shall cause its Subsidiaries to, use their
reasonable best efforts (a) to take, or cause to be taken,
all actions necessary, proper or advisable to comply promptly
with all legal requirements that may be imposed on such party or
its Subsidiaries with respect to the Merger and, subject to the
conditions set forth in Article VII hereof, to
consummate the transactions contemplated by this Agreement and
(b) to obtain (and to cooperate with the other party to
obtain) any material consent, authorization, order or approval
of, or any exemption by, any Governmental Entity and any other
third party that is required to be obtained by the Company or
Parent or any of their respective Subsidiaries in connection
with the Merger and the other transactions contemplated by this
Agreement.
Section 6.5 Stock
Exchange Listing. Parent shall use its
commercially reasonable efforts to cause the shares of Parent
Common Stock to be issued in the Merger or to be issued upon
exercise of the Company Warrants in accordance with the terms
thereof to be approved for listing on the NASDAQ Capital Market
System, subject to official notice of issuance, prior to the
Effective Time.
Section 6.6 Employee
Benefit Plans. Promptly after the Effective
Time, Parent shall grant to those persons who immediately prior
to the Effective Time were entitled to participate in the 2006
Plan, options under Parents Incentive Plan that would
entitle such persons to purchase an aggregate of not less than
350,000 shares (subject to adjustment to give effect to the
Reverse Stock Split) of Parent Common Stock at a price equal to
the fair market value of Parent Common Stock on the date of
grant; provided that no such
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options may be granted to a person who continues to hold an
option under the 2006 Plan (a 2006 Plan
Option) until such time as all 2006 Plan Options held
by such person shall have expired or been canceled .
Section 6.7 Indemnification;
Directors and Officers
Insurance.
(a) In the event of any threatened or actual claim, action,
suit, proceeding or investigation, whether civil, criminal or
administrative, including, without limitation, any such claim,
action, suit, proceeding or investigation in which any
individual who is now, or has been at any time prior to the date
hereof, or who becomes prior to the Effective Time, a director
or officer or employee of the Company or any of its Subsidiaries
(the Company Indemnified Parties), is, or is
threatened to be, made a party based in whole or in part on, or
arising in whole or in part out of, or pertaining to
(i) the fact that he is or was a director, officer or
employee of the Company or any of its Subsidiaries or
(ii) this Agreement or any of the transactions contemplated
hereby, whether in any case asserted or arising before or after
the Effective Time, the parties hereto agree to cooperate, and
the parties shall use their reasonable best efforts to defend
against and respond thereto, except that prior to the Effective
Time, the foregoing obligation of Parent with respect to the
directors, officers or employees of the Company shall be only to
cooperate. In the event of any threatened or actual claim,
action, suit, proceeding or investigation, whether civil,
criminal or administrative, including, without limitation, any
such claim, action, suit, proceeding or investigation in which
any individual who is now, or has been at any time prior to the
date hereof, or who becomes prior to the Effective Time, a
director or officer or employee of Parent or any of its
Subsidiaries (the Parent Indemnified
Parties), is, or is threatened to be, made a party
based in whole or in part on, or arising in whole or in part out
of, or pertaining to (i) the fact that he is or was a
director, officer or employee of Parent or any of its
Subsidiaries or (ii) this Agreement or any of the
transactions contemplated hereby, whether in any case asserted
or arising before or after the Effective Time, the parties
hereto agree to cooperate, and the parties shall use their
reasonable best efforts to defend against and respond thereto,
except that prior to the Effective Time, the foregoing
obligation of the Company with respect to the directors,
officers or employees of Parent shall be only to cooperate. It
is understood and agreed that after the Effective Time, Parent
shall indemnify and hold harmless, as and to the fullest extent
permitted by law, each such Company Indemnified Party and Parent
Indemnified Party against any losses, claims, damages,
liabilities, costs, expenses (including reasonable
attorneys fees and expenses in advance of the final
disposition of any claim, suit, proceeding or investigation to
each Indemnified Party to the fullest extent permitted by law
upon receipt of any undertaking required by applicable law),
judgments, fines and amounts paid in settlement (to the extent,
in the case of settlements, that the settlement was approved in
writing by Parent, such approval not to be unreasonably
withheld) in connection with any such threatened or actual
claim, action, suit, proceeding or investigation. It is
understood that after the Effective Time Parent may assume and
control the defense of any claim for which Parent is obligated
to provide indemnification under this
Section 6.7(a), provided that the foregoing
shall not apply with respect to any claim for which counsel has
been retained with the approval of the applicable liability
insurer (if such approval is required under the applicable
insurance policy, if any, to obtain coverage) and commenced the
defense prior to the Effective Time unless Parents Audit
Committee otherwise determines following the Effective Time.
(b) Parent shall cause the individuals serving as officers
and directors of Parent and the Company or any of their
Subsidiaries immediately prior to the Effective Time to be
(i) covered for a period of two years from the Effective
Time by the directors and officers liability
insurance policy maintained by Parent (in the case of officers
and directors of Parent) and the Company (in the case of
officers and directors of the Company) (provided that Parent and
the Company, as the case may be, may substitute therefor
policies of at least the same coverage and amounts containing
terms and conditions that are not less advantageous than such
policy) with respect to acts or omissions occurring prior to the
Effective Time that were committed by such officers and
directors in their capacity as such or (ii) if such
insurance cannot be obtained, covered for a period of five years
by a tail policy on the Companys and Parents
existing directors and officers liability insurance
policies, as the case may be, of at least the same coverage and
amounts containing terms and conditions that are no less
advantageous than such existing policy; provided, however,
that in no event shall Parent be required to expend more
than 200% per year of coverage of the amount currently expended
by Parent per year of coverage as of the date hereof (the
Maximum Amount) to maintain or procure
insurance coverage pursuant hereto. If Parent is unable to
maintain or obtain the insurance called for by this
Section 6.7, Parent shall obtain
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as much comparable insurance as available for the Maximum
Amount. Parent shall cause such Parent and Company officers and
directors, as may be required, to make reasonable application
and provide reasonable and customary representations and
warranties to Parents insurance carrier for the purpose of
obtaining such insurance, comparable in nature and scope to the
applications, representations and warranties required of persons
who are officers and directors of Parent (in the case of Parent)
and the Company (in the case of the Company) as of the date
hereof.
(c) The provisions of this Section 6.7 shall
survive the Effective Time and are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party
and his or her heirs and representatives.
Section 6.8 Additional
Agreements. In case at any time after the
Effective Time any further action is necessary or desirable to
carry out the purposes of this Agreement (including, without
limitation, any merger between a Subsidiary of Parent, on the
one hand, and a Subsidiary of the Company, on the other) or to
vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises
of any of the parties to the Merger, the proper officers and
directors of each party to this Agreement and their respective
Subsidiaries shall take all such necessary action as may be
reasonably requested by, and at the sole expense of, Parent.
Section 6.9 Advice
of Changes. Parent and the Company shall each
promptly advise the other party of any change or event
(i) having a Material Adverse Effect on it or
(ii) that it believes would or would be reasonably likely
to cause or constitute a material breach of any of its
representations, warranties or covenants contained herein;
provided that any failure to give notice in accordance
with the foregoing with respect to any breach shall not be
deemed to constitute the failure of any condition set forth in
Section 7.2 or 7.3 to be satisfied, or
otherwise constitute a breach of this Agreement by the party
failing to give such notice, in each case unless the underlying
breach would independently result in a failure of the conditions
set forth in Section 7.2 or 7.3 to be
satisfied or give rise to such termination right.
Section 6.10 Officers
following Effective Time.
(a) Parent shall take all such action as may be necessary
so that the officers of Parent immediately after the Effective
Time are only as set forth on Schedule 6.10(a)
hereto, assuming that such persons are willing to serve in the
capacities indicated on such Schedule 6.10(a).
(b) The Company shall take all such action as may be
necessary so that the officers of Company immediately prior to
the Effective Time are as only set forth on
Schedule 6.10(b) hereto, assuming that such persons
are willing to serve in the capacities indicated on such
Schedule 6.10(b).
Section 6.11 Board
of Directors.
(a) Parent shall take all such action as may be necessary
so that, immediately following the Effective Time, the size of
the Parent Board of Directors shall be seven (7) members
and that the directors of Parent are as set forth on
Schedule 6.11(a) hereto, assuming that such persons
are willing to serve in such capacity. In the event that any
such person listed as a Parent Designee on such schedule shall
be unable or unwilling to so serve, Parent shall have the power
to designate a replacement for such person. In the event that
any such person listed as a Company Designee such schedule shall
be unable or unwilling to so serve, Company shall have the power
to designate a replacement for such person.
(b) Parent, as sole stockholder of Merger Sub, and Merger
Sub shall take all such action as may be necessary so that,
immediately prior to the Effective Time, the size of Merger
Subs Board of Directors shall be two (2) members and
that the directors of Merger Sub are as set forth on
Schedule 6.11(b) hereto, assuming that such persons
are willing to serve in such capacity. In the event that any
such person listed as a Parent Designee on such schedule shall
be unable or unwilling to so serve, Parent shall have the power
to designate a replacement for such person. In the event that
any such person listed as a Company Designee such schedule shall
be unable or unwilling to so serve, Company shall have the power
to designate a replacement for such person.
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Section 6.12 Acquisition
Proposals.
(a) Until this Agreement has been terminated in accordance
with Section 8.1, each of Parent and the Company
agrees that it will not, and will cause its controlled
Affiliates and its and their officers, directors, agents and
representatives not to, directly or indirectly, (i)
(A) initiate, solicit, encourage or knowingly facilitate
inquiries or proposals with respect to, (B) engage or
participate in any negotiations concerning, (C) provide any
confidential or nonpublic information or data to any person in
connection with or (D) have, or engage or participate in,
any discussions with any person relating to, any Acquisition
Proposal (as defined in clause (e) below),
(ii) release or permit the release of any person from, or
waive or permit the waiver of any provisions of, or otherwise
fail to exercise its rights under, any confidentiality,
standstill or similar agreement to which such party is a party
or under which such party has any rights with respect to the
sale or transfer of the voting securities or any material
portion of the assets of such party, (iii) withdraw, modify
or qualify (or propose to withdraw, modify or qualify) in any
manner adverse to the other party the recommendation by such
partys Board of Directors of this Agreement to its
stockholders or take any action or make any statement in
connection with such partys meeting of stockholders
inconsistent with such recommendation, including any action to
approve, recommend or endorse, or to propose to approve,
recommend or endorse, any Acquisition Proposal (collectively, a
Change in Recommendation) or (iv) enter
into any agreement, letter of intent,
agreement-in-principle,
acquisition agreement or other instrument contemplating or
otherwise relating to any Acquisition Proposal or requiring such
party to abandon, terminate or fail to consummate any of the
transactions contemplated hereby, including the Merger.
(b) Notwithstanding Section 6.12(a), prior to approval
of the transactions contemplated by this Agreement at its
meeting of stockholders to be held pursuant to
Section 6.3, each of Parent and the Company (the
Acting Party) may, and may permit its
Affiliates and its and their appropriate officers, directors,
agents and representatives to furnish or cause to be furnished
nonpublic information or data and participate in such
negotiations or discussions with, any person in response to an
unsolicited, bona fide and written Acquisition Proposal that is
submitted to the Acting Party after the date hereof and prior to
the approval of the transactions contemplated by this Agreement
at its meeting of stockholders to be held pursuant to
Section 6.3, and may withdraw, modify or qualify the
recommendation by such partys Board of Directors of this
Agreement to its stockholders in connection therewith, if and so
long as (A) the Board of Directors of the Acting Party
concludes in good faith (after consultation with its outside
counsel and its financial advisors) that failure to take such
actions would result in a violation of its fiduciary duties
under applicable law, (B) at least twenty-four
(24) hours prior to furnishing or causing to be furnished
nonpublic information or data to, and participating in such
negotiations or discussions with, such person, the Acting Party
provides the other party with written notice of the identity of
such person and of the Acting Partys intention to
participate in discussions or negotiations with, or to furnish
or disclose nonpublic information to, such person,
(C) prior to providing any nonpublic information to such
person, the Acting Party shall have entered into a
confidentiality and standstill agreement with such person (a
copy of which it shall have provided to the other party) on
terms no less restrictive upon such person, in any respect, than
the terms applicable to the other party under the
Confidentiality Agreement, which confidentiality and standstill
agreement shall not provide such person with any exclusive right
to negotiate with the Acting Party or have the effect of
preventing the Acting Party from satisfying its obligations
under this Agreement, (D) at least twenty-four
(24) hours prior to furnishing or causing to be furnished
nonpublic information or data to such person, the Acting Party
furnishes such information to the other party (to the extent
such information has not been previously delivered or made
available by the Acting Party to the other party) and
(E) prior to so withdrawing, modifying or qualifying the
recommendation by its Board of Directors of this Agreement, the
Acting Party gives the other party five business days
prior written notice of its intention to do so (unless at the
time such notice is otherwise required to be given there are
less than five business days prior to the Acting Partys
stockholders meeting, in which case the Acting Party shall
provide as much notice as is reasonably practicable), and during
such time, the Acting Party, if requested by the other party,
shall have engaged in good faith negotiations to amend this
Agreement (including by making its officers and its financial
and legal advisors reasonably available to negotiate) such that
the Board of Directors of the Acting Party may continue to
recommend the approval of this Agreement.
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(c) If Parent or the Company effects a Change in
Recommendation, the Company or Parent, as the case may be, shall
have the option (the Stockholder Vote
Option), exercisable within ten business days after
such Change in Recommendation, to cause Parents or the
Companys, as the case may be, Board of Directors to submit
this Agreement to its stockholders for the purpose of adopting
this Agreement and approving the Merger.
(d) Each of Parent and the Company shall, and shall cause
its controlled Affiliates and its and their appropriate
officers, directors, agents and representatives to, immediately
cease and cause to be terminated any activities, discussions or
negotiations conducted before the date hereof with any persons
other than the Company or Parent, as applicable, with respect to
any Acquisition Proposal. Each party will (i) promptly
(within 24 hours) advise the other party following receipt
of any request for information, of any Acquisition Proposal or
any inquiry that could reasonably be expected to lead to an
Acquisition Proposal, and the substance thereof (including the
terms and conditions of, and the identity of the person making,
such request, Acquisition Proposal or inquiry),
(ii) promptly (within 24 hours) provide the other
party with all written materials received by such party in
connection with the foregoing and (iii) keep the other
party apprised of any related developments, discussions and
negotiations on a current basis. Each of Parent and the Company
shall use its reasonable best efforts to enforce any existing
confidentiality or standstill agreements to which it or any of
its Subsidiaries is a party in accordance with the terms thereof.
(e) As used in this Agreement, Acquisition
Proposal shall mean any offer, proposal or inquiry
relating to, or any indication of interest in, an Alternative
Transaction received by a party from any person other than the
other party, in each case, whether or not in writing and whether
or not delivered to such party or to the stockholders of such
party generally. As used in this Agreement, an
Alternative Transaction means any of
(i) a transaction (or series of related transactions)
pursuant to which any person (or group of persons), directly or
indirectly, acquires or would acquire direct or indirect
beneficial ownership of more than 15% of the outstanding shares
of a partys common stock or outstanding voting power or of
any new series or new class of preferred stock that would be
entitled to a class or series vote with respect to the Merger or
that would be entitled to more than 15% of the fair market value
of the outstanding equity interests of such party, whether from
such party or pursuant to a tender offer or exchange offer or
otherwise, (ii) a merger, share exchange, business
combination, consolidation, sale of all or substantially all of
the assets, liquidation, dissolution or similar transaction
involving a party or any of its significant
subsidiaries (as defined in
Rule 1-02
of
Regulation S-X
promulgated by the SEC), (iii) any transaction (or series
of related transactions) pursuant to which any person (or group
of persons) acquires or would acquire control of assets
(including for this purpose the outstanding equity securities of
Subsidiaries of such party and securities of the entity
surviving any merger or business combination including any of
its Subsidiaries) of such party, or any of its Subsidiaries
representing more than 15% of the fair market value of all the
assets, net revenues or net income of such party and its
Subsidiaries, taken as a whole, immediately prior to such
transaction (or series of related transactions) or (iv) any
other consolidation, business combination, recapitalization or
similar transaction (or series of related transactions)
involving a party or any of its Subsidiaries.
(f) Nothing contained in this Agreement shall prevent
Parent or its Board of Directors from complying with
Rule 14d-9
and
Rule 14e-2
under the Exchange Act with respect to an Acquisition Proposal;
provided, that such Rules will in no way eliminate or
modify the effect that any action pursuant to such Rules would
otherwise have under this Agreement.
(g) Any violation of this Section 6.12 by a
partys Affiliates or a partys or any of its
controlled Affiliates officers, directors, agents and
representatives shall be deemed to be a breach of this Agreement
by such party.
Section 6.13 Reverse
Stock Split by Parent. Immediately prior to
the Effective Time, and subject to receipt of the requisite
stockholder approval at the Parent Meeting, Parent shall cause
an appropriate filing to be made with the Secretary of State of
the State of Delaware, in the form of a Restated Certificate of
Incorporation of Parent or a Certificate of Amendment to
Parents current Restated Certificate of Incorporation (in
either case, the Parent Certificate),
whereby, without any further action on the part of Parent, the
Company or any stockholder of Parent each share of Parent Common
Stock issued and outstanding
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immediately prior to the filing of the Parent Certificate shall
be converted into and become a fractional number of fully paid
and nonassessable shares of Parent Common Stock to be determined
by Parent and the Company (the Reverse Stock
Split).
Section 6.14 Headquarters. The
parties hereby acknowledge and agree that, upon the occurrence
of the Merger, Parent shall be headquartered in California.
Section 6.15 Section 16
Matters. Prior to the Effective Time, Parent
shall take all such steps as may be required (to the extent
permitted under applicable Law) to cause any dispositions of
Company Common Stock or acquisitions of Parent Common Stock
(including, in each case, derivative securities) resulting from
the transactions contemplated hereby by each individual who is
subject to the reporting requirements of Section 16(a) of
the Exchange Act with respect to the Company to be exempt under
Rule 16b-3
promulgated under the Exchange Act.
Section 6.16 AIM
Delisting. The Company shall use its
commercially reasonable efforts to cause the Company Common
Stock to no longer be listed for trading on the AIM upon the
consummation of the Merger or as soon as practicable thereafter.
ARTICLE VII
CONDITIONS
PRECEDENT
Section 7.1 Conditions
to Each Partys Obligation To Effect the
Merger. The respective obligations of the
parties to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following
conditions:
(a) Stockholder Approvals. The
Company Shareholder Approval and the Parent Shareholder Approval
shall have been validly obtained under applicable Law and under
the applicable Partys governing documents.
(b) NASDAQ Listing. The shares of
Parent Common Stock to be authorized for listing on the NASDAQ
Capital Market System, subject to official notice of issuance
pursuant to Section 6.5, shall have been so
authorized.
(c) Registration Statement
Effective. The SEC shall have declared the
Form S-4
Registration Statement effective. No stop order suspending the
effectiveness of the
Form S-4
Registration Statement or any part thereof shall have been
issued, and no proceeding for such purpose, and no similar
proceeding in respect of the proxy statement, shall have been
initiated or threatened in writing by the SEC, and all requests
for additional information on the part of the SEC shall have
been complied with to the reasonably satisfaction of the Company
and Parent.
(d) Other Approvals. The approvals
of Governmental Entities required to consummate the transactions
contemplated hereby shall have been obtained and shall remain in
full force and effect and all statutory waiting periods in
respect thereof shall have expired, other than such approvals
the failure of which to obtain would not, either individually or
in the aggregate, reasonably be expected to have a Material
Adverse Effect on Parent or the Surviving Corporation (such
approvals and the expiration of such waiting periods being
referred to herein as the Requisite Regulatory
Approvals).
(e) No Injunctions or Restraints;
Illegality. No order, injunction or decree
issued by any court or agency of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of
the Merger or any of the other transactions contemplated by this
Agreement shall be in effect. No statute, rule, regulation,
order, injunction or decree shall have been enacted, entered,
promulgated or enforced by any Governmental Entity that
prohibits or makes illegal consummation of the Merger.
(f) Ownership of Merger Sub and Surviving
Corporation. All shares of capital stock of
Merger Sub outstanding immediately prior to the Merger and all
shares of capital stock of Surviving Corporation outstanding
immediately after the Merger shall be owned by Parent.
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(g) AIM Delisting. The Company
Common Stock shall no longer be listed for trading on the AIM as
of, or within a reasonable time after, the Merger.
Section 7.2 Conditions
to Obligations of Parent. The obligation of
Parent to effect the Merger is also subject to the satisfaction,
or waiver by Parent, at or prior to the Effective Time, of the
following conditions:
(a) Representations and
Warranties. The representations and
warranties of the Company set forth in this Agreement shall be
true and correct, except for deviations and inaccuracies that do
not, in the aggregate, constitute a Material Adverse Effect (it
being agreed and understood that, for purposes of this
Section 7.2(a), any qualifications by materiality or
Material Adverse Effect contained in such
representations and warranties shall be disregarded). Parent
shall have received a certificate signed on behalf of the
Company by the Chief Executive Officer of the Company to the
foregoing effect.
(b) Performance of Obligations of the
Company. The Company shall have performed in
all material respects the obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and
Parent shall have received a certificate signed on behalf of the
Company by the Chief Executive Officer of the Company to such
effect.
(c) Officers and
Directors. Company shall have complied with
its obligations under Section 6.10(b) hereof.
(d) Arrangements Regarding Fifth Third
Facility. The Fifth Third Facility shall have
been extended, modified or refinanced on terms reasonably
satisfactory to Parent or, if the Effective Time occurs prior to
such extension, modification or refinancing, the Company and
Fifth Third shall have entered into a forbearance agreement
reasonably satisfactory to Parent.
(e) Company Cash Position. Company
Cash Position shall be not less than $1,000,000.
(f) Dissenting Shares. Not more
than 3% of the outstanding shares of Company Common Stock
(including for such purpose convertible securities that would be
outstanding shares of Company Common Stock as of the Effective
Time) shall be eligible to be Dissenting Shares.
Section 7.3 Conditions
to Obligations of the Company. The obligation
of the Company to effect the Merger is also subject to the
satisfaction or waiver by the Company at or prior to the
Effective Time of the following conditions:
(a) Representations and
Warranties. The representations and
warranties of Parent set forth in this Agreement shall be true
and correct, except for deviations and inaccuracies that do not,
in the aggregate, constitute a Material Adverse Effect (it being
agreed and understood that, for purposes of this
Section 7.3(a), any qualifications by materiality or
Material Adverse Effect contained in such
representations and warranties shall be disregarded). The
Company shall have received a certificate signed on behalf of
Parent by the Chief Executive Officer of Parent to the foregoing
effect.
(b) Performance of Obligations of
Parent. Parent shall have performed in all
material respects the obligations required to be performed by it
under this Agreement at or prior to the Closing Date, and the
Company shall have received a certificate signed on behalf of
Parent by the Chief Executive Officer of Parent to such effect.
(c) Section 16
Matters. Parent shall have complied with its
obligations under Section 6.15.
(d) Officers and Directors. Parent
shall have complied with its obligations under
Section 6.10(a) and Section 6.11 hereof.
(e) Officer and Director
Resignations. Each of the officers and
directors of Parent, other than those who are Parent Designees,
shall have submitted to Parent his or her resignation in such
capacity to be effective as of the Effective Time.
(f) Arrangements Regarding Auction Rate Securities
Rights. The ARS Redemption shall have
occurred on the date and in the manner set forth in the ARSR
Commitment, or, if the Effective Time occurs prior to the ARS
Redemption, the Company shall be reasonably satisfied that
(i) the ARS
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Redemption will occur no later than July 11, 2010 and
substantially in the manner set forth in the ARSR Commitment
notwithstanding the Merger, (ii) the ARSR Commitment will
remain enforceable in accordance with it terms following the
Effective Time and (iii) the ability of Parent to continue
to utilize the ARSR Credit Facility until the time of the ARS
Redemption will be unimpaired.
(g) Parent Cash Position. Parent
Cash Position shall be not less than $1,000,000.
ARTICLE VIII
TERMINATION
AND AMENDMENT
Section 8.1 Termination. This
Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of this Agreement by the
stockholders of Parent or the Company:
(a) by mutual consent of Parent and the Company in a
written instrument, if the Board of Directors of each so
determines by a vote of a majority of the members of its entire
Board of Directors;
(b) by either the Board of Directors of Parent or the Board
of Directors of the Company if any Governmental Entity that must
grant a Requisite Regulatory Approval has denied approval of the
Merger and such denial has become final and nonappealable or any
Governmental Entity of competent jurisdiction shall have issued
a final nonappealable order permanently enjoining or otherwise
prohibiting the consummation of the transactions contemplated by
this Agreement, unless the failure to obtain a Requisite
Regulatory Approval shall be due to the failure of the party
seeking to terminate this Agreement to perform or observe the
covenants and agreements of such party set forth herein;
(c) by either the Board of Directors of Parent or the Board
of Directors of the Company if the Merger shall not have been
consummated on or before September 6, 2010, unless the
failure of the Closing to occur by such date shall be due to the
failure of the party seeking to terminate this Agreement to
perform or observe the covenants and agreements of such party
set forth herein;
(d) by either the Board of Directors of Parent or the Board
of Directors of the Company (provided that the terminating party
is not then in material breach of any representation, warranty,
covenant or other agreement contained herein) if there shall
have been a breach of any of the covenants or agreements or any
of the representations or warranties set forth in this Agreement
on the part of the Company, in the case of a termination by
Parent, or Parent, in the case of a termination by the Company,
which breach, either individually or in the aggregate, would
constitute, if occurring or continuing on the Closing Date, the
failure of the conditions set forth in Section 7.2
or 7.3, as the case may be, and that is not cured within
30 days following written notice to the party committing
such breach or by its nature or timing cannot be cured prior to
the Closing Date;
(e) by either the Board of Directors of Parent or the Board
of Directors of the Company if either party shall have failed to
obtain the requisite affirmative vote of its stockholders
required to consummate the transactions contemplated hereby at
the Parent Meeting or the Company Meeting, as applicable, or any
adjournment or postponement thereof at which a vote on such
approval was taken; provided that a party shall not have
the right to terminate this Agreement pursuant to this
Section 8.1(e) as a result of that partys
stockholders failing to approve this Agreement at the Parent
Meeting or the Company Meeting, as applicable, if such party has
failed to comply in all material respects with its obligations
under Sections 6.1(a) or 6.3;
(f) by the Company, if the Board of Directors of Parent
shall have (i) failed to recommend in the Joint Proxy
Statement/Prospectus the approval of this Agreement,
(ii) effected a Change in Recommendation, or resolved to do
so, or failed to recommend against acceptance of a tender offer
or exchange offer for outstanding Parent Common Stock that has
been publicly disclosed (other than by the Company or an
Affiliate of the Company) within 10 business days after the
commencement of such tender or exchange offer, in any such case
whether or not permitted by the terms hereof or
(iii) knowingly breached its obligations under
Section 6.1(a), 6.3 or 6.12 in any
material respect;
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(g) by Parent, if the Board of Directors of the Company
shall have (i) effected a Change in Recommendation, or
resolved to do so, or (ii) knowingly breached its
obligations under Section 6.1(a), 6.3 or
6.12 in any material respect;
(h) by Parent, if the Board of Directors of Parent shall
have effected a Change in Recommendation and the Company shall
not have elected the Stockholder Vote Option within ten business
days of being notified of the Parent Board of Directors
Change in Recommendation; or
(i) by the Company, if the Board of Directors of the
Company shall have effected a Change in Recommendation and
Parent shall not have elected the Stockholder Vote Option within
ten business days of being notified of the Company Board of
Directors Change in Recommendation.
Section 8.2 Effect
of Termination.
(a) In the event of termination of this Agreement by either
Parent or the Company as provided in Section 8.1,
this Agreement shall forthwith become void and have no effect,
and none of Parent, the Company, any of their respective
Subsidiaries or any of the officers or directors of any of them
shall have any liability of any nature whatsoever hereunder, or
in connection with the transactions contemplated hereby, except
that (i) Sections 6.2(b) and 8.2 and
Article IX (other than Section 9.1)
shall survive any termination of this Agreement and
(ii) notwithstanding anything to the contrary contained in
this Agreement, neither Parent nor the Company shall be relieved
or released from any liabilities or damages (which the parties
acknowledge and agree shall not be limited to reimbursement of
expenses or
out-of-pocket
costs, and may include to the extent proven the benefit of the
bargain lost by a partys shareholders (taking into
consideration relevant matters, including other combination
opportunities and the time value of money), which shall be
deemed in such event to be damages of such party) arising out of
its breach of any provision of this Agreement.
(b) (i) In the event that (A) a Pre-Termination
Takeover Proposal Event shall have occurred after the date
hereof with respect to the Company and thereafter this Agreement
is terminated by either Parent or the Company pursuant to
Section 8.1(e), or thereafter this Agreement is
terminated by Parent pursuant to Section 8.1(d) as a
result of a willful material breach of this Agreement by the
Company or pursuant to Section 8.1(c) if the failure to
consummate the Merger on or before the date contained in
Section 8.1(c) results from any willful material
breach of this Agreement by the Company and (B) either
(1) prior to the date that is twelve (12) months after
the date of such termination the Company consummates an
Alternative Transaction, the Company shall, on the date an
Alternative Transaction is consummated, pay Parent a fee equal
to $300,000 plus Parents reasonable costs and expenses
incurred in connection with the transactions contemplated by
this Agreement, not to exceed $350,000 in the aggregate, by wire
transfer of same day funds, or (2) prior to the date that
is twelve (12) months after the date of such termination
the Company enters into a definitive acquisition agreement
related to any Alternative Transaction (Acquisition
Agreement), the Company shall, on the date of entry
into such Acquisition Agreement, pay Parent a fee equal to
$300,000 plus Parents reasonable costs and expenses
incurred in connection with the transactions contemplated by
this Agreement, not to exceed $350,000 in the aggregate, by wire
transfer of same day funds.
(ii) In the event that this Agreement is terminated by
Parent pursuant to Section 8.1(g) or by the Company
pursuant to Section 8.1(i), then the Company shall
pay Parent a fee equal to $300,000 plus Parents reasonable
costs and expenses incurred in connection with the transactions
contemplated by this Agreement, not to exceed $350,000 in the
aggregate, by wire transfer of same day funds on the date of
termination.
(c) (i) In the event that (A) a Pre-Termination
Takeover Proposal Event (as hereinafter defined) shall have
occurred after the date hereof with respect to Parent and
thereafter this Agreement is terminated by either Parent or the
Company pursuant to Section 8.1(e), or thereafter this
Agreement is terminated by the Company pursuant to
Section 8.1(d) as a result of a willful material
breach of this Agreement by Parent or pursuant to
Section 8.1(c) if the failure to consummate the
Merger on or before the date contained in
Section 8.1(c) results from any willful material
breach of this Agreement by Parent and (B) either
(1) prior to the date that is twelve (12) months after
the date of such termination Parent consummates an Alternative
Transaction, Parent shall, on the date an Alternative
Transaction is consummated, pay the Company a fee equal to
$300,000 plus the Companys reasonable costs and expenses
incurred in connection with the transactions contemplated by
this
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Agreement, not to exceed $350,000 in the aggregate, by wire
transfer of same day funds or (2) prior to the date that is
twelve (12) months after the date of such termination
Parent enters into an Acquisition Agreement, Parent shall, on
the date of entry into such Acquisition Agreement, pay the
Company a fee equal to $300,000 plus the Companys
reasonable costs and expenses incurred in connection with the
transactions contemplated by this Agreement, not to exceed
$350,000 in the aggregate, by wire transfer of same day funds;
provided, however, notwithstanding anything to the
contrary contained in this Section 8.1(c)(i), that
if this Agreement is terminated by either Parent or the Company
pursuant to Section 8.1(e) after the Company has
elected to use the Stockholder Vote Option, any fee otherwise
payable pursuant to this Section 8.2(c)(i) shall be
reduced by one half.
(ii) In the event that this Agreement is terminated by the
Company pursuant to Section 8.1(f) or by Parent
pursuant to Section 8.1(h), then Parent shall pay
the Company a fee equal to $300,000 plus the Companys
reasonable costs and expenses incurred in connection with the
transactions contemplated by this Agreement, not to exceed
$350,000 in the aggregate, by wire transfer of same day funds on
the date of termination.
(d) For purposes of this Section 8.2, a
Pre-Termination Takeover Proposal Event
shall be deemed to occur if, prior to the event giving rise to
the right to terminate this Agreement, a bona fide Acquisition
Proposal shall have been made known to the Company (in the case
of an Acquisition Proposal relating to the Company) or shall
have been made known to Parent (in the case of any Acquisition
Proposal relating to Parent) or has been made directly to its
stockholders generally or any person shall have publicly
announced an Acquisition Proposal or an intention (whether or
not conditional) to make an Acquisition Proposal (the term
Acquisition Proposal, as used in the definition of Acquisition
Proposal for purposes of this Section 8.2, and as
used in this Section 8.2, shall have the same
meaning set forth in Section 6.12 except that the
references to more than 15% contained in the
definition of Alternative Transaction shall be deemed to be
references to 40% or more and such definition shall
not include any merger, share exchange, consolidation, business
combination or similar transaction where (i) the holders of
shares of such party immediately prior to such transaction (or
series of related transactions) would continue, in the
aggregate, to own at least a majority of the outstanding shares
of common stock and the outstanding voting power of the
surviving or resulting entity (or its ultimate parent) in the
transaction (or series of related transactions) immediately
after the consummation thereof in substantially the same
proportion as such holders held the shares of such partys
common stock immediately prior to the consummation thereof and
(ii) such party would retain at least a majority of the
surviving or resulting entitys (or its ultimate
parents) board of directors).
(e) Notwithstanding anything to the contrary herein, but
without limiting the right of any party to recover liabilities
or damages, the maximum aggregate amount of fees payable by a
single party under this Section 8.2 shall be
$650,000.
(f) Each of Parent and the Company acknowledges that the
agreements contained in this Section 8.2 are an
integral part of the transactions contemplated by this
Agreement, and that, without these agreements, the other party
would not enter into this Agreement; accordingly, if Parent or
the Company, as the case may be, fails promptly to pay the
amount due pursuant to this Section 8.2, and, in
order to obtain such payment, the other party commences a suit
that results in a judgment against the non-paying party for the
fee set forth in this Section 8.2, such non-paying
party shall pay the costs and expenses of the other party
(including attorneys fees and expenses) in connection with
such suit. In addition, if Parent or the Company, as the case
may be, fails to pay the amounts payable in this
Section 8.2, then such party shall pay interest on
such overdue amounts at a rate per annum equal to the
prime rate (as announced by JPMorgan
Chase & Co. or any successor thereto) in effect on the
date on which such payment was required to be made.
Section 8.3 Amendment. Subject
to compliance with applicable law, this Agreement may be amended
by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after
approval of the matters presented in connection with Merger by
the stockholders of Parent and the Company; provided,
however, that after any approval of the transactions
contemplated by this Agreement by the respective stockholders of
Parent or the Company, there may not be, without further
approval of such stockholders, any amendment of this Agreement
that changes the amount or the form of the consideration to
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be delivered hereunder to the holders of Company Common Stock,
other than as contemplated by this Agreement. This Agreement may
not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
Section 8.4 Extension;
Waiver. At any time prior to the Effective
Time, the parties hereto, by action taken or authorized by their
respective Boards of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of
the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the
agreements or satisfaction of any conditions contained herein;
provided, however, that after any approval of the
transactions contemplated by this Agreement by the respective
stockholders of Parent or the Company, there may not be, without
further approval of such stockholders, any extension or waiver
of this Agreement or any portion thereof that reduces the amount
or changes the form of the consideration to be delivered to the
holders of Company Common Stock hereunder, other than as
contemplated by this Agreement. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only
if set forth in a written instrument signed on behalf of such
party, but such extension or waiver or failure to insist on
strict compliance with an obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
ARTICLE IX
GENERAL
PROVISIONS
Section 9.1 Nonsurvival
of Representations, Warranties and
Agreements. None of the representations,
warranties, covenants and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement (other than the
Confidentiality Agreement, which shall survive in accordance
with its terms) shall survive the Effective Time, except for
Section 6.7 and for those other covenants and
agreements contained herein and therein that by their terms
apply in whole or in part after the Effective Time.
Section 9.2 Expenses. All
costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the
party incurring such expense.
Section 9.3 Notices. All
notices and other communications hereunder shall be in writing
and shall be deemed given if delivered personally, telecopied
(with confirmation), mailed by registered or certified mail
(return receipt requested) or delivered by an express courier
(with confirmation) to the parties at the following addresses
(or at such other address for a party as shall be specified by
like notice):
(a) if to Parent, to:
Clean Diesel Technologies, Inc.
10 Middle Street
Suite 1100
Bridgeport, CT 06604
Attention:
Telecopier:
With a copy to:
Finn Dixon & Herling LLP
177 Broad Street
Stamford, CT 06901-2048
Attention: David I. Albin
Telecopier: (203) 325-5001
(b) if to the Company, to:
Catalytic Solutions, Inc.4567 Telephone Road
Suite 206
Ventura, CA 93003
Attention:
Telecopier:
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With a copy to:
Reed Smith LLP
101 Second Street, Suite 1800
San Francisco, CA 94105
Attention: Robert M. Smith
Telecopier: (415) 391-8269
Section 9.4 Interpretation.
When a reference is made in this Agreement to Articles,
Sections, Exhibits or Schedules, such reference shall be to an
Article or Section of or Exhibit or Schedule to this Agreement
unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words include,
includes or including are used in this
Agreement, they shall be deemed to be followed by the words
without limitation. The Company Disclosure Schedule
and the Parent Disclosure Schedule, as well as all other
schedules and all Exhibits hereto, shall be deemed part of this
Agreement and included in any reference to this Agreement. To
the extent either of such Schedules contains language expressing
agreements of the parties, such agreements shall be deemed to be
enforceable to the same extent as if they were set forth in
Article VI of this Agreement.
Section 9.5 Counterparts. This
Agreement may be executed in counterparts, all of which shall be
considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.6 Entire
Agreement. This Agreement (including the
documents and the instruments referred to herein) together with
the Confidentiality Agreement constitutes the entire agreement
and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject
matter hereof, including, without limitation, any summary of
terms or prior understandings relating to expenses and
confidentiality and the unsigned Summary of Terms dated
February 24, 2010 and the related letter agreement between
Parent and the Company.
Section 9.7 Governing
Law. This Agreement shall be governed and
construed in accordance with the laws of the State of New York
applicable to contracts executed in and to be performed entirely
within the State of New York, without regard to any applicable
conflicts of law principles, except as specifically provided
herein.
Section 9.8 Publicity. Except
as otherwise required by applicable law or the rules of the
NASDAQ or AIM, and except for the dissemination by Parent and
the Company of a press release substantially contemporaneously
with the execution of this Agreement substantially in the form
agreed to by Parent and the Company, neither Parent nor the
Company shall, or shall permit any of its Subsidiaries to, issue
or cause the publication of any press release or other public
announcement with respect to, or otherwise make any public
statement concerning, the transactions contemplated by this
Agreement without the consent of the Company, in the case of a
proposed announcement or statement by Parent, or Parent, in the
case of a proposed announcement or statement by the Company,
which consent shall not be unreasonably withheld.
Section 9.9 Assignment;
Third Party Beneficiaries. Neither this
Agreement nor any of the rights, interests or obligations shall
be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the
other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
Except (a) as otherwise specifically provided in
Section 6.7, and (b) for the rights of Parent
and the Company, on behalf of their respective stockholders, to
pursue damages pursuant Section 8.2(a)(ii) hereof,
this Agreement (including the documents and instruments referred
to herein) is not intended to confer upon any person other than
the parties hereto any rights or remedies hereunder.
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Section 9.10 Specific
Performance. The parties hereto agree that
irreparable damage would occur if any provision of this
Agreement were not performed in accordance with the terms hereof
and, accordingly, that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
or to enforce specifically the performance of the terms and
provisions hereof (including the parties obligation to
consummate the Merger) in any federal court located in the State
of New York (or, to the extent that subject matter or personal
jurisdiction does not exist in any such federal court, then in
any New York state court located in New York County), in
addition to any other remedy to which they are entitled at law
or in equity. Each of the parties hereto submits to the
jurisdiction of any such court in any suit, action or proceeding
seeking to enforce any provision of, or based on any matter
arising out of, or in connection with, this Agreement or the
transactions contemplated hereby and hereby irrevocably waives
the benefit of jurisdiction derived from present or future
domicile or otherwise in such action or proceeding. Each party
hereto irrevocably waives, to the fullest extent permitted by
law, any objection that it may now or hereafter have to the
laying of the venue of any such suit, action or proceeding in
any such court or that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient
forum.
[Signature
Page Follows]
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IN WITNESS WHEREOF, Parent, Merger Sub and the
Company have caused this Agreement to be executed by their
respective officers thereunto duly authorized as of the date
first above written.
CATALYTIC SOLUTIONS, INC.
Name:
Title:
CLEAN DIESEL TECHNOLOGIES, INC.
Name:
Title:
CDTI MERGER SUB, INC.
Name:
Title:
[Signature Page to Agreement and Plan of Merger]
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Exhibit A
CERTAIN
DEFINITIONS
Capitalized and certain other terms used in this Agreement
and Plan of Merger (Agreement) have the meanings set
forth below. Unless the context otherwise requires,
(i) such terms shall include the singular and plural and
the conjunctive and disjunctive forms of the terms defined, and
(ii) references are to the appropriate location in the
Agreement.
1997 Plan has the meaning set forth in
Section 2.5(a).
2006 Plan has the meaning set forth in
Section 2.5(b).
2006 Plan Award has the meaning set forth in
Section 2.5(b).
2006 Plan Option has the meaning set forth in
Section 6.6.
Acquisition Agreement has the meaning set
forth in Section 8.2(b)(i)(B)(2).
Acquisition Proposal has the meaning set
forth in Section 6.12(e).
Acting Party has the meaning set forth in
Section 6.12(b).
Action means any action, order, writ,
injunction, judgment or decree outstanding or claim, suit,
litigation, proceeding, arbitration, charge, hearing, audit or
investigation by or before any Governmental Entity or arbitrator.
Adjusted Ratio has the meaning set forth in
Section 2.1.
Affiliate has the meaning set forth in
Rule 144 under the Securities Act.
Aggregate CSI Stock Consideration has the
meaning set forth in Section 2.1.
Agreement has the meaning set forth in the
preamble.
AIM means the Alternative Investment Market
of the London Stock Exchange.
Alternative Transaction has the meaning set
forth in Section 6.12(e).
ARS Redemption means the redemption,
repurchase or other acquisition of all of Parents
investment in auction rate securities and auction rate
securities rights pursuant to the ARSR Commitment.
ARSR Commitment means the obligation of UBS
to redeem, repurchase or otherwise acquire Parents
investment in auction rate securities and auction rate
securities rights on July 1, 2010 and payment to Parent not
later than July 1, 2010.
ARSR Credit Facility means the UBS Bank USA
Collateral and Credit Line Agreements dated December 24,
2008, as in effect on the date hereof to which Parent is a party
or beneficiary.
ARSR Net Amount means, as of the date of
determination and to the extent not otherwise included in
determining Parent Cash Position, the amount of the ARSR
Commitment that has not been paid to Parent less the amount of
Parents repayment obligations under ARSR Credit Facility.
Assets means, with respect to any Person, all
land, buildings, improvements, leasehold improvements, fixtures
and equipment and other assets, real or personal, tangible or
intangible, owned or leased by such Person or any of its
Subsidiaries.
Audits means any audit, assessment, or other
examination relating to Taxes by any Tax Authority or any
judicial or administrative proceedings relating to Taxes.
Bankruptcy and Equity Exception has the
meaning set forth in Section 3.4.
Capital Works Warrants means the warrants to
acquire an aggregate of 3,117,115 shares of Company Common
Stock issued to Capital Works ECS Investors, LLC.
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CDTI Percentage has the meaning set forth in
Section 2.1.
CDTI Percentage Penalty has the meaning set
forth in Section 2.1.
Certificate of Merger has the meaning set
forth in Section 1.3.
CGCL has the meaning set forth in the
recitals.
Change in Recommendation has the meaning set
forth in Section 6.12(a)(iii).
Closing has the meaning set forth in
Section 1.2.
Closing Date has the meaning set forth in
Section 1.2.
Code means the U.S. Internal Revenue
Code of 1986, as amended.
Company has the meaning set forth in the
preamble.
Companys AIM Reports has the meaning
set forth in Section 3.7(a).
Company Balance Sheet has the meaning set
forth in Section 3.7(b).
Company Cash Position means the good faith
estimate, determined in the manner provided in
Section 2.2(a), of the amount that would be included under
the caption Cash and cash equivalents if a
consolidated balance sheet of the Company were to be prepared as
at June 30, 2010 in accordance with U.S. GAAP in a
manner consistent with the Company Balance Sheet, less the
amount of any such cash and cash equivalents that is
restricted and subject to the following adjustments:
(a) adding to cash the proceeds, net of any unpaid
investment banking fees, of the Company Financing paid to the
Company subsequent to June 30, 2010 and not later than the
Closing Date; (b) adding to cash any investment banking or
legal fees or other out of pocket expenses incurred in
connection with the Merger and previously paid; provided that in
no event may the amounts in (b) exceed the difference
between $500,000 and any Merger related expenses that have not
been paid; (c) subtracting from cash any accrued and unpaid
directors fees; and (d) subtracting from cash any
cash acquired by virtue of violations of Section 6.1(b)
hereof.
Company Certificates has the meaning set
forth in Section 2.6.
Company Common Stock has the meaning set
forth in Section 2.1.
Company Designee means a person designated on
Schedule 6.11(a) or Schedule 6.11(b) as being one of
the designees of the Company to Parents or Merger
Subs Board of Directors, as the case may be.
Company Disclosure Schedule has the meaning
set forth in the introductory paragraph of Article III.
Company Employees has the meaning set forth
in Section 3.9(a)(ii)(x).
Company Financial Advisor has the meaning set
forth in Section 3.23.
Company Financial Statements has the meaning
set forth in Section 3.7(b).
Company Financing means the issuance of
securities or the incurrence of debt or other obligations of the
Company, the proceeds of which may be used by the Company to
supplement its Cash Position; provided that any debt shall have
been repaid, converted to equity or otherwise extinguished not
later than the Closing Date.
Company Indemnified Parties has the meaning
set forth in Section 6.7(a).
Company IP means all Intellectual Property
that is owned solely or jointly, used, held for use or exploited
by Company or any of its Subsidiaries in connection with the
current conduct of their businesses.
Company Material Adverse Effect means a
Material Adverse Effect affecting, individually or in the
aggregate, the Company
and/or any
one of its Subsidiaries.
Company Material Contract has the meaning set
forth in Section .3.11(a).
Company Meeting has the meaning set forth in
Section 6.3.
A-54
Company Plans has the meaning set forth in
Section 3.9(a)(ii).
Company Shareholder Approval has the meaning
set forth in Section 3.4.
Company Stock Option means an option, granted
under a Company Stock Plan, to acquire shares of Company Common
Stock.
Company Stock Plans has the meaning set forth
in Section 2.5(b).
Company Warrants has the meaning set forth in
Section 2.1.
Confidentiality Agreement has the meaning set
forth in Section 6.2(b).
Contract has the meaning set forth in
Section 3.5(b).
CSI Percentage has the meaning set forth in
Section 2.1.
CSI Percentage Penalty has the meaning set
forth in Section 2.1.
Cycad Warrants means the warrants to acquire
an aggregate of 1,250,000 shares of Company Common Stock
issued to Cycad Group, LLC.
DGCL has the meaning set forth in the
recitals.
Debt means any and all debt and other
obligations (including principal and accrued but unpaid
interest) for borrowed money owed by the relevant Party and its
Subsidiaries.
Dissenting Shares has the meaning set forth
in Section 2.4(a).
Effective Time has the meaning set forth in
Section 1.3.
Encumbrances mean any claim, lien, pledge,
option, right of first refusal or first offer, charge, security
interest, deed of trust, mortgage, restriction or encumbrance
pertaining to the Assets held by or in favor of Third Parties.
Environmental Claim means any claim, action,
cause of action, investigation or notice (written or oral) by
any person or entity alleging potential liability (including
potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property
damages, personal injuries, or penalties) arising out of, based
on or resulting from (i) the presence, or release into the
environment, of any Material of Environmental Concern at any
location, whether or not owned or operated by a Party or any of
its Subsidiaries or (ii) circumstances forming the basis of
any violation, or alleged violation, of any Environmental Law.
Environmental Laws means all federal, state,
local and foreign Laws and regulations and common laws relating
to pollution, protection of human health or worker safety (as
such matters relate to Materials of Environmental Concern) or
the environment (including ambient air, surface water, ground
water, land surface or subsurface strata, and natural
resources), including Laws relating to emissions, discharges,
releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or
handling of Materials of Environmental Concern.
ERISA has the meaning set forth in
Section 3.9(a)(i).
ERISA Affiliate has the meaning set forth in
Section 3.9(j).
ERISA Employee Benefit Plan has the meaning
set forth in Section 3.9(a)(i).
Exchange Agent has the meaning set forth in
Section 2.6.
Exchange Fund has the meaning set forth in
Section 2.6.
Fifth Third Facility means the Companys
credit facility with Fifth Third Bank.
Form S-4
Registration Statement has the meaning set forth in
Section 6.1(a).
A-55
Governmental Entity means any governmental
body, court, agency, official or regulatory or other authority,
whether federal, state, local or foreign.
Incentive Plan means the Clean Diesel
Technologies, Inc. Incentive Plan as amended through
June 11, 2002.
Intellectual Property means (a) all
inventions, all improvements thereto and all patents, patent
applications, and patent disclosures, together with all
reissuances, continuations,
continuations-in-part,
divisions, revisions, extensions, and reexaminations thereof,
(b) registered and unregistered trademarks, service marks,
trade dress, trade styles, logos, trade names, and corporate
names, including all goodwill associated therewith, and all
applications, registrations, and renewals in connection
therewith, (c) all copyrightable works and copyrights and
all applications, registrations and renewals in connection
therewith, (d) all trade secrets, customer lists, supplier
lists, pricing and cost information, business and marketing
plans and other confidential business information, (e) all
computer programs and related software, (f) all know-how,
binding processes and other manufacturing processes,
(g) all other proprietary rights (including product and
part names and numbers, model names and numbers and
style and tooling), (h) all domain names,
urls, and registrations in respect thereof and
(i) all copies and tangible embodiments thereof.
Joint Proxy Statement/Prospectus has the
meaning set forth in Section 6.1(a).
Knowledge means the actual knowledge (after
reasonable inquiry) of those members of senior management of the
Company or Parent, as the case may be, whose duties would, in
the normal course of the Companys or Parents
affairs, as the case may be, result in such member or members
having such knowledge.
Law means any constitution, law, statute,
common law, treaty, rule, directive, requirement or regulation
or Order of any Governmental Entity.
Licensed Company IP means all Company IP that
is not owned solely or jointly by the Company or any of its
Subsidiaries, and that the Company or any of its Subsidiaries
has a right to use or exploit by virtue of any agreement entered
into with the sole owner, or one or more joint owner(s), of such
Company IP.
Licensed Parent IP means all Parent IP that
is not owned solely or jointly by Parent or any of its
Subsidiaries, and that Parent or any of its Subsidiaries has a
right to use or exploit by virtue of any agreement entered into
with the sole owner, or one or more joint owner(s), of such
Parent IP.
Material Adverse Effect means (i) any
material change, effect, event, development, occurrence,
condition or state of facts (individually or in the aggregate
with all other such changes, effects, events, developments,
occurrences or states of fact) in the business, operations,
assets, results of operation or condition (financial or
otherwise) of a Party, provided that any change, effect, event,
development, occurrence, condition or state of facts resulting
from or attributable to the following will not be taken into
account in determining whether a Material Adverse Effect has
occurred or would reasonably be likely to occur: (a) the
economy or financial markets in general, except to the extent
such changes adversely affect the affect Party in a
disproportionate manner relative to other persons in such
Partys industry, (b) the economic, business,
financial or regulatory environment generally affecting the
industry in which the affected Party operates, except to the
extent such changes adversely affect such Party and its
Subsidiaries in a disproportionate manner relative to other
persons in such Partys industry, (c) changes in Law
or applicable accounting regulations or principles or
interpretations thereof, except to the extent such changes
adversely affect the affect Party and its Subsidiaries in a
disproportionate manner relative to other persons in such
Partys industry, (d) the announcement or pendency of
the Agreement or the transactions contemplated hereby, or
(e) an act of terrorism or an outbreak or escalation of
hostilities or war (whether declared or not declared) or any
natural disasters or any national or international calamity or
crisis, except to the extent such changes adversely affect the
affected Party and its Subsidiaries in a disproportionate manner
relative to other persons in such Partys industry,
and/or
(ii) any change, effect, event, development, occurrence,
condition or state of facts that (individually or in the
aggregate with all other such changes, effects, events,
developments, occurrences or states of fact) prevents or
materially impedes or materially delays the consummation by the
affected Party of the Merger or the other transactions
contemplated hereby.
A-56
Materials of Environmental Concern means
chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products, asbestos
or asbestos-containing materials or products, polychlorinated
biphenyls, lead or lead-based paints or materials, radon, fungus
or mold.
Maximum Amount has the meaning set forth in
Section 6.7(b)(ii).
Merger has the meaning set forth in
Section 1.1.
Merger Consideration has the meaning set
forth in Section 2.1.
Merger Sub has the meaning set forth in the
preamble.
more than 15% has the meaning set forth in
Section 8.2(d).
Order means any judgment, order, writ,
preliminary or permanent injunction or decree of any
Governmental Entity.
Outstanding CDTI Shares has the meaning set
forth in Section 2.1.
Outstanding CSI Shares has the meaning set
forth in Section 2.1.
Owned Company IP means all Company IP that is
not Licensed Company IP.
Owned Parent IP means all Parent IP that is
not Licensed Parent IP.
Parent has the meaning set forth in the
preamble.
Parent Balance Sheet has the meaning set
forth in Section 4.7(b).
Parent Cash Position means the good faith
estimate, determined in the manner provided in
Section 2.2(a) and 2.2(d), of the amount that would be
included under the caption Cash and cash
equivalents, less the amount of any such cash and cash
equivalents that is restricted, if a consolidated
balance sheet of Parent were to be prepared as at June 30,
2010 in accordance with U.S. GAAP in a manner consistent
with the Parent Balance Sheet, and subject to the following
adjustments: (a) adding to cash the ASR Net Amount;
(b) adding to cash the proceeds, net of any unpaid
investment banking fees, of the Company Financing ;
(c) adding to cash any investment banking or legal fees or
other out of pocket expenses incurred in connection with the
Merger and previously paid, provided that in no event may the
amounts in (c) exceed the difference between $500,000 and
any merger related expenses that have not been paid;
(d) subtracting from cash any accrued and unpaid
directors fees; and (e) subtracting from cash any
cash acquired by virtue of violations of Section 6.1(b)
hereof.
Parent Certificate has the meaning set forth
in Section 6.14.
Parent Closing Share Price means the average
of the daily volume weighted average sale price of one share of
Parent Common Stock for the five trading days immediately
preceding the Closing Date on the NASDAQ Capital Market.
Parent Common Stock has the meaning set forth
in Section 2.1(a).
Parent Designee means a person designated on
Schedule 6.11(a) or 6.11(b) as being one of Parents
stockholders designees to Parents Board of Directors or
Merger Subs Board of Directors, as the case may be.
Parent Disclosure Schedule has the meaning
set forth in the introductory paragraph of Article IV.
Parent Employees has the meaning set forth in
Section 4.9(a)(ii)(x).
Parent Financial Advisor has the meaning set
forth in Section 4.23.
Parent Financial Statements has the meaning
set forth in Section 4.7(b).
Parent Financing has the meaning set forth in
Section 2.1.
Parent Indemnified Parties has the meaning
set forth in Section 6.7(a).
A-57
Parent IP means all Parent IP that is not
owned solely or jointly by Parent or any of its Subsidiaries,
and that Parent or any of its Subsidiaries has a right to use or
exploit by virtue of any agreement entered into with the sole
owner, or one or more joint owner(s), of such Parent IP.
Parent Material Adverse Effect means a
Material Adverse Effect affecting, individually or in the
aggregate, Parent
and/or any
one of its Subsidiaries (including Merger Sub).
Parent Material Contract has the meaning set
forth in Section 4.11(a).
Parent Meeting has the meaning set forth in
Section 6.3.
Parent Option means an option, granted under
the Incentive Plan, to acquire shares of Parent Common Stock.
Parent Plans has the meaning set forth in
Section 4.9(a)(ii).
Parent Preferred Stock has the meaning set
forth in Section 4.2(a).
Parent Shareholder Approval has the meaning
set forth in Section 4.24.
Parent Warrants has the meaning set forth in
Section 2.1.
Parties means Parent, Merger Sub and the
Company.
Permitted Encumbrances means (a) any and
all Encumbrances that result from all statutory or other liens
for Taxes or assessments and are not yet due and payable or
delinquent or the validity of which is being contested in good
faith by appropriate proceedings by a Party hereto and for which
appropriate reserves have been established in accordance with US
GAAP; (b) all material cashiers, landlords,
workers, mechanics, carriers, repairers
and other similar liens imposed by law and incurred in the
ordinary course of business; and (c) other Encumbrances
that individually or in the aggregate do not materially detract
from the value of or materially interfere with the present use
of the property subject thereto or affected thereby or would not
otherwise be expected to cause a Material Adverse Effect.
Person means any individual, corporation,
partnership, limited liability company, joint venture, real
estate investment trust, other organization (whether
incorporated or unincorporated), governmental agency or
instrumentality, or any other legal entity.
Personal Property means all tangible personal
property owned, leased or rented by a Party or any of its
Subsidiaries but, for avoidance of doubt, Personal Property does
not include Company IP or Parent IP.
Pre-Termination Takeover Proposal Event
has the meaning set forth in Section 8.2(d).
Requisite Regulatory Approvals has the
meaning set forth in Section 7.1(d).
Release means any release, pumping, pouring,
emptying, injecting, escaping, leaching, migrating, dumping,
seepage, spill, leak, flow, discharge, disposal or emission.
Reverse Stock Split has the meaning set forth
in Section 6.13.
SEC means the U.S. Securities and
Exchange Commission.
SEC Reports has the meaning set forth in
Section 4.7(a).
Secretary of State has the meaning set forth
in Section 1.3.
Securities Act means the Securities Act of
1933, as amended.
Stockholder Vote Option has the meaning set
forth in Section 6.12(c).
Surviving Corporation has the meaning set
forth in Section 1.1.
SVB Warrants means the warrants to acquire an
aggregate of 37,500 shares of Company Common Stock issued
to Silicon Valley Bank.
A-58
Tax or Taxes means
federal, state, county, local, foreign or other income, gross
receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental,
communications, real or personal property, capital interests,
license, payroll, wage or other withholding, employment, social
security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever
(including deficiencies, penalties, additions to tax, and
interest attributable thereto) whether disputed or not and
including any obligations to indemnify or otherwise assume or
succeed to the tax liability of any other person (including any
obligation to make a tax distribution to members of a
partnership or limited liability company).
Tax Authorities means the U.S. Internal
Revenue Service and any other domestic or foreign Governmental
Entity responsible for the administration of any Taxes.
Tax Returns means all federal, state, local,
and foreign tax returns, declarations, statements, reports,
schedules, forms, and information returns and any amendments
thereto.
Third Party means any person other than
Parent, Merger Sub, the Company and their respective Affiliates.
Trade Secrets means trade secrets and
confidential information and rights in any jurisdiction to limit
the use or disclosure thereof by any Person.
US GAAP has the meaning set forth in
Section 3.6.
A-59
Annex B
AMENDMENT
TO CERTIFICATE OF INCORPORATION
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE
OF INCORPORATION
OF
CLEAN DIESEL TECHNOLOGIES, INC.
Clean Diesel Technologies, Inc., a corporation organized and
existing under the General Corporation Law of the State of
Delaware (the Corporation), hereby does
certify:
FIRST: The name of the corporation is Clean
Diesel Technologies, Inc. The original Certificate of
Incorporation of the Corporation was filed with the Secretary of
State of Delaware on January 19, 1994. A Restated
Certificate of Incorporation was filed with the Secretary of
State of Delaware on March 21, 2007 (the Restated
Certificate). A Certificate of Amendment to the
Restated Certificate was filed with the Secretary of State of
Delaware on June 15, 2007.
SECOND: That the Board of Directors of the
Corporation on May 11, 2010 duly adopted resolutions
setting forth a proposed amendment of the Restated Certificate,
as heretofore amended, declaring said amendment to be advisable
and in the best interests of the Corporation, and authorizing
the distribution of a resolution to the stockholders of the
Corporation for consideration thereof.
THIRD: That a majority of the stockholders of
the Corporation entitled to vote thereon, at the annual meeting
of the stockholders held
on ,
2010, voted to authorize said amendment in accordance with the
provisions of Section 211 of the General Corporation Law of
the State of Delaware.
FOURTH: That the said amendment was duly
adopted in accordance with the applicable provisions of
Sections 211, 222 and 242 of the General Corporation Law of
the State of Delaware. The Restated Certificate is hereby
amended as follows:
The introductory paragraph of Article 4 is hereby deleted
in its entirety and replaced with the following:
4. The corporation shall have authority to issue the
total number of Thirty-Five Million One Hundred Thousand
(35,100,000) Shares of the par value of $0.01 per share,
amounting in the aggregate to Three Hundred Fifty-One Thousand
Dollars ($351,000), and of such shares Thirty-Five Million
(35,000,000) shall be designated as Common Stock and One Hundred
Thousand (100,000) shall be designated as preferred stock.
Effective at 6:00 p.m. (Clean Diesel Time) on the date of
filing of this Certificate of Amendment (such time, the
Effective Time), every three (3) shares of
Common Stock outstanding immediately prior to the Effective Time
(such shares, the Old Common Stock) shall
automatically without further action on the part of the
Corporation be combined into one (1) fully paid and
nonassessable share of Common Stock (the New Common
Stock), subject to the treatment of fractional shares
described below. From and after the Effective Time, certificates
representing the Old Common Stock shall, without the necessity
of presenting the same for exchange, represent the number of
shares of New Common Stock into which such Old Common Stock
shall have been converted pursuant to this Certificate of
Amendment. There shall be no fractional shares issued.
Stockholders who otherwise would be entitled to receive
fractional shares because they hold a number of shares of Common
Stock not evenly divisible by three (3), will be entitled to
receive cash in lieu of fractional shares at the value thereof
on the date of the Effective Time as determined by the Board of
Directors.
FIFTH: the Restated Certificate is hereby
ratified and confirmed in all other respects.
B-1
IN WITNESS WHEREOF, this Corporation has caused this Certificate
to be duly executed this th day
of
2010.
CLEAN DIESEL TECHNOLOGIES, INC.
Name: Charles W. Grinnell
|
|
|
|
Title:
|
Vice President and Secretary
|
B-2
Annex C
WRITTEN
OPINION OF ARDOUR CAPITAL INVESTMENTS, LLC
May 11, 2010
The Board of Directors
Clean Diesel Technologies, Inc.
10 Middle Street
Suite 1100
Bridgeport, CT 06604
Dear Members of the Board,
We understand that Clean Diesel Technologies, Inc., a publicly
traded Delaware corporation listed on the NASDAQ Capital Market
(Clean Diesel or Clean Diesel), is
considering a merger (the Transaction) with
Catalytic Solutions, Inc. (Catalytic Solutions or
CSI), a publicly traded California corporation
traded on the London Stock Exchange Alternative Investment
Market (London AIM). The proposed merger agreement Ardour
Capital Investments, LLC (Ardour) reviewed is
outlined in the draft Summary of Terms dated February 24,
2010 and detailed in the March 10, 2010 draft Agreement and
Plan of Merger. You have requested our opinion as to the
fairness of the Consideration from a financial point of view to
the shareholders of Clean Diesel.
Within the last twelve months, Ardour has not acted as financial
advisor to the Board of Directors of Clean Diesel with regard to
ongoing business matters in the ordinary course. Neither Ardour,
nor its employees, affiliates nor shareholders shall receive a
fee for advising Clean Diesel on the Transaction. Ardour will
receive a fee for issuing this opinion.
In the ordinary course of business during the past twelve
months, Ardour, its subsidiaries, branches or affiliates may
have traded Clean Diesel securities for their own accounts and
the accounts of their customers and, accordingly, may at any
time hold long or short positions in such securities. Ardour
does not make a market in Clean Diesel shares.
Our opinion does not address fairness of the Transaction,
financially or otherwise, to the holders of Catalytic Solutions
shares.
In rendering this opinion we have assumed, with your consent,
the final Agreement and Plan of Merger will not differ in any
material respect from the draft Agreement and Plan of Merger
dated March 10, 2010 reviewed by us. We have not been
authorized to and have not solicited indications of interest in
a business combination with Clean Diesel from any party nor did
we participate in any negotiations on behalf of Clean Diesel or
Catalytic Solutions regarding the Agreement and Plan of Merger
or subsequent transactions.
In arriving at our opinion, we have:
(i) reviewed the draft Summary of Terms dated,
February 24, 2010, between Clean Diesel Technologies, Inc.
and Catalytic Solutions, Inc.
(ii) reviewed the draft Agreement Plan of Merger dated,
March 10, 2010 between Clean Diesel Technologies, Inc. and
Catalytic Solutions, Inc.
(iii) had discussions with management of Clean Diesel
Technologies, Inc. regarding the history and nature, as well as
the current and future prospects for the environmental emissions
control market for Clean Diesel Technologies, Inc.s and
Catalytic Solutions, Inc.s technology
(iv) reviewed Clean Diesels audited financial
statements for the year ending December 31, 2009 filed with
the SEC on March 25, 2010
C-1
(v) reviewed CSIs Managements Discussion
of Results and audited financial statements for the year
ended December 31,2009, both as provided by Clean Diesel
management
(vi) reviewed the capitalization table of Clean Diesel
(vii) reviewed the capitalization of CSI with the exception
of a complete derivative securities provisions review
(viii) reviewed Clean Diesels prepared financial
projections for 2010 though 2014
(ix) reviewed CSIs financial projections for 2010 and
2011 included in the PDF (portable document format) version of
the merger model provided by Clean Diesel management
(x) reviewed separate third party valuation assessments of
both Clean Diesel and CSI
(xi) reviewed publicly available data for comparable
companies
(xii) reviewed certain publicly available financial
information relating to Clean Diesel and Catalytic Solutions
(xiii) reviewed a pro forma capitalization table and a pro
forma balance sheet, both as of the effective time of the
contemplated merger, as jointly prepared by management of CSI
and Clean Diesel, and
(xiv) conducted such other financial studies, analyses,
investigations, and considered such other information as we
deemed necessary or appropriate
In connection with our review, with your consent, we have not
independently verified any of the information reviewed by us for
the purpose of this opinion and have, with your consent, relied
on such information being complete and accurate in all material
respects. In addition, at your direction, we have not made any
independent evaluation or appraisal of any of the assets or
liabilities (contingent or otherwise) of Clean Diesel or
Catalytic Solutions, and have not been furnished with any such
evaluation or appraisal. We note that we are not tax,
accountancy or other specialist advisors and we have not made
any determination as to the value of Clean Diesels or
Catalytic Solutions tax loss carry-forwards and have
assumed, based on Clean Diesels managements
assessment that no opportunity exists for Clean Diesel to
realize a material value through the use of such tax loss
carry-forwards, that the value of tax loss carry forwards is not
material to Clean Diesel. Our opinion is necessarily based on
economic, monetary, market and other conditions as in effect on,
and the information made available to us as of, the date hereof.
This letter and the opinion contained herein are provided for
the benefit of the Board of Directors and shareholders of Clean
Diesel only in connection with and for the purposes of their
consideration of the Transaction.
The following is a summary of the principal financial analyses
performed by Ardour to arrive at its opinion. In reviewing the
materials provided by Clean Diesel and Catalytic Solutions, it
was determined that the limited public market for the securities
of the two companies formed an insufficient basis from which to
value the combination. We have chosen comparable companies and
discounted cash flow analyses to value the merger combination of
Clean Diesel and Catalytic Solutions.
Comparable Company Analysis:
This analysis establishes value through a comparative analysis
of similar publicly traded companies active in similar industry
sectors. The approach compares ratios of income statement,
balance sheet and cash flow quantities versus known public
valuations and extrapolates the subject companys value
from said ratios.
Discounted Cash Flow Analysis:
The discounted cash flow analysis establishes the value of a
company whose asset base is determined to consist primarily of
intangible assets, through the capitalization of free cash flows
anticipated to be generated by the company. The procedure
requires calculating the net present value of the projected free
C-2
cash flow discounted by a risk adjusted rate of return over the
anticipated economic life of the investment.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the proposed Transaction is fair from a
financial point of view to the shareholders of Clean Diesel.
Yours faithfully,
Ardour Capital Investments, LLC
C-3
Annex D
WRITTEN
OPINION OF MARSHALL & STEVENS, INC.
May 11, 2010
The Board of Directors of Catalytic Solutions, Inc.
4567 Telephone Road, Suite 206
Ventura, CA 93003
Members of the Board of Directors:
We understand that the Board of Directors of Catalytic
Solutions, Inc. (CSI or the Company) is
contemplating a transaction (the Transaction) in
which a wholly-owned subsidiary of Clean Diesel Technologies,
Inc. (the Merger Sub and Clean Diesel
respectively) would be merged with and into the CSI (the
Merger), as a result of which CSI would become a
wholly-owned subsidiary of Clean Diesel pursuant to the terms of
an Agreement and Plan of Merger to be entered into by and among
Clean Diesel, Merger Sub and CSI ( the Merger
Agreement), a copy of which has been previously provided
to us by the Company.
The Merger Agreement contemplates that, immediately prior to the
consummation of the Merger, the certificate of incorporation of
CSI will be amended to authorize a second class of common stock
to be designated Class B Common Stock (the
Class B Common Stock) having terms that are
substantially the same as the existing common stock of CSI,
which will re-designated as Class A Common Stock (the
Class A Common Stock). The Merger Agreement
further contemplates that CSI will secure interim funding
through the issuance of secured convertible notes (the
Notes) in the aggregate principal amount of
$4,000,000, and that such Notes will convert into shares of
Class B Common Stock immediately prior to the Merger.
The Merger Agreement provides that Clean Diesel will issue to
CSI stockholders a number of shares that will result in an
Adjusted Ratio; provided that in no event shall the
post merger ownership by such CSI stockholders exceed 90.0%, of
Clean Diesel with 10.0% ownership remaining with the pre-merger
Clean Diesel stockholders, or be less than 48.0% , with 52.0%
ownership to the premerger Clean Diesel stockholders.
Adjusted Ratio is derived by dividing (i) the
CSI Ownership Percentage by (ii) the Clean Diesel Ownership
Percentage, as such terms are defined in the Merger Agreement.
For purposes of this opinion, among other things, we assumed the
lowest possible ratio under the Merger Agreement (that being
48.0% to premerger CSI stockholders with 52.0% being retained by
the premerger Clean Diesel stockholders). We assumed that
8,213,988 shares of Clean Diesel are outstanding as of the
date of this opinion and we assumed, based on information
provided to us by management, the premerger issuance by Clean
Diesel of an additional 1,305,587 shares, for a total
number of Clean Diesel outstanding shares of 9,519,575 as of the
effective time of the Merger. We also assumed that
69,761,902 shares of CSI common stock are outstanding as of
the date of this opinion and, after giving effect to the
exercise of 1,250,000 of premerger warrants, that there will be
a total of 71,011,902 shares of Class A Common Stock
outstanding as of the effective time of the Merger. We also
assumed, based on information provided to us by management, that
the Company will issue $4,000,000 Notes, which will be converted
into 173,664,478 shares of a newly created Class B
Common Stock immediately prior to the Merger. On the basis of
the lowest possible Adjusted Ratio, we thus assumed that the
Class A Common Stock outstanding after exercise of the
above referenced warrants, will, at the effective time of the
Merger, convert into 2,371,718 shares of the common stock
of Clean
D-1
Diesel (Clean Diesel Common Stock) and that the
Class B Common Stock will convert into
5,800,198 shares of Clean Diesel Common Stock. We have also
assumed the Allen & Company will receive 615,384 Clean
Diesel Stock and 1,000,000 of warrants in consideration of
services rendered. In addition, we assumed that a total of
3,000,000 warrants will be issued to the Class A Common
Stockholders, 1,000,000 to existing Clean Diesel stockholders
and that no additional shares or warrants will be issued to the
premerger Clean Diesel stockholders. For purposes of this
opinion, the term Merger Consideration means the
2,371,718 shares of Clean Diesel common stock and the
3,000,000 Clean Diesel warrants to be received by the holders of
the Class A Common Stock upon effectiveness of the Merger,
such Clean Diesel shares and Clean Diesel warrants to be
allocated prorate to the holders of such Class A Common
Stock.
You have requested Marshall & Stevens, Incorporated
(referred to herein as Marshall & Stevens
or we, us, our or words of
similar import) to advise the Board of Directors as to the
fairness, from a financial point of view, of the Merger
Consideration to be received by the holders of Class A
Common Stock (the Class A Common Stockholders)
in the Transaction. We have not been asked to render any opinion
with respect to the fairness of the issuance of the Notes, the
fairness of the terms of the Notes, as to the fairness of the
consideration to be received in the Transaction by the holders
of such Notes (either in their capacity as the holders of such
Notes or, after conversion, in their capacity as the holders of
Class B Common Stock) or as to the fairness of the
transaction to any other person, and we specifically express no
opinion as to such matters. We have not been engaged to serve as
the financial advisor to the CSI or the Board of Directors, were
not involved in the negotiation or structuring of the
Transaction, and have not been asked to consider any
non-financial elements of the Transaction or any other
alternatives that might be available to CSI, the Board of
Directors of the Class A Common Stockholders. Our services
in rending this opinion have been in our capacity as an
independent contractor and not as a fiduciary to the Board of
Directors, CSI, the Class A Common Stockholders or any
other person.
In connection with this opinion, we have made such reviews,
analysis and inquiry as we, in the exercise of our professional
judgment, have deemed necessary and appropriate under the
circumstances. We have considered, among other things, the
following information:
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Information obtained during interviews of members of the
CSIs management, Clean Diesels management, and
CSIs legal counsel;
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The Draft Merger Agreement dated May 5, 2010;
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The Pro-forma Capitalization Table including Management Stock
dated on May 7, 2010;
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CSIs audited financial statements for the fiscal year
ended December 31, 2003, 2004, and 2005;
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The Annual Report and Financial Statement of CSI for the fiscal
year ended December 31, 2006, 2007, and 2008;
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CSIs internal unaudited financial statements for the
six-month period ended June 30, 2008 and for the fiscal
year ended December 31, 2009;
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The 10K filing of Clean Diesel for the fiscal year ended
December 31, 2009;
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CSIs projected P&L for the fiscal year ending from
December 31, 2010 to December 31, 2014 provided by CSI;
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Clean Diesels five-year financial statement projections
from December 31, 2010 through December 31, 2014
provided by CSI;
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The various third-party valuation reports regarding CSI and
Clean Diesel;
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The Corporate Overview, Business Strategy and other market
presentation of CSI and Clean Diesel;
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D-2
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Market trading prices and indicated valuation metrics for CSI,
Clean Diesel, and comparable public companies;
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Valuation metrics for comparable merger transactions;
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Pertinent economic and industry information;
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Third-party industry and economic research, including, but not
limited to, Capital IQ, equity research reports and IBISWorld
Industry Research, and OneSource; and
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Other studies and analysis as we deemed appropriate.
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With your consent, we have i) relied upon the accuracy and
completeness of the financial and supplemental information
(a) provided by or on behalf of CSI or Clean Diesel or
(b) which we have otherwise obtained from public sources or
from private sources and which we believe, in the exercise of
our professional judgment to be reasonably dependable,
ii) not assumed responsibility for independent verification
of such information, or iii) not conducted any independent
valuation or appraisal of any assets of CSI or Clean Diesel or
any appraisal or estimate of the liabilities of CSI or Clean
Diesel. With respect to the financial forecasts relating to CSI
and/or the
company resulting from the Transaction (the Resultant
Company), we have assumed, with your consent, that such
forecasts have been reasonably prepared on the basis of and
reflecting the best currently available estimates and judgments
of management at CSI as to the future financial performance of
CSI or the Resultant Company, as the case may be. With respect
to financial forecasts relating to Clean Diesel
and/or the
Resultant Company, we have assumed, with your consent, that such
forecasts have been reasonably prepared on the basis of and
reflecting the best current available estimates and judgments of
management at Clean Diesel as to the future financial
performance of Clean Diesel or the Resultant Company, as the
case may be. With your consent, we assume no responsibility for,
and express no view as to, such financial forecasts or the
assumptions on which they are based. Our opinion assumes that
Merger Sub is wholly owned by Clean Diesel and has no separate
business operations, assets or liabilities.
With your consent, we have assumed that the Transaction is
consummated in accordance with the terms and conditions set
forth in the Merger Agreement and that the Clean Diesel shares
issued in connection with the Transaction will, upon issuance as
provided in the Merger Agreement, be duly issued and
non-assessable and listed for immediate trading on the NASDAQ
Capital Market.
Our opinion is based upon economic, market and other conditions
as they exist and can reasonably be evaluated on the date hereof
and does not address the fairness of the Merger Consideration as
of any other date. In rendering our opinion we have assumed that
the factual circumstances, agreements and terms, as they existed
at the date of the opinion, will remain substantially unchanged
through the time the Merger is completed. It is understood that
financial markets are subject to volatility, and our opinion
does not purport to address potential developments in applicable
financial markets.
Our opinion expressed herein has been prepared for the Board of
Directors in connection with its consideration of the
Transaction, and may not be relied upon by any other person. Our
opinion does not constitute a recommendation to the Board of
Directors or the holders of Class A Common Stock, Notes or
B Common Stock or any other person as to any action the Board of
Directors, CSI or any other person should take in connection
with the Transaction or any aspect thereof and specifically is
not a recommendation to purchase the Notes. Our opinion does not
address the merits of the Transaction or the underlying decision
by Board of Directors to engage in the Transaction or the
relative merits of any alternatives that may be available to CSI
or the holders of its equity securities or debt. This opinion
addressed only the financial aspects of the Transaction (i.e.
the value of the Merger Consideration that will be received by
the Class A Common Stockholders in the Transaction as
compared to the value of the shares that they own as of the date
of this opinion), and does not address any other aspect of the
Transaction. Furthermore, our opinion is not to be construed or
deemed to be a solvency opinion or provide any advice as to
legal, accounting or tax matters.
D-3
This opinion may not be reproduced, disseminated, quoted or
referred to at any time without our prior written consent.
Based on the subject to the foregoing, we are of the opinion
that, as of the date hereof, the Merger Consideration to be
received by the Class A Common Stockholders in the
Transaction is fair from a financial point of view.
Very truly yours,
Marshall & Stevens Incorporated
D-4
Annex E
CHAPTER 13
OF THE CALIFORNIA CORPORATIONS CODE
§1300.
Right to Require Purchase Dissenting
Shares and Dissenting Shareholder
Defined.
(a) If the approval of the outstanding shares
(Section 152) of a corporation is required for a
reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each
shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in
a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to
purchase for cash at their fair market value the shares owned by
the shareholder which are dissenting shares as defined in
subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the
proposed reorganization or short-form merger, excluding any
appreciation or depreciation in consequence of the proposed
action, but adjusted for any stock split, reverse stock split,
or share dividend which becomes effective thereafter.
(b) As used in this chapter, dissenting shares
means shares which come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization
or short-form merger either (A) listed on any national
securities exchange certified by the Commissioner of
Corporations under subdivision (o) of Section 25100 or
(B) listed on the National Market System of the NASDAQ
Stock Market, and the notice of meeting of shareholders to act
upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that
this provision does not apply to any shares with respect to
which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further,
that this provision does not apply to any class of shares
described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the
determination of shareholders entitled to vote on the
reorganization and (A) were not voted in favor of the
reorganization or, (B) if described in subparagraph
(A) or (B) of paragraph (1) (without regard to the
provisos in that paragraph), were voted against the
reorganization, or which were held of record on the effective
date of a short-form merger; provided, however, that
subparagraph (A) rather than subparagraph (B) of this
paragraph applies in any case where the approval required by
Section 1201 is sought by written consent rather than at a
meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance
with Section 1301.
(4) Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c) As used in this chapter, dissenting
shareholder means the recordholder of dissenting shares
and includes a transferee of record.
§1301.
Demand for Purchase.
(a) If, in the case of a reorganization, any shareholders
of a corporation have a right under Section 1300, subject
to compliance with paragraphs (3) and (4) of
subdivision (b) thereof, to require the corporation to
purchase their shares for cash, that corporation shall mail to
each such shareholder a notice of the approval of the
reorganization by its outstanding shares
(Section 152) within 10 days after the date of
that approval, accompanied by a copy of Sections 1300,
1302, 1303, and 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value
of the dissenting shares, and a brief description of the
procedure to be followed if the shareholder desires to exercise
the shareholders right under those sections. The statement
of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision
(b) of Section 1300, unless they lose their status as
dissenting shares under Section 1309.
E-1
(b) Any shareholder who has a right to require the
corporation to purchase the shareholders shares for cash
under Section 1300, subject to compliance with paragraphs
(3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase shares shall make written
demand upon the corporation for the purchase of those shares and
payment to the shareholder in cash of their fair market value.
The demand is not effective for any purpose unless it is
received by the corporation or any transfer agent thereof
(1) in the case of shares described in clause (A) or
(B) of paragraph (1) of subdivision (b) of
Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders
meeting to vote upon the reorganization, or (2) in any
other case within 30 days after the date on which the
notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the
shares held of record by the shareholder which the shareholder
demands that the corporation purchase and shall contain a
statement of what that shareholder claims to be the fair market
value of those shares as of the day before the announcement of
the proposed reorganization or short-form merger. The statement
of fair market value constitutes an offer by the shareholder to
sell the shares at that price.
§1302.
Endorsement of Shares.
Within 30 days after the date on which notice of the
approval by the outstanding shares or the notice pursuant to
subdivision (i) of Section 1110 was mailed to the
shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent
thereof, (a) if the shares are certificated securities, the
shareholders certificates representing any shares which
the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed or (b) if
the shares are uncertificated securities, written notice of the
number of shares which the shareholder demands that the
corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together
with the name of the original dissenting holder of the shares.
§1303.
Agreed Price Time for Payment.
(a) If the corporation and the shareholder agree that the
shares are dissenting shares and agree upon the price of the
shares, the dissenting shareholder is entitled to the agreed
price with interest thereon at the legal rate on judgments from
the date of the agreement. Any agreements fixing the fair market
value of any dissenting shares as between the corporation and
the holders thereof shall be filed with the secretary of the
corporation.
(b) Subject to the provisions of Section 1306, payment
of the fair market value of dissenting shares shall be made
within 30 days after the amount thereof has been agreed or
within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is
later, and in the case of certificated securities, subject to
surrender of the certificates therefor, unless provided
otherwise by agreement.
§1304.
Dissenters Action to Enforce Payment.
(a) If the corporation denies that the shares are
dissenting shares, or the corporation and the shareholder fail
to agree upon the fair market value of the shares, then the
shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after
the date on which notice of the approval by the outstanding
shares (Section 152) or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the
shares are dissenting shares or the fair market value of the
dissenting shares or both or may intervene in any action pending
on such a complaint.
(b) Two or more dissenting shareholders may join as
plaintiffs or be joined as defendants in any such action and two
or more such actions may be consolidated.
E-2
(c) On the trial of the action, the court shall determine
the issues. If the status of the shares as dissenting shares is
in issue, the court shall first determine that issue. If the
fair market value of the dissenting shares is in issue, the
court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
§1305.
Appraisers Report Payment
Costs.
(a) If the court appoints an appraiser or appraisers, they
shall proceed forthwith to determine the fair market value per
share. Within the time fixed by the court, the appraisers, or a
majority of them, shall make and file a report in the office of
the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on
such evidence as the court considers relevant. If the court
finds the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make
and file a report within 10 days from the date of their
appointment or within such further time as may be allowed by the
court or the report is not confirmed by the court, the court
shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306,
judgment shall be rendered against the corporation for payment
of an amount equal to the fair market value of each dissenting
share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest
thereon at the legal rate from the date on which judgment was
entered.
(d) Any such judgment shall be payable forthwith with
respect to uncertificated securities and, with respect to
certificated securities, only upon the endorsement and delivery
to the corporation of the certificates for the shares described
in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable
compensation to the appraisers to be fixed by the court, shall
be assessed or apportioned as the court considers equitable,
but, if the appraisal exceeds the price offered by the
corporation, the corporation shall pay the costs (including in
the discretion of the court attorneys fees, fees of expert
witnesses and interest at the legal rate on judgments from the
date of compliance with Sections 1300, 1301 and 1302 if the
value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under
subdivision (a) of Section 1301).
§1306.
Dissenting Shareholders Status as Creditor.
To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market
value, they shall become creditors of the corporation for the
amount thereof together with interest at the legal rate on
judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be
payable when permissible under the provisions of Chapter 5.
§1307.
Dividends Paid as Credit Against Payment.
Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the
reorganization by the outstanding shares
(Section 152) and prior to payment for the shares by
the corporation shall be credited against the total amount to be
paid by the corporation therefor.
§1308.
Continuing Rights and Privileges of Dissenting
Shareholders.
Except as expressly limited in this chapter, holders of
dissenting shares continue to have all the rights and privileges
incident to their shares, until the fair market value of their
shares is agreed upon or determined.
A dissenting shareholder may not withdraw a demand for payment
unless the corporation consents thereto.
E-3
§1309.
Termination of Dissenting Shareholder Status.
Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to
be entitled to require the corporation to purchase their shares
upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon
abandonment of the reorganization, the corporation shall pay on
demand to any dissenting shareholder who has initiated
proceedings in good faith under this chapter all necessary
expenses incurred in such proceedings and reasonable
attorneys fees.
(b) The shares are transferred prior to their submission
for endorsement in accordance with Section 1302 or are
surrendered for conversion into shares of another class in
accordance with the articles.
(c) The dissenting shareholder and the corporation do not
agree upon the status of the shares as dissenting shares or upon
the purchase price of the shares, and neither files a complaint
or intervenes in a pending action as provided in
Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice
pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder.
(d) The dissenting shareholder, with the consent of the
corporation, withdraws the shareholders demand for
purchase of the dissenting shares.
§1310.
Suspension of Proceedings for Payment Pending
Litigation.
If litigation is instituted to test the sufficiency or
regularity of the votes of the shareholders in authorizing a
reorganization, any proceedings under Sections 1304 and
1305 shall be suspended until final determination of such
litigation.
§1311.
Exempt Shares.
This chapter, except Section 1312, does not apply to
classes of shares whose terms and provisions specifically set
forth the amount to be paid in respect to such shares in the
event of a reorganization or merger.
§1312.
Attacking Validity of Reorganization or Merger.
(a) No shareholder of a corporation who has a right under
this chapter to demand payment of cash for the shares held by
the shareholder shall have any right at law or in equity to
attack the validity of the reorganization or short-form merger,
or to have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of
shares required to authorize or approve the reorganization have
been legally voted in favor thereof; but any holder of shares of
a class whose terms and provisions specifically set forth the
amount to be paid in respect to them in the event of a
reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal
terms of the reorganization are approved pursuant to subdivision
(b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved
reorganization.
(b) If one of the parties to a reorganization or short-form
merger is directly or indirectly controlled by, or under common
control with, another party to the reorganization or short-form
merger, subdivision (a) shall not apply to any shareholder
of such party who has not demanded payment of cash for such
shareholders shares pursuant to this chapter; but if the
shareholder institutes any action to attack the validity of the
reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, the
shareholder shall not thereafter have any right to demand
payment of cash for the shareholders shares pursuant to
this chapter. The court in any action attacking the validity of
the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall
not restrain or enjoin the consummation of the transaction
except upon 10 days prior notice to the corporation
and upon a determination by the court that
E-4
clearly no other remedy will adequately protect the complaining
shareholder or the class of shareholders of which such
shareholder is a member.
(c) If one of the parties to a reorganization or short-form
merger is directly or indirectly controlled by, or under common
control with, another party to the reorganization or short-form
merger, in any action to attack the validity of the
reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded,
(1) a party to a reorganization or short-form merger which
controls another party to the reorganization or short-form
merger shall have the burden of proving that the transaction is
just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to
a reorganization shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of any
party so controlled.
§1313.
Conversion Deemed to Constitute Reorganization for Purposes of
Chapter.
A conversion pursuant to Chapter 11.5 (commencing with
Section 1150) shall be deemed to constitute a
reorganization for purposes of applying the provisions of this
chapter, in accordance with and to the extent provided in
Section 1159.
E-5
Annex
F
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K/A
(Amendment
No. 1)
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended:
December 31, 2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File No.:
001-33710
CLEAN DIESEL TECHNOLOGIES,
INC.
(Exact name of
registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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06-1393453
(I.R.S. Employer
Identification No.)
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Suite 1100, 10 Middle Street
Bridgeport, CT
(Address of principal
executive offices)
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06604
(Zip Code)
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Registrants telephone number, including area code:
(203) 416-5290
Securities
registered pursuant to Section 12(b):
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g):
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in rule 405 of the Securities
Act. Yes o No þ
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 o No þ
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 þ No o
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 registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large Accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company þ
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
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, 2009 was $13,592,292.
As of April 28, 2010, the outstanding number of shares of
the registrants common stock, par value $0.01 per share,
was 8,213,988.
Documents incorporated by reference:
None.
F-1
CLEAN
DIESEL TECHNOLOGIES, INC.
Annual
Report on
Form 10-K
For the Fiscal Year Ended December 31, 2009
Table of
Contents
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PART I
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1.
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Business
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F-3
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1A.
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Risk Factors
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F-14
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1B.
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Unresolved Staff Comments
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F-19
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2.
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Properties
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F-19
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3.
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Legal Proceedings
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F-19
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4.
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(Removed and reserved)
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F-20
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PART II
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5.
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Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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F-20
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6.
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Selected Financial Data
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F-22
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7.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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F-23
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7A.
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Quantitative and Qualitative Disclosures about Market Risk
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F-39
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8.
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Consolidated Financial Statements and Supplementary Data
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F-41
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9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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F-69
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9A.
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Controls and Procedures
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F-69
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9B.
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Other Information
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F-69
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PART III
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10.
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Directors, Executive Officers and Corporate Governance
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F-69
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11.
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Executive Compensation
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F-74
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12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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F-82
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13.
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Certain Relationships and Related Transactions, and Director
Independence
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F-83
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14.
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Principal Accounting Fees and Services
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F-84
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PART IV
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15.
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Exhibits and Financial Statement Schedules
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F-85
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SIGNATURES
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F-89
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We are filing this Amendment No. 1 to Annual Report on
Form 10-K/A
(this Amendment) to amend our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, as filed with
the Securities and Exchange Commission (the SEC) on
March 25, 2010 (the
10-K).
The purpose of this Amendment is to include in Part III the
information that was to be incorporated by reference from the
Proxy Statement for our 2010 Annual Meeting of Stockholders, as
well as to amend the exhibit table to add additional exhibits.
This Amendment hereby amends the cover page, Part III,
Items 10 through 14, and Part IV, Item 15 of the
10-K. In
addition, as required by
Rule 12b-15
under the Securities Exchange Act of 1934, as amended, new
certifications by our principal executive officer and principal
financial officer are filed as exhibits to this Amendment.
No attempt has been made in this Amendment to modify or update
the other disclosures presented in the
10-K. This
Amendment does not reflect events occurring after the filing of
the original
10-K (i.e.,
those events occurring after March 25, 2010) or modify
or update those disclosures that may be affected by subsequent
events. Accordingly, this Amendment should be read in
conjunction with the
10-K and our
other filings with the SEC.
F-2
PART I
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 Company,
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®,
ARIS®
and Biodiesel
Plustm
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 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.
Key 2009 highlights and recent activities include the following:
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We received a diesel emissions reduction technology development
grant under the New Technology Research and Development (NTRD)
program from the Houston Advanced Research Center (HARC). This
award totaled $961,971, of which $29,000 is included in 2009
revenue. The grant period is from October 1, 2009 through
February 28, 2011. The projects goal is to develop
and verify a Nitrogen Oxide-Particulate Matter (NOx
PM) reduction retrofit system for on- and off-road engines.
Regulatory bodies such as the U.S. Environmental Protection
Agency (EPA), the California Air Resources Board (CARB) and
others have recognized the need to develop more advanced
emission reduction solutions for the retrofit market.
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We received an order from Metroline, a leading London bus
operator, valued at approximately $528,000, which amount will be
included in our revenue the first half of 2010 upon fulfillment
of this order. We view this order as a confirmation of our
decision to focus new product development efforts on the global
retrofit market.
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F-3
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Our work for the California Showcase is ongoing along with
certain supplemental environmental programs sponsored by
California Air Resources Board (CARB) and amounted
to $130,000 revenue in 2009.
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After in-depth analysis of market dynamics and competitive
activity, our management has determined that profitable growth
can best be achieved by focusing on the growing global retrofit
market. Therefore, we have determined to focus primarily on that
segment while pursuing original equipment manufacturer (OEM)
licensing business as opportunities arise.
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In support of our strategic course change, we are in the process
of building a portfolio of products with verifications from
government entities around the world. It is our intent to
leverage our broad and proven intellectual property to
successfully address both public health and industry needs and
therefore offer unique value to prospective customers and end
users.
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To better position the company for growth and sustained
profitability, we restructured the organization significantly.
Changes included a reduction in force and new appointments at
the Board of Director and executive management levels. At the
Board of Director level, Mr. Mungo Park was named Chairman
to assist in the Company in its restructuring and lead the
effort to reconstitute the Board of Directors. Similarly,
Michael Asmussen was named President & CEO to lead the
change at the management level.
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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 provided for annual royalties which commenced in 1998 and
terminated in 2008 of 2.5% of the gross revenue derived from the
sale of the Platinum
Plus®
fuel-borne catalyst, a diesel fuel additive for emissions
control and fuel economy improvement in diesel engines.
In 2009, we filed no U.S. or foreign patent applications.
In 2008, we filed 29 foreign patent applications but no
U.S. patent applications. In 2007, we filed ten
U.S. and two foreign patent applications.
As of December 31, 2009, we held 171 granted patents, 71
pending 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 December 31, 2009 includes 26 U.S. patents and 145
corresponding foreign patents along with 71 pending
U.S. and foreign patent applications. We continue to make
invention disclosures for which we are in the process of
preparing patent applications. Our patents have expiration dates
ranging from 2010 through 2027, with the majority of the
material patents upon which we rely expiring in 2018 and beyond.
We believe that we have sufficient patent coverage surrounding
our core patents that effectively serves to provide us longer
proprietary protection.
We have made substantial investments in our technology and
intellectual property and have incurred development costs for
engineering prototypes, pre-production models, verifications by
U.S. Environmental Protection Agency (EPA) and others 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 principal emissions from diesel
engines:
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nitrogen oxides (NOx);
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particulate matter (PM);
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carbon monoxide (CO);
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F-4
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hydrocarbon (HC); and
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carbon dioxide
(CO2).
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Our core patents, advanced patents and patent applications
include the following:
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Fuel-borne catalysts;
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Selective catalytic reduction;
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Catalyzed wire mesh diesel particulate filters;
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Biofuels; and
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Emission control systems.
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Our key technologies include the following:
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Cost effective means of controlling the principal emissions from
diesel engines (nitrogen oxides, particulate matter, carbon
monoxide and hydrocarbon).
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Reduction of carbon dioxide and other greenhouse gas emissions
by enhancing combustion efficiency and by enabling long-term
reliable performance of emission control systems.
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Effective utilization of strategic catalytic materials such as
platinum enables reduced emission control system costs,
recycling strategies and low nitrogen dioxide emission levels.
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Low cost, reliable and durable diesel particulate filter
performance through catalyzed wire mesh filter systems in
retrofit applications.
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Protecting our intellectual property rights is costly and time
consuming. We incur patent-related expenses for patent filings,
prosecution, maintenance and annuity fees which amounted to
$207,000, $227,000 and $364,000 for the years ended
December 31, 2009, 2008 and 2007, respectively. We incur
maintenance fees to maintain our granted U.S. patents and
annuity fees to maintain foreign patents and the pending 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 our trade
secrets or violations of our intellectual property rights.
Business
Strategy
Our goal is to maximize profitable growth by strategically
targeting segments of the diesel emission reduction market where
use and regulatory requirements create customer needs
specifically addressed by our intellectual property portfolio.
Tailored approaches utilizing license agreements, direct sales
or distribution arrangements are employed to address individual
market channels that include original equipment manufacturers
(OEMs), Tier One suppliers, retrofit system integrators and
others. Our standard licensing agreements are structured so that
we derive revenue from license fees and on-going royalties. In
2010, we will seek broader market coverage by not only
strengthening our marketing and distribution channels but also
stressing value propositions that highlight our unique
environmental benefits, fuel economy improvements and practical,
lower cost emission control. We intend to ensure that the full
value of our technology is realized by the end user.
F-5
Solutions
and Products
We have succeeded in developing technologies and products that,
when combined with other aftertreatment 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 our
Platinum
Plus®
fuel-borne catalyst;
ARIS®,
an advanced reagent injection system used in selective catalytic
reduction systems for control of emissions of nitrogen oxides
from diesel engines and for hydrocarbon injection applications;
diesel particulate filter technology based on catalyzed wire
mesh filter elements; and biofuels technology including
Biodiesel
Plustm.
Platinum
Plus Fuel-Borne Catalyst
We have developed and patented our Platinum Plus fuel-borne
catalyst as a diesel fuel soluble additive, which contains
minute amounts of organo-metallic platinum and cerium catalysts.
Platinum Plus is used to improve combustion which acts to 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 diesel
particulate filtration, low emission biodiesel, carbon
reduction, exhaust emission reduction and fuel economy.
Environmentally conscious corporations and fleets can utilize
this solution to voluntarily reduce emissions while obtaining an
economic benefit.
Our 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 fuel blends; to
reduce particulate emissions by 10% to 25% from the engine,
while also improving the performance of diesel oxidation
catalysts and particulate filters. When used with blends of
biodiesel and ultra-low sulfur diesel, 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. 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 independent test laboratories from 1996 to the present,
we have conducted research and development programs on platinum
fuel-borne catalysts which were performed by Delft Technical
University (Netherlands), Ricardo Consulting Engineers (U.K.),
Cummins Engine Company (U.S.), West Virginia University (U.S.),
the Technical University of Dresden (Germany) 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 EPA registration in December 1999 for the Platinum
Plus fuel-borne catalyst for use in bulk fuel by refiners,
distributors and 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. In July
2008, the EPA released a general statement regarding emissions
from platinum-based fuel additives which indicated that the EPA
is evaluating available emissions data and health effects
studies in an effort to assess potential health risks associated
with platinum- or cerium-based fuel additives. We are
cooperating with the EPA to plan and conduct further definitive
testing with respect to these questions, which testing costs we
have included in our 2010 budget. As of the date hereof, the EPA
has not approved our test plan. In 2009, the German Federal
Environment Agency, the Umweltbundesamt (UBA), issued a
F-6
non-disapproval
for sale of Platinum Plus fuel-borne catalyst for use in
conjunction with up to 2,000 diesel particulate filters in
Germany; further work will be required to lift fully the
2,000 unit restriction.
Platinum
Plus for Diesel Emission Reduction
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. Our fuel-borne catalyst also significantly lowers
the temperature at which the captured soot will burn, thereby
allowing the particulate filters to regenerate themselves and
stay cleaner during a wider range of operating conditions.
Platinum Plus fuel-borne catalyst is increasingly utilized as a
diesel particulate filter regeneration additive. In Europe, it
is currently being supplied into the U.K., Germany, Denmark,
Belgium, Switzerland, Sweden, Austria and Holland markets
through distribution sources for aftermarket retrofit
applications. Our Platinum Plus fuel-borne catalyst has also
found application in the U.K. to alleviate soot blocking from
light drive cycle bus applications. In Asia, we are conducting
field trials and developing relationships with Asian
distributors to fully exploit this growing market. In the U.S.,
the Platinum Plus fuel-borne catalyst has been accepted for use
by the Mine Safety and Health 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 most recently 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 passenger car
manufacturers.
Effective January 1, 2009, the EPA adopted new regulations
for nitrogen dioxide
(NO2)
emissions testing, now harmonized with the newly implemented
California Air Resources Board (CARB) requirements. Although we
received the EPAs Environmental Technology Verification in
2003 for our Platinum Plus fuel-borne catalyst and a
diesel-oxidation catalyst (the Platinum Plus
Purifiertm
e2 System) for pre-1996 manufactured engines, which are
higher emitters of particulates and nitrogen oxides than newer
engines, as well as verification extension for our fuel-borne
catalysts with diesel-oxidation catalysts to cover engines
manufactured between 1994 and 2003, the Platinum Plus
Purifier e2 System was removed from the EPA verified
list. We provided information to the EPA based on our prior
testing to demonstrate the low
NO2
performance features of this verified product. Although the test
results were positive, EPA determined that further testing in
accordance with the new protocols would be required to restore
the verified status. Until satisfactorily completing test
programs to meet these EPA requirements, our verification status
has been moved by the EPA to the Formerly Verified
Systems section of the EPA website. In 2009, we believe
the removal of the verified status on the Purifier e2 system had
an adverse impact on our business.
Platinum
Plus for Fuel Economy
We believe that recent volatility in the cost of fuel has made
the economic impact of greater fuel economy an important
consideration in many industries. Further, recent media focus on
climate change and the effects of fuel consumption on the
environment has 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 (dependent on the amount of platinum that
gets introduced into the engine, which conditioning period
varies by the surface area of the motor), 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 $1.75
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 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 persuasive one.
F-7
ARIS
Selective Catalytic Reduction (SCR)
The ARIS (Advanced Reagent Injection System) is our patented
airless, return-flow system for the injection of reducing
reagents for such applications as the low-NOx 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 transportation. 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 works well with various
reagents including hydrocarbon and 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. A 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, initially 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.
Combined
Use of Exhaust Gas Recirculation (EGR) and SCR
We believe as legislation tightens across the globe, exhaust gas
recirculation in combination with selective catalytic reduction
is becoming the preferred solution to meet strict nitrogen
oxides (NOx) levels. Once considered competing solutions, we
recognized the benefits of combining these technologies to
achieve very high levels of emissions reduction with maximum
fuel economy. EGR can be activated to reduce NOx when starting a
cold engine, whereas SCR operates at higher temperature when its
catalyst is fully active, and at low EGR rates. With both EGR
and SCR in place, engine systems can be fine-tuned to optimize
fuel efficiency together with emissions reduction. We have
intellectual property holdings for the design and implementation
of these systems. Most heavy duty manufacturers in the
U.S. have now announced their intentions to meet new
regulations using the combination of EGR-SCR. Several leading
providers to the industry have already licensed this patent from
us.
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. It also
provides lower nitrogen dioxide emissions levels relative to
traditional, heavily catalyzed filter systems. The catalyzed
wire mesh filter technology was transferred to us under a
technology transfer agreement with Mitsui and PUREarth in 2005.
Under the agreement, we acquired the worldwide title (excluding
Japan) to the patents and other intellectual properties. 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
wall-flow 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.
F-8
In addition to reducing the cost to achieve these emission
reductions, the patented combination with a fuel-borne catalyst
permits the catalyzed wire mesh filter to operate effectively at
the lower exhaust temperatures found in many
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
buses, delivery vehicles, refuse trucks, cranes and off-road
equipment.
Effective January 1, 2009, the EPA adopted new regulations
for
NO2
emissions testing, now harmonized with the newly implemented
CARB requirements. Although we received the EPAs
Environmental Technology Verification in June 2004 for our
Platinum Plus fuel-borne catalyst and the catalyzed wire mesh
filter (the Platinum Plus Purifier e3 System) as
reducing toxic particulates by up to 76%, carbon monoxide by
60%, hydrocarbons by 80% and nitrogen oxides by 9%, the Platinum
Plus
Purifiertm
e3 System was removed from the EPA verified list. We
provided information to the EPA based on our prior testing to
demonstrate the low
NO2
performance features of this verified product. Although the test
results were positive, EPA determined that further testing in
accordance with the new protocols would be required to restore
the verified status. Until satisfactorily completing test
programs to meet these EPA requirements, our verification status
has been moved by the EPA to the Formerly Verified
Systems section of the EPA website. We do not believe the
removal of the verified status on the Purifier e3 system has had
a material impact on our business.
The
Market and the Regulatory Environment
We estimate that worldwide annual consumption of diesel fuel
exceeds 225 billion U.S. gallons, including
approximately 42 billion in the U.S., 57 billion in
Europe and 69 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 best be achieved by using
combinations of cleaner-burning fuels and aftertreatment 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. The use of our technologies decreases fuel
consumption relative to the alternatives.
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 more
fully develop in 2010. European engine manufacturers 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, which makes our ARIS technology attractive. 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 intellectual property holdings for
the design and implementation of these systems.
In the non-road sector, new regulations stemming from EPA
proposals first made in 2004, will be phased in from 2008 to
2014. Targeted vehicles include a wide range of construction
equipment and agricultural equipment, as well as railroad and
marine applications.
We believe the U.S. market for diesel engines is poised for
growth due to favorable fuel economy performance of diesel
engines, coupled with the increased ability to reduce
particulate matter and emissions of nitrogen oxides from such
engines. Europe and Asia already use significantly more mobile
diesel engines than the U.S., particularly for passenger and
light-duty vehicles. Engine manufacturers have all employed
particulate filters to meet U.S. heavy-duty diesel vehicle
regulations effective 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
F-9
particulate filters and nitrogen oxides control technology will
be required in Europe and the U.S. in the 2009 to 2010
timeframe.
Existing
Diesel Engines and the Retrofit Market
While much of the regulatory pressure and resulting action from
engine manufacturers has focused on reducing emissions from new
engines, there is increasing concern over pollution from
existing diesel engines, many of which have from 20- to
30-year life
cycles. The EPA has estimated that in the U.S. alone there
are approximately 11 million diesel powered vehicles which
need to be retrofitted over the next ten years. There is 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.
As an example, 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 EPA stated its objective for
retrofitting vehicles with particulate controls and developed
the Clean School Bus U.S.A. program and the Smartway Transport
Program to reduce both diesel emissions and fuel consumption on
over-the-road
trucks and buses.
Competition
Because our principal strategy is the licensing of our
technologies, those companies that could be considered as
competitors should also be considered as our potential customers.
We face direct competition from companies that offer verified
products with far greater financial, technological,
manufacturing and personnel resources, including BASF (formerly
Engelhard), Donaldson, Cummins Filtration, Catalytic Solutions,
Inc. and Johnson Matthey. We also face indirect competition in
the form of alternative fuel consumption vehicles such as those
using 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 EPA verified, or
formerly verified, particulate reduction systems for retrofit is
from catalyst systems suppliers like Johnson Matthey, BASF and
Catalytic Solutions, Inc. 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 Energenics, who markets a cerium product
for fuel economy improvement. Our EPA-registered 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 and
hydrocarbon reduction. Finally, in the nitrogen oxides control
market, competition is from other suppliers of reagent-based
post-combustion nitrogen oxides control systems such as Johnson
Matthey (including Argillion which it acquired in 2007), Hilite
International and KleenAir Systems for retrofit, and Bosch and
Hilite International for OEMs. Each of Bosch and Hilite has a
worldwide, non-exclusive technology license agreement with us
for the right to use our proprietary technology for a single
fluid system which requires no compressed air.
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 continued to
emphasize fuel economy in the markets we serve, enabling a
lowest life cycle cost.
F-10
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 fuel strategies will also need to consider
means of reducing nitrogen oxides emissions.
The two principal market drivers for our products are
legislative compliance for emission control and the associated
cost of compliance that includes product performance, cost,
safety, efficiency and reliability among other factors. Platinum
Plus fuel-borne catalyst is an enabling technology
that enables emission reductions from the engine itself and
enhances performance of the exhaust aftertreatment 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 aftertreatment 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 form key components of both of these aftertreatment
systems.
The convergence of greater interest in regulated and greenhouse
gas emissions reduction and the economic benefit of our products
make their use attractive to end users. 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,
the economic potential for fuel economy benefits are even more
pronounced.
Marketing
Strategy and Commercialization
Aftertreatment systems for emissions reduction 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 Benz offer diesel
particulate filters for their larger vehicles. In the U.S.,
Daimler Benz 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 EPA and California Air Resources Board programs are
accelerating the activities toward creation of active markets
for diesel emissions reduction technologies and products in the
U.S. These markets include applications for new vehicles
from 2007 onward and retrofit applications in on- and off-road
segments, 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 diesel emissions
reduction technologies and products for 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 OEMs 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 EPA
and/or
California Air Resources Board protocols to qualify for credits
within the EPA
and/or
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.
As of the date of this report, we do not have EPA verifications
which may disadvantage us in attracting customers with access to
governmental funding for retrofit programs. In 2010, we intend
to verify our Platinum Plus fuel-borne catalyst in combination
with a high performance diesel particulate 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
F-11
recurring revenue 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 in the U.S., a toll blender
in the U.K. and from a warehouse in 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 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 entered into non-exclusive worldwide license agreements
for our ARIS nitrogen oxides reduction technology. 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.
We intend to utilize our catalyzed wire mesh filter technology
by selling products based upon that technology alone and in
combination with our Platinum Plus fuel-borne catalyst. We
developed 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 the Company 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 and diesel
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 environmental
authority, BUWAL, approved our Platinum Plus fuel-borne catalyst
fuel additive for use with a diesel particulate filter.
The U.K. Ministry of Healths 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.
In 2010, we intend to file with the EPA completed third-party
evaluations regarding secondary emissions from our fuel-born
catalyst. We initiated independent tests in 2005 to address
questions from the EPA 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 EPA confirmed that
any potentially allergenic platinum emissions from the
F-12
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
We generate revenue from product sales comprised of fuel-borne
catalysts, including our Platinum Plus fuel-borne catalyst
products and concentrate, and hardware (primarily, our patented
ARIS advanced reagent injector and dosing systems for selective
catalytic reduction of nitrogen oxides, our Platinum Plus
Purifier System, our fuel-borne catalyst and a diesel-oxidation
catalyst, and catalyzed wire mesh filters, including catalyzed
wire mesh filters used in conjunction with our Platinum Plus
fuel-borne catalyst); license and royalty fees from the ARIS
system and other technologies; and consulting fees 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, 2009, 2008 and 2007.
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For the Years Ended December 31,
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2009
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|
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2008
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2007
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|
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|
(In thousands)
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|
|
Product sales
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$
|
1,042
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|
|
85.3
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%
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|
$
|
7,024
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|
|
|
94.0
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%
|
|
$
|
1,466
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|
|
|
29.8
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%
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License and royalty revenue
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|
|
150
|
|
|
|
12.3
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%
|
|
|
451
|
|
|
|
6.0
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%
|
|
|
3,459
|
|
|
|
70.2
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%
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Consulting and other
|
|
|
29
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|
|
|
2.4
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%
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Total
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$
|
1,221
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|
|
|
100.0
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%
|
|
$
|
7,475
|
|
|
|
100.0
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%
|
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$
|
4,925
|
|
|
|
100.0
|
%
|
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|
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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,
2009, 2008 and 2007 are outlined in Note 14 of Notes to
Consolidated Financial Statements.
Our Platinum Plus fuel-borne catalyst concentrate and finished
product are sold to distributors, resellers and various
transportation segments, including on-road, off-road, rail and
marine, among other end users. Our products and solutions are
sold to customers through our distribution network, direct sales
and the efforts of our sales consultants and agents. We license
the ARIS nitrogen oxides reduction system and the combination of
EGR with SCR to others, generally with an up-front fee for the
technology, know-how transfer 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 and account
for a substantial portion of our product costs. These metals are
generally available from multiple sources, and we believe the
sources of these are adequate for our current operations. 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. We have a strategy of passing our cost increases along
to our customers and have identified opportunities to lower the
lifetime platinum cost within the overall system cost. 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
F-13
raw materials requirements. We also have ample licensed and
qualified manufacturers for the manufacture on our behalf of
hardware components, catalysts, filters and electronics.
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 verification
programs, evaluation and testing projects, salary and benefits,
consulting fees, materials and testing gear, and are charged to
operations as they are incurred. Our research and development
expenses, exclusive of patent costs, totaled approximately
$386,000, $430,000 and $428,000, respectively, for the years
ended December 31, 2009, 2008 and 2007.
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 March 22, 2010, we had 12 full-time employees
and two part-time employees. We also retain outside consultants,
including sales and marketing consultants and agents. As of
March 1, 2010, our sales and marketing team consisted of
six employees, sales consultants and agents supported by our
executive officers.
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 with the SEC at the
SECs 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 SECs 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.
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.
F-14
Future
growth of our business depends, in part, on successful
verification of our products and retention of our
verifications.
We believe that it is an essential requirement of the
U.S. retrofit market that emissions control products and
systems are verified under the EPA
and/or
California Air Resources Board protocols to qualify for funding
from the EPA
and/or
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.
In 2010, we intend to verify our Platinum Plus fuel-borne
catalyst in combination with a high performance diesel
particulate filter with California Air Resources Board. We have
no assurance that our product will be verified by California Air
Resources Board or that such a verification will be acceptable
to the EPA. Verification is also useful for commercial
acceptability.
EPA verifications were withdrawn on two of our products in
January 2009 because available test results were not accepted by
EPA as meeting new emissions testing requirements for nitrogen
dioxide
(NO2)
measurement. Although prior testing indicates satisfactory
performance can be achieved, we have no assurance that the EPA
will determine that the results of the proposed evaluations will
meet the new standards, nor whether additional testing which may
be required by EPA will be adequate to remove any remaining
concern the EPA may have regarding use of our fuel-borne
catalyst.
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 our 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 EPA 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.
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, including products that are verified by
EPA and/or
CARB, or other environmental authorities. We face direct
competition from companies with greater financial,
technological, manufacturing and personnel resources. Newly
developed products could be more effective and cost efficient
than our current or future products. 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
F-15
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 catalyst
patent, expired in 2008. However, we believe that other longer
lived patents, including those for platinum and other fuel-borne
catalyst materials in combination with aftertreatment devices,
will provide adequate protection of our proprietary technology,
but there can be no assurance 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:
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|
Actions taken by regulatory bodies relating to the verification,
registration or health effects of our products.
|
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|
|
The extent to which our Platinum Plus fuel-borne catalyst and
ARIS nitrogen oxides reduction products obtain market acceptance.
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|
|
The timing and size of customer purchases.
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|
|
Customer concerns about the stability of our business which
could cause them to seek alternatives to our solutions and
products.
|
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|
|
Increases in raw material costs, especially platinum.
|
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. The market price for platinum increased from $480 per
ounce in early 2002 to $965 per ounce at December 31, 2005,
$1,120 per ounce at December 31, 2006, $1,530 per ounce at
December 31, 2007, decreased to $922 per ounce at
December 31, 2008, and increased to $1,475 per ounce at
December 31, 2009. On February 16, 2010, the London
Metal Exchange afternoon fixing for platinum was $1,536 per
ounce. Although we may 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.
F-16
Failure
to attract and retain key personnel could have a material
adverse effect on our future success.
Our success depends, in part, on our ability to retain current
key personnel, attract and retain future key personnel,
additional qualified management, marketing, scientific and
engineering 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 a limited number of
primary products and technologies, including Platinum Plus
fuel-borne catalyst, ARIS advanced reagent injection system for
selective catalytic reduction, Purifier Systems and catalyzed
wire mesh filters.
Our Platinum Plus fuel-borne catalyst, ARIS advanced reagent
injection system for selective catalytic reduction, Purifier
Systems and our catalyzed wire mesh filter are currently our
primary products and technologies. Failure of any of our
products or technologies to achieve market acceptance may limit
our growth potential. Further, our gross profit may vary widely
in relation to the mix of products and technologies that we sell
during any reporting period. 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 EPA,
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, ARIS
injector, EGR-SCR, catalyzed wire mesh filter and diesel
particulate filter regeneration. 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 near future.
We have incurred losses since inception totaling
$65.6 million as of December 31, 2009, which amount
includes approximately $4.8 million of non-cash preferred
stock dividends. At the date of this Annual Report on
Form 10-K,
our cash and cash equivalents and investments are estimated to
be sufficient for our needs for the next twelve months.
We have recognized limited revenues through December 31,
2009 and expect to continue to incur operating losses at least
through 2010. There can be no assurance that we will achieve or
sustain significant revenues, positive cash flows from
operations or profitability in the future. See the discussion
below under the caption Liquidity and Capital
Resources in Item 7, Managements
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 as
well as current general economic conditions. 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
F-17
of our marketing programs and commercialization progress, as
well as conditions then 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
Capital Resources in Item 7, Managements
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
have been 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.
Historically, we have derived a significant portion of our
revenue from a limited number of customers. For the year ended
December 31, 2009, two customers accounted for
approximately 26% of our revenue. For the year ended
December 31, 2008, one customer accounted for approximately
15% of our revenue and for the year ended December 31,
2007, three customers accounted for approximately 70% of our
revenue. 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.
Because of our activities in the U.K., Europe and Asia, we 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 of which there were none in 2009.
Foreign currency fluctuations may have a significant effect on
our operations in the future.
An
inability to realize proceeds from our auction rate securities
right issued by UBS may significantly impact our
liquidity.
On November 6, 2008, the Company accepted from UBS an Offer
to acquire a put right to sell to UBS commencing
June 30, 2010 the Companys holdings of
$11.7 million par value in auction rate securities (ARS).
Also, UBS has established a loan facility whereby the Company
may borrow up to 75% of the UBS-determined value of these ARS
collateralized by the securities. There can be no assurance that
the financial position of UBS will be such as to afford the
Company the ability to receive the par value of ARS upon
exercise of the put right.
F-18
We
have not and do not intend to pay dividends on shares of our
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.
Our
common stock is currently listed on The NASDAQ Capital
Market.
The trading volume in our common stock has been relatively
limited and a consistently active trading market for our common
stock may not develop. Our common stock began trading on The
NASDAQ Capital Market effective October 3, 2007. Prior to
this date, our common stock was traded on the OTC
Bulletin Board. The average daily trading volume in our
common stock on The NASDAQ Capital Market in 2009 was
approximately 9,600 shares.
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.
We
received a NASDAQ Staff Deficiency Letter and have not cured the
deficiencies.
On September 15, 2009, we received a NASDAQ Staff
Deficiency Letter indicating that the Company fails to comply
with NASDAQ Listing Rule 5605(c)(4)(A) because it does not
have at least three Audit Committee members and NASDAQ Listing
Rule 5605(b)(1) because our Board does not have a majority
of independent directors. These deficiencies occurred on
August 28, 2009 when Mr. John J. McCloy II, who had
been an Audit Committee member, resigned as a director of the
Registrant leaving the Audit Committee with two members and the
Board with three independent directors and three non-independent
directors.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We have a seven-year lease which expires on December 31,
2015 for our U.S. headquarters relocated in 2009 to 10
Middle Street, Bridgeport, Connecticut (5,515 square feet)
at an annual cost of approximately $141,000, including
utilities. We have a lease for 1,942 square feet of office
space outside London, U.K. through March 2013 at an annual cost
of approximately $65,000, including utilities and parking.
|
|
Item 3.
|
Legal
Proceedings
|
We are not involved in any legal proceedings, except for
collection matters routine to our business.
F-19
|
|
Item 4.
|
(Removed
and reserved)
|
Part II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock is listed on The NASDAQ Capital Market in the
U.S. since October 3, 2007, and prior to that date, it
traded on the Over-The-Counter Bulletin Board. Our common
stock had also been listed on the London Stock Exchange through
the Alternative Investment Market (AIM) until a vote by our
stockholders in 2009 to delist. At the May 13, 2009 Annual
Meeting of Stockholders of the Company, our stockholders
approved the proposal to apply to the London Stock Exchange to
delist the Companys shares from trading on the AIM Market
by a vote of 2,853,574 for, 3,603 against and 160 shares
abstaining. Reports of transactions of our shares are available
on The NASDAQ Capital Market under the trading symbol
CDTI.
The following table sets forth the high and low sale prices of
our common stock on The NASDAQ Capital Market for each of the
periods listed. 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.
|
|
|
|
|
|
|
|
|
|
|
NASDAQ Capital Market
|
|
|
|
High
|
|
|
Low
|
|
|
2008
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
24.85
|
|
|
$
|
8.74
|
|
2nd
Quarter
|
|
$
|
15.98
|
|
|
$
|
10.50
|
|
3rd
Quarter
|
|
$
|
12.25
|
|
|
$
|
3.00
|
|
4th
Quarter
|
|
$
|
4.79
|
|
|
$
|
1.54
|
|
2009
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
3.05
|
|
|
$
|
1.00
|
|
2nd
Quarter
|
|
$
|
2.50
|
|
|
$
|
1.41
|
|
3rd
Quarter
|
|
$
|
2.20
|
|
|
$
|
1.25
|
|
4th
Quarter
|
|
$
|
2.23
|
|
|
$
|
1.40
|
|
Holders
At March 22, 2010, there were 174 holders of record of our
common stock representing approximately 1,600 beneficial owners.
Dividends
No dividends have been paid on our common stock and we do not
anticipate paying dividends in the foreseeable future.
Sales
and Uses of Unregistered Securities During the
Period
In March 2009, we issued 40,000 restricted shares of our common
stock under our Incentive Plan to the Companys President
and Chief Executive Officer (see Note 8 of Notes to the
Consolidated Financial Statements).
On October 1, 2009, our directors, Michael Asmussen, who
also serves as President and Chief Executive Officer, and Derek
Gray, purchased 10,000 shares and 25,684 shares,
respectively, of our common stock. Total shares acquired were
35,684 and total proceeds based on the October 1, 2009
NASDAQ closing price of $1.65, were $58,878.60. The proceeds
will be used for the general corporate purposes of the Company.
The shares are restricted shares issued pursuant to an exemption
from registration under Regulation D of the Securities Act
of 1933, as amended.
F-20
Equity
Compensation Plan Information as of December 31,
2009
The following table represents options and warrants outstanding
as of December 31, 2009 (see Note 8 of Notes to
Consolidated Financial Statements):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares to be
|
|
|
Weighted Average
|
|
|
|
|
|
|
Issued upon Exercise of
|
|
|
Exercise Price of
|
|
|
Number of Shares
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Remaining Available
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
for Future Issuance
|
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
|
876,410
|
(1)
|
|
$
|
10.40
|
|
|
|
521,038
|
(1)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
|
|
876,410
|
|
|
$
|
10.40
|
|
|
|
521,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by shareholders
|
|
|
407,493
|
|
|
$
|
11.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrants
|
|
|
407,493
|
|
|
$
|
11.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents awards issued under the Incentive Plan. The maximum
number of awards allowed under the 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. |
Performance
Graph
The following line graph compares (i) CDTs cumulative
total return to stockholders per share of common stock of the
Company for the five years ended December 31, 2009 to that
of (ii) the NASDAQ Composite index and (iii) the
Russell 2000 Index for the period December 31, 2004 through
December 31, 2009, assuming a $100 investment. The stock
price performance shown on the graph below is not necessarily
indicative of future price performance.
F-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/04
|
|
|
12/30/05
|
|
|
12/29/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
12/31/09
|
Clean Diesel Technologies, Inc.
|
|
|
$
|
100
|
|
|
|
$
|
59
|
|
|
|
$
|
106
|
|
|
|
$
|
271
|
|
|
|
$
|
31
|
|
|
|
$
|
17
|
|
Russell 2000 Index
|
|
|
|
100
|
|
|
|
|
103
|
|
|
|
|
121
|
|
|
|
|
118
|
|
|
|
|
77
|
|
|
|
|
96
|
|
NASDAQ Composite Index
|
|
|
|
100
|
|
|
|
|
102
|
|
|
|
|
112
|
|
|
|
|
122
|
|
|
|
|
59
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data has been derived from our
audited consolidated financial statements. The Statements of
Operations Data relating to 2009, 2008 and 2007, and the Balance
Sheet Data as of December 31, 2009 and 2008 should be read
in conjunction with the audited consolidated financial
statements, including the notes thereto in Item 8,
Consolidated Financial Statements and Supplementary
Data and Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operations. Historical results for any prior period are
not necessarily indicative of future results for any period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
STATEMENTS OF OPERATIONS DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
1,042
|
|
|
$
|
7,024
|
|
|
$
|
1,466
|
|
|
$
|
860
|
|
|
$
|
760
|
|
License and royalty revenue
|
|
|
150
|
|
|
|
451
|
|
|
|
3,459
|
|
|
|
74
|
|
|
|
47
|
|
Consulting and other
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
189
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,221
|
|
|
|
7,475
|
|
|
|
4,925
|
|
|
|
1,123
|
|
|
|
812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of total revenue
|
|
|
801
|
|
|
|
5,717
|
|
|
|
1,126
|
|
|
|
658
|
|
|
|
471
|
|
Selling, general and administrative
|
|
|
6,073
|
|
|
|
9,992
|
|
|
|
8,041
|
|
|
|
5,278
|
|
|
|
4,963
|
|
Severance charge
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
386
|
|
|
|
430
|
|
|
|
428
|
|
|
|
510
|
|
|
|
439
|
|
Patent amortization and other expense
|
|
|
207
|
|
|
|
227
|
|
|
|
364
|
|
|
|
235
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,204
|
)
|
|
|
(8,891
|
)
|
|
|
(5,034
|
)
|
|
|
(5,558
|
)
|
|
|
(5,231
|
)
|
Foreign currency exchange gain (loss)
|
|
|
112
|
|
|
|
(845
|
)
|
|
|
(11
|
)
|
|
|
104
|
|
|
|
(221
|
)
|
Interest income
|
|
|
245
|
|
|
|
602
|
|
|
|
509
|
|
|
|
58
|
|
|
|
26
|
|
Other income (expense), net
|
|
|
100
|
|
|
|
(239
|
)
|
|
|
1
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,747
|
)
|
|
$
|
(9,373
|
)
|
|
$
|
(4,535
|
)
|
|
$
|
(5,384
|
)
|
|
$
|
(5,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.83
|
)
|
|
$
|
(1.15
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(1.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted-average number of common shares
outstanding
|
|
|
8,147
|
|
|
|
8,138
|
|
|
|
6,886
|
|
|
|
5,212
|
|
|
|
3,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
15,998
|
|
|
$
|
12,219
|
|
|
$
|
11,871
|
|
|
$
|
8,287
|
|
|
$
|
5,505
|
|
Total assets
|
|
|
17,432
|
|
|
|
18,747
|
|
|
|
24,663
|
|
|
|
9,018
|
|
|
|
6,274
|
|
Current liabilities
|
|
|
8,669
|
|
|
|
4,056
|
|
|
|
1,663
|
|
|
|
1,070
|
|
|
|
496
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
7,329
|
|
|
|
8,163
|
|
|
|
10,208
|
|
|
|
7,217
|
|
|
|
5,009
|
|
Stockholders equity
|
|
|
8,763
|
|
|
|
14,691
|
|
|
|
23,000
|
|
|
|
7,948
|
|
|
|
5,778
|
|
F-22
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We design and sell environmentally-proven technologies and
solutions for the global emission reduction market based upon
our portfolio of patents, extensive library of performance data
and know-how. We believe our core competencies to be the
innovation, application, development and marketing of
technological products and solutions to enable emission control.
Our suite of technologies offers a broad range of proven,
market-ready solutions to reduce emissions while saving costs
through fuel economy improvement and other engine operating
efficiencies.
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 climate change 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
35% or 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 product sales, technology
licensing fees and royalties, and consulting and other. The
following table sets forth the percentage contribution of our
revenue sources in relation to total revenue for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Product sales
|
|
$
|
1,042
|
|
|
|
85.3
|
%
|
|
$
|
7,024
|
|
|
|
94.0
|
%
|
|
$
|
1,466
|
|
|
|
29.8
|
%
|
License and royalty revenue
|
|
|
150
|
|
|
|
12.3
|
%
|
|
|
451
|
|
|
|
6.0
|
%
|
|
|
3,459
|
|
|
|
70.2
|
%
|
Consulting and other
|
|
|
29
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,221
|
|
|
|
100.0
|
%
|
|
$
|
7,475
|
|
|
|
100.0
|
%
|
|
$
|
4,925
|
|
|
|
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.
Product sales include our patented Platinum
Plus®
fuel-borne catalyst products and concentrate and hardware
(primarily, our patented
ARIS®
advanced reagent injector and dosing systems for selective
catalytic reduction of nitrogen oxides, our Platinum Plus
Purifier Systems and catalyzed wire mesh filters). Our Platinum
Plus fuel-borne catalyst is registered with the
U.S. Environmental Protection Agency (EPA) and other
environmental authorities around the world. Our products are
sold to distributors, resellers, various transportation
segments, including on-road, off-road, rail and marine, among
other end users, through our distribution network and direct
sales.
We license our ARIS nitrogen oxides selective catalytic
reduction (SCR) system and the combination of exhaust gas
recirculation (EGR) with SCR 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 SCR systems
to potential ARIS licensees and end users. We are actively
seeking additional licensees for both mobile and stationary
applications. We offer rights to our catalyzed wire mesh
technology through license agreements as well as selling
finished filters for use with our Platinum Plus fuel-borne
catalyst.
Since inception, we have devoted efforts to the research and
development of technologies and products in various areas,
including platinum fuel-borne catalysts for emission reduction
and fuel economy improvement
F-23
and nitrogen oxides reduction systems to control emissions from
diesel engines. 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 $65.6 million as of December 31, 2009.
The internally generated funds from our revenue sources have not
been sufficient to cover our operating costs. The ability of our
revenue sources, especially product sales and technology license
fees 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 prove to be inadequate, we believe
that we may 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 consolidated 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. 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 grant income,
engineering and development consulting services. Revenue from
technical consulting services is generally recognized and billed
as the services are performed. Revenue from grant income is
recognized when grant income is earned.
Generally, our license agreements are non-exclusive and specify
the geographic territories and classes of diesel engines
covered, such as on-road vehicles, off-road vehicles,
construction, stationary engines, marine and railroad engines.
At the time of the execution of our license agreements, we
assign the right to the licensee to use our patented
technologies. The up-front fees are not subject to refund or
adjustment. We recognize the license fee as revenue at the
inception of the license agreement when we have reasonable
assurance that the technologies transferred have been accepted
by the licensee and collectability of the license fee is
reasonably assured. The nonrefundable up-front fee is in
exchange for the culmination of the earnings process as the
Company has accomplished what it must do to be entitled to the
benefits represented by the revenue. Under our license
agreements, there is no significant obligation for future
performance required of
F-24
the Company. Each licensee must determine if the rights to our
patented technologies are usable for their business purposes and
must determine the means of use without further involvement by
the Company. In most cases, licensees must make additional
investments to enable the capabilities of our patents, including
significant engineering, sourcing of and assembly of multiple
components. Such investments are for the benefit of the
licensee. Our obligation to defend valid patents does not
represent an additional deliverable to which a portion of an
arrangement fee should be allocated. Defending the patents is
generally consistent with our representation in the license
agreement that such patents are legal and valid.
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 verification programs, evaluation
and testing projects, salary and benefits, consulting fees,
materials and testing gear. Our research and development
expenses totaled approximately $386,000, $430,000 and $428,000
for the years ended December 31, 2009, 2008 and 2007,
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 twenty years. Indirect and other
patent-related costs are expensed as incurred. Patent
amortization expense for the years ended December 31, 2009,
2008 and 2007 was $54,000, $51,000 and $41,000, 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 patents 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, 2009 and 2008, the
Companys patents, net, were $1,083,000 and $1,027,000,
respectively.
The types of events and changes in circumstances that would
indicate the carrying value of our patents is not recoverable
and therefore, impairment testing would be triggered include the
following: permanent elimination of mandated compliance with
emission reduction standards; reduction in overall market
prevalence of diesel engines; obsolescence of our technologies
due to new discoveries and inventions; and an adverse action or
assessment against our technologies.
Our technology is comprised of patents, patent applications,
trade or service marks, data and know-how. We consider the life
of our technologies to be commensurate with the remaining term
of our U.S. and corresponding foreign patents. Our patents
have expiration dates ranging from 2010 through 2027, with the
majority of the material patents upon which we rely expiring in
2018 and beyond. We believe that we have sufficient patent
coverage surrounding our core patents that effectively serves to
provide us longer proprietary protection. Our technologies
comprise technologies that have been asserted as the
technologies of choice by various automotive original equipment
manufacturers (OEMs) to meet mandates to comply with upcoming
regulatory requirements that go into effect starting in 2010
(EPA 2010). We monitor evolving technologies in the automotive
and other applicable industries to evaluate obsolescence of any
of our patents.
Although we have seen certain suspensions and delays in mandated
emissions requirements, we expect sufficient revenue over the
remaining life of the underlying patents to recover the carrying
value of our patents. We believe the emission reduction mandates
will be phased in over time so that despite volatility in our
revenue streams, we should realize the expected revenue from our
patents. We have consistently applied
F-25
our methodologies used for valuing intangible assets during the
year ended December 31, 2009 from the prior year but
believe we incorporated more educated assumptions about our
opportunities based upon the third-party market data that we did
not have in the prior year. Our intellectual property strategy
has been to build upon our base of core technology with newer
advanced technology patents developed 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 our core patents.
In evaluating the viability of our patents, we used a cash flow
model with the following assumptions:
|
|
|
|
|
Liquidity/cash We will maintain our patents in force
in the appropriate geographical areas by paying the required
maintenance and annuity fees. We expect to continue to invest in
our patents to ensure adequate coverage and protection from
inventions related to our existing patents. Our expected capital
expenditures include funds for prosecution of additional and
pending patents.
|
|
|
|
Revenue/growth rates We based our royalty revenue
projections upon third-party market data regarding volume
production projections for various engine sizes and vehicle
classifications. We estimated our market penetration rates based
upon our understanding of market share of our current licensees
and expectations of future licensing activities. We recognize
certain contingent license fee revenue once volume milestones
have been achieved. We used an expected rate for non-refundable,
up-front fees from future licensees because historically the
timing and amount of license fees have been unpredictable. Our
year over year growth rates assumed for Purifier Systems were up
to 3.5% based upon further mandated low emission zones.
|
|
|
|
Sensitivity analysis We evaluated the sensitivity of
our revenue streams using judgmentally selected discount rates
ranging from 8% to 15% should revenues not meet projected
targets.
|
Recently
Adopted and Recently Issued Accounting
Pronouncements:
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement
No. 162. This statement modifies the Generally
Accepted Accounting Principles (GAAP) hierarchy by
establishing only two levels of GAAP, authoritative and
nonauthoritative accounting literature. Effective July 2009, the
FASB Accounting Standards Codification (ASC), also
known collectively as the Codification, is
considered the single source of authoritative
U.S. accounting and reporting standards, except for
additional authoritative rules and interpretive releases issued
by the SEC. The Codification is organized by topic, subtopic,
section, and paragraph, each of which is identified by a
numerical designation. This statement is effective for interim
and annual periods ending after September 15, 2009. The
Company adopted the Codification for the quarter ended
September 30, 2009. Upon adoption, this standard had no
material effect on the Companys financial position,
results of operations or cash flows.
Effective beginning second quarter 2009, the Financial
Instruments Topic, ASC
825-10,
requires disclosures about fair value of financial instruments
in quarterly reports as well as in annual reports.
On January 1, 2009, the Company adopted a new accounting
standard issued by the FASB related to accounting for business
combinations which provides revised guidance on how acquirers
recognize and measure the consideration transferred,
identifiable assets acquired, liabilities assumed,
noncontrolling interests and goodwill acquired in a business
combination. This standard also expands required disclosures
surrounding the nature and financial effects of business
combinations. This standard will be applied prospectively for
acquisitions beginning in 2009 or thereafter.
In April 2009, the FASB issued new accounting guidance regarding
accounting for assets acquired and liabilities assumed in a
business combination that arise from contingencies. This
guidance applies to all assets acquired and all liabilities
assumed in a business combination that arise from contingencies.
This guidance states that the acquirer will recognize such an
asset or liability if the acquisition-date fair value of that
asset or liability can be determined during the measurement
period. If the acquisition date fair value cannot be
F-26
determined, the acquirer applies the recognition criteria to
determine whether the contingency should be recognized as of the
acquisition date or after it. This new accounting standard is
effective January 1, 2009 for business combinations
prospectively.
On January 1, 2009, the Company adopted a new accounting
standard issued by the FASB that permits delayed adoption of new
guidance regarding certain non-financial assets and liabilities,
which are not recognized at fair value on a recurring basis,
until fiscal years and interim periods beginning after
November 15, 2008. As permitted, the Company elected to
delay the adoption of the new accounting standard for qualifying
non-financial assets and liabilities, such as fixed assets and
patents. This standard had no material impact on the
Companys financial position, results of operations or cash
flows.
On January 1, 2009, the Company adopted a new accounting
standard issued by the FASB that requires enhanced disclosures
about an entitys derivative and hedging activities. These
enhanced disclosures require: (a) how and why a company
uses derivative instruments; (b) how derivative instruments
and related hedged items are accounted for; and (c) how
derivative instruments and related hedged items affect a
companys financial position, results of operations and
cash flows. This standard had no material impact on the
Companys financial position, results of operations or cash
flows.
On January 1, 2009, the Company adopted a new accounting
standard that amends the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The intent of
the new requirements is to improve the consistency between the
useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset.
This standard had no material impact on the Companys
financial position, results of operations or cash flows.
On January 1, 2009, the Company adopted new requirements
related to guidance on determining what types of instruments or
embedded features in an instrument held by a reporting entity
can be considered indexed to its own stock for the purpose of
evaluating the first criteria of the scope exception in
accounting standards about derivatives. The adoption of these
new rules had no material impact on the Companys financial
position, results of operations or cash flows.
In April 2009, the FASB issued new accounting guidance related
to interim disclosures about the fair values of financial
instruments. This guidance requires disclosures about the fair
value of financial instruments whenever a public company issues
financial information for interim reporting periods. This
guidance was effective for the Companys interim periods
ending after June 15, 2009 consolidated financial
statements and is applied on a prospective basis. This
accounting guidance was adopted for the interim reporting period
ended June 30, 2009 and had no material impact on the
Companys financial position, results of operations or cash
flows.
In April 2009, the FASB issued new requirements regarding
determining fair value when the volume and level of activity for
the asset or liability have significantly decreased and
identifying transactions that are not orderly. This requirement
is effective for the Companys interim and annual periods
ending after June 15, 2009 and will be applied on a
prospective basis. This rule was adopted for the interim
reporting period ended June 30, 2009 and had no material
impact on the Companys financial position, results of
operations or cash flows.
In May 2009, the FASB amended accounting guidance for subsequent
events to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be
issued. This guidance was effective for interim or annual
financial periods ending after June 15, 2009. In February
2010, the FASB issued Accounting Standards Update (ASU)
2010-09,
Subsequent Events (Topic 855) Amendments to Certain
Recognition and Disclosure Requirements, to remove the
requirement for SEC filers to disclose the date through which an
entity has evaluated subsequent events. The adoption of this
guidance had no impact on the Companys financial
condition, results of operations or cash flows.
In August 2009, the FASB issued an amendment to the accounting
standards related to the measurement of liabilities that are
recognized or disclosed at fair value on a recurring basis. This
standard clarifies how a company should measure the fair value
of liabilities and that restrictions preventing the transfer of
a liability
F-27
should not be considered as a factor in the measurement of
liabilities within the scope of this standard. This standard is
effective for the Company on October 1, 2009. The adoption
of this standard had no material impact on the Companys
financial position, results of operations or cash flows.
In January 2010, the FASB published ASU
2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU
No. 2010-06
clarifies improved disclosure requirements related to fair value
measurements and disclosures in Overall Subtopic
820-10 of
the FASB Codification. The new disclosures and clarifications of
existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except
for the disclosure about purchases, sales, issuances, and
settlements in the rollforward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years. The adoption of this standard
will not have an impact on the Companys financial position
and results of operations.
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Total revenue for the year ended December 31, 2009 was
$1,221,000 compared to $7,475,000 in 2008, a decrease of
$6,254,000, or 83.7%, reflecting declines in product sales as
well as licensing fees and royalties. Operating revenue in 2009
consisted of approximately 85.3% in product sales, 12.3% in
technology licensing fees and royalties, and 2.4% in grant
revenue. Of our 2008 operating revenue, 94.0% was from product
sales and 6.0% was from technology licensing fees and royalties.
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.
Product sales in 2009 were $1,042,000 compared to $7,024,000 in
2008, a decrease of $5,982,000, or 85.2%. The decrease in
product sales was attributable primarily to lower demand for our
Platinum Plus Purifier Systems, a product comprised of a diesel
particulate filter along with our Platinum Plus fuel-borne
catalyst for compliance with the requirements of the London Low
Emission Zone (LEZ) because in 2009, there was no London LEZ
compliance deadline. The next compliance deadlines for the
London LEZ are in 2010 and 2012, although the Mayor of London
has proposed suspension of the 2010 deadline to be continued
until 2012. We received approval in October 2007 from Transport
for London to supply our Purifier Systems as an emission
reduction solution that meets the standards established for the
London LEZ. The deadlines for compliance with the London LEZ
will be phased in over time for different classifications of
vehicles. February 2008 was the compliance deadline for vehicles
greater than 12 metric tons and July 2008 was the compliance
deadline for motor coaches and vehicles greater than 3.5 metric
tons. The sales of our Purifier Systems for compliance with the
requirements of the London LEZ provide us with recurring revenue
from use of our Platinum Plus fuel-borne catalyst that enables
the regeneration of the diesel particulate filter. We believe we
will have the opportunity to expand this business opportunity as
additional low emission zones are established throughout Europe
and elsewhere.
Technology licensing fees and royalties were $150,000 for the
year ended December 31, 2009 compared to $451,000 in 2008,
a decrease of $301,000, or 66.7%. Our technology licensing fees
and royalties include fees upon execution of new agreements and
royalties from existing licensees, primarily for use of our ARIS
technologies. We did not execute new technology licensing
agreements in 2009. During 2008, we executed new technology
licensing agreements with Headway Machinery Co., Ltd. (Zhucheng
City, China), Hilite International, Inc. (Cleveland, Ohio) and
Eaton Corporation (Cleveland, Ohio) and recognized revenue from
license fees. We are continuing our efforts to consummate
technology license agreements with manufacturers and component
suppliers.
Our total cost of revenue was $801,000 in 2009 compared to
$5,717,000 for the year ended December 31, 2008. The
decrease in our cost of sales is due to lower product sales
volume. Our total gross profit as a percentage of revenue was
34.4% and 23.5% for the years ended December 31, 2009 and
2008, respectively, with the increase attributable to the mix of
higher margin product sales. Gross margin for product sales in
F-28
2009 was $241,000, or 23.1% of product sales, compared to
$1,307,000, or 18.6% in 2008. Our cost of license fee and
royalty revenue was zero in 2009 and 2008 resulting in $150,000
and $451,000 gross margin, respectively. Likewise, the cost
of our grant revenue in 2009 was zero resulting in
$29,000 gross margin.
Our cost of product sales includes the costs we incur to
formulate our finished products into saleable form for our
customers, including material costs, labor and processing costs
charged to us by our outsourced blenders, installers and other
vendors, packaging costs incurred by our outsourced suppliers,
freight costs to customers and inbound freight charges from our
suppliers. Our inventory is primarily maintained off-site by our
outsourced suppliers. To date, our purchasing, receiving,
inspection and internal transfer costs have been insignificant
and have been included in cost of product sales. In addition,
the costs of our warehouse which we occupied through October
2009 are included in selling, general and administrative
expenses. Our gross margins may not be comparable to those of
other entities, because some entities include all of the costs
related to their distribution network in cost of revenue and
others like us exclude a portion of such costs from gross
margin, including such costs instead within operating expenses.
Cost of licensing fees and royalties is zero as there are no
incremental costs associated with the revenue. Cost of
consulting and other revenue includes incremental out of pocket
costs to provide consulting services.
Selling, general and administrative expenses were $6,073,000 in
the year ended December 31, 2009 compared to $9,992,000 in
2008, a decrease of $3,919,000, or 39.2%. The decrease in
selling, general and administrative costs is primarily
attributable to lower professional services, particularly
investor relations and financial advisory services, lower
compensation and benefits, travel, marketing and bad debts. We
made a concerted effort in 2009 to contain our costs and
eliminate those costs that were redundant or deemed unnecessary.
Selling, general and administrative expenses are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
3,463
|
|
|
$
|
4,386
|
|
Non-cash stock-based compensation
|
|
|
725
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits
|
|
$
|
4,188
|
|
|
$
|
5,590
|
|
Professional services
|
|
|
685
|
|
|
|
1,683
|
*
|
Travel
|
|
|
371
|
|
|
|
712
|
|
Occupancy, property and business taxes, supplies, postage and
delivery
|
|
|
738
|
|
|
|
859
|
|
Sales and marketing expenses
|
|
|
94
|
|
|
|
400
|
|
(Recovery) provision for bad debts
|
|
|
(157
|
)
|
|
|
629
|
|
Depreciation and all other
|
|
|
154
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,073
|
|
|
$
|
9,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Professional services includes $227,000 of non-cash stock-based
compensation charges for fair value of warrants. |
The Companys aggregate non-cash charges for the fair value
of stock options and warrants in the year ended
December 31, 2009 were $735,000, of which $725,000 has been
included in selling, general and administrative expenses and
$10,000 in research and development expenses. This compares to
$1,444,000 in total non-cash stock-based compensation expense in
2008 of which $1,431,000 has been included in selling, general
and administrative expenses ($1,204,000 in compensation,
$227,000 in professional) and $13,000 included in research and
development expenses.
Excluding the non-cash stock-based charges, compensation and
benefit expenses were $3,463,000 for the year ended
December 31, 2009 compared to $4,386,000 in 2008, a
decrease of $923,000, or 21.0%, primarily due to a reduction in
workforce in 2009. In addition, 2009 includes no bonuses,
whereas the 2008 compensation and benefits included bonuses of
approximately $310,000.
F-29
Total severance charges in the year ended December 31, 2009
were $958,000, comprised of a third quarter charge of $448,000
and a first quarter charge of $510,000. In August 2009, the
Board of Directors adopted a plan to implement a company-wide
restructuring effective August 7, 2009. We incurred
severance charges totaling $448,000 in the third quarter of 2009
related to the reduction of approximately 44% of the
companys workforce. In addition, non-executive members of
the Companys Board of Directors agreed to receive 50% of
their annual compensation effective commencing for the second
half of 2009 ($41,250 reduction in 2009). On February 10,
2009, the Companys Board of Directors elected Michael L.
Asmussen, then 38, as President and Chief Executive Officer
replacing Dr. Bernhard Steiner. Mr. Asmussen was also
appointed to serve as a Director of the Company. Effective
February 11, 2009, Dr. Steiner resigned as a Director
of the Company. As a consequence of his termination of
employment, Dr. Steiner is entitled to salary of
approximately $315,445 (EUR 241,500) per annum until
September 13, 2010, the remainder of his contract term,
along with specified expenses not to exceed an aggregate of
approximately $4,300, together totaling $510,000, to be paid in
monthly installments until September 2010.
We have restructured the Company so that each employee will
manage resources based upon data-driven revenue expectations. As
such, new processes are being established to ensure
organizational and individual discipline and accountability.
Professional services decreased $998,000, or 59.3%, to $685,000
in 2009 compared to $1,683,000 in 2008. The companys
professional services include audit-related costs, investor
relations and financial advisory fees. In addition to
curtailment of outside agency use, a significant component of
the decrease in professional services is attributable to
stock-based compensation charges of $227,000 for the fair value
of warrants issued for financial advisory services (such amount
represented the remaining stock-based amount that was amortized
over the period that services were rendered).
We relocated our U.S. corporate offices in January 2009 and
incurred rent expense on both our old and new
U.S. headquarters due to the timing of our relocation and
expiration of the old lease. The lease for the new
U.S. office provides for more square feet at a lower per
square foot cost resulting in total rent expense at a slightly
higher rate than 2008 but with lower cash outlay in the early
years of the new lease.
(Recovery) provision for bad debts decreased $786,000, or
125.0%, reflecting a recovery of ($157,000) in 2009 compared to
a provision of $629,000 in the prior year. Bad debt as a
percentage of product sales was (15.1%) in 2009 compared to 9.0%
in 2008. The (recovery) provision for bad debts is attributable
to specific aged account activity.
Research and development expenses were $386,000 in the year
ended December 31, 2009 compared to $430,000 in 2008, a
decline of $44,000 (10.2%). Our work for the California Showcase
is ongoing along with certain supplemental environmental
programs sponsored by California Air Resources Board
(CARB). We continue work to overcome gaps in our
technology and product portfolios brought about by volatile
markets and past development setbacks. In addition to
development of new products, our 2009 projects included field
testing of emission control technologies. The 2008 projects
included laboratory testing on additive formulations. Research
and development expenses in the year ended December 31,
2009 and 2008 include $10,000 and $13,000, respectively, of
non-cash charges for the fair value of stock options granted.
In January 2009, EPA verifications were withdrawn on two of our
products because available test results were not accepted by EPA
as meeting new emissions testing requirements for NO2
measurement. Presently, we do not intend to seek verification of
these products. We have no assurance of the extent of additional
testing that may be required by EPA or whether it will be
adequate to remove any remaining concern the EPA may have
regarding use of our fuel-borne catalyst.
We believe that it is an essential requirement of the
U.S. retrofit market that emissions control products and
systems are verified under the U.S. EPA
and/or CARB
protocols in order to qualify for funding from EPA
and/or CARB
programs. Funding for these emissions control products and
systems is generally limited to those products and technologies
that have already been verified. Verification is also useful for
commercial acceptability. We believe that the lack of CARB
verification will result in a shift of expected
U.S. retrofit
F-30
revenue into future periods. We expect to have CARB verification
in the fourth quarter of 2010. We may have the opportunity to
obtain a conditional CARB verification before all of our testing
has been concluded.
Without full CARB verification, our U.S. retrofit
opportunities are limited although certain jurisdictions have
been satisfied with other of our certifications. We received the
EPA 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. In 2007, we received accreditation for our Purifier
Systems, our Platinum Plus fuel-borne catalyst used with a
diesel particulate filter, to be sold for compliance with the
emission reduction requirements established for the London LEZ.
In 2009, the German Federal Environment Agency, the
Umweltbundesamt (UBA), issued a non disapproval for sale of
Platinum Plus fuel-borne catalyst for use in conjunction with up
to 2,000 diesel particulate filters in Germany; further work
will be required to lift fully the 2,000 unit restriction.
In 2009, in addition to emphasis on the global retrofit market,
we started to focus on fuel economy opportunities in the
U.S. in non-road sectors, including rail, marine, mining
and construction, and in 2010, expect continued focus on these
sectors by our distributors rather than through our direct
selling efforts. Platinum Plus fuel-borne catalyst is 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 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. Platinum
Plus is used to improve combustion which acts to 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. Our 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. 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 $1.75 per U.S. gallon.
Patent amortization and other patent related expense, including
abandonment of $13,000 of previously capitalized patents, was
$207,000 in the year ended December 31, 2009 compared to
$227,000 in 2008, a decline of $20,000 (8.8%). At each reporting
period, the Company evaluates the events or changes in
circumstances that may indicate that patents are not recoverable.
Foreign currency transaction gains, net of losses, were $112,000
in 2009 compared to net transaction losses of $845,000 in 2008.
Interest income was $245,000 for the year ended
December 31, 2009 compared to $602,000 in 2008, a decrease
of $357,000, or 59.3%, due to lower invested balances and rates
of return during 2009.
Other income (expense) was $100,000 in 2009 and is comprised of
interest expense of ($85,000) and a net unrealized gain on
investments of $185,000. The Company had an unrealized gain on
the fair value of its investment in auction rate securities
(ARS) of $342,000 and an unrealized loss of
($157,000) on its ARS put right (ARSR), resulting in
$185,000 net unrealized gain. The 2008 other income
(expense) consists of interest expense ($56,000), impairment
loss on investments, net ($185,000) and miscellaneous other
income of $2,000. In 2008, the fair value of the ARS declined
$1.5 million from par value, which loss was charged to
other expense. Upon the initial recording of the ARSR at a fair
value of $1.3 million, we recognized a gain, which together
with the $1.5 million decline in fair value of the ARS,
resulted in a net charge to operations in 2008 of
$0.2 million included in other income (expense) on our
consolidated statement of operations.
F-31
We compare the UBS-determined current value per the monthly
statements from UBS to the par value of the ARS, noting that UBS
may have an interest in being conservative in its values because
we may seek additional loan advances from UBS based upon 75% of
their ARS value. The UBS current value of our ARS increased
$1.7 million from December 31, 2008 to
December 31, 2009. We compare the UBS-determined current
value to the fair value computed by the Company with the
assistance from a third party valuation firm. The compared
values differed by approximately $0.2 million at
December 31, 2009 and $1.6 million at
December 31, 2008, with the UBS values being lower. In
making our fair value determination, we considered a range of
fair value estimates with the assistance of our third party
valuation firms understanding of all available factors
resulting in low, mid-point and high fair value assessments with
a total range of 3% between the low and high fair values. We
believe that the use of the mid-point range is appropriate based
on the available information at December 31, 2009.
We note that the UBS Valuation Methodology for Student Loan ARS
considers many variables in its cash flow modeling of student
loan ARS including, but not limited to:
General ARS considerations
(a) projected forward interest rates
(b) cost of funds (e.g., perpetually failed auctions)
(c) issuer optionality and redemption provisions
General collateral performance considerations
(a) prepayment speeds
(b) deferment and forbearance
(c) delinquencies
(d) gross default rates
The above assumptions, plus additional considerations, are
formulated and applied by UBS. A cash flow, or series of cash
flows, is generated for both the student loan assets (i.e., the
student loans and cash) as well as the corresponding liabilities
(i.e., the ARS and other debt securities). The scheduled
interest and final principal payments on each ARS note are then
discounted to arrive at a net present value (NPV).
Finally, the NPV for each security is adjusted to reflect the
current market liquidity for ARS and UBSs proprietary
valuation methodology is routinely calibrated to observe market
transactions.
We have not relied upon the UBS-determined values as our fair
value. We have used the third-party assessment to evaluate if
the UBS values are reasonable as well as evaluating the discount
from par that several other public companies used, companies
that also have student loan ARS issued by UBS. We continue to
caution our investors about the credit risk should UBS be unable
to fulfill its commitment under the Offer for a put right
permitting us to sell to UBS at par value all ARS previously
purchased from UBS at a future date (any time during a two-year
period beginning June 30, 2010). There can be no assurance
that the financial position of UBS will be such as to afford the
Company the ability to acquire the par value of its ARS upon
exercise of the ARS right.
In our assessment of fair values, we monitor developments and
changes in the student loan ARS market. Key general
considerations for 2009 include the following:
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During 2009, indications of market liquidity have improved. ARS
spreads have continued to contract over the course of the year.
As a result, we have reduced the liquidity risk premium on our
student loan ARS.
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Spreads indicated by the Bloomberg/Bear Stearns Student Loan
Index on AAA issues of 15 year or greater duration have
decreased substantially from the all-time high of
436.37 basis points as of December 31, 2008 to
208.02 basis points as of December 31, 2009. This is
further evidence these spreads are on a downward trend.
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F-32
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Probabilities of default are slightly lower on most securities
given falling credit spreads in the market over the course of
the year and remain in the range of 0%-5% on a cumulative basis
for AAA securities.
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Probabilities of passing auction/return of capital within a
2-3 year period have remained stable over the year.
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LIBOR interest rate forwards rose during the year at a faster
rate than treasury strip securities, which caused upward
pressure on prices.
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Monetary actions over the past year have reduced yields on
short-term treasury securities and the Federal Funds rate
remained unchanged, at a target range of 0% to 0.25%. Similarly,
the discount rate remained unchanged at 0.5%. However, many
market participants are now forecasting higher inflation over
the longer term due to these actions.
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Recovery rates remained unchanged for most securities over the
course of the year.
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General Credit Movements ? The rating agencies continue their
review of student loan ARS structures with focus on three major
factors: (1) changes in levels of over-collateralization;
(2) excess spread compression; and (3) the impact of
prolonged auction failures. None of our ARS have been downgraded.
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UBS has reported full or partial redemption notices for a number
of transactions for which UBS served as lead broker-dealer that
were redeemed for par amount.
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Based upon the trends noted above, our key risk considerations
by investment metric for 2009 include the following.
Structure:
Counterparty Moderate as counterparty
structure remained unchanged.
Complexity Moderate as complexity of security
remained unchanged.
Collateral:
Quality Minimal/Moderate as none of our ARS
experienced downgrades, thus no increases in quality risk.
Default Minimal/Moderate; this risk
assessment remains unchanged for our ARS which maintained the
same credit rating.
Liquidity:
Trading Environment Moderate due to easing
liquidity pressures.
Asset Correlation High as all of our ARS
continued to fail auction, asset correlation risk remained high
in 2009.
In the event that UBS is unable to perform upon our exercise of
the ARS put right on or after June 30, 2010, we would have
to sell the underlying securities at a discount which would
negatively impact our future cash flows.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Revenue was $7,475,000 in 2008 compared to $4,925,000 in 2007,
an increase of $2,550,000, or 51.8%, due primarily to sales of
our Purifier Systems as an emission reduction solution that
meets the standards established for the London Low Emission
Zone. Of our 2008 operating revenue, 94.0% was from product
sales and 6.0% was from technology licensing fees and royalties.
Of our operating revenue for the year ended December 31,
2007, approximately 29.8% was from product sales and 70.2% was
from technology licensing fees and royalties. The mix of our
revenue sources during any reporting period may have a material
impact on
F-33
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.
Product sales increased $5,558,000, or 379.1%, to $7,024,000 in
2008 from $1,466,000 in 2007. The increase in product sales is
attributable primarily to demand for our Platinum Plus Purifier
Systems, a product comprised of a diesel particulate filter
along with our Platinum Plus fuel-borne catalyst to enable
regeneration. We received approval in October 2007 from
Transport for London to supply our Purifier Systems as an
emission reduction solution that meets the standards established
for the London Low Emission Zone. The deadlines for compliance
with the London Low Emission Zone are being phased in over time
for different classifications of vehicles. February 2008 was the
compliance deadline for vehicles greater than 12 metric tons and
July 2008 was the compliance deadline for motor coaches and
vehicles greater than 3.5 metric tons. The next compliance
deadline is October 2010 for large vans and minibuses, followed
by further compliance deadlines in 2012. We believe sales of our
Purifier Systems for compliance with the requirements of the
London Low Emission Zone may provide us with recurring revenue
from use of our Platinum Plus fuel-borne catalyst that enables
the regeneration of the diesel particulate filter. We believe we
will have the opportunity to expand this business model as
additional Low Emission Zones are established throughout Europe.
Our technology license fees and royalties were $451,000 in 2008
compared to $3,459,000 in 2007, a decrease of $3,008,000, or
87.0%, with the decrease attributable to recognition of
significant up-front license fees in 2007. In 2008 and 2007, we
executed new technology licensing agreements and recognized
revenue from license fees for the use of our
ARIS®
technologies for control of oxides of nitrogen (NOx) using our
selective catalytic reduction (SCR) emission control, the
combination of exhaust gas recirculation (EGR) with SCR
technologies, and hydrocarbon injection for lean NOx traps, NOx
catalysts and diesel particulate filter regeneration. Our
license agreements executed in 2008 include Headway Machinery
Co., Ltd. (Zhucheng City, China), Hilite International, Inc.
(Cleveland, Ohio) and Eaton Corporation. The new license
agreements executed in 2007 included Robert Bosch GmbH and
Tenneco Automotive Operating Company, Inc. and amendment of
license agreement with Combustion Components Associates, Inc. We
are continuing our efforts to consummate technology license
agreements with manufacturers and component suppliers for the
use of our technologies.
Total cost of revenue was $5,717,000 for the year ended
December 31, 2008 compared to $1,126,000 for the year ended
December 31, 2007, an increase of $4,591,000, or 407.7%,
due to higher costs and higher product sales volume in 2008
compared to 2007. Total gross profit as a percentage of revenue
was 23.5% and 77.1% for the years ended December 31, 2008
and 2007, respectively, with the decrease attributable to the
mix that included higher product sales. The gross margin for
products compliant with the LEZ requirements was initially set
at a low level, based on low prices for our products, to attract
interest in our offering to establish greater visibility of the
Company in the marketplace. Our international operation
implemented price increases late in the third quarter of 2008.
Gross margin for product sales in 2008 was $1,307,000, or 18.6%
of product sales, compared to $340,000 in 2007, or 23.2% in
2007. Our cost of license fee and royalty revenue was zero in
2008 and 2007 resulting in $451,000 and $3,459,000 gross
margin, respectively.
Our cost of product sales includes the costs we incur to
formulate our finished products into salable form for our
customers, including material costs, labor and processing costs
charged to us by our outsourced blenders, installers and other
vendors, packaging costs incurred by our outsourced suppliers,
freight costs to customers and inbound freight charges from our
suppliers. Our inventory is primarily maintained off-site by our
outsourced suppliers. To date, our purchasing, receiving,
inspection and internal transfer costs have been insignificant
and have been included in cost of product sales. In addition,
the costs of our warehouse of approximately $21,000 per year are
included in selling, general and administrative expenses. Our
gross margins may not be comparable to those of other entities,
because some entities include all of the costs related to their
distribution network in cost of revenue and others like us
exclude a portion of such costs from gross margin, including
such costs instead within operating expenses. Cost of consulting
and other revenue includes incremental out of pocket costs to
provide consulting services. Cost of licensing fees and
royalties is zero as there are no incremental costs associated
with the revenue.
F-34
Selling, general and administrative expenses were $9,992,000 for
the year ended December 31, 2008 compared to $8,041,000 in
2007, an increase of $1,951,000, or 24.3%. The increase in
selling, general and administrative costs is primarily
attributable to higher compensation and benefit costs, as well
as higher professional fees, occupancy costs and bad debt
provision, as discussed further below. Selling, general and
administrative expenses are summarized below:
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Years Ended December 31,
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2008
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2007
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(In thousands)
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Compensation and benefits
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$
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4,386
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$
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2,997
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Non-cash stock-based compensation
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1,204
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1,966
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Total compensation and benefits
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$
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5,590
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$
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4,963
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Professional services
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1,683
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*
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1,487
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*
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Travel
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712
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622
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Occupancy, property and business taxes, supplies, postage and
delivery
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859
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511
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Sales and marketing expenses
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400
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341
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Bad debt expense
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629
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28
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Depreciation and all other
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119
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89
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Total
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$
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9,992
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$
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8,041
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* |
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Professional services includes $227,000 of non-cash stock-based
compensation charges for fair value of warrants. |
The Companys aggregate non-cash charges for the fair value
of stock options and warrants in 2008 were $1,444,000, of which
$1,431,000 has been included in selling, general and
administrative expenses ($1,204,000 in compensation and $227,000
in professional services) and $13,000 in research and
development expenses. This compares to $2,208,000 in total
non-cash stock-based compensation expense in 2007. Effectively,
the 2007 charge reflects two grants of stock options to
employees, one grant by the Board of Directors in December 2007
and another in January 2007.
Excluding the non-cash stock-based charges, compensation and
benefit expenses were $4,386,000 for 2008 compared to $2,997,000
in 2007, an increase of $1,389,000, or 46.3%, due to new
personnel, recruitment and relocation costs, and higher salary
rates in 2008 compared to 2007. The 2008 compensation includes
approximately $310,000 in bonuses, whereas, the 2007
compensation includes approximately $400,000 bonus expense based
upon achievement of milestones.
Professional fees include investor relations and financial
advisory fees along with audit-related costs, including costs of
complying with the requirements of Sarbanes-Oxley. Included in
each of 2008 and 2007 is a $227,000 non-cash compensation
expense for stock warrants issued for financial advisory
services. The 2008 investor relations program costs were higher
than 2007.
Occupancy costs include office rents, insurance, telephone and
communications, office supplies and related costs, along with
property and various other taxes. We moved our U.K.
administrative offices in November 2007 and our
U.S. headquarters in January 2009. The lease for the new
U.S. office provides for more square feet at a lower per
square foot cost resulting in total rent expense at a slightly
higher rate than 2008 but with lower cash outlay in the early
years of the new lease.
Bad debt provision as a percentage of product sales for the year
ended December 31, 2008 and 2007 was 9.0% and 1.9%,
respectively. The $601,000 increase in our bad debts in 2008
compared to 2007 was due to the difficult economic environment.
The 2008 provision is attributable to specific aged accounts.
Twelve customers comprised approximately 83% of our bad debt
expense in 2008 and one of those customers filed for bankruptcy
within six months of our successful LEZ product sales and
collection activity. That customers initial order from us
was in January 2008, and we received payments within the normal
billing cycle so there
F-35
was no indication of pending bankruptcy. That bankrupt customer
was approximately $200,000 (in excess of 31% of our 2008 bad
debt expense) and was written off in 2008. To the extent that we
have past due customer balances, we require prepayment on new
orders and establishment of payment plans on past due balances.
Research and development expenses were $430,000 for the year
ended December 31, 2008 compared to $428,000 in 2007, a
decrease of $2,000, or 0.5%. The research and development
expenses included $13,000 and $14,000, respectively, in 2008 and
2007 of non-cash charges for the fair value of stock options
granted. The 2008 projects included laboratory testing on
additive formulations, fuel economy and carbon reduction along
with field testing of emission control technologies. Our 2007
research and development projects included testing required to
meet Transport for Londons certification standards for the
London Low Emission Zone. In October 2007, we received approval
from Transport for London to supply our Purifier System as an
emission reduction solution that meets the standards established
for the London LEZ.
Patent amortization and other patent costs decreased to $227,000
in 2008 from $364,000 in 2007, a decline of $137,000, or 37.6%,
due to additional costs incurred in 2007 associated with the
protection of our patents. Included are $38,000 and $58,000 in
2008 and 2007, respectively, related to abandonment of some
patents in jurisdictions that we deemed unnecessary. Patent
amortization expense for the years ended December 31, 2008
and 2007 was $51,000 and $41,000, respectively.
Interest income was $602,000 for the year ended
December 31, 2008 compared to $509,000 in 2007, an increase
of $93,000, or 18.3%, due to higher invested balances during the
2008 period, although at lower rates than 2007.
Foreign currency transaction losses, net of gains, were $845,000
and $11,000, respectively for the year ended December 31,
2008 and 2007 due to the strengthening U.S. dollar.
Other expense was $239,000 in 2008 and is comprised of interest
expense ($56,000), impairment loss on investments, net
($185,000) and miscellaneous other income.
Interest expense was $56,000 in 2008 compared to zero in 2007
and is due to our borrowing of all of the $3.0 million line
of credit we had established with UBS.
The fair value of our auction rate securities (ARS)
was approximately $10.2 million (par value of
$11.7 million) and $18.8 million (par value of
$18.8 million) as of December 31, 2008 and 2007,
respectively. We sold $7.1 million of these investments in
2008. The fair value declined $1.5 million from par value
in 2008, which loss was charged to operations. The fair value of
the ARS was determined utilizing a discounted cash flow approach
and market evidence with respect to the ARSs collateral,
ratings and insurance to assess default risk, credit spread risk
and downgrade risk. The Company also recorded an auction rate
securities right (ARSR) at a fair value of
$1.3 million and recognized the gain in operations, which,
together with the $1.5 million decline in fair value of the
ARS, resulted in a net charge to operations in 2008 of
$0.2 million included in other expense. The fair value of
the ARSR was based on an approach in which the present value of
all expected future cash flows was subtracted from the current
fair market value of the securities and the resultant value was
calculated as a future value at an interest rate reflective of
counterparty risk.
Liquidity
and Capital Resources
We require capital resources and liquidity to fund our global
development and for working capital. Our working capital
requirements vary from period to period depending upon
manufacturing volumes, the timing of deliveries and payment
cycles of our customers. At December 31, 2009 and 2008,
respectively, we had cash and cash equivalents of
$2.8 million and $4.0 million to use for our
operations. Our working capital was $7.3 million at
December 31, 2009 compared to $8.2 million at
December 31, 2008 reflecting a decrease of
$0.8 million. The decline in working capital was primarily
attributable to the use of cash to fund our operations along
with increase in our short-term debt, partially offset by the
classification of our investments to current from non-current.
Net cash used for operating activities was $5.7 million in
the year ended December 31, 2009 and was used primarily to
fund the net loss of $6.7 million, adjusted for non-cash
items. Included in the 2009 non-cash
F-36
items was stock-based compensation expense of $735,000,
depreciation and amortization expense of $184,000, unrealized
gain on fair value of investments of ($185,000) and recovery of
doubtful accounts ($157,000).
Accounts receivable, net decreased to $0.1 million at
December 31, 2009 from $0.6 million at
December 31, 2008 due primarily to lower sales activity. As
noted in the Results of Operations discussion above, our
(recovery) provision for bad debts as a percentage of product
sales for the year ended December 31, 2009 and 2008 was
(15.1%) and 9.0%, respectively, and the $786,000 decrease in our
bad debt expense in 2009 compared to 2008 was attributable to
lower sales activity and collections of past due amounts. To the
extent that we have past due customer balances, we require
prepayment on new orders and establishment of payment plans on
past due balances. We are using available legal remedies as
needed to improve our collection efforts, including enforcement
of personal guarantees.
Inventories, net was slightly higher at December 31, 2009
compared to the December 31, 2008 levels primarily due to
year-end purchases to fulfill the London Metroline order in the
first quarter of 2010, partially offset by an increase in our
inventory reserves to reflect the net realizable value of our
inventories for items that have been slow moving. The increase
in our other current assets was primarily due to tax refunds
(VAT) due us as of December 31, 2009.
Current liabilities, excluding short-term debt, decreased
slightly at December 31, 2009 compared to December 31,
2008. The decreases in accounts payable and other liabilities
were due to the slow business environment and more than offset
the increase in accrued expenses. The increase in accrued
expenses was primarily due to accrued severance provisions in
2009 totaling $958,000 of which $569,000 had been paid through
December 31, 2009 (see Note 6 of Notes to the
Consolidated Financial Statements). The $389,000 accrued
severance balance at December 31, 2009 will be paid in
monthly installments through September 2010 as outlined above in
the Results of Operations.
Net cash used for investing activities was $0.2 million in
the year ended December 31, 2009. We capitalized fixed
assets and improvements associated with our
U.S. headquarters to which we relocated in January 2009. We
also used cash for investments in our patents, including patent
applications in foreign jurisdictions. We expect to continue to
invest in our intellectual property portfolio.
Cash provided by financing activities was $4.7 million for
the year ended December 31, 2009 and was attributable
primarily to proceeds from borrowing from our demand loan
facility. We are using the proceeds from short-term debt for
general working capital purposes. In May 2008, we arranged a
$3 million demand loan facility using our investments in
auction rate securities (ARS) as collateral and in
July 2008, borrowed those funds as a matter of financial
prudence to secure available cash (see Note 9 of Notes to
Consolidated Financial Statements). In January 2009, the lender
(UBS) approved a $6.5 million credit facility. In September
2009, we arranged a further increase to the credit facility to
$7.7 million and drew down the additional available cash
totaling $1.3 million. Our ARS serve as collateral for the
debt which is due upon demand.
At December 31, 2009 and 2008, our investments are recorded
at fair value and comprise ARS and an ARS put right
(ARSR). In October 2008, the Company received an
offer (the Offer) from UBS for a put right
permitting us to sell to UBS at par value all ARS previously
purchased from UBS at a future date (any time during a two-year
period beginning June 30, 2010). The Offer also included a
commitment to loan us 75% of the UBS-determined value of the ARS
at any time until the put is exercised. The Offer was
non-transferable and expired on November 14, 2008. On
November 6, 2008, the Company accepted the Offer. The
Companys right under the Offer is in substance a put
option (with the strike price equal to the par value of the ARS)
which was recorded as an asset, measured at its fair value, with
the resultant gain recognized in earnings.
At December 31, 2009 and 2008, respectively, our
investments totaled $11.7 million and $11.5 million of
which approximately $10.6 million and $10.2 million
($11.7 million par value) were investments in ARS
collateralized by student loans, primarily AAA/Aaa-rated, which
are substantially guaranteed by the U.S. Department of
Education. We sold $7.1 million of these investments in
2008. However, starting on February 15, 2008 and continuing
to date, the Company experienced difficulty in effecting
additional sales of such securities because of the failure of
the auction mechanism as a result of sell orders exceeding buy
orders.
F-37
Liquidity for these ARS is typically provided by an auction
process that resets the applicable interest rate at
pre-determined intervals. These failed auctions represent
liquidity risk exposure and are not defaults or credit events.
Holders of the securities continue to receive interest on the
investments, and the securities continue to be auctioned at the
pre-determined intervals (typically every 28 days) until
the auction succeeds, the issuer calls the securities, or they
mature.
The fair value of the Companys ARS increased $342,000 in
the year ended December 31, 2009, which unrealized gain was
recognized in our consolidated statement of operations. The fair
value of the ARS was determined utilizing a discounted cash flow
approach and market evidence with respect to the ARSs
collateral, ratings and insurance to assess default risk, credit
spread risk and downgrade risk. The Company also recorded a
unrealized loss on the ARSR of $157,000 and recognized the loss
in operations, which, together with the $342,000 increase in
fair value of the ARS, resulted in a $185,000 net
unrealized gain to operations in 2009. The fair value of the
ARSR was based on an approach in which the present value of all
expected future cash flows was subtracted from the current fair
market value of the securities and the resultant value was
calculated as a future value at an interest rate reflective of
counterparty risk. The Company used an independent third party
valuation firm to assist it with its determination of fair
values of the ARS and ARSR.
Classification of investments as current or non-current is
dependent upon managements intended holding period, the
securitys maturity date and liquidity considerations based
on market conditions. At December 31, 2009, the Company
classified all investments as current based on managements
intention and ability to liquidate the investments within the
next twelve months. At December 31, 2008, the Company
classified $6.4 million of the ARS as current based on
managements intention to use such securities as
consideration if UBS demands payment on its loan prior to the
date the Company exercises the ARSR.
The Company will be exposed to credit risk should UBS be unable
to fulfill its commitment under the Offer. There can be no
assurance that the financial position of UBS will be such as to
afford the Company the ability to acquire the par value of its
ARS upon exercise of the put right.
Our management believes that based upon the Companys cash
and cash equivalents and investments at December 31, 2009,
the current lack of liquidity in the credit and capital markets
will not have a material impact on our liquidity, cash flow,
financial flexibility or our ability to fund our operations for
at least the next twelve months.
We have evaluated our cash burn and determined that we have
sufficient resources to fund operations for the next twelve
months. Presently, we do not have liquidity sources other than
the UBS credit facility but believe we will have the ability to
use the ARS as collateral for additional borrowings, including
possible third-party financing as we near June 30, 2010,
the date that the par value of the ARS will be available to us
from UBS. We have reviewed a worst case scenario
regarding our cash (including the assumption of no additional
cash from collection of receivables) and concluded that we have
sufficient resources for the next twelve months to accomplish
our plans. We continue to pay our obligations in the ordinary
course as obligations become due. We made a concerted effort in
2009 and to date in 2010 to contain our costs and eliminate
those costs that are redundant or considered unnecessary with
strict controls over all discretionary spending and travel
costs. We have significantly reduced our ongoing cash
requirements by curtailment of expenses and a 44% reduction in
our work force, effective August 7, 2009. We have
restructured the Company so that each employee will manage
resources based upon data-driven revenue expectations, and we
are establishing processes to ensure organizational and
individual discipline and accountability.
We have incurred losses since inception aggregating
$65.6 million, which amount includes $4.8 million of
non-cash preferred stock dividends. We expect to incur losses
through 2010. 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
technology licensing 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. Historically, we have
been primarily dependent upon funding from new and existing
stockholders. The Company can provide no assurance that it will
be successful in any future financing effort to obtain the
necessary working capital to support operations or if such
financing is available, that it will be on acceptable terms.
F-38
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.
No dividends have been paid on our common stock and we do not
anticipate paying cash dividends in the foreseeable future.
Capital
Expenditures
As of December 31, 2009, 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, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 to 3
|
|
4 to 5
|
|
Over 5
|
|
|
Total
|
|
1 Year
|
|
Years
|
|
Years
|
|
Years
|
|
|
(In thousands)
|
|
Operating Leases
|
|
$
|
1,030
|
|
|
$
|
180
|
|
|
$
|
382
|
|
|
$
|
316
|
|
|
$
|
152
|
|
The operating leases include our facilities in the U.S. and
U.K. and consist of leases with the following remaining terms:
72 months under an
84-month
lease for our relocated U.S. headquarters and
39 months under a
64-month
lease for our U.K. office.
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, 2009, there were no off-balance sheet
transactions.
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, exchange rates for pounds
sterling and Euros, and current turmoil in the capital markets,
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 An extended interruption of the supply or a
substantial increase in the price of platinum could have an
adverse effect on our business. Please also see
Item 1A. Risk Factors An inability to
realize proceeds from our auction rate securities right issued
by UBS may significantly impact our liquidity for
discussion of factors relating to our investments that may
impact the Company.
Foreign
Currency Risk
Our results of operations are subject to both currency
transaction risk and currency translation risk. We incur
currency transaction risk when we enter into either a purchase
or sale transaction using a currency other than our functional
currency, which is the U.S. dollar. With respect to
currency translation risk, our financial condition and results
of operations are measured and recorded in the relevant domestic
currency (U.K. pounds sterling) then translated into
U.S. dollars for inclusion in our consolidated financial
statements. The Company held cash and cash equivalents
denominated in pounds sterling that amounted to approximately
GBP
F-39
0.1 million (U.S. $0.2 million) at
December 31, 2009 compared to approximately GBP
1.5 million (U.S. $2.2 million) at
December 31, 2008. Due to weakening of the U.S. dollar
in 2009, the currency rate increase of the pound sterling from
December 31, 2008 to December 31, 2009 was 12%. One
pound sterling was equal to approximately $1.45 at
December 31, 2008; $1.43 at March 31, 2009; $1.64 at
June 30, 2009; $1.60 at September 30, 2009; and $1.62
at December 31, 2009. A hypothetical 10% increase or
decrease in the U.S. dollar versus the U.K. pound sterling
would have resulted in an approximately $40,000 change of our
revenues during 2009.
Commodity
Risk
We are subject to the commodity risk of platinum prices, which
could result in unfavorable pricing to us for production of our
Platinum Plus fuel-borne catalyst. We do not use any hedging or
derivative contracts to purchase our platinum. During 2009, we
noted wide fluctuations in the price of platinum with a quoted
high closing price of $1,502 per troy ounce and quoted low
closing price of $920 per troy ounce. The closing price per troy
ounce of platinum at December 31, 2008 was $922; $1,133 at
March 31, 2009; $1,204 at June 30, 2009; $1,280 at
September 30, 2009; and $1,475 at December 31, 2009. A
hypothetical 10% increase or decrease in the price of platinum
would have resulted in approximately $24,000 change of our cost
of goods sold in 2009.
F-40
|
|
Item 8.
|
Consolidated
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, 2009 and 2008 and
the related consolidated statements of operations, comprehensive
loss, changes in stockholders equity and cash flows for
each of the years in the three-year period ended
December 31, 2009. Our audits also included the financial
statement schedule II Valuation and Qualifying
Accounts for each of the years in the three-year period ended
December 31, 2009 listed in Item 15(a)(2) in the
accompanying index. These consolidated financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule 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. We were not engaged for 2009 to
perform an audit of the Companys internal control over
financial reporting. Our audit of the 2009 financial statements
includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Clean Diesel Technologies, Inc. and
subsidiary as of December 31, 2009 and 2008 and the
consolidated results of their operations and their consolidated
cash flows for each of the years in the three-year period ended
December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the referred financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information stated therein.
As described in Note 2 to the consolidated financial
statements, the Company elected to measure certain financial
assets at fair value effective from January 1, 2008.
New York, New York
March 24, 2010
F-41
CLEAN
DIESEL TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,772
|
|
|
$
|
3,976
|
|
Accounts receivable, net of allowance of $232 and $359,
respectively
|
|
|
148
|
|
|
|
637
|
|
Investments
|
|
|
11,725
|
|
|
|
6,413
|
|
Inventories, net
|
|
|
1,059
|
|
|
|
974
|
|
Other current assets
|
|
|
294
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,998
|
|
|
|
12,219
|
|
Investments
|
|
|
|
|
|
|
5,127
|
|
Patents, net
|
|
|
1,083
|
|
|
|
1,027
|
|
Fixed assets, net of accumulated depreciation of $369 and $505,
respectively
|
|
|
294
|
|
|
|
296
|
|
Other assets
|
|
|
57
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,432
|
|
|
$
|
18,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
301
|
|
|
$
|
501
|
|
Accrued expenses
|
|
|
675
|
|
|
|
534
|
|
Short-term debt
|
|
|
7,693
|
|
|
|
3,013
|
|
Customer deposits
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,669
|
|
|
|
4,056
|
|
Commitments (Note 10)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share:
|
|
|
|
|
|
|
|
|
authorized 100,000; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share:
|
|
|
|
|
|
|
|
|
authorized 12,000,000; issued and outstanding 8,213,988 and
8,138,304 shares, respectively
|
|
|
82
|
|
|
|
81
|
|
Additional paid-in capital
|
|
|
74,694
|
|
|
|
73,901
|
|
Accumulated other comprehensive loss
|
|
|
(381
|
)
|
|
|
(406
|
)
|
Accumulated deficit
|
|
|
(65,632
|
)
|
|
|
(58,885
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
8,763
|
|
|
|
14,691
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
17,432
|
|
|
$
|
18,747
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
1,042
|
|
|
$
|
7,024
|
|
|
$
|
1,466
|
|
Technology licensing fees and royalties
|
|
|
150
|
|
|
|
451
|
|
|
|
3,459
|
|
Consulting and other
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,221
|
|
|
|
7,475
|
|
|
|
4,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
801
|
|
|
|
5,717
|
|
|
|
1,126
|
|
Cost of licensing fees and royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of consulting and other revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
6,073
|
|
|
|
9,992
|
|
|
|
8,041
|
|
Severance charge
|
|
|
958
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
386
|
|
|
|
430
|
|
|
|
428
|
|
Patent amortization and other expense
|
|
|
207
|
|
|
|
227
|
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
8,425
|
|
|
|
16,366
|
|
|
|
9,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,204
|
)
|
|
|
(8,891
|
)
|
|
|
(5,034
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange gain (loss)
|
|
|
112
|
|
|
|
(845
|
)
|
|
|
(11
|
)
|
Interest income
|
|
|
245
|
|
|
|
602
|
|
|
|
509
|
|
Change in fair value of investments and interest expense
|
|
|
100
|
|
|
|
(239
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,747
|
)
|
|
$
|
(9,373
|
)
|
|
$
|
(4,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.83
|
)
|
|
$
|
(1.15
|
)
|
|
$
|
(0.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted-average number of common shares
outstanding
|
|
|
8,147
|
|
|
|
8,138
|
|
|
|
6,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(6,747
|
)
|
|
$
|
(9,373
|
)
|
|
$
|
(4,535
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
25
|
|
|
|
(390
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(6,722
|
)
|
|
$
|
(9,763
|
)
|
|
$
|
(4,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
To be Issued
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
5,964
|
|
|
$
|
60
|
|
|
|
668
|
|
|
$
|
7
|
|
|
$
|
52,854
|
|
|
$
|
4
|
|
|
$
|
(44,977
|
)
|
|
$
|
7,948
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,535
|
)
|
|
|
(4,535
|
)
|
Warrants exercised
|
|
|
1,400
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
15,159
|
|
|
|
|
|
|
|
|
|
|
|
15,173
|
|
Options exercised
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
Compensation expense for stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,208
|
|
|
|
|
|
|
|
|
|
|
|
2,208
|
|
Issuance of common stock
|
|
|
668
|
|
|
|
7
|
|
|
|
(668
|
)
|
|
|
(7
|
)
|
|
|
1,901
|
|
|
|
|
|
|
|
|
|
|
|
1,901
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(20
|
)
|
Expenses of registration and reverse split
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
(168
|
)
|
Payment of directors fees in common stock
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
8,124
|
|
|
$
|
81
|
|
|
|
|
|
|
$
|
|
|
|
$
|
72,447
|
|
|
$
|
(16
|
)
|
|
$
|
(49,512
|
)
|
|
$
|
23,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,373
|
)
|
|
|
(9,373
|
)
|
Options exercised
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Compensation expense for stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,444
|
|
|
|
|
|
|
|
|
|
|
|
1,444
|
|
Expenses of registration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(390
|
)
|
|
|
|
|
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
8,138
|
|
|
$
|
81
|
|
|
|
|
|
|
$
|
|
|
|
$
|
73,901
|
|
|
$
|
(406
|
)
|
|
$
|
(58,885
|
)
|
|
$
|
14,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,747
|
)
|
|
|
(6,747
|
)
|
Issuance of common stock
|
|
|
76
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
Compensation expense for issuance of stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Compensation expense for stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
719
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
8,214
|
|
|
$
|
82
|
|
|
|
|
|
|
$
|
|
|
|
$
|
74,694
|
|
|
$
|
(381
|
)
|
|
$
|
(65,632
|
)
|
|
$
|
8,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-44
CLEAN
DIESEL TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,747
|
)
|
|
$
|
(9,373
|
)
|
|
$
|
(4,535
|
)
|
Adjustments to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
184
|
|
|
|
142
|
|
|
|
112
|
|
(Recovery)/provision for doubtful accounts, net
|
|
|
(157
|
)
|
|
|
629
|
|
|
|
28
|
|
Compensation expense for options, warrants and stock awards
|
|
|
735
|
|
|
|
1,444
|
|
|
|
2,208
|
|
Loss on disposition/abandonment of fixed assets/patents
|
|
|
16
|
|
|
|
38
|
|
|
|
58
|
|
Unrealized (gain)/loss on investments, net
|
|
|
(185
|
)
|
|
|
185
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
646
|
|
|
|
661
|
|
|
|
(1,855
|
)
|
Inventories, net
|
|
|
(85
|
)
|
|
|
119
|
|
|
|
(728
|
)
|
Other current assets and other assets
|
|
|
(54
|
)
|
|
|
12
|
|
|
|
(177
|
)
|
Accounts payable and accrued expenses
|
|
|
(59
|
)
|
|
|
(572
|
)
|
|
|
677
|
|
Other liabilities
|
|
|
(8
|
)
|
|
|
(48
|
)
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(5,714
|
)
|
|
|
(6,763
|
)
|
|
|
(4,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale (purchase) of investments, net
|
|
|
|
|
|
|
7,100
|
|
|
|
(18,825
|
)
|
Patent costs
|
|
|
(123
|
)
|
|
|
(299
|
)
|
|
|
(313
|
)
|
Purchase of fixed assets
|
|
|
(124
|
)
|
|
|
(212
|
)
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by investing activities
|
|
|
(247
|
)
|
|
|
6,589
|
|
|
|
(19,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term debt
|
|
|
4,735
|
|
|
|
3,013
|
|
|
|
|
|
Repayment of short-term debt
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
59
|
|
|
|
|
|
|
|
4,313
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
15,173
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
24
|
|
|
|
353
|
|
Stockholder-related charges
|
|
|
|
|
|
|
(14
|
)
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,739
|
|
|
|
3,023
|
|
|
|
19,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
18
|
|
|
|
(390
|
)
|
|
|
(20
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(1,204
|
)
|
|
$
|
2,459
|
|
|
$
|
(3,797
|
)
|
Cash and cash equivalents at beginning of the year
|
|
|
3,976
|
|
|
|
1,517
|
|
|
|
5,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
|
$
|
2,772
|
|
|
$
|
3,976
|
|
|
$
|
1,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation of abandoned assets
|
|
$
|
270
|
|
|
$
|
|
|
|
$
|
|
|
Payment of accrued directors fees in common stock
|
|
|
|
|
|
|
|
|
|
|
140
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
85
|
|
|
$
|
32
|
|
|
$
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-45
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial Statements
|
|
1.
|
Business
and Basis of Presentation
|
Clean Diesel Technologies, Inc. (CDT, the
Company, we, us or
our) (a Delaware corporation) is a developer of
technological solutions to reduce harmful emissions from
internal combustion engines while improving fuel economy. The
Company licenses its patented technologies to leading
manufacturers and suppliers, addressing original equipment
manufacturer (OEM) and retrofit markets globally. The
Companys products and patented technologies include
Platinum
Plus®,
a fuel-borne catalyst; a range of
Purifiertm
Systems, which combines its fuel-borne catalyst in integrated
emission control aftertreatment systems with diesel particulate
filters, diesel oxidation catalysts, or with catalyzed wire mesh
filter systems; and the
ARIS®
nitrogen oxides selective catalytic reduction (SCR) system. CDT
is establishing a network of licensed distributors to sell and
market its SCR products and solutions. For market development
and technology validation purposes, CDT also directly markets
and sells products based on its suite of technologies to end
users, such as corporate fleets, generating demand, proving
product performance and creating further innovations. The
success of the Companys technologies will depend upon the
commercialization opportunities as supported by federal, state
and local governmental regulations and by incentives driving
adoption around the world.
During 2009, 2008 and 2007, the Company incurred net losses of
approximately $6.7 million, $9.4 million and
$4.5 million, respectively, and at December 31, 2009,
has an accumulated deficit of approximately $65.6 million.
Net cash used for operating activities for the year ended
December 31, 2009 was approximately $5.7 million. As
of December 31, 2009, the Companys cash and cash
equivalents were $2.8 million, investments were
$4.0 million, net of borrowing collateralized by the
investments, and working capital was $7.3 million. Our
availability to fund operations assumes that the Company will be
able to exercise the put right and receive the par value of
investments, net, of the outstanding short-term debt
collateralized by the investments. In the event of a default by
UBS on its put right obligation, the Company would need to seek
to sell such investments to a third party and may not be able to
recover the face amount of the underlying securities. Based upon
the Companys operating plan for 2010 and assuming UBS
honors its put right obligation, management believes that the
Company will have sufficient working capital to fund its
operations through December 31, 2010.
|
|
2.
|
Significant
Accounting Policies
|
Consolidation:
The consolidated financial statements include the accounts of
CDT and Clean Diesel International, LLC (CD
International), its wholly-owned subsidiary, after
elimination of all significant intercompany transactions and
balances.
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,
amortization periods of intangible assets and the fair value of
investments. 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.
F-46
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
Revenue
Recognition:
The Company generates revenue from product sales comprised of
fuel-borne catalysts, including the Platinum Plus fuel-borne
catalyst products and concentrate and hardware including the
Purifier System, ARIS advanced reagent injection system
injectors and dosing systems; license and royalty fees from the
ARIS System and other technologies; and consulting fees and
other.
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 grant income,
engineering and development consulting services. Revenue from
technical consulting services is generally recognized and billed
as the services are performed. Revenue from grant income is
recognized when grant income is earned.
Generally, our license agreements are non-exclusive and specify
the geographic territories and classes of diesel engines
covered, such as on-road vehicles, off-road vehicles,
construction, stationary engines, marine and railroad engines.
At the time of the execution of our license agreements, we
assign the right to the licensee to use our patented
technologies. The up-front fees are not subject to refund or
adjustment. We recognize the license fee as revenue at the
inception of the license agreement when we have reasonable
assurance that the technologies transferred have been accepted
by the licensee and collectability of the license fee is
reasonably assured. The nonrefundable up-front fee is in
exchange for the culmination of the earnings process as the
Company has accomplished what it must do to be entitled to the
benefits represented by the revenue. Under our license
agreements, there is no significant obligation for future
performance required of the Company. Each licensee must
determine if the rights to our patented technologies are usable
for their business purposes and must determine the means of use
without further involvement by the Company. In most cases,
licensees must make additional investments to enable the
capabilities of our patents, including significant engineering,
sourcing of and assembly of multiple components. Such
investments are for the benefit of the licensee. Our obligation
to defend valid patents does not represent an additional
deliverable to which a portion of an arrangement fee should be
allocated. Defending the patents is generally consistent with
our representation in the license agreement that such patents
are legal and valid.
Cost
of Revenue:
Our cost of product sales includes the costs we incur to
formulate our finished products into salable form for our
customers, including material costs, labor and processing costs
charged to us by our outsourced blenders, installers and other
vendors, packaging costs incurred by our outsourced suppliers,
freight costs to customers and inbound freight charges from our
suppliers. Our inventory is primarily maintained off-site by our
outsourced suppliers. To date, our purchasing, receiving,
inspection and internal transfer costs have been insignificant
and have been included in cost of product sales. In addition,
the costs of the warehouse we used through October 2009 are
included in selling, general and administrative expenses. Cost
of consulting and other revenue includes incremental out of
pocket costs to provide consulting services. Cost of licensing
fees and royalties is zero as there are no incremental costs
associated with the revenue.
F-47
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
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. At times, the Company maintains cash and cash
equivalents in accounts in excess of the Federal Deposit
Insurance Corporation (FDIC) limits.
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, 2009 and 2008, our inventory reserves were
$73,000 and $22,000, respectively.
Fixed
Assets:
Our fixed assets, comprised of leasehold improvements, furniture
and fixtures, purchased software, office and computer equipment,
are stated at cost. Depreciation is computed over the estimated
useful lives of the depreciable assets ranging from three to
seven years using the straight-line method. Depreciation expense
was $130,000, $91,000 and $71,000 for the years ended
December 31, 2009, 2008 and 2007, 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 twenty 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 patents 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.
Comprehensive
Loss:
We report comprehensive loss by reflecting 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 loss 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 (loss). Other
comprehensive income (loss) includes certain changes in
stockholders equity that are excluded from net loss,
including foreign currency translation adjustments.
F-48
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
Foreign
Currency Translation:
Gains or losses on foreign currency transactions are included in
other income (expense) in the consolidated statements of
operations and aggregated a gain of $112,000 in 2009 and losses
in 2008 and 2007 of $845,000 and $11,000, respectively. The
functional currency for CD International, the Companys
U.K. branch, is the British pound sterling. Accordingly, assets
and liabilities of CD International 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 $25,000 and $(390,000) for the years ended
December 31, 2009 and 2008, respectively, is included in
accumulated other comprehensive loss. The Companys policy
is that exchange differences arising from the translation of the
balance sheets of entities that have functional currencies other
than the U.S. dollar are taken to accumulated other
comprehensive loss, a component of stockholders equity on
the consolidated balance sheet. In entities where the
U.S. dollar is the functional currency, unrealized gains
and losses due to remeasurement of monetary assets held in
currencies other than the U.S. dollar are reflected in
foreign currency exchange gain (loss) on the consolidated
statement of operations.
Valuation
of Accounts Receivable:
The Company makes judgments as to the collectability of accounts
receivable based upon the historic trends and future
expectations. Management estimates an allowance for doubtful
accounts, which adjusts gross trade accounts receivable downward
to its estimated net realizable value. To determine the
allowance for doubtful accounts, management reviews specific
customer risks and the accounts receivable aging.
Management reviews the creditworthiness of a customer prior to
accepting an initial order. Upon review of the customers
credit application and confirmation of the customers
credit and bank references, management establishes the
customers terms and credit limits. Credit terms for
payment of products are extended to customers in the normal
course of business and no collateral is required. We receive
order acknowledgements from customers confirming their orders
prior to our fulfillment of orders. To determine the allowance
for doubtful accounts receivable, management considers the
ongoing financial stability of the Companys customers, the
aging of accounts receivable balances, historical losses and
recoveries, and general business trends and existing economic
conditions that impact our industry and customers. In cases
where the Company is aware of circumstances that may impair a
specific customers ability to meet its financial
obligations, we record a specific allowance against amounts due
from that customer, and thereby reduce the net recognized
receivable to the amount the Company reasonably believes will be
collected. An account is written off only after management has
determined that all available means of collection, including
legal remedies, are exhausted.
Basic
and Diluted Loss per Common 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 Companys computation
of diluted net loss per share for 2009, 2008 and 2007 does not
include common share equivalents associated with 876,410,
972,578 and 812,800 options, respectively, and 407,493, 424,992
and 424,992 warrants, respectively, as the result would be
anti-dilutive. Further, per share effects of the 40,000 unvested
restricted shares under a stock award in 2009 have not been
included as the effect would be anti-dilutive.
Investments:
The Companys investments consist of auction rate
securities (ARS) and an auction rate securities
right (ARSR). The Company accounts for its ARS
investments based upon accounting standards that provide for
F-49
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
determination of the appropriate classification of investments.
Available-for-sale
securities are carried at fair value, with unrealized holding
gains and losses, net of tax, reported as a separate component
of stockholders equity. Trading securities are carried at
fair value, with unrealized holding gains and losses included in
other income (expense) on our consolidated statements of
operations.
The Companys ARSR investment is accounted for based upon
accounting guidance that permits irrevocable fair value option
election as the initial and subsequent measurement attribute for
certain assets and liabilities. Changes in fair value are
recognized in earnings as they occur for those assets or
liabilities for which the election is made. The election is made
on an instrument by instrument basis at initial recognition of
an asset or liability or upon an event that gives rise to a new
basis of accounting for that instrument. Effective
January 1, 2008, the Company elected to adopt ARSR at fair
value.
The Companys investments are reported at fair value in
accordance with accounting standards that accomplish the
following key objectives:
|
|
|
|
|
Defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date;
|
|
|
|
Establishes a three-level hierarchy (valuation
hierarchy) for fair value measurements;
|
|
|
|
Requires consideration of the Companys creditworthiness
when valuing liabilities; and
|
|
|
|
Expands disclosures about instruments measured at fair value.
|
The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement
date. A financial instruments categorization within the
valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement. The three levels
of the valuation hierarchy are as follows:
|
|
|
|
|
Level 1 inputs to the valuation methodology are
quoted prices (unadjusted) for identical assets or liabilities
in active markets.
|
|
|
|
Level 2 inputs to the valuation methodology
include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the
full term of the financial instrument.
|
|
|
|
Level 3 inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
|
Fair
Value of Financial Instruments:
The Companys assets carried at fair value on a recurring
basis are its investments (see Note 5). The investments
have been classified within level 3 in the valuation
hierarchy as their valuation requires substantial judgment and
estimation of factors that are not currently observable in the
market due to the lack of trading in the securities. The
valuation may be revised in future periods as market conditions
evolve.
Certain financial instruments are carried at cost on our
consolidated balance sheets, which approximates fair value due
to their short-term, highly liquid nature. These instruments
include cash and cash equivalents, accounts receivable, prepaid
expenses, accounts payable, customer deposits, accrued expenses
and short-term debt.
Concentrations
of Credit Risk:
Financial instruments, which potentially subject us to
concentration of credit risk, consist of cash and cash
equivalents, investments 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 do not believe we are exposed to any
significant risk with respect to cash and cash equivalents.
F-50
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
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.
Significant
Customers:
In each of the years ended December 31, 2009, 2008 and
2007, 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,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Customer A
|
|
|
13.8
|
%
|
|
|
|
*
|
|
|
|
*
|
Customer B
|
|
|
11.7
|
%
|
|
|
|
*
|
|
|
|
*
|
Customer C
|
|
|
|
*
|
|
|
15.1
|
%
|
|
|
|
*
|
Customer D
|
|
|
|
*
|
|
|
|
*
|
|
|
30.5
|
%
|
Customer E
|
|
|
|
*
|
|
|
|
*
|
|
|
24.3
|
%
|
Customer F
|
|
|
|
*
|
|
|
|
*
|
|
|
15.5
|
%
|
|
|
|
* |
|
Represents less than 10% revenue for that customer in the
applicable year. There were no other customers that represented
10% or more of revenue for the years indicated. |
At December 31, 2009, one customer represented greater than
10% of the Companys gross accounts receivable balance
(that customer is not included in the table above). At
December 31, 2008, no one customer represented greater than
10% of the Companys gross accounts receivable balance.
Stock-Based
Compensation:
The Company measures 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.
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 verification programs, evaluation
and testing projects, salary and benefits, consulting fees,
materials and testing gear.
F-51
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
Selling,
General and Administrative Expenses:
Selling, general and administrative expenses are comprised of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
3,463
|
|
|
$
|
4,386
|
|
|
|
|
|
|
$
|
2,997
|
|
Non-cash stock-based compensation
|
|
|
725
|
|
|
|
1,204
|
|
|
|
|
|
|
|
1,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits
|
|
$
|
4,188
|
|
|
$
|
5,590
|
|
|
|
|
|
|
$
|
4,963
|
|
Professional services
|
|
|
685
|
|
|
|
1,683
|
*
|
|
|
|
|
|
|
1,487
|
*
|
Travel
|
|
|
371
|
|
|
|
712
|
|
|
|
|
|
|
|
622
|
|
Occupancy, property and business taxes, supplies, postage and
delivery
|
|
|
738
|
|
|
|
859
|
|
|
|
|
|
|
|
511
|
|
Sales and marketing expenses
|
|
|
94
|
|
|
|
400
|
|
|
|
|
|
|
|
341
|
|
(Recovery) provision for bad debts
|
|
|
(157
|
)
|
|
|
629
|
|
|
|
|
|
|
|
28
|
|
Depreciation and all other
|
|
|
154
|
|
|
|
119
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,073
|
|
|
$
|
9,992
|
|
|
|
|
|
|
$
|
8,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes $227,000 of non-cash stock-based compensation charges
for fair value of warrants. |
Aggregate non-cash share-based compensation charges incurred by
the Company in 2009, 2008 and 2007, were $735,000, $1,444,000
and $2,208,000, respectively, all of which was included in
selling, general and administrative expenses, except $10,000,
$13,000 and $14,000 in 2009, 2008 and 2007, respectively,
included in research and development expenses.
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.
Recently
Adopted and Recently Issued Accounting
Pronouncements:
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement
No. 162. This statement modifies the Generally
Accepted Accounting Principles (GAAP) hierarchy by
establishing only two levels of GAAP, authoritative and
nonauthoritative accounting literature. Effective July 2009, the
FASB Accounting Standards Codification (ASC), also
known collectively as the Codification, is
considered the single source of authoritative
U.S. accounting and reporting standards, except for
additional authoritative rules and interpretive releases issued
by the SEC. The Codification is organized by topic, subtopic,
section, and paragraph, each of which is identified by a
numerical designation. This statement is effective for interim
and annual periods ending after September 15, 2009. The
Company adopted the Codification for the quarter ended
September 30, 2009. Upon adoption, this standard had no
material effect on the Companys financial position,
results of operations or cash flows.
Effective beginning second quarter 2009, the Financial
Instruments Topic,
ASC 825-10,
requires disclosures about fair value of financial instruments
in quarterly reports as well as in annual reports.
On January 1, 2009, the Company adopted a new accounting
standard issued by the FASB related to accounting for business
combinations which provides revised guidance on how acquirers
recognize and
F-52
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
measure the consideration transferred, identifiable assets
acquired, liabilities assumed, noncontrolling interests and
goodwill acquired in a business combination. This standard also
expands required disclosures surrounding the nature and
financial effects of business combinations. This standard will
be applied prospectively for acquisitions beginning in 2009 or
thereafter.
In April 2009, the FASB issued new accounting guidance regarding
accounting for assets acquired and liabilities assumed in a
business combination that arise from contingencies. This
guidance applies to all assets acquired and all liabilities
assumed in a business combination that arise from contingencies.
This guidance states that the acquirer will recognize such an
asset or liability if the acquisition-date fair value of that
asset or liability can be determined during the measurement
period. If the acquisition date fair value cannot be determined,
the acquirer applies the recognition criteria to determine
whether the contingency should be recognized as of the
acquisition date or after it. This new accounting standard is
effective January 1, 2009 for business combinations
prospectively.
On January 1, 2009, the Company adopted a new accounting
standard issued by the FASB that permits delayed adoption of new
guidance regarding certain non-financial assets and liabilities,
which are not recognized at fair value on a recurring basis,
until fiscal years and interim periods beginning after
November 15, 2008. As permitted, the Company elected to
delay the adoption of the new accounting standard for qualifying
non-financial assets and liabilities, such as fixed assets and
patents. This standard had no material impact on the
Companys financial position, results of operations or cash
flows.
On January 1, 2009, the Company adopted a new accounting
standard issued by the FASB that requires enhanced disclosures
about an entitys derivative and hedging activities. These
enhanced disclosures require: (a) how and why a company
uses derivative instruments; (b) how derivative instruments
and related hedged items are accounted for; and (c) how
derivative instruments and related hedged items affect a
companys financial position, results of operations and
cash flows. This standard had no material impact on the
Companys financial position, results of operations or cash
flows.
On January 1, 2009, the Company adopted a new accounting
standard that amends the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The intent of
the new requirements is to improve the consistency between the
useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset.
This standard had no material impact on the Companys
financial position, results of operations or cash flows.
On January 1, 2009, the Company adopted new requirements
related to guidance on determining what types of instruments or
embedded features in an instrument held by a reporting entity
can be considered indexed to its own stock for the purpose of
evaluating the first criteria of the scope exception in
accounting standards about derivatives. The adoption of these
new rules had no material impact on the Companys financial
position, results of operations or cash flows.
In April 2009, the FASB issued new accounting guidance related
to interim disclosures about the fair values of financial
instruments. This guidance requires disclosures about the fair
value of financial instruments whenever a public company issues
financial information for interim reporting periods. This
guidance was effective for the Companys interim periods
ending after June 15, 2009 consolidated financial
statements and is applied on a prospective basis. This
accounting guidance was adopted for the interim reporting period
ended June 30, 2009 and had no material impact on the
Companys financial position, results of operations or cash
flows.
In April 2009, the FASB issued new requirements regarding
determining fair value when the volume and level of activity for
the asset or liability have significantly decreased and
identifying transactions that are not orderly. This requirement
is effective for the Companys interim and annual periods
ending after June 15, 2009 and will be applied on a
prospective basis. This rule was adopted for the interim
reporting period ended June 30, 2009 and had no material
impact on the Companys financial position, results of
operations or cash flows.
F-53
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
In May 2009, the FASB amended accounting guidance for subsequent
events to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be
issued. This guidance was effective for interim or annual
financial periods ending after June 15, 2009. In February
2010, the FASB issued Accounting Standards Update (ASU)
2010-09,
Subsequent Events (Topic 855) Amendments to Certain
Recognition and Disclosure Requirements, to remove the
requirement for SEC filers to disclose the date through which an
entity has evaluated subsequent events. The adoption of this
guidance had no impact on the Companys financial
condition, results of operations or cash flows.
In August 2009, the FASB issued an amendment to the accounting
standards related to the measurement of liabilities that are
recognized or disclosed at fair value on a recurring basis. This
standard clarifies how a company should measure the fair value
of liabilities and that restrictions preventing the transfer of
a liability should not be considered as a factor in the
measurement of liabilities within the scope of this standard.
This standard is effective for the Company on October 1,
2009. The adoption of this standard had no material impact on
the Companys financial position, results of operations or
cash flows.
In January 2010, the FASB published ASU
2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU
No. 2010-06
clarifies improved disclosure requirements related to fair value
measurements and disclosures in Overall Subtopic
820-10 of
the FASB Codification. The new disclosures and clarifications of
existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except
for the disclosure about purchases, sales, issuances, and
settlements in the rollforward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years. The adoption of this standard
will not have an impact on the Companys financial position
and results of operations.
Inventories are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Finished Platinum Plus fuel-borne catalyst
|
|
$
|
85
|
|
|
$
|
144
|
|
Platinum concentrate/metal
|
|
|
449
|
|
|
|
578
|
|
Hardware
|
|
|
587
|
|
|
|
268
|
|
Other
|
|
|
11
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,132
|
|
|
$
|
996
|
|
Less: inventory reserves
|
|
|
(73
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
1,059
|
|
|
$
|
974
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, U.S. inventories were
approximately 45% and 80%, respectively, with foreign
inventories comprising the balance of the total inventories, net.
F-54
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
Patents held by the Company consist of capitalized patent costs
net of accumulated amortization and are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Patents
|
|
$
|
1,330
|
|
|
$
|
1,220
|
|
Less: accumulated amortization
|
|
|
(247
|
)
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
Patents, net
|
|
$
|
1,083
|
|
|
$
|
1,027
|
|
|
|
|
|
|
|
|
|
|
Patent amortization expense for the years ended
December 31, 2009, 2008 and 2007 was $54,000, $51,000 and
$41,000, respectively. Patent amortization expense for each of
the five succeeding years based upon patents as of
December 31, 2009 is estimated to be approximately $50,000
annually. In each of 2009, 2008 and 2007, the Company wrote off
net patent costs in jurisdictions the Company determined to
abandon totaling approximately $13,000, $38,000 and $58,000,
respectively.
The Companys investments as of December 31, 2009 have
been classified within level 3 as their valuation requires
substantial judgment and estimation of factors that are not
currently observable in the market due to the lack of trading in
the securities. The fair value of the investments may be revised
in future periods as market conditions evolve. Investments are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Auction rate securities
|
|
$
|
10,577
|
|
|
$
|
10,235
|
|
Auction rate securities put right
|
|
|
1,148
|
|
|
|
1,305
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
11,725
|
|
|
$
|
11,540
|
|
Classified as current assets
|
|
|
11,725
|
|
|
|
6,413
|
|
|
|
|
|
|
|
|
|
|
Classified as non-current assets
|
|
$
|
|
|
|
$
|
5,127
|
|
|
|
|
|
|
|
|
|
|
Our ARS are variable-rate debt securities, most of which are
AAA/Aaa rated, that are collateralized by student loans
substantially guaranteed by the U.S. Department of
Education. While the underlying securities have a long-term
nominal maturity, the interest rate is reset through dutch
auctions that are typically held every 28 days. The
contractual maturities of our ARS range from 2027 to 2047.
Auctions for our ARS have failed since February 2008 resulting
in illiquid investments for the Company. Our ARS were purchased
and held through UBS. In October 2008, the Company received an
offer (the Offer) from UBS AG for a put right
permitting us to sell to UBS at par value all ARS previously
purchased from UBS at a future date (any time during a two-year
period beginning June 30, 2010). The Offer also included a
commitment to loan us 75% of the UBS-determined value of the ARS
at any time until the put is exercised. We accepted the Offer on
November 6, 2008. Our right under the Offer is in substance
a put option (with the strike price equal to the par value of
the ARS) which we recorded as an asset, measured at its fair
value, with the resultant gain recognized in operations.
For the period through the date the Company accepted the Offer,
the Company classified the ARS as
available-for-sale;
thereafter, the Company transferred the ARS to the trading
category.
F-55
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
The fair value of the ARS was approximately $10.6 million
and $10.2 million (par value of $11.7 million) as of
December 31, 2009 and 2008, respectively. We sold
$7.1 million of these investments in 2008. The fair value
of the ARS was determined utilizing a discounted cash flow
approach and market evidence with respect to the ARSs
collateral, ratings and insurance to assess default risk, credit
spread risk and downgrade risk. The Company also recorded the
ARSR at an initial fair value of $1.3 million. The fair
value of the ARSR was based on an approach in which the present
value of all expected future cash flows were subtracted from the
current fair market value of the securities and the resultant
value was calculated as a future value at an interest rate
reflective of counterparty risk.
In the year ended December 31, 2009, we recorded a gain of
$342,000 on the ARS and a loss of $157,000 on the ARSR,
resulting in a $185,000 net unrealized gain included in
other income (expense) on our consolidated statement of
operations. In 2008, the fair value of the ARS declined
$1.5 million from par value, which loss was charged to
other expense. Upon the initial recording of the ARSR at fair
value, we recognized an unrealized gain of $1.3 million,
which together with the $1.5 million decline in fair value
of the ARS, resulted in a net charge to operations in 2008 of
$0.2 million included in other income (expense) on our
consolidated statement of operations.
Classification of investments as current or non-current is
dependent upon managements intended holding period, the
securitys maturity date and liquidity considerations based
on market conditions. At December 31, 2009, the Company
classified all investments as current based on managements
intention and ability to liquidate the investments by
June 30, 2010. At December 31, 2008, the Company
classified $6.4 million of the investments as current based
on managements intention to use such securities as
consideration if UBS demands payment on its loan prior to the
date the Company exercises the ARSR.
The Company will be exposed to credit risk should UBS be unable
to fulfill its commitment under the Offer. There can be no
assurance that the financial position of UBS will be such as to
afford the Company the ability to acquire the par value of its
ARS upon exercise of the ARSR.
Interest income for the years ended December 31, 2009, 2008
and 2007 was approximately $245,000, $602,000 and $509,000,
respectively. Accrued interest receivable at December 31,
2009 and 2008 was approximately $7,000 and $11,000, respectively.
The table below includes a rollforward of the Companys
investments in ARS and ARSR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Significant
|
|
|
Other
|
|
|
Significant
|
|
|
|
Unobservable
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
(Level 3)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
|
Fair value at beginning of year
|
|
$
|
11,540
|
|
|
$
|
18,825
|
|
|
$
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
(7,100
|
)
|
|
|
|
|
Transfers (out) in
|
|
|
|
|
|
|
(11,725
|
)
|
|
|
11,725
|
|
Unrealized gain (loss) included in statement of operations
|
|
|
185
|
|
|
|
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of year
|
|
$
|
11,725
|
|
|
$
|
|
|
|
$
|
11,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss)
|
|
$
|
185
|
|
|
|
|
|
|
$
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-56
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
Accrued expenses are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Professional fees
|
|
$
|
146
|
|
|
$
|
168
|
|
Accrued severance
|
|
|
389
|
|
|
|
|
|
Accrued compensation
|
|
|
24
|
|
|
|
234
|
|
Value added taxes payable
|
|
|
|
|
|
|
9
|
|
Travel and all other
|
|
|
116
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
675
|
|
|
$
|
534
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2009, we incurred severance charges
totaling $510,000 to be paid in monthly installments until
September 2010. On February 10, 2009, the Companys
Board of Directors elected Michael L. Asmussen as President and
Chief Executive Officer replacing Dr. Bernhard Steiner.
Mr. Asmussen was also appointed to serve as a Director of
the Company. Effective February 11, 2009, Dr. Steiner
resigned as a Director of the Company. As a consequence of his
termination of employment, Dr. Steiner is entitled to
salary of approximately $315,445 (EUR 241,500) per annum until
September 13, 2010, the remainder of his contract term,
along with specified expenses not to exceed an aggregate of
approximately $4,300, to be paid in monthly installments.
On August 4, 2009, the Board of Directors adopted a plan to
implement a company-wide reduction in force effective
August 7, 2009. In accordance with ASC 420, Exit or
Disposal Cost Obligations, we recognized approximately $448,000
in severance charges in the third quarter of 2009.
A summary of the activity in the severance accrual is as follows:
|
|
|
|
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
|
|
Provisions
|
|
|
958
|
|
Payments
|
|
|
569
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
389
|
|
|
|
|
|
|
Authorized
Capital Stock
As of December 31, 2009, the Company has 12.1 million
shares authorized, 12 million shares of which are
$0.01 par value common stock and 100,000 of which are
$0.01 par value preferred stock. At the Companys
annual meeting of stockholders held on June 7, 2007, the
stockholders approved a
five-to-one
reverse split of the Companys common stock, a reduction of
the par value of the Companys common stock from $0.05 per
share to $0.01 per share and an increase to the number of shares
of common stock the Company is authorized to issue from
9 million to 12 million. Such actions became effective
on June 15, 2007 when the Company filed a Certificate of
Amendment to its Restated Certificate of Incorporation with the
Secretary of State of Delaware. The historical share numbers and
per share amounts in these financial statements for all periods
presented have been adjusted to give effect to the reverse
split. The Company believes that there is a sufficient number of
shares authorized to cover its current needs.
F-57
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
In 2007 in conjunction with the reverse split, we incurred costs
aggregating approximately $33,000, primarily from our transfer
agents and outside legal counsel which were charged to
additional paid-in capital. We also charged an aggregate of
$83,000 to additional paid-in capital for costs incurred in
connection with our filing of a Registration Statement on
Form S-1
with the SEC and approximately $52,000 related to our initial
listing on The NASDAQ Capital Market. On October 3, 2007,
our common stock began trading on The NASDAQ Capital Market
under the symbol CDTI.
We acquired 86 shares of our common stock from the
fractional shares that were paid in cash in lieu of fractional
shares to stockholders as stockholders surrendered old stock
certificates for new stock certificates. The cash value of the
fractional shares was determined based upon the average of our
high and low prices on June 15, 2007 on the
U.S. Over-the-Counter
market and the U.K. AIM of the London Stock Exchange with the
average AIM price translated at the foreign exchange rate then
in effect. The Company retired all treasury shares on
August 9, 2007.
Issuance
of Common Shares
In March 2009, we issued 40,000 restricted shares of our common
stock under our Incentive Plan to the Companys President,
Chief Executive Officer (see Note 8). In October 2009
pursuant to an opportunity to acquire restricted shares of
common stock that had been offered to all employees and
directors of the Company, we issued 35,684 restricted shares of
common stock to two CDT directors for proceeds of $58,879 based
on the October 1, 2009 NASDAQ closing price of $1.65. The
proceeds will be used for the general corporate purposes of the
Company. The restricted shares were issued pursuant to an
exemption from registration under Regulation D of the
Securities Act of 1933, as amended.
In 2008, we issued 14,247 shares of our common stock upon
the exercise of 27,166 stock options. In connection therewith,
we received approximately $24,000 in cash and the surrender of
12,920 stock options. Also in 2008, the Company charged
approximately $14,000 to additional paid-in capital for costs
incurred in connection with our filing of a Post-effective
Amendment to a Registration Statement on
Form S-1.
In 2007, we issued 2,159,649 shares of our common stock as
follows:
|
|
|
|
|
Shares subscribed in the 2006 private placement
|
|
|
667,999
|
|
Shares issued upon exercise of warrants
|
|
|
1,399,873
|
|
Shares issued upon exercise of options
|
|
|
72,178
|
|
Shares issued for services
|
|
|
19,599
|
|
|
|
|
|
|
|
|
|
2,159,649
|
|
|
|
|
|
|
We issued 667,999 shares of our common stock upon
collection of approximately $4.3 million, net of expenses,
representing all of the remaining subscriptions from the
December 2006 private placement in which we secured commitments
for the purchase of 1,400,000 shares of our common stock,
par value $0.01, and warrants for the purchase of an additional
1,400,000 shares of common stock. From the exercise of
1,399,873 warrants, we received gross proceeds of
$15.7 million which, after approximately $575,000 in
placement agent fees, netted us $15.2 million. The proceeds
from the exercise of warrants were used for general corporate
purposes. Those newly issued shares were covered by an effective
Registration Statement on file with the Securities and Exchange
Commission. Upon the exercise of these warrants, we also issued
143,432 five-year warrants to the placement agent as additional
compensation.
We issued 72,178 shares of our common stock upon exercise
of 93,609 options in 2007 and, in connection therewith, we
received approximately $353,000 in cash and the surrender of
21,431 shares. In January and June 2007, we issued 17,142
and 2,457, respectively, of our common stock to non-executive
members of our board of directors in lieu of approximately
$115,000 and $25,000 of directors fees earned for services
provided during the year ended December 31, 2006 and the
first quarter of 2007. The number of
F-58
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
shares of our common stock issued to the directors was
determined based upon the average of the high and low share
prices during each quarter. The grant date for such shares of
common stock for purposes of measuring compensation is the last
day of the quarter in which the shares are earned, which is the
date that the director begins to benefit from, or be adversely
affected by, subsequent changes in the price of the stock.
Directors compensation charged to operations did not
materially differ from such measurement.
|
|
8.
|
Stock
Options, Stock Awards and Warrants
|
Stock
Options
The Company maintains an equity award plan approved by its
stockholders, the 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 Companys 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 Companys 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 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 Companys 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 Companys stock on the U.S. NASDAQ
Capital Market (the
Over-the-Counter
market prior to October 3, 2007) 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. ASC 718 requires forfeitures to be
estimated at the time of grant in order to estimate the amount
of share-based awards ultimately expected to vest. The estimate
is based on the Companys historical rates of forfeitures.
ASC 718 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.
There were no stock options granted in 2009. The
weighted-average fair values at the date of grant for options
granted during the years ended December 31, 2008 and 2007
were $3.18 and $11.65, respectively, and were estimated using
the Black-Scholes option pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected term in years
|
|
|
|
|
|
|
8.84
|
|
|
|
8.75
|
|
Risk-free interest rate
|
|
|
|
|
|
|
2.46
|
%
|
|
|
2.38
|
%
|
Expected volatility
|
|
|
|
|
|
|
89.1
|
%
|
|
|
97.5
|
%
|
Dividend yield
|
|
|
|
|
|
|
0
|
%
|
|
|
0
|
%
|
For the years ended December 31, 2009, 2008 and 2007,
share-based compensation for options and warrants was $735,000,
$1,444,000 and $2,208,000, respectively. Compensation costs for
stock options which vest over time are recognized over the
vesting period. As of December 31, 2009, the Company had
$136,000 of unrecognized
F-59
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
compensation cost related to granted stock options and warrants
that remained to be recognized over vesting periods. These costs
are expected to be recognized over a weighted average period of
0.8 years.
The following table summarizes the Companys stock option
activity and related information for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares *
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
972,578
|
|
|
$
|
10.19
|
|
|
|
812,844
|
|
|
$
|
11.72
|
|
|
|
648,087
|
|
|
$
|
10.08
|
|
Options granted
|
|
|
|
|
|
$
|
|
|
|
|
202,500
|
|
|
$
|
4.18
|
|
|
|
291,166
|
|
|
$
|
14.57
|
|
Options exercised
|
|
|
|
|
|
$
|
|
|
|
|
(27,166
|
)
|
|
$
|
10.37
|
|
|
|
(93,609
|
)
|
|
$
|
7.55
|
|
Options expired
|
|
|
(24,500
|
)
|
|
$
|
4.50
|
|
|
|
(1,500
|
)
|
|
$
|
10.00
|
|
|
|
(20,333
|
)
|
|
$
|
23.02
|
|
Options forfeited
|
|
|
(71,668
|
)
|
|
$
|
9.60
|
|
|
|
(14,100
|
)
|
|
$
|
11.19
|
|
|
|
(12,467
|
)
|
|
$
|
6.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
876,410
|
|
|
$
|
10.40
|
|
|
|
972,578
|
|
|
$
|
10.19
|
|
|
|
812,844
|
|
|
$
|
11.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year-end
|
|
|
838,410
|
|
|
$
|
10.69
|
|
|
|
780,744
|
|
|
$
|
10.62
|
|
|
|
657,177
|
|
|
$
|
11.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for grant at year-end
|
|
|
521,038
|
|
|
|
|
|
|
|
451,625
|
|
|
|
|
|
|
|
608,866
|
|
|
|
|
|
Weighted-average fair value of options granted during the year
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
3.18
|
|
|
|
|
|
|
$
|
11.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value options exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
288,414
|
|
|
|
|
|
|
$
|
880,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value options outstanding
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value options exercisable
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Table does not include 40,000 shares issued to the
President and Chief Executive Officer in 2009 as a stock award
under the Plan. |
The following table summarizes information about stock options
outstanding at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Contractual
|
|
Average
|
|
|
|
Average
|
|
|
Number
|
|
Life
|
|
Exercise
|
|
Number
|
|
Exercise
|
Range of Exercise Prices
|
|
Outstanding
|
|
(In Years)
|
|
Price
|
|
Exercisable
|
|
Price
|
|
$2.71
|
|
|
137,833
|
|
|
|
7.95
|
|
|
$
|
2.71
|
|
|
|
107,500
|
|
|
$
|
2.71
|
|
$5.10 - $7.88
|
|
|
95,267
|
|
|
|
3.00
|
|
|
$
|
5.92
|
|
|
|
95,267
|
|
|
$
|
5.92
|
|
$8.25 - $9.10
|
|
|
199,910
|
|
|
|
4.25
|
|
|
$
|
8.78
|
|
|
|
193,243
|
|
|
$
|
8.79
|
|
$9.20 - $10.13
|
|
|
124,200
|
|
|
|
2.31
|
|
|
$
|
9.64
|
|
|
|
124,200
|
|
|
$
|
9.64
|
|
$12.50 - $17.67
|
|
|
188,700
|
|
|
|
1.70
|
|
|
$
|
14.48
|
|
|
|
187,700
|
|
|
$
|
14.46
|
|
$19.13
|
|
|
130,500
|
|
|
|
5.90
|
|
|
$
|
19.13
|
|
|
|
130,500
|
|
|
$
|
19.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
876,410
|
|
|
|
4.12
|
|
|
$
|
10.40
|
|
|
|
838,410
|
|
|
$
|
10.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
Stock
Awards
On March 30, 2009, the board of directors awarded 40,000
restricted shares to the Companys newly-elected President
and Chief Executive Officer at an average market price of $1.625
per share, representing the high and low market price on the
date of award. These shares vest as to one-third of the total on
each of February 10, 2010, 2011 and 2012. The total fair
value of the award was $65,000 which is being charged to expense
over the vesting period.
Warrants
In 2009, 17,499 of the Companys outstanding warrants
expired. In 2008, there was no activity in the Companys
424,992 outstanding warrants.
In 2007, 1,399,873 warrants were exercised for total gross
proceeds of $15.7 million (net proceeds of
$15.2 million). The warrants exercised were those that had
been issued in connection with the Companys December 2006
private placement. In 2007, we issued 50,000 warrants to an
adviser on the Companys investor matters. The computed
fair value of this warrant was approximately $455,000 and was
estimated using the Black-Scholes option pricing model with the
following assumptions: five year expected term, 4.04% risk-free
interest rate, 77.6% expected volatility and 0% dividend yield.
The fair value of this warrant is being expensed over the
four-month term of the agreement. We included $227,000 of this
stock compensation in our selling, general and administrative
expenses in each of 2007 and 2008. Also in 2007, we issued the
remaining 74,142 warrants of the 140,542 warrants subject to the
availability of authorized capital not otherwise committed,
representing the balance of additional compensation due the
placement agent for the Companys December 2006 private
placement. The computed fair value of the placement agents
140,542 warrants was approximately $748,000 and was estimated
using the Black-Scholes option pricing model with the following
assumptions: five year expected term, 4.65% risk-free interest
rate, 83.2% expected volatility and 0% dividend yield. There was
no accounting impact on our financial statements because the
fair value chargeable to stockholders equity was fully
offset by the corresponding credit to stockholders equity.
Further, we were obligated to issue the placement agent 143,432
warrants as partial compensation for the financings generated
upon exercise of certain warrants that were exercised in 2007.
Of this amount, 70,255 are exercisable at $12.50 per share and
expire on July 2, 2012 and 73,177 warrants are exercisable
at $15.625 per share and expire on December 29, 2012. The
computed fair value of the placement agents 143,432
warrants was approximately $1,599,000 and was estimated using
the Black-Scholes option pricing model with the following
assumptions: five year expected term, 3.63% and 4.65% risk-free
interest rates, 77.3% and 80.3% expected volatility and 0%
dividend yield. There was no accounting impact on our financial
statements because the fair value chargeable to
stockholders equity was fully offset by the corresponding
credit to stockholders equity.
F-61
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
Warrant activity for the years ended December 31 is summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
424,992
|
|
|
$
|
11.35
|
|
|
|
424,992
|
|
|
$
|
11.35
|
|
|
|
1,557,424
|
|
|
$
|
10.98
|
|
Warrants to be issued
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
143,432
|
|
|
$
|
14.09
|
|
Warrants issued
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
124,142
|
|
|
$
|
11.67
|
|
Warrants exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
(1,399,873
|
)
|
|
$
|
11.25
|
|
Warrants expired / forfeited
|
|
|
(17,499
|
)
|
|
$
|
7.50
|
|
|
|
|
|
|
$
|
|
|
|
|
(133
|
)
|
|
$
|
7.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
407,493
|
|
|
$
|
11.51
|
|
|
|
424,992
|
|
|
$
|
11.35
|
|
|
|
424,992
|
|
|
$
|
11.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at year-end
|
|
|
407,493
|
|
|
$
|
11.51
|
|
|
|
424,992
|
|
|
$
|
11.35
|
|
|
|
424,992
|
|
|
$
|
11.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
4,953,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about warrants
outstanding as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding and Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number
|
|
Average Remaining
|
|
Weighted
|
|
|
|
|
Outstanding
|
|
Contractual
|
|
Average
|
|
|
|
|
And
|
|
Life
|
|
Exercise
|
Range of Exercise Prices
|
|
|
|
Exercisable
|
|
(In Years)
|
|
Price
|
|
$8.15
|
|
|
|
|
|
|
45,553
|
|
|
|
3.74
|
|
|
$
|
8.15
|
|
$8.44
|
|
|
|
|
|
|
140,542
|
|
|
|
2.00
|
|
|
$
|
8.44
|
|
$10.00 $12.50
|
|
|
|
|
|
|
98,220
|
|
|
|
2.02
|
|
|
$
|
11.89
|
|
$15.63 $16.45
|
|
|
|
|
|
|
123,178
|
|
|
|
2.93
|
|
|
$
|
15.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407,493
|
|
|
|
2.48
|
|
|
$
|
11.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the principal amount of our
short-term debt payable to UBS was $7.7 million
($3.0 million borrowed in July 2008, $3.4 million in
January 2009 and $1.3 million in September 2009). Our ARS
serve as collateral for the loan which is payable upon demand.
If UBS should demand repayment prior to the commencement of the
exercise period for our ARSR (June 30, 2010), UBS will
arrange alternative financing with substantially the same terms
and conditions. If alternative financing cannot be established,
UBS will purchase our pledged ARS at par value.
Interest is calculated at the weighted average rate of interest
we earn on the ARS. Interest is payable monthly. Interest
expense for the years ended December 31, 2009 and 2008 was
$85,000 and $56,000, respectively.
On July 25, 2008, the Company borrowed $3.0 million
from the demand loan facility with UBS collateralized by our
ARS, a facility we had arranged on May 8, 2008. Management
determined to draw down the entire facility as a matter of
financial prudence to secure available cash. The loan facility
was available for our working capital purposes and required that
we continue to meet certain collateral maintenance requirements,
such that our outstanding borrowings may not exceed 50% of the
value of our ARS as determined by the lender. No facility fee
was required. Borrowings under that facility bore interest at a
floating interest rate per annum equal to the sum of the
prevailing daily
30-day Libor
plus 25 basis points.
F-62
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
In November 2008, the Company accepted the Offer from UBS AG
(see Note 5). UBS committed to loan us 75% of the value of
the ARS as determined by UBS at any time until the ARS right is
exercised. We applied for the loan which UBS committed would be
on a no net cost basis to the Company. UBS approved our
application on January 14, 2009 and approved a
$6.5 million credit facility based upon acceptance of our
credit application pursuant to its Offer.
In January 2009, we received $3.4 million proceeds from UBS
under the approved no net cost loan. On September 4, 2009,
we arranged an increase of the credit line from
$6.5 million to $7.7 million and received
$1.3 million proceeds from UBS.
The Company is obligated under a seven-year lease that expires
December 2015 for its relocated U.S. headquarters
(5,515 square feet) at an annual cost of approximately
$141,000, including utilities. In addition, the Company is
obligated under a
64-month
lease through March 2013 for 1,942 square feet of
administrative space in the U.K. at an annual cost of
approximately $65,000, including utilities and parking. The
Company has an early termination right to cancel its leases for
(1) U.K. administrative space on November 16, 2010
with at least six months advance written notice and
(2) U.S. headquarters on December 31, 2013 with
at least nine months advanced written notice along with an
early termination fee of $45,960; the landlords
unamortized portion of construction costs with seven percent
interest thereon; brokerage fees and attorney fees. For the
years ended December 31, 2009, 2008 and 2007, rental
expense approximated $226,000, $225,000 and $205,000,
respectively. Our contractual obligations for each of the next
five years ended December 31 and thereafter are as follows:
$180,000, $191,000, $191,000, $164,000 and $152,000; and
$152,000 thereafter.
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 expired in 2008. CDT, as assignee and owner,
maintains the technology at its expense. Royalty expense
incurred under this obligation in 2008 and 2007 amounted to
$21,000 and $14,000, respectively. Royalties payable to Fuel
Tech at each of December 31, 2009 and 2008 amounted to
$21,000.
|
|
11.
|
Related
Party Transactions
|
Board
of Director Changes
On August 26, 2009, the Companys Board of Directors
increased the number of its directors from six to seven and
elected Mungo Park, 53, as a director of the Company to fill the
vacancy. On August 28, 2009, the Directors accepted the
resignation of Derek R. Gray as Chairman of the Board of the
Company and elected Mr. Park as Chairman in
Mr. Grays place. Mr. Gray continues as a
director of the Company and Chairman of the Audit Committee.
Also, on August 28, 2009, John J. McCloy II resigned
as a director of the Company. Mr. McCloy, who had been a
member of the Audit and Compensation and Nominating Committees
of the Board, advised the Company that he resigned because he
objected both to the election of Mr. Park as Chairman and
to the manner in which Mr. Park had been elected chairman.
On August 28, 2009 following Mr. McCloys
resignation, the Directors reduced the number of the
Companys Board of Directors from seven to six.
Mr. Park, as a director and as Chairman, is entitled under
the current directors compensation policy of the Company
to an annual directors retainer of $15,000 and a
chairmans retainer of $15,000, each paid
F-63
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
quarterly in arrears; such amounts reflect the reduced rate
approved in August 2009 wherein non-executive members of the
Companys Board of Directors agreed to receive 50% of their
annual compensation. For the year ended December 31, 2009,
our selling, general and administrative expenses include
approximately $10,300 of director fees for Mr. Park.
Mr. Park is the chairman of Innovator Capital Limited, a
financial services company of London, England, which firm has
provided services to the Company (see below). Mr. Park is
not an independent director within the meaning of NASDAQ
Rule 5605(a)(2) and, as such, is and will not be a member
of the Audit or the Compensation and Nominating Committees of
the Board of the Company.
Innovator
Capital
We have retained the services of Innovator and have incurred
costs as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Financial advisory fees
|
|
$
|
30
|
|
|
$
|
268
|
|
|
$
|
207
|
|
Merger and acquisition fees
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Private placement fees
|
|
|
|
|
|
|
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44
|
|
|
$
|
268
|
|
|
$
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innovator provided financial advice to the Company from 2006
through January 2009 and compensation for such advice, along
with travel and other expenses, charged to expense was $30,000,
$268,000 and $207,000 in the years ended December 31, 2009,
2008 and 2007, respectively. In addition, as compensation for
its financial advisory services to the Company, Innovator
received and holds warrants to purchase 283,974 shares of
common stock of the Company at exercise prices from $8.4375 to
$15.625 which expire from December 29, 2011 through
December 29, 2012. Further, the Company paid Innovator
$986,000 for fund raising services which amount was charged to
stockholders equity as a reduction of proceeds received
from investors.
On November 20, 2009, the Company entered into an
engagement letter with Innovator to provide financing and merger
and acquisition services. The engagement letter has a three
month term during which Innovator will (i) act for the
Company in arranging a private placement financing of
$3 million to $4 million from the sale of the
Companys common stock and warrants and (ii) assist
the Company in merger and acquisition activities.
For its financing services, Innovator will receive (i) a
placing commission of five percent (5%) of all monies received
by the Company and (ii) financing warrants to acquire
shares of common stock of the Company equal in value to fifteen
percent (15%) of the total gross proceeds received by the
Company in the financing, such financing warrants to be
exercisable at a price equal to a ten percent (10%) premium to
the price per share of common stock in the financing. Issuance
of the financing warrants is contingent on the stockholders of
the Company authorizing additional common stock.
For its merger and acquisition services, Innovator will receive
monthly retainer fees of $10,000 and success fees as a
percentage of transaction value of five percent (5%) on the
first $10 million, four percent (4%) on the next
$3 million, three percent (3%) on the next $2 million,
and two percent (2%) on amounts above $15 million in
connection with possible merger and acquisition transactions.
Success fees are payable in cash or shares or a combination of
cash or shares as determined by the Board of the Company. In
2009, we incurred $14,000 for the monthly retainer to Innovator.
F-64
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
The engagement letter further provides that retainer fees may be
deducted from success fees, that Innovator shall be reimbursed
for its ordinary and necessary out of pocket expenses, that the
engagement letter is subject to Delaware law, and that disputes
between the parties are subject to arbitration.
Issuance
of Common Stock
In October 2009, we issued 35,684 shares of common stock to
CDT directors, Michael Asmussen (the Companys President
and Chief Executive Officer) and Derek Gray, who purchased
10,000 shares and 25,684 shares, respectively, of
Clean Diesel common stock. Total shares acquired were 35,684 and
total proceeds based on the October 1, 2009 NASDAQ closing
price of $1.65, were $58,879. The proceeds will be used for the
general corporate purposes of the Company. The shares are
restricted shares issued pursuant to an exemption from
registration under Regulation D of the Securities Act of
1933, as amended.
As outlined in Note 7, in 2007, we issued
19,599 shares of our common stock to non-executive members
of our board of directors in lieu of approximately $25,000 and
$115,000 of directors fees earned in the first quarter of
2007 and the year ended December 31, 2006, respectively.
Such directors fees had been accrued and charged to
expense during the respective periods. The number of shares of
our common stock issued to the directors was determined based
upon the average of the high and low share prices during each
quarter. The grant date for such shares of common stock for
purposes of measuring compensation is the last day of the
quarter in which the shares are earned, which is the date that
the director begins to benefit from, or be adversely affected
by, subsequent changes in the price of the stock.
Directors compensation charged to operations did not
materially differ from such measurement.
During 2007, directors and management exercised 14,446 warrants
for an aggregate of $162,749 to acquire 14,446 shares of
common stock.
Fuel
Tech
The Company had a Management and Services Agreement with Fuel
Tech that required the Company to reimburse Fuel Tech for
management, services and administrative expenses incurred on its
behalf at a rate from 3% to 10% of the costs paid on the
Companys behalf, dependent upon the nature of the costs
incurred. 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 Companys financial statements include charges from
Fuel Tech of certain management and administrative costs of
approximately $6,000, $70,000 and $71,000 for the years ended
December 31, 2009, 2008 and 2007, respectively. The Company
believes the charges under this Management and Services
Agreement were reasonable and fair. The Company and Fuel Tech
terminated the Management and Services Agreement effective
February 1, 2009.
|
|
12.
|
Technology
Licensing Agreements and Other Revenue
|
We did not execute new license agreements in 2009. In each of
2008 and 2007, we executed license agreements with new licensees
for our selective catalytic reduction (SCR) emission control
(our patented ARIS technologies for control of oxides of
nitrogen) and the combination of exhaust gas recirculation (EGR)
with SCR technologies. The agreements provided for up-front fees
and quarterly
per-unit
royalty payments during the term of the licenses. The licenses
will stay in effect for the remaining life of the underlying
patents. The licenses are non-exclusive and cover specific
geographic territories. For the year ended December 31,
2009, technology licensing fees and royalties totaled $150,000.
For the year ended December 31, 2008, technology licensing
fees and royalties totaled $451,000. The year ended
December 31, 2007 includes approximately $3.5 million
in technology licensing fees and royalties, including
approximately $0.2 million from an existing licensees
license and $0.5 million due to amendment of a license
agreement with an existing licensee.
F-65
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
Other revenue of $29,000 in 2009 consists of grant income under
an award from a diesel emissions reduction technology
development grant under a program from the Houston Advanced
Research Center (HARC) totaling $960,971. The project goal is to
develop and verify a Nitrogen Oxide-Particulate Matter
(NOx-PM)
reduction retrofit system for on- and off-road engines,
including those used in Class 8 type diesel fleets that
will result in an EPA verified, cost-effective and reliable NOx
and PM reduction solution. Revenue from grant income is
recognized when grant income, comprised of cost reimbursements,
is earned.
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.
As of December 31, 2009, the Company has tax losses
available for offset against future years taxable income
of approximately $53.7 million, of which $8.6 million
will expire over the next five years and the remaining tax
losses expire from 2018 through 2029. The Company also has
research and development tax credit carryforwards of
approximately $1.9 million, expiring between 2011 and 2029.
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
$2.4 million during the year ended December 31, 2009.
Deferred tax assets and valuation allowance at December 31,
2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Research and development
|
|
$
|
1,871
|
|
|
$
|
1,789
|
|
Net operating loss carryforwards
|
|
|
20,937
|
|
|
|
18,867
|
|
Reserves
|
|
|
118
|
|
|
|
140
|
|
Options
|
|
|
1,255
|
|
|
|
968
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
24,181
|
|
|
|
21,764
|
|
Less: valuation allowance
|
|
|
(24,181
|
)
|
|
|
(21,764
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
There were no unrecognized tax benefits at the date of adoption
of ASC 740, and there were no unrecognized tax benefits at
December 31, 2009 and 2008. It is the Companys policy
to classify in the financial statements accrued interest and
penalties attributable to a tax position as income taxes. The
Company believes, however, that there should be no change during
the next twelve months.
Utilization of CDTs U.S. federal tax loss
carryforwards for the period prior to December 12, 1995 is
limited as a result of the ownership change in excess of 50%
attributable to the 1995 Fuel Tech rights offering to a maximum
annual allowance of $735,000. Utilization of CDTs
U.S. federal tax loss carryforwards for the period after
December 12, 1995 and before December 30, 2006 is
limited as a result of the ownership change in excess of 50%
attributable to the private placement which was effective
December 29, 2006 to a maximum annual allowance of
$2,519,000. To the extent the annual limitation is not met in
any year, subsequent years annual limitations are
increased by the unused amounts. Utilization of CDTs tax
losses subsequent to 2006 may be limited due to cumulative
ownership changes in any future three-year period.
F-66
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
We file our tax returns as prescribed by the tax laws of the
jurisdictions in which we operate. Our tax years ranging from
2006 through 2009 remain open to examination by various taxing
jurisdictions as the statute of limitations has not expired.
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, 2009, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Federal taxes (benefits) at statutory rates
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
State taxes (benefits) rate
|
|
|
(5
|
)%
|
|
|
(5
|
)%
|
|
|
(5
|
)%
|
Change in valuation allowance
|
|
|
39
|
%
|
|
|
39
|
%
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefits)
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Geographic
Information
|
CDT sells its products and licenses its technologies throughout
the world. A geographic distribution of revenue consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
U.S.
|
|
$
|
602
|
|
|
$
|
905
|
|
|
$
|
2,563
|
|
Europe
|
|
|
451
|
|
|
|
6,405
|
|
|
|
2,255
|
|
Asia
|
|
|
168
|
|
|
|
165
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,221
|
|
|
$
|
7,475
|
|
|
$
|
4,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has patent coverage in North and South America,
Europe, Asia, Africa and Australia. As of December 31, 2009
and 2008, the Companys assets comprise the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
U.S.
|
|
$
|
15,576
|
|
|
$
|
17,214
|
|
Foreign
|
|
|
1,856
|
|
|
|
1,533
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,432
|
|
|
$
|
18,747
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Employee
Retirement Savings Plans
|
The Company has a defined benefit pension plan available for all
full-time U.S. employees who have met minimum
length-of-service
requirements. If an employee contributes 5% to the plan, the
Company matches 100% of employee contributions up to 4% of
employee salary. Costs related to this plan were $49,000,
$59,000 and $34,000 in 2009, 2008 and 2007, respectively.
Effective January 1, 2009, the Company established a
pension plan available for all full-time U.K. employees who have
met minimum
length-of-service
requirements. Under the pension plan, the Company will
contribute an amount equal to 3% of employees base salary
per annum. An employee may make voluntary additional
contributions which the Company will match up to a further 2%.
After five years of service, the Company will increase its
contribution to an amount equal to 5% of employees base
salary. Costs related to this plan were $24,000 in 2009.
F-67
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
Effective January 27, 2010, we engaged David F. Merrion, a
director of the Company, to perform consulting services for us
as an expert witness for patent prosecution with respect to
diesel engine technology. Mr. Merrion will be paid for his
services, as requested from time to time by the Company, at the
rate of $300 per hour or a daily maximum of $3,000 per day.
In March 2010, UBS purchased one of our ARS instruments at par
value. UBS applied the sale proceeds of $1,250,000 to reduce the
outstanding debt. This action is pursuant to the terms of the
UBS Offer that grants UBS the right to purchase ARS from our
account at par value plus accrued interest and apply all
proceeds to the outstanding debt. As such, UBS has modified the
amount we are eligible to borrow based upon 75% of the
UBS-determined value of the ARS. On March 24, 2010, UBS
advised us that we have approximately $500,000 available under
our UBS credit facility.
|
|
17.
|
Quarterly
Financial Data (unaudited)
|
The table below presents the Companys unaudited quarterly
information for the last eight quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
2009
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
(In thousands, except per share amounts)
|
|
Total revenue
|
|
$
|
346
|
|
|
$
|
375
|
|
|
$
|
253
|
|
|
$
|
247
|
|
Gross profit*
|
|
|
112
|
|
|
|
158
|
|
|
|
36
|
|
|
|
114
|
|
Net loss attributable to common stockholders
|
|
|
(2,473
|
)
|
|
|
(1,076
|
)
|
|
|
(1,900
|
)
|
|
|
(1,298
|
)
|
Basic and diluted net loss per common share
|
|
|
(0.30
|
)
|
|
|
(0.13
|
)
|
|
|
(0.23
|
)
|
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
2008
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
(In thousands, except per share amounts)
|
|
Total revenue
|
|
$
|
2,601
|
|
|
$
|
2,619
|
|
|
$
|
1,580
|
|
|
$
|
675
|
|
Gross profit*
|
|
|
536
|
|
|
|
626
|
|
|
|
406
|
|
|
|
190
|
|
Net loss attributable to common stockholders
|
|
|
(1,590
|
)
|
|
|
(2,143
|
)
|
|
|
(2,381
|
)
|
|
|
(3,259
|
)
|
Basic and diluted net loss per common share
|
|
|
(0.20
|
)
|
|
|
(0.26
|
)
|
|
|
(0.29
|
)
|
|
|
(0.40
|
)
|
|
|
|
* |
|
Gross profit is defined as total revenue less total cost of
revenue. |
F-68
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Disclosure Controls and
Procedures. As of the end of the period covered
by this report, we carried out an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that as
of the end of the period covered by this report, our disclosure
controls and procedures were effective to ensure that
information required to be disclosed by us in reports we file or
submit under the Exchange Act is (1) recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms, and (2) accumulated and communicated to
our management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosure.
(b) Managements Annual Report on Internal Control
over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rule 13a-15(f)
of the Exchange Act. Under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation
of the effectiveness of our internal control over financial
reporting based upon the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, our management concluded
that our internal control over financial reporting is effective
as of December 31, 2009.
(c) Changes in Internal Control over Financial
Reporting. The Company is continuously seeking to
improve the efficiency and effectiveness of its operations and
of its internal controls. This results in refinements to
processes throughout the year. We continue to enhance the design
and documentation of our internal control processes to ensure
suitable controls over our financial reporting.
There were no changes in our internal control over financial
reporting that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting during our fourth fiscal quarter of 2009.
|
|
Item 9B.
|
Other
Information
|
None.
Part III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Directors
and Executive Officers
The following includes a brief biography of each member of our
Board of Directors and our executive officers, including their
ages as of April 28, 2010. Each biography of each member of
our Board of Directors includes information regarding the
specific experience, qualifications, attributes or skills that
led the Compensation and Nominating Committee and our Board of
Directors to determine that the applicable director should serve
as a member of our Board of Directors as of the date of this
report. The term of office of each director is until the 2010
annual meeting or until a successor is duly elected or, if
before then, a director resigns, retires or is removed by the
stockholders.
Michael L. Asmussen, 39, has been President, Chief
Executive Officer and a director of Clean Diesel since February
2009. He joined Clean Diesel in September 2008 as Vice
President, Sales. In 2007, Mr. Asmussen was Vice President,
Sales and Marketing of Mirror Controls International, a mirror
actuator manufacturer. From 2002 to 2007, Mr. Asmussen held
a variety of managerial positions at Eaton Corporation,
F-69
a diversified power management company. From 2000 to 2002, he
was Customer Manager, North America for The Ford Motor Company.
Mr. Asmussen holds BS and MBA degrees. When
Mr. Asmussen was appointed as our Chief Executive Officer
in 2009, our Board of Directors determined that it was important
that our Chief Executive Officer also be a director of the
Company and appointed Mr. Asmussen to the Board at that
time. Mr. Asmussen brings to the Board significant
managerial experience.
John A. de Havilland, 72, has been a
director of Clean Diesel since its inception in 1994. Mr. de
Havilland was a director of J. Henry Schroder Wagg &
Co. Ltd., a merchant bank, from 1972 until his retirement in
1989. Mr. de Havilland was one of the Companys original
founders. He brings to the board his financial expertise from
his former banking experience as well as his investor relation
skills that he has gained throughout his history with the
Company and his relationships with stockholders over the years.
Derek R. Gray, 76, has been a director of Clean
Diesel since 1998. Mr. Gray has been managing director of
SG Associates Limited, a United Kingdom fiscal advisory firm,
since 1971 and a director of Velcro Industries N.V., a
manufacturing company, since 1974. Mr. Gray has extensive
financial expertise and is a knowledgeable advisor. His
extensive knowledge and experience in international business and
tax matters make him a valued advisor to the Board.
Charles W. Grinnell, 73, has been Vice President,
General Counsel, Corporate Secretary and a director of Clean
Diesel since its inception. He has been a director of Fuel Tech,
Inc., an emissions control company, since 1987 and Vice
President, General Counsel and Corporate Secretary of that
company from 1987 until his retirement in February 2009.
Mr. Grinnell holds JD and LLM (Tax) degrees.
Mr. Grinnell has broad experience in commercial law,
licensing, corporate law, and corporate governance.
Mr. Grinnell has been involved with the Company since its
inception and has extensive knowledge of the Company and its
history. Mr. Grinnells legal experience and
longstanding history with the Company make him a trusted advisor
to the Board.
David F. Merrion, 73, has been a director of Clean
Diesel since June 2006. He is the principal of David F. Merrion
LLC, a consulting practice. Mr. Merrion is a retired
Executive Vice President - Engineering of Detroit Diesel
Corporation, his employer from 1988 to 1999. He has been a
director of Hy-Drive Technologies, Ltd., a hydrogen technology
company, since 2007. He has been a Director and Chairman of
Greenvision Technology, LLC, an intellectual property holding
company, since 2000. Mr. Merrion was Chairman of the Clean
Diesel Technical Advisory Board from 2005 until its termination
in January 2009. Mr. Merrion has extensive experience in
the diesel manufacturing business and his technical expertise is
directly applicable to Clean Diesels business and enhances
the composition of the Board.
Mungo Park, 54, has been Chairman and a director
of Clean Diesel since September 2009. Mr. Park is the
Chairman of Innovator Capital Limited, a financial services
company of London, England. Innovator Capital has significant
experience in advising Greentech companies on
financial matters. Mr. Park was elected to the Board of
Directors and appointed as Chairman of the Board at the
suggestion of several significant stockholders of the Company to
assist the Company in focusing on strategic objectives and
creating value for stockholders.
Dr. Daniel K. Skelton, 36, has been Vice
President, Global Sales since February 2009. He was previously
Vice President, International since August 2008; Commercial
Director, Europe since September 2006 and Business Development
Manager, International since January 2005. From 2000 to 2004
Dr. Skelton was a Manager at Mitsui & Co. Ltd.,
an international diversified company, with responsibilities for
developing emission control technology. Dr. Skelton holds a
PhD degree in metallurgy.
Dr. Bernhard Steiner, 61, left the Company as
an officer and director in February 2009. He was Chief Executive
Officer of Clean Diesel since September 2004 and President since
January 2006. Dr. Steiner held Executive Director positions
from 2003 until 2008 at both Wayfinder Systems AB of Sweden, a
navigation and location software development company, and OWR
AG, a leading nuclear, biological and chemical protection
solutions company. From 1999 until 2003, Dr. Steiner was
General Manager of the Software Group of Motorola, Inc., an
electronics company.
Timothy Rogers, 48, has been Executive Vice
President of International Operations since 2006; had been Vice
President, International of Clean Diesel from 2004; and had been
a consultant to Clean Diesel from
F-70
2003. From 2002 to September 2003, he was Director of Sales and
Marketing of ADAS Consulting, Ltd. and from 1993 to 2002, was a
director of Adastra, a wholly owned-subsidiary of Associated
Octel Company, Ltd., a U.K.-based multinational petrochemical
company.
Ann B. Ruple, 58, was Vice President, Treasurer
and Chief Financial Officer of Clean Diesel from December 2006
until April 19, 2010. Previously she had been Director,
Financial Reporting, Planning and Analysis of NCT Group, Inc.,
her employer since 1998. Ms. Ruple is a Certified Public
Accountant and holds an MBA Degree.
John B. Wynne, 48, was appointed by our Board of
Directors as Vice President, Treasurer and Interim Chief
Financial Officer of Clean Diesel to be effective on
April 23, 2010. Mr. Wynne has been a partner of Tatum,
LLC since 2005. Tatum is an executive services firm and is
furnishing to Clean Diesel the services of Mr. Wynne as
Interim Chief Financial Officer. During his association with
Tatum, Mr. Wynne, who is a certified public accountant,
served as Chief Financial Officer of Arbinet Corporation, a
telecommunications company, from 2006 to 2009 and as Interim
Chief Financial Officer of North American Airlines, Inc. from
2005 to 2006. Prior to his association with Tatum,
Mr. Wynne held Chief Financial Officer positions with The
Promptcare Companies, Inc, a health services company; Allied
International Healthcare, Inc.; and Wassall USA, Inc., a
conglomerate.
There are no family relationships among any of the directors or
executive officers. Other than the recommendation of the
Compensation and Nominating Committee of the Board, there are no
understandings or arrangements with any persons regarding the
nomination or election of any of the above persons. Please also
see the text below in Item 13 under the caption
Agreements with Related Persons.
Committees
of the Board
The standing Committees of the Board are an Audit Committee and
a Compensation and Nominating Committee. Messrs. de Havilland
and Gray are the members of the Audit Committee. Messrs. de
Havilland and Merrion are the members of the Compensation and
Nominating Committee. Mr. Gray is Chairman of the Audit
Committee. Mr. de Havilland is Chairman of the Compensation and
Nominating Committee. The Charters of the Audit Committee and
the Compensation and Nominating Committees are available for
viewing on our web site <www.cdti.com>.
We have 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 Companys annual report to stockholders. The
Code may also be viewed on our website under Investor
Relations as follows:
http://www.cdti.com.
The Audit
Committee
The Audit Committee is responsible for review of audits,
financial reporting and compliance, and accounting and internal
controls policy. For audit services, the Audit Committee is
responsible for the engagement and compensation of independent
auditors, oversight of their activities and evaluation of their
independence. The Audit Committee has instituted procedures for
receiving reports of improper record keeping, accounting or
disclosure. The Board has also constituted the Audit Committee
as a Qualified Legal Compliance Committee in accordance with
Securities and Exchange Commission regulations.
In the opinion of the Board, each of the voting members of the
Audit Committee has both business experience and an
understanding of generally accepted accounting principles and
financial statements enabling them to effectively discharge
their responsibilities as members of that Committee. Moreover,
the Board has determined that Mr. Gray is a financial
expert within the meaning of Securities and Exchange Commission
regulations. In making this determination the Board considered
Mr. Grays formal training, and long experience in
accounting and auditing and his former service for many years as
the Chairman of the Audit Committee of another reporting company
under the Securities Exchange Act.
F-71
On September 15, 2009, we received a Nasdaq Staff
Deficiency Letter indicating that we fail to comply with Nasdaq
Listing Rule 5605(c)(4)(A) because we do not have at least
three Audit Committee members and Listing Rule 5605(b)(1)
because its Board does not have a majority of independent
directors. These deficiencies occurred on August 28, 2009
when Mr. John J. McCloy II, who had been an Audit Committee
member, resigned as a director leaving the Audit Committee with
two members and the Board with three independent directors and
three non-independent directors. We have a cure period to regain
compliance which shall be until the earlier of the date of the
next annual meeting of stockholders or August 28, 2010. Our
Board has determined to recruit an appropriate new director to
cure the deficiencies mentioned above.
Compensation
and Nominating Committee
The Compensation and Nominating Committee is responsible for
establishing executive compensation and administering Clean
Diesels Incentive Compensation Plan and also identifies
director nominees for election to fill vacancies on our Board.
Nominees are approved by the Board on recommendation of the
Committee.
In evaluating nominees, the Committee particularly seeks
candidates of high ethical character with significant business
experience at the senior management level who have the time and
energy to attend to Board responsibilities. Candidates should
also satisfy such other particular requirements that the
Committee may consider important to our business at the time.
When a vacancy occurs on the Board, the Committee will consider
nominees from all sources, including stockholders, nominees
recommended by other parties, and candidates known to the
Directors or our management. The Committee may, if appropriate,
make use of a search firm and pay a fee for services in
identifying candidates. The best candidate from all evaluated
will be recommended to the Board to consider for nomination.
Stockholders who wish to recommend candidates for consideration
as nominees should on or before January 1 in each year furnish
in writing detailed biographical information concerning the
candidate to the Committee addressed to the Corporate Secretary
of Clean Diesel at the address set out on the Notice of Meeting.
No material changes have been made to the procedures by which
security holders may recommend nominees to our Board of
Directors.
Compensation
and Nominating Committee Diversity Policy
The Compensation and Nominating Committee does not have a
diversity policy. When evaluating nominees, however, the
Committee considers a candidates background, experience,
education, skills and individual qualities that could contribute
to heterogeneity and perspective in Board deliberations.
Corporate
Governance
Meetings
During 2009, there were eleven meetings of our Board, five
meetings of the Audit Committee and five meetings of the
Compensation and Nominating Committee. The Independent Directors
met in executive session of the Board without the presence of
Management or employee Directors on three occasions, the members
of the Audit Committee met in executive session on three
occasions, and the Compensation and Nominating Committee did not
meet in executive session in 2009. The policy of the Board is to
hold at least two executive sessions of the Board annually and
executive sessions of committees when needed. Each Director
attended during 2009 at least 75% of Board and Committee
meetings of which he was a member. Clean Diesel does not have a
formal policy relating to director attendance at annual meetings.
Code of
Business Ethics and Conduct
On the recommendation of the Audit Committee, the Board 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 Companys annual report to stockholders. The
Code may also be viewed on our website under Investor
F-72
Relations as follows:
http://www.cdti.com.
Changes to or waivers of the requirements of the Code will be
posted to the web site and reflected in appropriate Securities
and Exchange Commission filings.
Risk
Oversight
The Board of Directors exercises ultimate risk oversight
responsibility for Clean Diesel directly and through its
committees. The direct role for the Board is to assist
management in identifying risk, to evaluate managements
performance in managing risk, and, when appropriate, to request
information and data to assist in that process. The Board
believes that its leadership structure of a separate Chairman
and Chief Executive Officer enhances the Boards assessment
of risk. The Audit Committee assesses financial risk, and
reviews and approves all related party transactions and
potential conflicts of interest. The Compensation and Nominating
Committee oversees risks relating to the Companys
compensation policies and practices. Each Committee reports its
activities and recommendations to the Board, including
assessment of risk, when appropriate.
Board
Leadership Structure
The Clean Diesel Board is led by a Chairman who is a
non-executive director selected by the full Board on nomination
of the Compensation and Nominating Committee. Except for a brief
interim period in 2002 and 2003, the positions of Chairman and
Chief Executive Officer have not been held by the same person
since the inception of the Company. The Board believes that the
Chairman is responsible for Board leadership and the Chief
Executive Officer is responsible for leading the management,
employees and operations of the Company and that these are two
distinct and separate responsibilities. The Board believes this
leadership structure is efficient and promotes good corporate
governance. However, the Board continues to evaluate its
leadership structure and may change it, if, in the opinion of
the Board, a change is required by the needs of the
Companys business and operations.
Section 16(a)
Beneficial Ownership Reporting Compliance
Based on filings with the Securities and Exchange Commission, we
believe that all our officers and directors were in compliance
with 2009 filing requirements relating to beneficial ownership
reports under Section 16(a) of the Securities Exchange Act
of 1934, except that the following filing, relating to a single
event or transaction, was delayed: for Mr. Park a
Form 3 due September 7 was filed November 2.
F-73
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Item 11.
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Executive
Compensation
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SUMMARY
COMPENSATION TABLE
The table below sets forth information for the year indicated
with respect to compensation earned by our Chief Executive
Officer and our two most highly compensated executive officers
other than our Chief Executive Officer who were serving as
executive officers as of December 31, 2009, as well as our
former President and Chief Executive Officer who resigned in
February 2009. We refer to these individuals in this report as
the Named Executive Officers.
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Non-Equity
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Stock
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Option
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Incentive Plan
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All Other
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Name and Principal
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Compensation
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Total
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Position
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Year
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($)
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($)(1)
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($)(2)(3)
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($)(3)
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($)(4)
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($)(5)
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($)
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(a)
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(b)
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(c)
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(d)
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(e)
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(f)
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(g)
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(i)
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(j)
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Michael L. Asmussen(6)
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2009
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$
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276,779
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$
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$
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16,366
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$
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27,526
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$
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$
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273,212
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$
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593,883
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President and Chief Executive Officer
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2008
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$
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68,385
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$
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20,200
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$
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$
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33,478
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$
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$
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3,683
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$
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125,746
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Bernhard Steiner(7)
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2009
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$
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55,675
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$
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$
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$
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$
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$
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296,080
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$
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351,755
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Former President and Chief Executive Officer
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2008
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$
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334,574
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$
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$
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$
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310,774
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$
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47,317
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$
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89,427
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$
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782,092
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Chief Executive Officer
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Ann B. Ruple(8)
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2009
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$
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210,000
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$
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$
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$
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124,719
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$
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$
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27,550
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$
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362,269
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Former Vice President,
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2008
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$
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196,075
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$
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$
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$
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149,348
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$
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53,921
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$
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29,229
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$
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428,573
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Treasurer and Chief Financial Officer
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Timothy Rogers
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2009
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$
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217,063
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$
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$
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$
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93,539
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$
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$
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34,981
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$
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345,583
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Executive Vice President, International
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2008
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$
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257,056
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$
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14,495
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$
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$
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129,004
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$
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$
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39,277
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$
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439,832
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(1) |
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These bonus payments were for personal performance. See
Note 3 below. Salary and incentive payments to
Dr. Steiner and Mr. Rogers were paid in euros and
sterling, respectively, and were valued by the dollar conversion
rate for those currencies as reported in the Wall Street Journal
with respect to banking transactions of $1 million or more
as of the date accrued. |
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(2) |
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40,000 restricted shares issued to Mr. Asmussen in March
2009. |
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(3) |
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Option and restricted share awards do not represent cash paid to
the optionees. The amounts shown in these columns represent the
aggregate grant date fair value of the options, as determined in
accordance with FASB ASC Topic 718, disregarding any estimates
of forfeitures relating to service-based vesting conditions. The
methodology of and all assumptions made in the valuation of
these option awards are disclosed in Note 8 to Clean
Diesels Consolidated Financial Statements for the fiscal
year 2009. |
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(4) |
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The amount of the incentive bonus awarded to the Named Executive
Officer in March 2009 for 2008 performance was based on the
metrics and other criteria described below in the section
regarding the 2008 Incentive Plan. |
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(5) |
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All Other Compensation includes 401(k) match,
pension contributions, life insurance premiums, and medical and
dental insurance premiums. Further, for Mr. Asmussen, in
2009, All Other Compensation also includes $249,869
for the relocation of Mr. Asmussen from Michigan to
Connecticut in 2009 and related tax
gross-up.
For Dr. Steiner, in 2009, All Other
Compensation also includes 201,250 ($278,374) in
salary continuation and 10,000 ($13,832) as cash in lieu
of medical and retirement plan benefits. For Dr. Steiner,
in 2008, All Other Compensation also includes
60,000 ($83,124) pursuant to his employment agreement as
cash in lieu of medical and retirement plan benefits. |
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(6) |
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Mr. Asmussen commenced employment on September 3, 2008
as Vice President of Sales, Americas and became Director,
President and Chief Executive Officer effective
February 10, 2009. |
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(7) |
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Dr. Steiner resigned as Director, President and Chief
Executive Officer of the Company in February 2009 and was
replaced by Mr. Michael L. Asmussen. Under
Dr. Steiners Employment Agreement effective
March 4, 2008 which continues until September 13,
2010, his salary and benefit continuation for the remaining term
of the Agreement at April 28, 2010 will be approximately
$137,000. |
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(8) |
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Ms. Ruple was terminated as Vice President, Treasurer and
Chief Financial Officer effective as of April 19, 2010. |
F-74
NARRATIVE
DISCLOSURE TO SUMMARY COMPENSATION TABLE
Base
Salary
Executive base salaries are approved by the Compensation and
Nominating Committee on recommendation of the Chief Executive
Officer, except that the base salary of the Chief Executive
Officer is fixed by the Committee itself. In approving or fixing
base salaries, the Committee acts in its collective business
judgment and experience on what it understands to be fair,
reasonable and equitable compensation in view of our
requirements for recruiting and retention in a highly
competitive market. The Committee does not rely on compensation
consultants. In its deliberations, the Committee considers:
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the executives compensation relative to other officers;
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recent and expected performance of the executive;
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our recent and expected overall performance; and
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our overall budget for base salary increases.
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In December 2008, a salary freeze was initiated, with the
exception of increases for four employees, effective
January 1, 2009.
Annual
Incentive and Bonus Awards
2009
In 2009, no awards were made under our incentive cash bonus
program, called the Management Incentive Program
(MIP).
2008
In 2008, potential cash awards under MIP, were designed to focus
our managers on the achievement of Company financial targets for
that year, as well as on individual objectives established at
the commencement of the year.
The 2008 MIP was structured as follows:
Participation in the incentive program was limited to managers.
Each participant in the 2008 MIP was assigned a Target
Participation Percentage (Target) which was a
percentage of annual gross salary. The Targets assigned were:
50% for each of Mr. Rogers and Ms. Ruple. For each
participant, individual goals were set each representing a
percentage of the Target, but all such goals in total not
exceeding 100% of Target. Payouts for goals attained would be
evaluated as having been attained on a scale of from 70% to
125%. No payout would be available for a goal evaluated at less
than 70% and no payout could exceed 125% of a goal.
Dr. Steiners goals were 2008 revenues of
$14 million, 40%; attain a minimum year end share price
ranging from $17.50 to $22.50, 7.5% to 30%; enter into licensing
arrangements, 30%. Ms. Ruples goals were 2008
revenues of $14 million, 20%; implement management
information technology reporting, 20%; staff development, 20%;
implement credit facilities, 20%; office relocation and lease
negotiation, 20%. Mr. Rogers goals were international
revenues of $8,861,700, 50%; develop team, 20%; enter into
licensing arrangements, 20%; develop business strategies, 10%.
Results under the 2008 MIP were as follows:
Dr. Steiner was recognized by the Committee as having
attained in 2008, 100% of one individual goal in connection with
the Companys licensing program. Ms. Ruple was
recognized as having attained three individual goals, staff
development evaluated at 75%, credit facilities evaluated at
100%, and office relocation evaluated at 100%. In addition,
while the Committee determined that Mr. Rogers had not met
his individual goals, nevertheless, he was recognized by the
Committee as having achieved substantial success in the
management in 2008 of the Companys international business
activities and was awarded a cash bonus otherwise than pursuant
to the 2008 MIP.
F-75
Long-Term
Incentives
We have one equity based employee compensation plan, referred to
as the Incentive Plan, approved by the stockholders in 1994 and
in 2002, under which awards may be granted to participants in
the form of non-qualified stock options, incentive stock
options, stock appreciation rights, restricted stock,
performance awards, bonuses or other forms of share-based or
non-share-based awards or combinations thereof. Participants in
the Incentive Plan may be our directors, officers, employees,
consultants or advisors (except consultants or advisors in
capital-raising transactions) as the directors determine are key
to the success of our business.
Our long-term equity incentives are stock options and are
designed to focus management on the long-term success of the
Company as evidenced by appreciation of the Companys stock
price over several years, by growth in its earnings per share
and other elements, and thereby, to align the interests of the
optionees with the interests of the stockholders.
Details concerning stock options awarded in 2009 to the Named
Executive Officers and to the directors are set out in the
Summary Compensation Table above.
Ownership
Guidelines
We do not have a stock ownership policy for Senior Executives.
Hedging
and Insider Trading Policies
We do not have a formal policy on hedging. We prohibit trading
in our securities during closed periods which are the two months
before the release of annual results and one month before the
release of quarterly results.
Equity
Grant Practices
Under the Incentive Plan, the Board grants stock option awards
for a term of not more than ten years. Stock option awards are
made by the full Board rather than the Compensation and
Nominating Committee because the non-executive directors
themselves are eligible for discretionary stock option awards.
The awards have an exercise price per share equal to fair market
value on the grant date. Fair market value is the mean of the
high and low trading price, or if there are not trading prices,
the bid and asked prices, reported in either case on The NASDAQ
Stock Market LLC. The grant date is the date of Board action but
may be a future date tied to an event, such as commencement of
employment. Under the current policy of the Board, awards to
employees may be exercised one-third on the grant date and
one-third on each of the first and second anniversaries of the
grant date; awards to new employees may be granted so as to be
exercised one-third on each of the first through third
anniversaries of grant; option awards may in the discretion of
the Board be Incentive Stock Options under Internal Revenue Code
Section 422, if awarded to U.S. employees; on
resignation, options which once vested, i.e. which may then be
exercised, will continue to be exercisable for time periods
depending on length of employment, so that such options are
exercisable for 180 days, if employed less than three
years; for two years, if employed for between three and five
years; for three years, if employed between five and seven
years; for five years if employed more than seven years; but in
no event later than the basic ten-year option term. In case of
death, total disability or normal retirement, the portion of the
option then vested shall continue in force and be exercisable
until the expiration of the basic ten-year term, but the then
unvested portion of the option shall terminate and be of no
effect.
Retirement
Benefits
We have a 401(k) Plan covering substantially all
U.S. employees. The 401(k) Plan is an important factor in
attracting and retaining employees as it provides an opportunity
to accumulate retirement funds. Our 401(k) Plan provides for
annual deferral of up to $16,500 for individuals until
age 50, $22,000 for individuals 50 and older, or, as
allowed by the Internal Revenue Code. If an employee contributes
5% to the 401(k) Plan, we match 100% of employee contributions
up to 4% of employee salary. Matching contributions vest
immediately. Costs related to this plan were $49,000, $59,000
and $34,000 in 2009, 2008 and 2007, respectively. Effective
January 1, 2009, we
F-76
established a pension plan available for all full-time U.K.
employees who have met minimum
length-of-service
requirements. Under the pension plan, the Company will
contribute an amount equal to 3% of employees base salary
per annum. An employee may make voluntary additional
contributions which the Company will match up to a further 2%.
After five years of service, the Company will increase its
contribution to an amount equal to 5% of employees base
salary. Costs related to this plan were $24,000 in 2009.
Welfare
Benefits
In order to attract and retain employees, we provide certain
welfare benefit plans to its employees, which include medical
and dental insurance benefits. We may also provide other
benefits to executives including term life insurance and
disability insurance. These benefits are not provided to
non-employee directors.
Employment
Agreements; Severance Arrangements
Each of the Named Executive Officers identified
above in the Summary Compensation Table is party to our form of
employment agreement with similar provisions. These agreements
are for indefinite terms except for Dr. Steiner whose
agreement expires September 13, 2010. Our employment
agreements provide for certain severance benefits. The severance
benefit is payable in the event of termination of employment
because of physical incapacity or without cause. Termination of
employment without cause is termination under circumstances
other than resignation, retirement or cause and includes
constructive discharge. Termination for cause, for which no
severance is payable, is termination on account of conviction or
plea of guilty to a felony; 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 by us in writing as a potential disciplinary measure.
The severance benefit for incapacity for each of the officers is
in the form of base salary for six months. The severance benefit
for termination without cause is base salary and benefit
continuation for varying time periods depending on the employee
or until the employee finds comparable employment. Benefit
continuation includes health and medical insurance, 401(k) Plan
match, and the employers portion of social security. The
time periods and estimated cash value of benefits are for
Mr. Asmussen, twelve months ($329,000) and for
Mr. Rogers, three months ($61,000). The value of these
estimated severance benefits is based on the amount of base
salary and benefits payable from January 1, 2010 for the
applicable time period. For Dr. Steiner, the remaining
severance benefit under his Employment Agreement effective
March 4, 2008 which continues until September 13, 2010
will be, from April 1, 2010, approximately $137,000.
Under Mr. Asmussens employment agreement, he was
awarded 40,000 restricted shares vesting one-third on each of
February 10, 2010, 2011 and 2012 provided he is employed on
those dates. Mr. Asmussen was reimbursed for his reasonable
expenses of relocation from Michigan to the vicinity of the
Companys headquarters in Connecticut. Under his employment
agreement, Mr. Asmussen is also eligible for a change of
control bonus equal to one years base salary in the event
of a change in control of the Company approved in advance by the
Board of Directors.
Under the several employment agreements, each of the officers is
indefinitely obligated to maintain confidentiality of our
proprietary information and to assign inventions made in the
course of employment by us. Severance benefits are not
explicitly conditioned on these undertakings.
Options
Vesting on Change in Control
Under the Incentive Plan, all outstanding options shown in the
table below Outstanding Equity Awards at Fiscal Year
End for the Named Executive Officers will become
immediately exercisable in the event that there is with respect
to us, a Change in Control. A Change in
Control takes place if (a) any person or affiliated
group becomes the beneficial owner of 51% or more of our
outstanding securities; (b) in any two-year period, persons
in the majority of the Board cease being so unless the
nomination of the new directors was approved by the former
directors when they were in office; (c) a business
combination takes place where our shares of Common Stock are
converted to cash, securities or other property, but not in a
transaction in
F-77
which our stockholders have proportionately the same share
ownership before and after the transaction; or (d) our
stockholders approve of a plan for our liquidation or
dissolution.
Indemnification
and Insurance
Under our Certificate of Incorporation, indemnification is
afforded our directors and executive officers to the fullest
extent permitted by Delaware law. Such indemnification also
includes payment of any costs which an indemnitee incurs because
of claims against the indemnitee and provides for advancement to
the indemnitee of those costs, including legal fees. We are,
however, not obligated to provide indemnity and costs where it
is adjudicated that the indemnitee did not act in good faith in
the reasonable belief that the indemnitees actions were in
our best interests, or, in the case of a settlement of a claim,
such determination is made by our Board.
We carry insurance providing indemnification, under certain
circumstances, to all of our directors and officers for claims
against them by reason of, among other things, any act or
failure to act in their capacities as directors or officers. The
current annual premium for this policy is $43,000.
No payments have been made to any of our past or present
directors or officers for such indemnification or under any
insurance policy.
Compensation
Recovery Policies
We maintain a policy that we will evaluate in appropriate
circumstances whether to seek the reimbursement of certain
compensation awards paid to an executive officer, if such
executive engages in misconduct that caused or partially caused
a restatement of our financial results, in accordance with
section 304 of the Sarbanes-Oxley Act of 2002. If
circumstances warrant, we will seek to recover appropriate
portions of the executive officers compensation for the
relevant period, as provided by law.
Tax
Deductibility of Executive Compensation
We review and consider the deductibility of executive
compensation under the requirements of Internal Revenue Code
Section 162(m), which provides that we may not deduct
compensation of more than $1,000,000 that is paid to certain
individuals. We believe that compensation paid under our
incentive plans is generally fully deductible for federal income
tax purposes.
Accounting
for Equity-Based Compensation
On January 1, 2006, we began accounting for the
equity-based compensation issued under the Incentive Plan in
accordance with FASB ASC Topic 718.
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 Companys 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 Companys stock on the U.S. NASDAQ
Capital Market (the
Over-the-Counter
market prior to October 3, 2007) 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. ASC 718 requires forfeitures to be
estimated at the time of grant in order to estimate the amount
of share-based awards ultimately expected to vest. The estimate
is based on the Companys historical rates of forfeitures.
ASC 718 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.
OPTION
EXERCISES AND STOCK VESTED
As mentioned above, we have one equity-based employee
compensation plan, the Incentive Plan, under which awards may be
granted to participants in the form of non-qualified stock
options, incentive stock options, stock appreciation rights,
restricted stock, performance awards, bonuses or other forms of
share-based
F-78
or non-share-based awards or combinations thereof. There were no
exercises of stock options during 2009 by the Named Executive
Officers and none of the stock awards vested in 2009.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END
The following table sets out information as to the Named
Executive Officers concerning their unexercised options awards,
by award outstanding at fiscal 2009 year end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
|
Options #
|
|
Options #
|
|
Exercise
|
|
Expiration
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price
|
|
Date(1)
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
Michael L. Asmussen(2)
|
|
|
3,333
|
|
|
|
6,667
|
|
|
$
|
8.40
|
|
|
|
09/03/18
|
|
|
|
|
1,667
|
|
|
|
3,333
|
|
|
$
|
2.705
|
|
|
|
12/22/18
|
|
Bernhard Steiner
|
|
|
30,000
|
|
|
|
|
|
|
$
|
9.20
|
|
|
|
02/11/11
|
|
|
|
|
10,000
|
|
|
|
|
|
|
$
|
9.70
|
|
|
|
02/11/11
|
|
|
|
|
20,000
|
|
|
|
|
|
|
$
|
5.10
|
|
|
|
02/11/11
|
|
|
|
|
38,000
|
|
|
|
|
|
|
$
|
9.10
|
|
|
|
02/11/11
|
|
|
|
|
23,333
|
|
|
|
|
|
|
$
|
19.125
|
|
|
|
02/11/11
|
|
|
|
|
6,667
|
|
|
|
|
|
|
$
|
2.705
|
|
|
|
02/11/11
|
|
Ann B. Ruple
|
|
|
10,000
|
|
|
|
|
|
|
$
|
8.25
|
|
|
|
12/13/16
|
|
|
|
|
20,000
|
|
|
|
|
|
|
$
|
19.125
|
|
|
|
12/18/17
|
|
|
|
|
13,333
|
|
|
|
6,667
|
|
|
$
|
2.705
|
|
|
|
12/22/18
|
|
Timothy Rogers
|
|
|
20,000
|
|
|
|
|
|
|
$
|
9.75
|
|
|
|
09/30/13
|
|
|
|
|
4,000
|
|
|
|
|
|
|
$
|
9.70
|
|
|
|
12/09/14
|
|
|
|
|
3,333
|
|
|
|
|
|
|
$
|
5.10
|
|
|
|
12/20/15
|
|
|
|
|
13,000
|
|
|
|
|
|
|
$
|
9.10
|
|
|
|
01/04/17
|
|
|
|
|
15,000
|
|
|
|
|
|
|
$
|
19.125
|
|
|
|
12/18/17
|
|
|
|
|
10,000
|
|
|
|
5,000
|
|
|
$
|
2.705
|
|
|
|
12/22/18
|
|
|
|
|
(1) |
|
The option expiration date indicated is the tenth anniversary of
the date of grant. Each of the foregoing options is for a
ten-year term and vests as to the shares granted, one-third on
grant and one-third on each of the first and second
anniversaries of grant. On resignation, those of the above
options which are then vested may continue to be exercisable for
time periods depending on length of employment, so that such
options are exercisable for 180 days, if employed less than
three years; for two years, if employed for between three and
five years; for three years, if employed between five and seven
years; for five years if employed more than seven years; but in
no event later than the basic ten-year option term. In case of
death, total disability or normal retirement, the portion of the
option then vested shall continue in force and be exercisable
until the expiration of the basic ten-year term, but the then
unvested portion of the option shall terminate and be of no
effect. |
|
(2) |
|
40,000 shares restricted common stock award unvested. |
DIRECTOR
COMPENSATION
At the commencement of 2009, our directors were paid an annual
retainer of $30,000, and the Chairman of the Board and the
Chairman of the Audit Committee were each paid retainers of
$30,000 and $10,000, respectively. Retainers are paid quarterly
in arrears. Effective July 1, 2009, the Board agreed to
reduce those retainers by 50%. Thus for the full year the
retainers paid were $22,500 as a director, $22,500 as Chairman
of the Board and $7,500 as Chairman of the Audit Committee. On
March 26, 2010, the Board agreed to reinstate the original
compensation schedule. There are no meeting fees. Directors are
also eligible for stock option awards. Stock option awards to
non-executive directors are, under the current policy of the
Board, for a ten-year term and are fully vested when granted.
Directors who are also our employees or executive officers
receive no compensation for their service as directors as such,
and accordingly, Messrs. Grinnell and Asmussen are not
included in the table.
F-79
Summary
Director Compensation Table
The following table shows for our non-executive directors all
compensation earned in 2009 on account of fees, whether paid in
cash or stock, and stock option awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
Or
|
|
|
|
|
|
|
Paid in Cash
|
|
Option Awards
|
|
Total
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
J. A. de Havilland
|
|
$
|
22,500
|
|
|
|
|
|
|
$
|
22,500
|
|
D. R. Gray(4)
|
|
|
47,379
|
|
|
|
|
|
|
|
47,379
|
|
J. J. McCloy II(2)
|
|
|
17,379
|
|
|
|
|
|
|
|
17,379
|
|
D. F. Merrion
|
|
|
22,500
|
|
|
|
|
|
|
|
22,500
|
|
M. Park(1)
|
|
|
10,323
|
|
|
|
|
|
|
|
10,323
|
|
D. R. Gammon(3)
|
|
|
11,083
|
|
|
|
|
|
|
|
11,083
|
|
|
|
|
(1) |
|
Elected as a director August 26, 2009. Elected as chairman
August 28, 2009. |
|
(2) |
|
Resigned as a director August 28, 2009. |
|
(3) |
|
Resigned as a director May 13, 2009. |
|
(4) |
|
Resigned as chairman August 28, 2009. |
F-80
NON-EMPLOYEE
DIRECTORS OUTSTANDING STOCK OPTIONS AT 2009 FISCAL YEAR
END
The following table sets out by grant date the outstanding
options held at year end 2009 by the non-employee directors. All
of these options are vested.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
Underlying
|
|
Option
|
|
Option
|
|
|
Unexercised
|
|
Exercise
|
|
Expiration
|
Name
|
|
Options #
|
|
Price
|
|
Date(1)
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
John A. de Havilland
|
|
|
2,000
|
|
|
$
|
12.50
|
|
|
|
02/10/10
|
|
|
|
|
2,000
|
|
|
$
|
9.825
|
|
|
|
03/14/11
|
|
|
|
|
5,000
|
|
|
$
|
14.50
|
|
|
|
03/13/12
|
|
|
|
|
4,000
|
|
|
$
|
8.25
|
|
|
|
06/11/13
|
|
|
|
|
2,000
|
|
|
$
|
15.35
|
|
|
|
12/02/13
|
|
|
|
|
3,000
|
|
|
$
|
9.70
|
|
|
|
12/09/14
|
|
|
|
|
3,000
|
|
|
$
|
5.10
|
|
|
|
12/20/15
|
|
|
|
|
5,000
|
|
|
$
|
9.10
|
|
|
|
01/04/17
|
|
|
|
|
7,000
|
|
|
$
|
19.125
|
|
|
|
12/18/17
|
|
|
|
|
7,000
|
|
|
$
|
2.705
|
|
|
|
12/22/18
|
|
Derek R. Gray
|
|
|
2,000
|
|
|
$
|
12.50
|
|
|
|
02/10/10
|
|
|
|
|
2,000
|
|
|
$
|
9.825
|
|
|
|
03/14/11
|
|
|
|
|
5,000
|
|
|
$
|
14.50
|
|
|
|
03/13/12
|
|
|
|
|
7,000
|
|
|
$
|
8.25
|
|
|
|
06/11/13
|
|
|
|
|
4,000
|
|
|
$
|
15.35
|
|
|
|
12/02/13
|
|
|
|
|
5,000
|
|
|
$
|
9.70
|
|
|
|
12/09/14
|
|
|
|
|
3,000
|
|
|
$
|
5.10
|
|
|
|
12/20/15
|
|
|
|
|
10,000
|
|
|
$
|
9.10
|
|
|
|
01/04/17
|
|
|
|
|
12,500
|
|
|
$
|
19.125
|
|
|
|
12/18/17
|
|
|
|
|
12,500
|
|
|
$
|
2.705
|
|
|
|
12/22/18
|
|
David F. Merrion
|
|
|
11,000
|
|
|
$
|
8.375
|
|
|
|
11/13/16
|
|
|
|
|
5,000
|
|
|
$
|
9.10
|
|
|
|
01/04/17
|
|
|
|
|
7,000
|
|
|
$
|
19.125
|
|
|
|
12/18/17
|
|
|
|
|
7,000
|
|
|
$
|
2.705
|
|
|
|
12/22/18
|
|
Mungo Park
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
(1) |
|
Each of these options is for a ten-year term and was fully
vested on date of grant. |
F-81
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
PRINCIPAL
STOCKHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information known to us regarding
the beneficial ownership of Common Stock as of April 28,
2010 by: (i) each person owning beneficially more than five
percent of the outstanding shares of Common Stock;
(ii) each of our directors; (iii) the Named Executive
Officers; and (iv) all directors and executive officers as
a group.
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
Beneficial Owner
|
|
|
|
Beneficially
|
Name and Address(1)
|
|
No. of Shares(2)(3)
|
|
Owned(4)
|
|
Ruffer LLP(3)
|
|
|
1,196,561
|
|
|
|
14.6
|
%
|
Hawkwood Fund Limited(3)
|
|
|
458,148
|
|
|
|
5.6
|
%
|
Directors and
|
|
|
|
|
|
|
|
|
Named Executive Officers
|
|
|
|
|
|
|
|
|
Michael L. Asmussen
|
|
|
68,333
|
|
|
|
|
*
|
John A. de Havilland
|
|
|
53,718
|
|
|
|
|
*
|
Derek R. Gray
|
|
|
195,791
|
|
|
|
2.3
|
%
|
Charles W. Grinnell
|
|
|
62,193
|
|
|
|
|
*
|
David F. Merrion
|
|
|
30,000
|
|
|
|
|
*
|
Mungo Park
|
|
|
283,974
|
|
|
|
3.3
|
%
|
Timothy Rogers
|
|
|
65,733
|
|
|
|
|
*
|
Ann B. Ruple
|
|
|
2,421
|
|
|
|
|
*
|
Bernhard Steiner
|
|
|
162,090
|
|
|
|
1.9
|
%
|
All Directors and Officers
|
|
|
|
|
|
|
|
|
as a Group (11 persons)
|
|
|
954,721
|
|
|
|
10.7
|
%
|
|
|
|
* |
|
Less than 1% |
|
(1) |
|
The address of Ruffer LLP is 80 Queen Victoria Street, London
SW1E 52C; and of Hawkwood Fund Limited is The Jersey
Trust Company, Elizabeth House, 9 Castle Street, St.
Helier, Jersey, Channel Islands JE4 2QP; of Avenir Finances S.A.
is Channel House, Forest Lane, St. Peter Port, Guernsey GY1 4HL,
U.K.; the address of directors and Named Executive Officers is
c/o Clean
Diesel Technologies, Inc., Suite 1100, 10 Middle Street,
Bridgeport, Connecticut 06604. |
|
(2) |
|
In addition to shares issued and outstanding, includes shares
subject to options or warrants exercisable within 60 days
for Ruffer LLP, 8,090 shares; Mr. Asmussen,
18,333 shares; Mr. de Havilland, 40,430 shares;
Mr. Gray, 64,749 shares; Mr. Grinnell,
56,000 shares; Mr. Merrion, 30,000 shares;
Mr. Park, 283,974 shares held by Innovator Capital
Limited of which Mr. Park is a principal; Mr. Rogers,
65,333 shares; Dr. Steiner, 128,000 shares; and,
for all directors and officers as a group, 714,953 shares.
The amounts for Mr. de Havilland, Mr. Gray, and for
directors and officers as a group do not include for Mr. de
Havilland, 8,026 shares, and for Mr. Gray,
49,215 shares, which are held respectively by their adult
children and as to which Mr. de Havilland and Mr. Gray
disclaim beneficial ownership. |
|
(3) |
|
To our knowledge, the directors and Named Executive Officers
hold sole beneficial ownership and investment power over the
shares reported; and the remaining beneficial owners have at
least shared investment power over their shareholdings. |
|
(4) |
|
The percentages are percentages of outstanding stock and have
been calculated by including warrants and options exercisable
within 60 days by the respective stockholders calculated
individually. |
F-82
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Private
Placements
In March 2009, we issued 40,000 restricted shares of our common
stock under our Incentive Plan to the Companys President
and Chief Executive Officer.
On October 1, 2009, our directors, Michael Asmussen, who
also serves as President and Chief Executive Officer, and Derek
Gray, purchased 10,000 shares and 25,684 shares,
respectively, of our common stock. Total shares acquired were
35,684 and total proceeds based on the October 1, 2009
NASDAQ consolidated closing bid price of $1.65 on the effective
date of the Company offer, were $58,878.60. The proceeds will be
used for the general corporate purposes of the Company. The
shares are restricted shares issued pursuant to an exemption
from registration under Regulation D of the Securities Act
of 1933, as amended.
Agreements
with Related Persons
Mr. Park, as a director and as Chairman, is entitled under
the current directors compensation policy of the Company
to an annual directors retainer of $15,000 and a
chairmans retainer of $15,000, each paid quarterly in
arrears; such amounts reflect the reduced rate approved in
August 2009 wherein non-executive members of the Companys
Board of Directors agreed to receive 50% of their annual
compensation. For the year ended December 31, 2009, our
selling, general and administrative expenses include
approximately $10,300 of director fees for Mr. Park.
Mr. Park is the chairman of Innovator Capital Limited, a
financial services company of London, England, which firm has
provided services to the Company (see below). Mr. Park is
not an independent director within the meaning of NASDAQ
Rule 5605(a)(2) and, as such, is and will not be a member
of the Audit or the Compensation and Nominating Committees of
the Board of the Company.
Innovator
Capital
We have retained the services of Innovator and have incurred
costs as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Financial advisory fees
|
|
$
|
30
|
|
|
$
|
268
|
|
|
$
|
207
|
|
Merger and acquisition fees
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Private placement fees
|
|
|
|
|
|
|
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44
|
|
|
$
|
268
|
|
|
$
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innovator provided financial advice to the Company from 2006
through January 2009 and compensation for such advice, along
with travel and other expenses, charged to expense was $30,000,
$268,000 and $207,000 in the years ended December 31, 2009,
2008 and 2007, respectively. In addition, as compensation for
its financial advisory services to the Company, Innovator
received and holds warrants to purchase 283,974 shares of
common stock of the Company at exercise prices from $8.4375 to
$15.625 which expire from December 29, 2011 through
December 29, 2012. Further, the Company paid Innovator
$986,000 for fund raising services which amount was charged to
stockholders equity as a reduction of proceeds received
from investors.
On November 20, 2009, the Company entered into an
engagement letter with Innovator to provide financing and merger
and acquisition services. The engagement letter has a term
expiring on June 30, 2010, during which Innovator will
(i) act for the Company in arranging a private placement
financing of $1 million to $1.5 million from the sale
of the Companys common stock and warrants and
(ii) assist the Company in merger and acquisition
activities.
For its financing services, Innovator will receive (i) a
placing commission of five percent (5%) of all monies received
by the Company and (ii) financing warrants to acquire
shares of common stock of the
F-83
Company equal in value to fifteen percent (15%) of the total
gross proceeds received by the Company in the financing, such
financing warrants to be exercisable at a price equal to a ten
percent (10%) premium to the price per share of common stock in
the financing. Issuance of the financing warrants is contingent
on the stockholders of the Company authorizing additional common
stock.
For its merger and acquisition services, Innovator will receive
monthly retainer fees of $10,000 and success fees as a
percentage of transaction value of five percent (5%) on the
first $10 million, four percent (4%) on the next
$3 million, three percent (3%) on the next $2 million,
and two percent (2%) on amounts above $15 million in
connection with possible merger and acquisition transactions.
Success fees are payable in cash or shares or a combination of
cash or shares as determined by the Board of the Company. In
2009, we incurred $14,000 for the monthly retainer to Innovator.
The engagement letter further provides that retainer fees may be
deducted from success fees, that Innovator shall be reimbursed
for its ordinary and necessary out of pocket expenses, that the
engagement letter is subject to Delaware law, and that disputes
between the parties are subject to arbitration.
David
Merrion
Effective January 27, 2010, we engaged David F. Merrion, a
director of the Company, to perform consulting services for us
as an expert witness for a Clean Diesel patent application with
respect to diesel engine technology. Mr. Merrion earned a
total of $19,963 for those services.
Director
Independence
Messrs. Gray, de Havilland and Merrion are independent
directors under the requirements of the NASDAQ listing
standards. The members of our Audit Committee, Messrs. de
Havilland and Gray are also independent under the more
restrictive independence standards applicable to Audit Committee
members within the meaning of the applicable NASDAQ listing
standards and SEC rules. Mr. Asmussen, Mr. Grinnell,
and Mr. Park are not independent under applicable NASDAQ
listing standards and SEC rules.
On September 15, 2009, we received a Nasdaq Staff
Deficiency Letter indicating that we fail to comply with Nasdaq
Listing Rule 5605(c)(4)(A) because we do not have at least
three Audit Committee members and Listing Rule 5605(b)(1)
because its Board does not have a majority of independent
directors. These deficiencies occurred on August 28, 2009
when Mr. John J. McCloy II, who had been an Audit Committee
member, resigned as a director leaving the Audit Committee with
two members and the Board with three independent directors and
three non-independent directors. We have a cure period to regain
compliance which shall be until the earlier of the date of the
next annual meeting of stockholders or August 28, 2010. Our
Board has determined to recruit an appropriate new director to
cure the deficiencies mentioned above.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Audit
Fees
Fees for professional services provided by Eisner LLP in the
last two fiscal years by category were:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Audit Fees
|
|
$
|
165,300
|
|
|
$
|
224,500
|
|
Audit-Related Fees
|
|
|
1,300
|
|
|
|
11,632
|
|
Tax Fees
|
|
|
|
|
|
|
|
|
All Other Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
166,600
|
|
|
$
|
236,132
|
|
|
|
|
|
|
|
|
|
|
Audit fees include fees for the audit of the financial
statements, quarterly reviews and Sarbanes-Oxley
Section 404 internal controls. Audit-related fees were for
services in connection with Clean Diesels filing with the
Securities and Exchange Commission of a registration statement
for the resale of Common Stock and Warrants in 2009 and a
registration statement for the shares reserved for sale under
the Clean Diesel Incentive Plan.
F-84
Pre-Approval
Policies and Procedures
The Clean Diesel Audit Committee policy is that it must approve
in advance an engagement of our independent registered public
accounting firm for any audit or non-audit service. All fees
were pre-approved by the Audit Committee.
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
|
|
|
F-41
|
|
Consolidated Balance Sheets as of December 31, 2009 and 2008
|
|
|
F-42
|
|
Consolidated Statements of Operations and Comprehensive Loss for
the years ended December 31, 2009, 2008 and 2007
|
|
|
F-43
|
|
Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2009, 2008 and 2007
|
|
|
F-44
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007
|
|
|
F-45
|
|
(2) Financial Statement Schedules
The following financial statement schedule is included herein
and should be read in conjunction with the consolidated
financial statements referred to above.
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts
|
|
|
Page F-88
|
|
Other 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 consolidated
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 (incorporated by reference to Exhibit 3(i)(a) to
Annual Report on
Form 10-K
filed on March 30, 2007).
|
|
3(i)(b)
|
|
|
Certificate of Amendment to Restated Certificate of
Incorporation dated as of June 15, 2007(incorporated by
reference to Exhibit 3(i)(b) to Registration Statement on
Form S-1
[No. 333-144201]
dated on June 29, 2007).
|
|
3(i)(c)
|
|
|
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 November 6, 2008 (incorporated
by reference to Exhibit 3.1 to Quarterly Report on
Form 10-Q
filed on November 10, 2008).
|
|
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 by 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).
|
F-85
|
|
|
|
|
|
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)
|
|
|
Incentive Plan as amended through June 11, 2002
(incorporated by reference to Exhibit 10(d) to Annual
Report on
Form 10-K
filed on March 30, 2007).
|
|
10(e)
|
|
|
Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10(g) to Annual Report on
Form 10-K
filed on March 30, 2007).
|
|
10(f)
|
|
|
Form of Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10(h) to
Form 10-K
filed on March 30, 2007).
|
|
10(g)
|
|
|
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(h)
|
|
|
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(i)
|
|
|
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(j)
|
|
|
Registration Rights Agreement between Clean Diesel Technologies,
Inc. and Fuel-Tech N.V. of March 24, 1997 (incorporated by
reference to Exhibit to
Form 10-K
for the year ended December 31, 1996).
|
|
10(k)
|
|
|
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(l)
|
|
|
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(m)
|
|
|
License Agreement of March 31, 2003 between Clean Diesel
Technologies, Inc. and Combustion Components Associates, Inc.
(incorporated by reference to Exhibit to
Form 10-Q
for quarter ended June 30, 2004).
|
|
10(n)
|
|
|
Employment Agreement dated September 23, 2003 between Tim
Rogers and the Company (incorporated by reference to
Exhibit 10(x) to Annual Report on
Form 10-K
filed on March 30, 2007) and letter dated May 3,
2004 (incorporated by reference to Exhibit 10(n) to Annual
Report on Form
10-K filed
on March 24, 2010).
|
|
10(o)
|
|
|
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(p)
|
|
|
Employment Agreement dated November 29, 2006 between Ann B.
Ruple and the Company (incorporated by reference to
Exhibit 10(z) to Annual Report on
Form 10-K
filed on March 30, 2007).
|
|
10(q)
|
|
|
Employment Agreement dated as of January 1, 2008 between
Bernhard Steiner and the Company (incorporated by reference to
Exhibit 10(t) to Annual Report on
Form 10-K
filed on March 17, 2008).
|
|
10(r)
|
|
|
Office lease dated as of September 2008 (incorporated by
reference to Exhibit 10(t) to Annual Report on
Form 10-K
filed on March 16, 2009).
|
|
10(s)
|
|
|
Employment Agreement effective March 30, 2009 between
Michael L. Asmussen and the Company (incorporated by reference
to Exhibit 10 to Quarterly Report on
Form 10-Q
filed on May 11, 2009).
|
|
10(t)
|
|
|
Employment Agreement effective January 16, 2009 between
Dr. Daniel K. Skelton and the Company (incorporated by
reference to Exhibit 10(t) to Annual Report on Form 10-K filed
on March 24, 2010).
|
|
10(u)
|
|
|
Consulting Services Agreement effective January 27, 2010
between David F. Merrion and the Company (incorporated by
reference to Exhibit 10(u) to Annual Report on Form 10-K filed
on March 24, 2010).
|
F-86
|
|
|
|
|
|
10(v)
|
|
|
Company Acceptance dated November 6, 2008 of UBS Offer
relating to Auction Rate Securities (incorporated by reference
to Exhibit 10.1 to Quarterly Report on
Form 10-Q
filed on November 10, 2008).
|
|
10(w)
|
|
|
UBS Bank USA Collateral and Credit Line Agreements dated
December 24, 2008 (incorporated by reference to Exhibit
10(w) to Annual Report on Form 10-K filed on March 24,
2010).
|
|
10(x)
|
|
|
Form of 2000 Series Warrants (incorporated by reference to
Schedule B of Exhibit 10(o) to Annual Report on
Form 10-K
filed on March 23, 2001).
|
|
10(y)
|
|
|
Form of 2003 Series Warrants (incorporated by reference to
Exhibit 10(y) to Annual Report on Form 10-K/A filed on
April 30, 2010).
|
|
10(z)(1)
|
|
|
Description of Ardour Capital Warrants (incorporated by
reference to Exhibit 10(z)(1) to Annual Report on Form
10-K/A filed on April 30, 2010).
|
|
10(z)(2)
|
|
|
Description of Innovator Capital Warrants (incorporated by
reference to Exhibit 10(z)(2) to Annual Report on Form
10-K/A filed on April 30, 2010).
|
|
14
|
|
|
Code of Ethics and Business Conduct (incorporated by reference
to Exhibit to Annual Report on
Form 10-K
for the year ended December 31, 2004).
|
|
21
|
|
|
Subsidiaries (incorporated by reference to Exhibit 21 to Annual
Report on
Form 10-K
filed on March 24, 2010).
|
|
23(a)
|
|
|
Consent of Eisner LLP (incorporated by reference to Exhibit
23(a) to Annual Report on
Form 10-K
filed on March 24, 2010).
|
|
31(a)
|
|
|
Section 302 CEO Certification (incorporated by reference to
Exhibit 31(a) to Annual Report on Form 10-K/A filed on
April 30, 2010).
|
|
31(b)
|
|
|
Section 302 CFO Certification (incorporated by reference to
Exhibit 31(b) to Annual Report on Form 10-K/A filed on
April 30, 2010).
|
|
31(c)
|
|
|
Section 302 CEO Certification (incorporated by reference to
Exhibit 31(a) to Annual Report on Form 10-K/A filed on
April 30, 2010).
|
|
31(d)
|
|
|
Section 302 CEO Certification (incorporated by reference to
Exhibit 31(b) to Annual Report on Form 10-K/A filed on
April 30, 2010).
|
|
32
|
|
|
Section 906 Certification by CEO and CFO (incorporated by
reference to Exhibit 32 to Annual Report on Form 10-K filed on
March 24, 2010).
|
F-87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
Additions
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
Charged to
|
|
|
|
Balance at
|
|
|
Beginning
|
|
Costs and
|
|
Other
|
|
|
|
End of
|
|
|
of Period
|
|
Expenses
|
|
Accounts
|
|
Deductions *
|
|
Period
|
|
|
(In thousands)
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
34
|
|
|
$
|
28
|
|
|
$
|
|
|
|
$
|
13
|
|
|
$
|
49
|
|
December 31, 2008
|
|
$
|
49
|
|
|
$
|
629
|
|
|
$
|
|
|
|
$
|
319
|
|
|
$
|
359
|
|
December 31, 2009
|
|
$
|
359
|
|
|
$
|
(157
|
)
|
|
$
|
|
|
|
$
|
30
|
|
|
$
|
232
|
|
|
|
|
* |
|
Uncollected receivables written off, net of recoveries and
translation adjustment |
F-88
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.
|
|
|
|
By:
|
/s/ Michael
L. Asmussen
|
Michael L. Asmussen
Chief Executive Officer, President and Director
April 30, 2010
Date
F-89
Annex G
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q/A
(Amendment No. 1)
|
|
|
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the quarterly period ended
March 31, 2010
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission file number:
001-33710
CLEAN DIESEL TECHNOLOGIES,
INC.
(Exact name of
registrant as specified in its charter)
|
|
|
Delaware
(State or other jurisdiction
of
incorporation or organization)
|
|
06-1393453
(I.R.S. Employer
Identification No.)
|
|
|
|
10 Middle Street, Suite 1100, Bridgeport, CT
(Address of principal
executive offices)
|
|
06604
(Zip Code)
|
(203) 416-5290
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for 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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated
filer o
|
|
Accelerated
filer o
|
|
Non-accelerated
filer o
|
|
Smaller reporting
company þ
|
|
|
|
|
(Do not check if a smaller
reporting company.)
|
|
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of May 10, 2010, there were 8,213,988 outstanding shares
of the registrants common stock, par value $0.01 per share.
G-1
EXPLANATORY
NOTE REGARDING RESTATEMENT
Clean Diesel Technologies, Inc is filing this Amendment
No. 1 on
Form 10-Q/A
(the Amendment) to its Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010, originally filed
May 14, 2010 (the Original Filing) to amend and
restate the following previously-filed condensed consolidated
financial statements (and related disclosures) (the
Restatement): (1) our condensed consolidated
balance sheet as of March 31, 2009 and the related
condensed consolidated statements of operations and cash flows
for the quarter ended March 31, 2009 contained in
Part I Item 1 of this Amendment; and
(2) managements discussion and analysis of our
financial condition and results of operations as of and for the
quarter ended March 31, 2009 contained in Part I,
Item 2 of this Amendment. The Restatement results from our
managements determination subsequent to the issuance of
our financial statements for the year ended December 31,
2009 that there were cumulative immaterial errors in the
recording of abandonment of patent and patent applications for
the year ended December 31, 2009 that if recorded as of
March 31, 2010 would be material to this quarter and
therefore our unaudited condensed consolidated financial
statements required restatement. In applying the accounting
guidance of Staff Accounting Bulletin 108, the Company has
restated its March 31, 2009 information to reflect the
error noted above for comparative purposes. Refer to Note 1
to the condensed consolidated financial statements included in
Item 1 for further discussion of the Restatement.
Financial information related to the interim period ended
March 31, 2009 included in the reports on
Form 10-Q
and
Form 8-K
previously filed by us and all related earnings press releases
and similar communications issued by us related to these
periods, should not be relied upon and in the event there are
discrepancies between this Amendment and previous reports, press
releases and similar communications, the information in this
Amendment shall control.
G-2
CLEAN
DIESEL TECHNOLOGIES, INC.
Quarterly Report on
Form 10-Q
for the Quarter Ended March 31, 2010
INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
PART I.
|
|
|
FINANCIAL INFORMATION
|
|
|
|
|
|
Item 1.
|
|
|
Financial Statements
|
|
|
G-4
|
|
|
|
|
|
Condensed Consolidated Balance Sheets as of March 31, 2010
(Unaudited) and December 31, 2009 (Restated)
|
|
|
G-4
|
|
|
|
|
|
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2010 and 2009 (Restated) (Unaudited)
|
|
|
G-5
|
|
|
|
|
|
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2010 and 2009 (Restated) (Unaudited)
|
|
|
G-6
|
|
|
|
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
G-7
|
|
|
Item 2.
|
|
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations
|
|
|
G-19
|
|
|
Item 3.
|
|
|
Quantitative and Qualitative Disclosures about Market Risk
|
|
|
G-24
|
|
|
Item 4.
|
|
|
Controls and Procedures
|
|
|
G-24
|
|
|
|
|
|
|
|
|
|
|
|
PART II.
|
|
|
OTHER INFORMATION
|
|
|
|
|
|
Item 6.
|
|
|
Exhibits
|
|
|
G-24
|
|
SIGNATURES
|
|
|
G-25
|
|
G-3
PART I.
FINANCIAL INFORMATION
|
|
Item 1.
|
Condensed
Consolidated Financial Statements
|
CLEAN
DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Restated)
|
|
|
|
|
|
|
Note 1
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,257
|
|
|
$
|
2,772
|
|
Investments
|
|
|
10,475
|
|
|
|
11,725
|
|
Accounts receivable, net of allowance of $218 and $232,
respectively
|
|
|
522
|
|
|
|
148
|
|
Inventories, net
|
|
|
887
|
|
|
|
1,059
|
|
Other current assets
|
|
|
128
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
14,269
|
|
|
|
15,998
|
|
Patents, net
|
|
|
908
|
|
|
|
898
|
|
Fixed assets, net of accumulated depreciation of $396 and $505,
respectively
|
|
|
270
|
|
|
|
294
|
|
Other assets
|
|
|
55
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,502
|
|
|
$
|
17,247
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
405
|
|
|
$
|
301
|
|
Accrued expenses
|
|
|
618
|
|
|
|
675
|
|
Short-term debt
|
|
|
6,900
|
|
|
|
7,693
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,923
|
|
|
|
8,669
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share:
authorized 100,000; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share:
authorized 12,000,000; issued and outstanding 8,213,988 and
8,213,988 shares, respectively
|
|
|
82
|
|
|
|
82
|
|
Additional paid-in capital
|
|
|
74,724
|
|
|
|
74,694
|
|
Accumulated other comprehensive loss
|
|
|
(435
|
)
|
|
|
(381
|
)
|
Accumulated deficit
|
|
|
(66,792
|
)
|
|
|
(65,817
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
7,579
|
|
|
|
8,578
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
15,502
|
|
|
$
|
17,247
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
G-4
CLEAN
DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Restated Note 1)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
(Unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
612
|
|
|
$
|
312
|
|
Technology licensing fees and royalties
|
|
|
33
|
|
|
|
34
|
|
Consulting and other
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
683
|
|
|
|
346
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
465
|
|
|
|
234
|
|
Cost of licensing fees and royalties
|
|
|
|
|
|
|
|
|
Cost of consulting and other revenues
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,221
|
|
|
|
1,952
|
|
Severance charge
|
|
|
(103
|
)
|
|
|
510
|
|
Research and development
|
|
|
53
|
|
|
|
59
|
|
Patent amortization and other expense
|
|
|
49
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
1,685
|
|
|
|
2,824
|
|
Loss from operations
|
|
|
(1,002
|
)
|
|
|
(2,478
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
60
|
|
|
|
92
|
|
Other income (expense), net
|
|
|
(33
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(975
|
)
|
|
$
|
(2,507
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted-average number of common shares
outstanding
|
|
|
8,181
|
|
|
|
8,138
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements
G-5
CLEAN
DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Restated
|
|
|
|
Note 1)
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(975
|
)
|
|
$
|
(2,507
|
)
|
Adjustments to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
47
|
|
|
|
47
|
|
Compensation expense for options, warrants and stock awards
|
|
|
30
|
|
|
|
206
|
|
Unrealized loss on investments, net
|
|
|
|
|
|
|
72
|
|
Loss on abandonment of patents
|
|
|
3
|
|
|
|
34
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(374
|
)
|
|
|
235
|
|
Inventories, net
|
|
|
172
|
|
|
|
11
|
|
Other current assets and other assets
|
|
|
168
|
|
|
|
12
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
47
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(882
|
)
|
|
|
(1,767
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Sale of investments
|
|
|
1,250
|
|
|
|
|
|
Patent costs
|
|
|
(29
|
)
|
|
|
(24
|
)
|
Purchase of fixed assets
|
|
|
(9
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities
|
|
|
1,212
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from short-term debt
|
|
|
498
|
|
|
|
3,471
|
|
Repayment of short-term debt
|
|
|
(1,291
|
)
|
|
|
(25
|
)
|
Net cash (used for) provided by financing activities
|
|
|
(793
|
)
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(52
|
)
|
|
|
(9
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(515
|
)
|
|
$
|
1,530
|
|
Cash and cash equivalents at beginning of the period
|
|
|
2,772
|
|
|
|
3,976
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$
|
2,257
|
|
|
$
|
5,506
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash activities:
|
|
|
|
|
|
|
|
|
Accumulated amortization of abandoned assets
|
|
$
|
2
|
|
|
$
|
3
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
24
|
|
|
$
|
20
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
G-6
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Note 1.
|
Significant
Accounting Policies
|
Basis of
Presentation:
In this Quarterly Report on
Form 10-Q,
the terms CDT, Clean Diesel,
Company, we, us, or
our mean Clean Diesel Technologies, Inc. and its
wholly-owned subsidiary, Clean Diesel International, LLC.
The accompanying unaudited condensed consolidated financial
statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and
in accordance with accounting principles generally accepted in
the United States of America (GAAP) for interim financial
information. Certain information and note disclosures normally
included in financial statements prepared in accordance with
GAAP have been omitted or condensed. These interim condensed
consolidated financial statements should be read in conjunction
with Clean Diesels consolidated financial statements and
notes thereto included in our Annual Report on
Form 10-K
for the year ended December 31, 2009.
The unaudited condensed consolidated financial statements
reflect all adjustments which, in the opinion of management, are
necessary for a fair statement of the results of operations,
financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring
nature. The results for interim periods are not necessarily
indicative of results which may be expected for any other
interim period or for the full year.
Revision
of Prior Period Amounts:
In preparing its financial statements for the three months ended
March 31, 2010, Clean Diesel identified certain errors
related to accounting for patents. These errors resulted in the
overstatement of Patents, net and the understatement of patent
costs for 2009. In accordance with SEC Staff accounting
Bulletin Nos. 99 and 108 (SAB 99 and
SAB 108), Clean Diesel evaluated these errors and
determined that they were immaterial to the each reporting
period affected and, therefore, amendment of previously filed
reports was not required. However, if the adjustments to correct
the cumulative errors had been recorded in the first quarter
2010, Clean Diesel believes the impact would have been
significant to the quarter ended March 31, 2010 and would
impact comparisons to prior periods. As permitted by
SAB 108, Clean Diesel revised in the current filing and
will revise in the future filings of its quarterly and annual
consolidated financial statements previously reported annual and
quarterly results for 2009 for these immaterial amounts.
The Consolidated Balance Sheet at December 31, 2009 was
revised to reflect the cumulative effect of these errors which
resulted in an increase in Accumulated deficit of $185,000.
Also, in accordance with SAB 108, the Consolidated
Statement of Operations and Consolidated Statement of Cash Flows
have been revised as follows:
Condensed Consolidated Balance Sheet
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustment
|
|
|
Revised
|
|
|
|
(In thousands)
|
|
|
Patents, net
|
|
$
|
1,083
|
|
|
$
|
(185
|
)
|
|
$
|
898
|
|
Total assets
|
|
|
17,432
|
|
|
|
(185
|
)
|
|
|
17,247
|
|
Accumulated deficit
|
|
|
(65,632
|
)
|
|
|
(185
|
)
|
|
|
(65,817
|
)
|
Total stockholders equity
|
|
|
8,763
|
|
|
|
(185
|
)
|
|
|
8,578
|
|
Total liabilities and stockholders equity
|
|
|
17,432
|
|
|
|
(185
|
)
|
|
|
17,247
|
|
G-7
Condensed Consolidated Statement of Operations Three
Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustment
|
|
|
Revised
|
|
|
|
(In thousands)
|
|
|
Patent amortization and other expense
|
|
$
|
35
|
|
|
$
|
34
|
|
|
$
|
69
|
|
Operating costs and expenses
|
|
|
2,790
|
|
|
|
34
|
|
|
|
2,824
|
|
Loss from operations
|
|
|
(2,444
|
)
|
|
|
(34
|
)
|
|
|
(2,478
|
)
|
Net loss
|
|
|
(2,473
|
)
|
|
|
(34
|
)
|
|
|
(2,507
|
)
|
Basic and diluted loss per common share
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
(0.31
|
)
|
Condensed Consolidated Statement of Cash Flows Three
Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustment
|
|
|
Revised
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(2,473
|
)
|
|
$
|
(34
|
)
|
|
$
|
(2,507
|
)
|
Loss on abandonment of patents
|
|
|
|
|
|
|
34
|
|
|
|
34
|
|
Accumulated amortization of abandoned assets
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
Revenue
Recognition:
The Company generates revenue from sales of emission reduction
products including Purifier system hardware;
ARIS®
advanced reagent injection system injectors and dosing systems;
fuel-borne catalysts, including the Platinum
Plus®
fuel-borne catalyst products and concentrate; and license and
royalty fees from the ARIS system and other technologies.
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 grant income,
engineering and development consulting services. Revenue from
technical consulting services is generally recognized and billed
as the services are performed. Revenue from grant income is
recognized when grant income is earned.
Generally, our license agreements are non-exclusive and specify
the geographic territories and classes of diesel engines
covered, such as on-road vehicles, off-road vehicles,
construction, stationary engines, marine and railroad engines.
At the time of the execution of our license agreement, we assign
the right to the licensee to use our patented technologies. The
up-front fees are not subject to refund or adjustment. We
recognize the license fee as revenue at the inception of the
license agreement when we have reasonable assurance that the
technologies transferred have been accepted by the licensee and
collectability of the license fee is reasonably assured. The
nonrefundable up-front fee is in exchange for the culmination of
the earnings process as the Company has accomplished what it
must do to be entitled to the benefits represented by the
revenue. Under our license agreements, there is no significant
obligation for future performance required of the Company. Each
licensee must determine if the rights to our patented
technologies are usable for their business purposes and must
determine the means of use without further involvement by the
Company. In most cases, licensees must make additional
investments to enable the capabilities of our patents, including
significant engineering, sourcing of and assembly of multiple
components. Our obligation to defend valid patents does not
represent an
G-8
additional deliverable to which a portion of an arrangement fee
should be allocated. Defending the patents is generally
consistent with our representation in the license agreement that
such patents are legal and valid.
Valuation
of Accounts Receivable:
Management reviews the creditworthiness of a customer prior to
accepting an initial order. Upon review of the customers
credit application and confirmation of the customers
credit and bank references, management establishes the
customers terms and credit limits. Credit terms for
payment of products are extended to customers in the normal
course of business and no collateral is required. We receive
order acknowledgements from customers confirming their orders
prior to our fulfillment of orders. To determine the allowance
for doubtful accounts receivable which adjusts gross trade
accounts receivable downward to estimated net realizable value,
management considers the ongoing financial stability of the
Companys customers, the aging of accounts receivable
balances, historical losses and recoveries, and general business
trends and existing economic conditions that impact our industry
and customers. In cases where the Company is aware of
circumstances that may impair a specific customers ability
to meet its financial obligations, we record a specific
allowance against amounts due from that customer, and thereby
reduce the net recognized receivable to the amount the Company
reasonably believes will be collected. An account is written off
only after management has determined that all available means of
collection, including legal remedies, are exhausted.
Cost of
Revenue:
Our cost of product sales includes the costs we incur to
formulate our finished products into saleable form for our
customers, including material costs, labor and processing costs
charged to us by our outsourced blenders, installers and other
vendors, packaging costs incurred by our outsourced suppliers,
freight costs to customers and inbound freight charges from our
suppliers. Our inventory is primarily maintained off-site by our
outsourced suppliers. To date, our purchasing, receiving,
inspection and internal transfer costs have been insignificant
and have been included in cost of product sales. Cost of
licensing fees and royalties is zero as there are no incremental
costs associated with the revenue. Cost of consulting and other
revenue includes incremental out of pocket costs to provide
consulting services.
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 twenty years. During the three months ended
March 31, 2010, we capitalized $29,000 of patent costs and
recognized a $3,000 loss on the abandonment of certain patents
and patent applications. Indirect and other patent-related costs
are expensed as incurred. Patent amortization expense for the
three months ended March 31, 2010 and March 31, 2009
was $16,000 and $11,000, respectively. At March 31, 2010
and December 31, 2009, the Companys patents, net of
accumulated amortization, were $908,000 and $898,000,
respectively.
Basic and
Diluted Loss per Common 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 Companys computation
of diluted net loss per share for the three months ended
March 31, 2010 and 2009 does not include common share
equivalents associated with 818,744 and 972,078 options,
respectively, and 407,493 and 424,992 warrants, respectively, as
the result would be anti-dilutive. Further, per share effects of
the 26,667 and 40,000 unvested restricted shares under a stock
award have not been included in the diluted net loss per share
for the three months ended March 31, 2010 and 2009,
respectively, as the result would be anti-dilutive.
G-9
Income
Taxes:
At March 31, 2010, there were no unrecognized tax benefits.
It is the Companys policy to classify in the financial
statements accrued interest and penalties attributable to a tax
position as income taxes.
Utilization of CDTs U.S. federal tax loss
carryforwards for the period prior to December 12, 1995 is
limited as a result of the ownership change in excess of 50%
attributable to the 1995 Fuel-Tech N.V. rights offering to a
maximum annual allowance of $734,500. Utilization of CDTs
U.S. federal tax loss carryforwards for the period after
December 12, 1995 and before December 30, 2006 is
limited as a result of the ownership change in excess of 50%
attributable to the private placement which was effective
December 29, 2006 to a maximum annual allowance of
$2,518,985. Utilization of CDTs tax losses subsequent to
2006 may be limited due to cumulative ownership changes in
any future three-year period.
We file our tax returns as prescribed by the tax laws of the
jurisdictions in which we operate. Our tax years after 2006
remain open to examination by various taxing jurisdictions as
the statute of limitations has not expired.
Selling,
General and Administrative Expense:
Selling, general and administrative expense is summarized as the
following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
620
|
|
|
$
|
1,016
|
|
Non-cash stock-based compensation
|
|
|
30
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits
|
|
|
650
|
|
|
|
1,218
|
|
Professional services
|
|
|
326
|
|
|
|
247
|
|
Travel
|
|
|
51
|
|
|
|
111
|
|
Occupancy
|
|
|
122
|
|
|
|
235
|
|
Sales and marketing expenses
|
|
|
7
|
|
|
|
52
|
|
Depreciation and all other
|
|
|
65
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
$
|
1,221
|
|
|
$
|
1,952
|
|
|
|
|
|
|
|
|
|
|
Aggregate non-cash stock-based compensation charges incurred by
the Company in the three months ended March 31, 2010 and
2009 were $30,000 and $206,000, respectively, (including zero
and $4,000, respectively, in research and development expenses).
Fair
Value of Financial Instruments:
The Companys assets carried at fair value on a recurring
basis are its investments (see Note 2). The investments
have been classified within level 3 in the valuation
hierarchy as their valuation requires substantial judgment and
estimation of factors that are not currently observable in the
market due to the lack of trading in the securities. The
valuation may be revised in future periods as market conditions
evolve.
Certain financial instruments are carried at cost on our
condensed consolidated balance sheets, which approximates fair
value due to their short-term, highly liquid nature. These
instruments include cash and cash equivalents, accounts
receivable, prepaid expenses, accounts payable, customer
deposits, accrued expenses and short-term debt.
Recently
Adopted and Recently Issued Accounting Pronouncements:
In January 2010, the Financial Accounting Standards Board
(FASB) published Accounting Standards Update
(ASU)
2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU
No. 2010-06
clarifies improved disclosure requirements related to fair
G-10
value measurements and disclosures in Overall Subtopic
820-10 of
the FASB Codification. The new disclosures and clarifications of
existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except
for the disclosure about purchases, sales, issuances, and
settlements in the rollforward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years. The adoption of this standard
will not have a material impact on the Companys financial
position and results of operations.
The Companys investments consist of auction rate
securities (ARS) and an auction rate securities
right (ARSR). The Company accounts for its ARS
investments based upon accounting standards that provide for
determination of the appropriate classification of investments.
Available-for-sale
securities are carried at fair value, with unrealized holding
gains and losses, net of tax, reported as a separate component
of stockholders equity. Trading securities are carried at
fair value, with unrealized holding gains and losses included in
other income (expense) on our condensed consolidated statements
of operations.
The Companys ARSR investment is accounted for based upon a
standard that provides a fair value option election that allows
entities to irrevocably elect fair value as the initial and
subsequent measurement attribute for certain assets and
liabilities. Changes in fair value are recognized in earnings as
they occur for those assets or liabilities for which the
election is made. The election is made on an instrument by
instrument basis at initial recognition of an asset or liability
or upon an event that gives rise to a new basis of accounting
for that instrument.
The Companys investments are reported at fair value in
accordance with accounting standards that accomplish the
following key objectives:
|
|
|
|
|
Defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date;
|
|
|
|
Establishes a three-level hierarchy (valuation
hierarchy) for fair value measurements;
|
|
|
|
Requires consideration of the Companys creditworthiness
when valuing liabilities; and
|
|
|
|
Expands disclosures about instruments measured at fair value.
|
The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement
date. A financial instruments categorization within the
valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement. The three levels
of the valuation hierarchy are as follows:
|
|
|
|
|
Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
|
|
|
|
Level 2 inputs to the valuation
methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
|
|
|
|
Level 3 inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.
|
G-11
The Companys investments as of March 31, 2010 and
December 31, 2009 have been classified within level 3
as their valuation requires substantial judgment and estimation
of factors that are not currently observable in the market due
to the lack of trading in the securities. The fair value of the
investments may be revised in future periods as market
conditions evolve. Investments are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Auction rate securities
|
|
$
|
9,461
|
|
|
$
|
10,577
|
|
Auction rate securities right
|
|
|
1,014
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
10,475
|
|
|
$
|
11,725
|
|
Classified as current assets
|
|
|
10,475
|
|
|
|
11,725
|
|
|
|
|
|
|
|
|
|
|
Classified as non-current assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Our ARS are variable-rate debt securities, most of which are
AAA/Aaa rated, that are collateralized by student loans
substantially guaranteed by the U.S. Department of
Education. While the underlying securities have a long-term
nominal maturity, the interest rate is reset through dutch
auctions that are typically held every 28 days. The
contractual maturities of our ARS range from 2027 to 2047.
Auctions for our ARS have failed since February 2008 resulting
in illiquid investments for the Company. Our ARS were purchased
and held through UBS. In October 2008, the Company received an
offer (the Offer) from UBS AG for a put right
permitting us to sell to UBS at par value all ARS previously
purchased from UBS at a future date (any time during a two-year
period beginning June 30, 2010). The Offer also included a
commitment to loan us 75% of the UBS-determined value of the ARS
at any time until the put is exercised. We accepted the Offer on
November 6, 2008. Our right under the Offer is in substance
a put option (with the strike price equal to the par value of
the ARS) which we recorded as an asset, measured at its fair
value, with the resultant gain recognized in our statement of
operations.
For the period through the date the Company accepted the Offer,
the Company classified the ARS as
available-for-sale;
thereafter, the Company transferred the ARS to the trading
category.
In March 2010, UBS purchased one of our ARS instruments at par
value. UBS applied the sale proceeds of $1,250,000 to reduce the
outstanding borrowing under our UBS credit facility (see
Note 4.). This action is pursuant to the terms of the UBS
Offer that grants UBS the right to purchase ARS from our account
at par value plus accrued interest and apply all proceeds to the
outstanding debt. As such, UBS has modified the amount we are
eligible to borrow based upon 75% of the UBS-determined value of
the ARS.
The fair value of the ARS was approximately $9.5 million
(par value of $10.5 million) at March 31, 2010 and
$10.6 million at December 31, 2009. The fair value of
the ARS was determined utilizing a discounted cash flow approach
and market evidence with respect to the ARSs collateral,
ratings and insurance to assess default risk, credit spread risk
and downgrade risk. The Company also recorded the ARSR at an
initial fair value of $1.3 million. The fair value of the
ARSR was based on an approach in which the present value of all
expected future cash flows were subtracted from the current fair
market value of the securities and the resultant value was
calculated as a future value at an interest rate reflective of
counterparty risk. In the three months ended March 31,
2010, we recorded a gain of $134,000 on the ARS and a loss of
$134,000 on the ARSR, resulting in no impact on our results of
operation. In the three months ended March 31, 2009, we
recorded a gain of $34,000 on the ARS and a loss of $106,000 on
the ARSR, resulting in a $72,000 net loss included in other
income (expense) on our condensed consolidated statements of
operations.
Classification of investments as current or non-current is
dependent upon managements intended holding period, the
securitys maturity date and liquidity considerations based
on market conditions. At March 31, 2010 and
December 31, 2009, the Company classified all investments
as current based on managements intention and ability to
liquidate the investments by June 30, 2010.
G-12
The Company will be exposed to credit risk should UBS be unable
to fulfill its commitment under the Offer. In the event that UBS
is unable to perform upon our exercise of the ARS put right on
or after June 30, 2010, we would have to sell the
underlying securities at a discount which would negatively
impact our future cash flows.
Interest income for the three months ended March 31, 2010
and March 31, 2009 was approximately $60,000 and $92,000,
respectively. Accrued interest receivable at March 31, 2010
and December 31, 2009 was approximately $12,000 and $7,000,
respectively.
The table below includes a rollforward of the Companys
investments in ARS and ARSR for the three months ended
March 31, 2010:
|
|
|
|
|
|
|
2010
|
|
|
|
Significant
|
|
|
|
Unobservable
|
|
|
|
Inputs
|
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
|
Fair value at beginning of period
|
|
$
|
11,725
|
|
Purchases
|
|
|
|
|
Sales
|
|
|
(1,250
|
)
|
Transfers (out) in
|
|
|
|
|
Unrealized gain (loss) included in statement of operations
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
$
|
10,475
|
|
|
|
|
|
|
Change in unrealized gain (loss)
|
|
$
|
|
|
|
|
|
|
|
Inventories are stated at the lower of cost or market with cost
determined using the average cost method. Inventories consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Finished Platinum Plus fuel-borne catalyst
|
|
$
|
185
|
|
|
$
|
85
|
|
Platinum concentrate/metal
|
|
|
262
|
|
|
|
449
|
|
Hardware
|
|
|
443
|
|
|
|
587
|
|
Other
|
|
|
67
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
957
|
|
|
$
|
1,132
|
|
Less: inventory reserves
|
|
|
(70
|
)
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
887
|
|
|
$
|
1,059
|
|
|
|
|
|
|
|
|
|
|
On July 25, 2008, the Company borrowed $3.0 million
from the demand loan facility with UBS collateralized by our
ARS, a facility we had arranged in May 2008. Management
determined to draw down the entire facility as a matter of
financial prudence to secure available cash. The loan facility
was available for our working capital purposes and required that
we continue to meet certain collateral maintenance requirements,
such that our outstanding borrowings could not exceed 50% of the
value of our ARS as determined by the lender. No facility fee
was required. Borrowings bore interest at a floating interest
rate per annum equal to the sum of the prevailing daily
30-day Libor
plus 25 basis points.
In November 2008, the Company accepted the Offer from UBS AG
(see Note 2). UBS committed to loan us 75% of the value of
the ARS as determined by UBS at any time until the ARSR is
exercised. We applied
G-13
for the loan which UBS committed would be on a no net cost basis
to the Company. UBS approved our credit application on
January 14, 2009 and approved a $6.5 million credit
facility pursuant to its Offer. On September 4, 2009, we
arranged an increase of the credit line to $7.7 million.
In March 2010, UBS purchased one of our ARS instruments at par
value. UBS applied the sale proceeds of $1,250,000 to reduce the
outstanding debt. This action was pursuant to the terms of the
UBS Offer that grants UBS the right to purchase ARS from our
account at par value plus accrued interest and apply all
proceeds to the outstanding debt. As such, UBS modified the
amount we are eligible to borrow based upon 75% of the
UBS-determined value of the ARS to approximately
$6.9 million.
The outstanding balance of the short-term debt at March 31,
2010 and December 31, 2009 was $6.9 million and
$7.7 million, respectively.
Our ARS serve as collateral for the loan which is payable upon
demand. If UBS should demand repayment prior to the commencement
of the exercise period for our ARSR (June 30, 2010), UBS
will arrange alternative financing with substantially the same
terms and conditions. If alternative financing cannot be
established, UBS will purchase our pledged ARS at par value.
Interest is calculated at the weighted average rate of interest
we earn on the ARS. Interest is payable monthly. Interest
expense for the three months ended March 31, 2010 and 2009
was approximately $27,000 and $20,000, respectively. Accrued
interest payable at March 31, 2010 was approximately $3,000.
|
|
Note 5.
|
Stockholders
Equity
|
In March 2009, we issued 40,000 restricted shares of our common
stock under our Incentive Plan (see Note 6).
In the first three months of 2010, there was no activity in the
Companys warrants. At March 31, 2010, the Company had
407,493 warrants outstanding, exercisable at a weighted-average
exercise price of $11.51 with a weighted-average remaining life
of 2.2 years.
|
|
Note 6.
|
Stock-Based
Compensation
|
The Company maintains a stock award plan approved by its
stockholders, the 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 ten years after date of grant. Participants in
the Plan may include the Companys 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 Companys outstanding common
stock less the then outstanding awards, subject to sufficient
authorized shares.
Share-based compensation cost recognized under ASC 718 was
approximately $30,000 and $206,000 for the three months ended
March 31, 2010 and 2009, respectively. As of March 31,
2010, there was approximately $0.1 million of unrecognized
compensation cost related to stock options and restricted shares
granted under the Plan. The cost is expected to be recognized
over a weighted-average period of 0.7 years.
G-14
The following table summarizes information concerning stock
options outstanding including the related transactions under the
Plan for the three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares*
|
|
|
Price
|
|
|
Term in Years
|
|
|
Value
|
|
|
Options Outstanding as of December 31, 2009
|
|
|
876,410
|
|
|
$
|
10.40
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(57,666
|
)
|
|
$
|
12.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of March 31, 2010
|
|
|
818,744
|
|
|
$
|
10.27
|
|
|
|
4.2
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of March 31, 2010
|
|
|
781,744
|
|
|
$
|
10.58
|
|
|
|
3.9
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Table does not include 40,000 shares issued in 2009 as a
restricted stock award under the Plan. |
The aggregate intrinsic value (market value of stock less option
exercise price) in the preceding table represents the total
pretax intrinsic value, based on the Companys closing
stock price on March 31, 2010, which would have been
received by the holders had all holders of awards and options in
the money exercised their options as of that date.
No stock options were exercised in the three months ended
March 31, 2010 and 2009.
In 2009, the board of directors awarded 40,000 shares to
the newly-elected Chief Executive Officer at an average market
price of $1.625 per share, representing the high and low market
price on the date of award, March 30, 2009. These shares
vest as to one-third of the total on each of February 10,
2010, 2011 and 2012. The total fair value of the award was
$65,000 which is being charged to expense over the vesting
period.
The Company estimates the fair value of stock options using a
Black-Scholes option pricing model. Key input assumptions used
to estimate the fair value of stock options include the expected
term, expected volatility of the Companys 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 Companys stock on the U.S. NASDAQ
Capital Market (the
Over-the-Counter
market prior to October 3, 2007) 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. ASC 718 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 Companys historical rates of forfeitures.
ASC 718 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.
|
|
Note 7.
|
Commitments
and Contingencies
|
Legal
Proceedings
From time to time, the Company is involved in legal proceedings
in the ordinary course of its business. The litigation process
is inherently uncertain, and the Company cannot guarantee that
the outcome of existing proceedings will be favorable for the
Company or that they will not be material to the Companys
business, results of operations or financial position. However,
the Company does not currently believe these matters will have a
material adverse effect on its business, results or financial
position.
G-15
|
|
Note 8.
|
Related
Party Transactions
|
Mr. Park, our Chairman, is also a principal and chairman of
Innovator Capital Limited, a financial services company based in
London, England, which firm has provided services to the
Company. On November 20, 2009, the Company entered into an
engagement letter with Innovator to provide financing and merger
and acquisition services (Engagement Letter). The
Engagement Letter had an initial three month term during which
Innovator would (i) act for the Company in arranging a
private placement financing of $3.0 million to
$4.0 million from the sale of the Companys common
stock and warrants and (ii) assist the Company in merger
and acquisition activities. Effective February 20, 2010,
the Company extended the term of the Engagement Letter to
June 30, 2010 and revised the minimum and maximum range of
private placement financing to $1.0 million to
$1.5 million.
For its financing services, Innovator will receive (i) a
placing commission of five percent (5%) of all monies received
by the Company and (ii) financing warrants to acquire
shares of common stock of the Company equal in value to fifteen
percent (15%) of the total gross proceeds received by the
Company in the financing, such financing warrants to be
exercisable at a price equal to a ten percent (10%) premium to
the price per share of common stock in the financing. Issuance
of the financing warrants is contingent on the stockholders of
the Company authorizing additional common stock.
For its merger and acquisition services, Innovator will receive
monthly retainer fees of $10,000 and success fees as a
percentage of transaction value of five percent (5%) on the
first $10.0 million, four percent (4%) on the next
$3.0 million, three percent (3%) on the next
$2.0 million, and two percent (2%) on amounts above
$15.0 million in connection with possible merger and
acquisition transactions. Success fees are payable in cash or
shares or a combination of cash or shares as determined by the
Board of the Company.
The Engagement Letter further provides that retainer fees may be
deducted from success fees, that Innovator shall be reimbursed
for its ordinary and necessary out of pocket expenses, that the
Engagement Letter is subject to Delaware law, and that disputes
between the parties are subject to arbitration.
Selling, general and administrative expenses for the three
months ended March 31, 2010 include $30,000 related to
services rendered by Innovator Capital under the terms of the
Engagement Letter.
Effective January 27, 2010, we engaged David F. Merrion, a
director of the Company, to perform consulting services for us
as an expert witness in an administrative proceeding related to
a patent application with respect to diesel engine technology.
Mr. Merrion will be paid for his services, as requested
from time to time by the Company, at the rate of $300 per hour
or a daily maximum of $3,000 per day. In the three months ended
March 31, 2010, the Company incurred costs of approximately
$20,000 under this agreement.
|
|
Note 9.
|
Significant
Customers
|
For the three months ended March 31, 2010 and 2009, revenue
derived from certain customers comprised 10% or more of our
consolidated revenue as set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2010
|
|
2009
|
|
Customer A
|
|
|
53.9
|
%
|
|
|
*
|
|
Customer B
|
|
|
*
|
|
|
|
38.3
|
%
|
|
|
|
* |
|
Represents less than 10% revenue for that customer in the
applicable period. There were no other customers that
represented 10% or more of revenue for the periods indicated. |
At March 31, 2010, Clean Diesel had two customers (one
customer is not included in the table above) that represented
approximately 59.3% of its gross accounts receivable balance.
G-16
|
|
Note 10.
|
Comprehensive
Loss
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(975
|
)
|
|
$
|
(2,507
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(54
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(1,029
|
)
|
|
$
|
(2,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Note 11.
|
Geographic
Information
|
CDT sells its products and licenses its technologies throughout
the world. A geographic distribution of revenue consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
U.S.
|
|
$
|
138
|
|
|
$
|
221
|
|
U.K./Europe
|
|
|
518
|
|
|
|
97
|
|
Asia
|
|
|
27
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
683
|
|
|
$
|
346
|
|
|
|
|
|
|
|
|
|
|
The Company has patent coverage in North and South America,
Europe, Asia, Africa and Australia. As of March 31, 2010
and December 31, 2009, the Companys assets comprise
the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
U.S.
|
|
$
|
13,771
|
|
|
$
|
15,551
|
|
Foreign
|
|
|
1,731
|
|
|
|
1,696
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,502
|
|
|
$
|
17,247
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12.
|
Severance
Charges
|
On February 10, 2009, the Companys Board of Directors
elected Michael L. Asmussen as President and Chief Executive
Officer replacing Dr. Bernhard Steiner. As a consequence of
his termination of employment, Dr. Steiner is entitled to
salary of approximately $315,445 (EUR 241,500) per annum until
September 13, 2010, the remainder of his contract term,
along with specified expenses not to exceed an aggregate of
approximately $4,300, to be paid in monthly installments. During
the three months ended March 31, 2009, the Company
recognized a severance charge of $510,000 for this obligation.
On August 4, 2009, the Board of Directors adopted a plan to
implement a company-wide reduction in force effective
August 7, 2009. In accordance with ASC 420, Exit or
Disposal Cost Obligations, the Company recognized approximately
$448,000 in severance charges in the third quarter of 2009.
During the three months ended March 31, 2010, the Company
reversed $103,000 of its severance accrual to recognize a
reduction in the Companys obligations under these
severance arrangements.
G-17
A summary of the activity in the severance accrual is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2009
|
|
$
|
389
|
|
Provisions (Reversals)
|
|
|
(103
|
)
|
Payments
|
|
|
(146
|
)
|
|
|
|
|
|
Balance at March 31, 2010
|
|
$
|
140
|
|
|
|
|
|
|
|
|
Note 13.
|
Subsequent
Events
|
Effective April 19, 2010, our Board of Directors terminated
the employment of Ann B. Ruple and her appointment as Vice
President, Treasurer and Chief Financial Officer. Also on the
same date, our Board of Directors appointed John B. Wynne, 48,
as Vice President, Treasurer and Interim Chief Financial Officer
to be effective on April 23, 2010. Mr. Wynne has been
a partner of Tatum, LLC since 2005. Tatum is an executive
services firm and is furnishing to Clean Diesel the services of
Mr. Wynne as Interim Chief Financial Officer.
In May 2010, UBS purchased one of our ARS instruments at par
value in the amount of $3.5 million and applied the
proceeds to reduce the outstanding borrowing under our UBS
credit facility (See Note 4). This action is pursuant to
the terms of the UBS Offer that grants UBS the right to purchase
ARS from our account at par value plus accrued interest and
apply all proceeds to the outstanding debt. As such, UBS has
modified the amount we are eligible to borrow based upon 75% of
the UBS-determined value of the ARS. On May 6, 2010, UBS
advised us that we have approximately $1.2 million available
under our UBS credit facility.
Effective May 10, 2010, Mr. John A. de Havilland
resigned as a director of the Company.
On May 13, 2010, the Company entered into an Agreement and
Plan of Merger (the Merger Agreement) with Catalytic
Solutions, Inc. (CSI) (AIM: CTS and CTSU), a global
manufacturer and distributor of emissions control systems and
products based in Ventura, CA. The proposed merger is a
transaction that will result in the combination of the
businesses of Clean Diesel and CSI, whereby CSI will become a
wholly-owned subsidiary of Clean Diesel (the
Merger). For accounting purposes, CSI is considered
to be acquiring the Company. Under the terms of the Merger
Agreement:
|
|
|
|
|
In exchange for their shares of CSI common stock, the
shareholders of CSI will receive shares, and warrants to
purchase shares, of Clean Diesel common stock. CSI shareholders
will receive such numbers of Clean Diesel common stock so that
after the Merger, CSI will own approximately 60% of the
outstanding shares of Clean Diesel common stock, subject to
adjustment for the cash position, as defined in the Merger
Agreement, of CSI and Clean Diesel, at the earlier of closing or
June 30, 2010. In addition, CSI shareholders will receive
warrants to purchase up to 3 million shares of Clean Diesel
common stock.
|
|
|
|
The Merger is conditional among other matters on obtaining Clean
Diesel stockholder approval and CSI shareholder approval and
also a number of further closing requirements including that
Clean Diesel has $4.5 million and CSI has $2.0 million
in cash or equivalent at the time of the Merger.
|
|
|
|
The Company will amend its certificate of incorporation to
effect a 3 for 1 reverse stock split.
|
In connection with the proposed merger, the Company in a
Regulation S offering, has received commitment letters from
existing stockholders to raise approximately $1.0 million
for the issuance of additional shares of common stock and
warrants.
In connection with the Merger Agreement, if successful,
Innovator Capital, an investment banking firm described in
Note 8 is estimated to receive approximately $821,000 as
compensation for its services.
The Merger Agreement may be terminated at any time prior to the
effective time of the Merger by the mutual written consent. The
Merger Agreement obligates to pay a termination fee of $300,000
in cash plus reasonable costs and expenses not to exceed
$350,000, in the aggregate, to the counter party if either the
Company or CSI fails to approve the merger under conditions
stipulated in the Merger Agreement.
Through May 13, 2010, the Company has incurred $215,000
merger related expenses excluding investment banking fee
described above.
G-18
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
Statements in this Quarterly Report on
Form 10-Q
that are not historical facts, so-called forward-looking
statements, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that all forward-looking
statements involve risks and uncertainties, including those
detailed in the Companys filings with the Securities and
Exchange Commission. See Item 1A, Risk Factors,
and Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2009.
Results
of Operations
Three
Months ended March 31, 2010 Compared to Three Months ended
March 31, 2009
Total revenue in the three months ended March 31, 2010 was
$683,000 compared to $346,000 in the three months ended
March 31, 2009, an increase of $337,000, or 97.4%,
reflecting increased traction in the Companys attempt to
establish itself in the retrofit space. Operating revenue for
the three months ended March 31, 2010 consisted of
approximately 89.6% in product sales, 4.8% in technology
licensing fees and royalties, and 5.6% in grant revenue. Of our
operating revenue for the three months ended March 31,
2009, approximately 90.2% was from product sales and 9.8% was
from technology licensing fees and royalties. 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.
Product sales were $612,000 in the first quarter of 2010
compared to $312,000 in the same quarter of 2009, an increase of
$300,000. This increase in product sales was attributable
primarily to higher demand for our Platinum Plus Purifier
Systems, a product comprised of a diesel particulate filter
along with our Platinum Plus fuel-borne catalyst. We received
approval in October 2007 from Transport for London to supply our
Purifier Systems as an emission reduction solution that meets
the standards established for the London Low Emission Zone. The
deadlines for compliance with the London Low Emission Zone will
be phased in over time for different classifications of
vehicles. February 2008 was the compliance deadline for vehicles
greater than 12 metric tons and July 2008 was the compliance
deadline for motor coaches and vehicles greater than 3.5 metric
tons. The next compliance deadlines for the London Low Emission
Zone are in 2010 and 2012, although the Mayor of London has
proposed suspension of the 2010 deadline. The sales of our
Purifier Systems for compliance with the requirements of the
London Low Emission Zone provide us with recurring revenue from
use of our Platinum Plus fuel-borne catalyst that enables the
regeneration of the diesel particulate filter. We believe we
will have the opportunity to expand this business opportunity as
we build the infrastructure required to address additional low
emission zones throughout Europe and elsewhere.
Our technology licensing fees and royalties were essentially
flat year over year with $33,000 in the three months ended
March 31, 2010 compared to $34,000 in the same quarter of
2009. These revenues are primarily attributable to royalties
related to our
ARIS®
technologies. While we have not executed new technology license
agreements in 2010, we continue our efforts to consummate
technology license agreements with manufacturers and component
suppliers for the use of our ARIS technologies for control of
oxides of nitrogen (NOx) using our selective catalytic reduction
(SCR) emission control, the combination of exhaust gas
recirculation (EGR) with SCR technologies, and hydrocarbon
injection for lean NOx traps, NOx catalysts and diesel
particulate filter regeneration.
Our total cost of revenue was $465,000 in the three month period
ended March 31, 2010 compared to $234,000 in the three
month period ended March 31, 2009. The increase in our cost
of sales is due to higher product sales volume. Our gross profit
as a percentage of revenue was 31.9% and 32.4% for the three
month periods ended March 31, 2010 and 2009, respectively.
Our cost of revenue product sales includes the costs
we incur to formulate our finished products into saleable form
for our customers, including material costs, labor and
processing costs charged to us by our outsourced blenders,
installers and other vendors, packaging costs incurred by our
outsourced suppliers, freight
G-19
costs to customers and inbound freight charges from our
suppliers. Our inventory is primarily maintained off-site by our
outsourced suppliers. To date, our purchasing, receiving,
inspection and internal transfer costs have been insignificant
and have been included in cost of revenue product
sales. In addition, in 2009 the costs of our warehouse of
approximately $21,000 per year were included in selling, general
and administrative expenses. Our gross margins may not be
comparable to those of other entities, because some entities
include all of the costs related to their distribution network
in cost of revenue and others like us exclude a portion of such
costs from gross margin, including such costs instead within
operating expenses. Cost of revenue licensing fees
and royalties is zero as there are no incremental costs
associated with the revenue. Cost of consulting and other
revenue includes incremental out of pocket costs to provide
consulting services.
Selling, general and administrative expenses were $1,221,000 in
the three months ended March 31, 2010 compared to
$1,952,000 in the comparable 2009 period, a decrease of
$731,000, or 37.4%. The decrease in selling, general and
administrative costs is primarily attributable to lower
compensation and benefits, travel, rent and related occupancy
expenses. Our cost control initiatives to strictly control
spending are ongoing and improvements are apparent in our
current operating costs. Selling, general and administrative
expenses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
620
|
|
|
$
|
1,016
|
|
Non-cash stock-based compensation
|
|
|
30
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits
|
|
|
650
|
|
|
|
1,218
|
|
Professional services
|
|
|
326
|
|
|
|
247
|
|
Travel
|
|
|
51
|
|
|
|
111
|
|
Occupancy
|
|
|
122
|
|
|
|
235
|
|
Sales and marketing expenses
|
|
|
7
|
|
|
|
52
|
|
Depreciation and all other
|
|
|
65
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
$
|
1,221
|
|
|
$
|
1,952
|
|
|
|
|
|
|
|
|
|
|
Excluding the non-cash stock-based charges, compensation and
benefit expenses were $620,000 for the three months ended
March 31, 2010 compared to $1,016,000 in the comparable
prior year period. This decrease of $396,000, or 39.0%, is due
primarily to the reduction in force implemented effective
August 7, 2009. The reduction in non-cash stock-based
compensation reflects a reduction in the Companys
workforce and related issuance of stock-based awards.
Research and development expenses were $53,000 in the three
months ended March 31, 2010 compared to $59,000 in the
three months ended March 31, 2009, a decrease of $6,000, or
10.2%. Presently, we are working to overcome gaps in our
technology and product portfolios brought about by volatile
markets and past development setbacks. In addition to
development of new products, our 2010 projects include field
testing of fuel economy and emission control technologies. Total
research and development expenses for the three months ended
March 31, 2009 included $4,000 of non-cash charges for
stock-based compensation.
The U.S. Environmental Protection Agency (EPA) verifications
were withdrawn on two of our products in January 2009 because
available test results were not accepted by EPA as meeting new
emissions testing requirements for NO2 measurement. Presently,
we do not intend to seek verification of these products. We have
no assurance of the extent of additional testing that may be
required by EPA or whether it will be adequate to remove any
remaining concern the EPA may have regarding use of our
fuel-borne catalyst.
We believe that it is an essential requirement of the
U.S. retrofit market that emissions control products and
systems are verified under the U.S. EPA
and/or the
California Air Resources Board (CARB) protocols in order to
qualify for funding from EPA
and/or CARB
programs. Funding for these emissions control products and
systems is generally limited to those products and technologies
that have already been verified.
G-20
Verification is also useful for commercial acceptability. We
believe that the lack of CARB verification will result in a
shift of U.S. retrofit revenue into future periods. We
expect to have CARB verification in the fourth quarter of 2010.
We may have the opportunity to obtain a conditional CARB
verification before all of our testing has been concluded.
Without full CARB verification, our U.S. retrofit
opportunities are limited although certain jurisdictions have
been satisfied with other of our certifications. We received the
EPA 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. In 2007, we received accreditation for our Purifier
System, our Platinum Plus fuel-borne catalyst used with a diesel
particulate filter, to be sold for compliance with the emission
reduction requirements established for the London LEZ. In 2009,
the German Federal Environment Agency, the Umweltbundesamt
(UBA), issued a non disapproval for sale of Platinum
Plus fuel-borne catalyst for use in conjunction with up to 2,000
diesel particulate filters in Germany; further work will be
required to lift fully the 2,000 unit restriction.
In addition to emphasis on the global retrofit market, we
continued to focus on fuel economy opportunities in the
U.S. in non-road sectors, including rail, marine, mining
and construction, and expect continued focus on these sectors by
our distributors rather than through our direct selling efforts.
Our Platinum Plus fuel-borne catalyst is 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 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. Platinum Plus is used
to improve combustion which acts to 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 improved fuel economy. 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. 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 $1.75 per
U.S. gallon.
Patent amortization and other patent related expense was $49,000
in the three months ended March 31, 2010 compared to
$69,000 in the same prior year period, a decrease of $20,000.
The 2009 expense includes the write-off of $34,000 in
capitalized costs related to the abandonment of certain patents
and patent applications not material to our business, the
continued maintenance of which was judged by management to be
uneconomic.
At each reporting period, the Company evaluates the events or
changes in circumstances that may indicate that patents are not
recoverable. The types of events and changes in circumstances
that would indicate the carrying value of our patents is not
recoverable and therefore, impairment testing would be triggered
include the following: permanent elimination of mandated
compliance with emission reduction standards; reduction in
overall market prevalence of diesel engines; obsolescence of our
technologies due to new discoveries and inventions; and an
adverse action or assessment against our technologies.
Our technology is comprised of patents, patent applications,
trade or service marks, data and know-how. We consider the life
of our technologies to be commensurate with the remaining term
of our U.S. and corresponding foreign patents. Our patents
have expiration dates ranging from 2010 through 2026, with the
majority of the material patents upon which we rely expiring in
2018 and beyond. We believe that we have sufficient patent
coverage surrounding our core patents that effectively serves to
provide us longer proprietary
G-21
protection. Our patents comprise technologies that have been
asserted as the technologies of choice by various automotive
original equipment manufacturers (OEMs) to meet mandates to
comply with upcoming regulatory requirements that go into effect
starting in 2010 (EPA 2010). We monitor evolving technologies in
the automotive and other applicable industries to evaluate
obsolescence of any of our patents.
Although we have seen certain suspensions and delays in mandated
emissions requirements, we expect sufficient revenue over the
remaining life of the underlying patents to recover the carrying
value of our patents. We believe the emission reduction mandates
will be phased in over time so that despite volatility in our
revenue streams, we should realize the expected revenue from our
patents. Our intellectual property strategy has been to build
upon our base of core technology with newer advanced technology
patents developed 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 our core patents.
Interest income was $60,000 in the three months ended
March 31, 2010 compared to $92,000 in the three months
ended March 31, 2009, a decrease of $32,000, or 34.8%,
principally due to lower invested balances.
Other (expense) was ($33,000) in the three months ended
March 31, 2010 compared to ($121,000) in the comparable
2009 period, a decrease of $88,000, which was primarily
attributable to unrealized losses recognized on the fair value
of our investments in the first quarter of 2009. The 2010 other
income (expense) includes foreign currency transaction losses,
net of gains of ($6,000), and interest expense of ($27,000).
Liquidity
and Capital Resources
We require capital resources and liquidity to fund our global
development and for working capital. Our working capital
requirements vary from period to period depending upon
manufacturing volumes, the timing of deliveries and payment
cycles of our customers. At March 31, 2010 and
December 31, 2009, we had cash and cash equivalents of
$2.3 million and $2.8 million, respectively, to use
for our operations. In addition, we have short-term investments
net of outstanding borrowings with UBS of $3.6 million,
which we expect to exercise our put right with UBS on
June 30, 2010. Our working capital was $6.3 million at
March 31, 2010 compared to $7.3 million at
December 31, 2009 reflecting a decrease of
$1.0 million primarily attributable to our operating losses
during the period.
Net cash used for operating activities was $0.9 million in
the three months ended March 31, 2010 and was used
primarily to fund the net loss of $1.0 million, adjusted
for non-cash items. Included in the non-cash items was
stock-based compensation expense of $30,000 and depreciation and
amortization of $47,000.
Accounts receivable, net increased to $0.5 million at
March 31, 2010 from $0.1 million at December 31,
2009 due primarily to increased sales activity. Inventories, net
decreased $172,000, reflecting increased product sales in the
retrofit-market. Other current assets and other assets decreased
$168,000 at March 31, 2010 from the December 31, 2009
levels, principally reflecting collections of other receivables.
Our accounts payable, accrued expenses and other liabilities
decreased at March 31, 2010 compared to December 31,
2009 reflecting increases in accounts payable that were more
than offset by decreases in accrued expenses and other
liabilities. The decrease in accrued expenses is principally due
to the payment and adjustment of severance liabilities.
Net cash provided by investing activities was $1.2 million
in the three months ended March 31, 2010, principally
reflecting the sale of $1.25 million of our ARS
investments. We also used cash for investments in our patents,
including patent applications in foreign jurisdictions. We
expect to continue to invest in our intellectual property
portfolio.
Cash used in financing activities was approximately
$0.8 million in the three months ended March 31, 2010
and was attributable to net repayment of borrowings under our
demand loan facility with UBS.
In October 2008, the Company received an offer (the
Offer) from UBS for a put right permitting us to
sell to UBS at par value all ARS previously purchased from UBS
at a future date (any time during a two-year period beginning
June 30, 2010). The Offer also included a commitment to
loan us 75% of the UBS-
G-22
determined value of the ARS at any time until the put is
exercised. The Offer was non-transferable and expired on
November 14, 2008. On November 6, 2008, the Company
accepted the Offer. The Companys right under the Offer is
in substance a put option (with the strike price equal to the
par value of the ARS) which it recorded as an asset, measured at
its fair value. The Company uses an independent third party
valuation firm to assist it with its determination of fair
values of the ARS and ARSR.
At March 31, 2010 our investments are recorded at fair
value and comprise ARS and an ARSR and together totaled
$10.5 million. At March 31, 2010 and December 31,
2009, we held approximately $9.5 million and
$10.6 million ($11.7 million par value), respectively,
in investments in ARS collateralized by student loans, primarily
AAA/Aaa-rated, which are substantially guaranteed by the
U.S. Department of Education and approximately
$1.0 million and $1.1 million, respectively, in
investment in ARSR. Starting on February 15, 2008 and
continuing to date, the Company has experienced difficulty in
effecting sales of its ARS because of the failure of the auction
mechanism as a result of sell orders exceeding buy orders.
Liquidity for these ARS is typically provided by an auction
process that resets the applicable interest rate at
pre-determined intervals. These failed auctions represent
liquidity risk exposure and are not defaults or credit events.
Holders of the securities continue to receive interest on the
investments, and the securities continue to be auctioned at the
pre-determined intervals (typically every 28 days) until
the auction succeeds, the issuer calls the securities, or they
mature.
Classification of investments as current or non-current is
dependent upon managements intended holding period, the
securitys maturity date and liquidity considerations based
on market conditions. At March 31, 2010 and
December 31, 2009, the Company classified all investments
as current based on managements intention and ability to
liquidate the investments within the next twelve months through
exercise of its put right with UBS.
The Company will be exposed to credit risk should UBS be unable
to fulfill its commitment under the Offer. In the event that UBS
is unable to perform upon our exercise of the ARS put right on
or after June 30, 2010, we would have to sell the
underlying securities at a discount which would negatively
impact our future cash flows.
Our management believes that based upon the Companys cash
and cash equivalents and investments at March 31, 2010, the
current lack of liquidity in the credit and capital markets will
not have a material impact on our liquidity, cash flow,
financial flexibility or our ability to fund our operations for
at least the next twelve months.
We have evaluated our cash burn and determined that we have
sufficient resources to fund operations for the next twelve
months. We continue to pay our obligations in the ordinary
course as obligations become due. We continue the efforts begun
in 2009 to contain our costs and eliminate those costs that are
redundant or considered unnecessary with strict controls over
all discretionary spending and travel costs. We have
significantly reduced our ongoing cash requirements by
curtailment of expenses and a 44% reduction in our work force,
effective August 7, 2009. We have also restructured the
Company so that each employee will manage resources based upon
data-driven revenue expectations, and we have established
processes to ensure organizational and individual discipline and
accountability.
We have incurred losses since inception aggregating
$66.8 million, which amount includes $4.8 million of
non-cash preferred stock dividends. We expect to incur losses
through 2010. 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
technology licensing 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. Historically, we have
been primarily dependent upon funding from new and existing
stockholders. The Company can provide no assurance that it will
be successful in any future financing effort to obtain the
necessary working capital to support operations or if such
financing is available, that it will be on acceptable terms.
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
G-23
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.
No dividends have been paid on our common stock and we do not
anticipate paying cash dividends in the foreseeable future.
Capital
Expenditures
As of March 31, 2010, we had no commitments for capital
expenditures and no material commitments are anticipated in the
near future.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Not required for smaller reporting companies.
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
The Companys management, with the participation of the
Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of the Companys disclosure controls and
procedures (as defined in
Rule 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this Quarterly Report on
Form 10-Q.
Based upon that evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that Clean Diesel
had effective disclosure controls and procedures (as defined in
Rule 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this Quarterly Report on
Form 10-Q.
Changes
in Internal Controls
In connection with the evaluation by the Companys Chief
Executive Officer and Chief Financial Officer of internal
control over financial reporting that occurred during the
Companys last fiscal quarter, no change in the
Companys internal control over financial reporting was
identified that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over
financial reporting.
PART II.
OTHER INFORMATION
(a) Exhibits
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|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
*
|
|
Amendment of Engagement Letter between Clean Diesel
Technologies, Inc. and Innovator Capital Limited as of
April 21, 2010.
|
|
|
**
|
|
Interim Services Agreement between Clean Diesel Technologies,
Inc. and SFN Professional Services LLC d/b/a Tatum as of
April 23, 2010.
|
|
31(a)
|
|
|
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)
under the Exchange Act.
|
|
31(b)
|
|
|
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)
under the Exchange Act.
|
|
32
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.
|
|
|
|
* |
|
Previously filed as Exhibit 10(a) to
Form 10-Q
filed May 14, 2010 and incorporated by reference. |
|
** |
|
Previously filed as Exhibit 10(b) to
Form 10-Q
filed May 14, 2010 and incorporated by reference. |
G-24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC.
(Registrant)
|
|
|
|
By:
|
/s/ Michael
L. Asmussen
|
Michael L. Asmussen
Director, President and
Chief Executive Officer
Date: May 14, 2010
John B. Wynne
Interim Chief Financial Officer,
Vice President and Treasurer
Date: May 14, 2010
G-25
Annex H
Draft
Certificate Of Amendment
Of
Third Amended And
Restated
Articles Of
Incorporation
Of
Catalytic Solutions,
Inc.
The undersigned hereby certify that:
A. They are the Chief Executive Officer and the Secretary,
respectively, of
Catalytic Solutions,
Inc., a California corporation.
B. Article III of the corporations Third Amended
and Restated Articles of Incorporation is amended and restated
in its entirety to read as follows:
1. Classes of Stock. This
corporation is authorized to issue two classes of stock to be
designated, respectively, Class A Common Stock
and Class B Common Stock. The Class A
Common Stock and Class B Common Stock are hereinafter
referred to collectively as Common Stock. The
total number of shares of stock that the corporation is
authorized to issue is
[ ]
( )
shares. One Hundred Forty Eight Million Five Hundred Thousand
(148,500,000) shares shall be Class A Common Stock, and
[ ]
( )
shares shall be Class B Common Stock. As of the filing date
of these Third Amended and Restated Articles of Incorporation,
the corporation has no authorized, issued or outstanding shares
of preferred stock, all shares of previously authorized and
issued preferred stock having converted into shares of
Class A Common Stock automatically upon the corporation
closing a Qualified Public Offering (as such term was defined in
the corporations Second Amended and Restated Articles of
Incorporation).
2. Common Stock. Subject to
Article IV of these Third Amended and Restated Articles of
Incorporation, the Board of Directors of the corporation may
authorize the issuance of shares of Class A Common Stock
and shares of Class B Common Stock from time to time.
Shares of Common Stock that are redeemed, purchased or otherwise
acquired by the corporation may be reissued except as otherwise
provided by law.
(a) Dividends and
Distributions. The holders of shares of
Common Stock shall be entitled to receive such dividends,
payable in cash or otherwise, as may be declared thereon by the
Board of Directors from time to time out of assets or funds of
the corporation legally available therefor, provided that
the holders of shares of Class A Common Stock and shares of
Class B Common Stock shall be entitled to share equally, on
a per share basis, in such dividends, subject to the limitations
described below. If the corporation shall in any manner
subdivide or combine the outstanding shares of Class A
Common Stock or Class B Common Stock, the outstanding
shares of the other such series of Common Stock shall be
proportionately subdivided or combined in the same manner and on
the same basis as the outstanding shares of Class A Common
Stock or Class B Common Stock, as the case may be, which
have been subdivided or combined. Subject to the prior rights of
holders of all classes of stock at that time outstanding having
prior rights as to liquidation, upon a liquidation, dissolution
or winding up of the corporation, the assets and funds of the
corporation legally available for distribution shall be
distributed ratably among the holders of Class A common
stock and Class B common stock in proportion to the amount
of such stock owned by each such holder.
(b) Voting Rights. The holders of
shares of Class A Common Stock and the holders of shares of
Class B Common Stock shall vote together as one class on
all matters submitted to a vote of shareholders of the
corporation, except as otherwise required by applicable law.
Each share of Class A Common Stock and Class B Common
Stock shall be entitle the holder thereof to one (1) vote
on all matters submitted to a vote of the shareholders of the
corporation.
C. The foregoing amendment has been approved by the Board
of Directors of the corporation.
H-1
D. The foregoing amendment has been approved by the
required vote of shareholders of the corporation in accordance
with Sections 902 and 903 of the General Corporation Law of
California. The total number of outstanding shares entitled to
vote with respect to the foregoing amendment at the time that
shareholder approval was obtained was 69,761,902 shares of
Common Stock. The number of shares voting in favor of the
foregoing amendment equaled or exceeded the vote required, such
required vote being more than 50% of the outstanding shares of
Common Stock.
The undersigned further declare under penalty of perjury under
the laws of the State of California that the matters set forth
in this certificate are true and correct of our own knowledge.
,
Chief Executive Officer
,
Secretary
Dated:
[ ]
H-2
Annex I
FORM OF
COMPANY NON-TRANSFERABLE WARRANT
No.
THIS WARRANT IS NOT TRANSFERABLE OTHER THAN IN THE LIMITED
CIRCUMSTANCES PROVIDED HEREIN AND THE HOLDER HEREOF AGREES FOR
THE BENEFIT OF THE COMPANY THAT THIS WARRANT MAY NOT BE OFFERED,
SOLD, PLEDGED, OR OTHERWISE TRANSFERRED BY SUCH HOLDER OTHER
THAN AS PROVIDED HEREIN.
[Insert Date]
[Insert no. of Shares] Shares
Warrant for Purchase of Common Stock
of Clean Diesel Technologies, Inc.
(a Delaware Corporation)
This Certifies that [Insert Name] (the
Holder) of [Insert Address] for value
received and subject to the provisions hereinafter set forth is
entitled to purchase from Clean Diesel Technologies, Inc., a
Delaware corporation (the Company), [Insert No.
of Shares] shares of Common Stock of the Company, par
value $.01 per share (the Shares), at a price of
USD$
per
share1
(the Exercise Price) on or before 5:00 p.m.
local time at the then executive offices of the Company on or
prior to the Expiration Date (as defined below). This Warrant
shall be void unless exercised on or before the Expiration Date.
1. Merger Consideration. This
Warrant is issued pursuant to that certain Agreement and Plan of
Merger by and between the Company, CDTI Merger Sub, Inc. and
Catalytic Solutions, Inc. (CSI) relating to the
Merger (as defined therein) and the issuance by the Company to
the Holder of the Merger Consideration (as defined therein),
including this Warrant on the date hereof.
2. Exercise; Expiration Date. This
Warrant may be exercised from time to time by the Holder as to
the whole or any lesser number of the Shares upon tender of this
Warrant at the then executive office of the Company with a
written notice signed by the Holder to the attention of the
Company Secretary expressing the Holders intent to
exercise the same together with payment to the Company of the
Exercise Price of the Shares stated in the notice to be
purchased. If this Warrant is exercised in respect of fewer than
all of the Shares that may be purchased under this Warrant, the
Company shall execute a new warrant in the form of this Warrant
for the remaining Shares issuable under the original Warrant and
deliver such new Warrant to the Holder.
This Warrant and all rights hereunder will expire if not
exercised by 5:00 p.m. prevailing local time in New York,
New York on the date that is the earlier to occur of (i)
[insert
date]2,
and (ii) that date that is thirty (30) days after the
giving of notice by the Company to the Holder that the Fair
Market Value of one Share has exceeded 130% of the Exercise
Price for ten (10) consecutive days (which
10-day
period means, if the Shares are then listed or traded on an
exchange or otherwise quoted, 10 consecutive days for which the
Closing Bid Price is reported), and that the Warrant will
therefore expire if not exercised prior to the Expiration Date.
Fair Market Value means (i) the consolidated
closing bid price of one Share as reported on the NASDAQ Stock
Market, LLC or on any other principal national securities
exchange on which the Shares are then listed or admitted for
trading or (ii) if the Shares are not then listed or
admitted for trading on any
1 Price
to be determined by the Company by determining the quotient of
$30,000,000 divided by the number of outstanding Shares
immediately upon the occurrence of the merger (the
Merger) of a subsidiary of the Company with and into
Catalytic Solutions, Inc., a California corporation, and giving
effect thereto.
2 Insert
third anniversary of the date of the Merger.
I-1
national securities exchange, the last reported sale price or,
in case no such sale takes place on each day during the
10-day
period referred to below, the average of the highest reported
bid and the lowest reported asked quotation for the Shares,
either case as reported on any authorized interdealer quotation
system (in each case, the Closing Bid Price). If the
Shares are not listed or admitted for trading on any national
securities exchange or quoted by any interdealer quotation
system or a similar service, Fair Market Value means the fair
market value of a Share as determined by a majority of the
directors of the Companys Board of Directors.
3. No Stockholder Rights. This
Warrant does not confer upon the Holder or the Holders
permitted Assignees any right whatsoever as a stockholder of the
Company, including without limiting the generality of the
foregoing, the right to vote, to receive notices and the right
to receive dividends, prior to the exercise of the Holders
rights to purchase the Shares as provided herein.
4. No Transfers. This Warrant may
not be transferred, sold, or made subject to a security interest
or charge, pledged, hypothecated, or otherwise transferred
except (i) as the result of or assignment by operation of
law (such as death or merger or otherwise) or (ii) as
required by law or any court of competent jurisdiction (such as
in connection with divorce, bankruptcy or liquidation). A
request for a transfer of this Warrant shall be accompanied by
such documentation establishing satisfaction of the conditions
set forth in clause (i) or (ii) above, as applicable,
as may be reasonably requested by the Company (including
opinions of counsel, if appropriate). Upon receipt of
documentation reasonably satisfactory to the Company, the
Company shall permit the transfer of this Warrant.
5. Securities Laws. Any Shares
issued upon the exercise of this Warrant (unless pursuant to an
effective registration statement under the Act) shall bear the
following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
TAKEN FOR INVESTMENT AND THEY MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED BY ANY PERSON, INCLUDING A PLEDGEE, IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY, THAT AN
EXEMPTION FROM REGISTRATION IS THEN AVAILABLE.
6. Capital Adjustments. The
Exercise Price and the number of Shares purchasable hereunder
are subject to adjustment from time to time, as follows:
(a) If at any time there shall be a merger or consolidation
of the Company with or into another corporation when the Company
is not the surviving corporation, then, as part of such merger
or consolidation, lawful provision shall be made so that the
Holder shall thereafter be entitled to receive upon exercise of
this Warrant, during the period specified herein and upon
payment of the aggregate Exercise Price then in effect, the
number of Shares of stock or other securities or property of the
successor corporation resulting from such merger or
consolidation, to which the Holder would have been entitled in
such merger or consolidation, if this Warrant had been exercised
immediately before such merger or consolidation.
(b) If the Company at any time shall, by subdivision,
combination or reclassification of securities or otherwise,
change any of the Shares into the same or a different number of
securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind
of securities as would have been issuable as the result of such
change with respect to the Shares immediately prior to such
subdivision, combination, reclassification or other change.
(c) If the Company at any time shall split or subdivide its
Common Stock, the Exercise Price shall be proportionately
decreased and the number of Shares issuable pursuant to this
Warrant shall be proportionately increased. If the Company at
any time shall combine its Common Stock, the Exercise Price
shall be proportionately increased and the number of Shares
issuable pursuant to this Warrant shall be proportionately
decreased.
7. Governing Law. This Warrant
shall be governed by and construed for all purposes by in
accordance with the laws of the State of Delaware without
reference to the conflicts of laws rules of any jurisdiction.
I-2
8. Notices. Any notice effecting
an exercise of this Warrant shall, if in writing, be effective
upon receipt by the Company of the Warrant, notice of exercise
and payment of the Exercise Price. Other notices shall, if in
writing, be effective on receipt, if delivered in person or by
facsimile transmission, or, if given by mail, four (4) days
after deposit in the mail service, air-mail postage pre-paid, in
any case to the then executive office of the Company to the
attention of the Company Secretary, or, if to the Holder, to the
address given above or to such other address by notice so given.
9. Holidays. If the last or
appointed day for the taking of any action or the expiration of
any right required or granted herein shall be a Saturday, Sunday
or a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding day not a Saturday,
Sunday or a legal holiday.
10. Lost Warrants. The Company
covenants with the Holder that, upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of
any such loss, theft, or destruction, upon receipt of an
indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation, upon surrender and cancellation of such
Warrant, the Company will make and deliver a new Warrant of like
tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant.
11. Fractional Shares. Fractional
Shares may not be purchased hereunder. In lieu of fractional
Shares the Holder shall be entitled to receive a cash payment
equal to the fair market value for such fractional share. Fair
market value shall be the consolidated closing bid price on the
NASDAQ Stock Market, LLC on the date of exercise, or, if the
Shares are not listed on such exchange, the closing price on
such recognized exchange on which the Shares may then be listed,
or, if the Shares shall not be listed on an exchange, then the
average of the bid and asked prices of the Shares, if the Shares
are traded in an
over-the-counter
market, or, if not regularly traded in an over the counter
market, or if the Directors of the Company determine that the
trading prices do not represent fair value, then such fair value
as determined by the Directors.
12. Headings. The headings in this
Warrant are for convenience of reference only and shall in no
way modify or affect the meaning or construction of any of the
terms or provisions of this Warrant.
[Signature
page follows.]
I-3
WITNESS the seal of the Company and the signature of its duly
authorized officers as of the date first written above.
CLEAN DIESEL TECHNOLOGIES, INC.
Name:
|
|
|
|
Title:
|
Vice President & Treasurer
|
Name:
I-4
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
ITEM 20.
|
INDEMNIFICATION
OF CLEAN DIESEL OFFICERS AND DIRECTORS
|
Clean Diesels Certificate of Incorporation, as amended and
restated, limits the liability of directors to the maximum
extent permitted by Delaware law. Section 102 of the
Delaware General Corporation Law allows a corporation to include
in its certificate of incorporation a provision that eliminates
the personal liability of the directors of that corporation to
the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except where the
director breached the duty of loyalty, failed to act in good
faith, engaged in intentional misconduct or knowingly violated a
law, authorized the payment of a dividend or approved a stock
repurchase in violation of Delaware corporate law or obtained an
improper personal benefit. Clean Diesels charter documents
provide that Clean Diesel shall indemnify its officers,
directors and agents to the fullest extent permitted by law,
including those circumstances where indemnification would
otherwise be discretionary. Clean Diesel believes that
indemnification under its charter documents covers at least
negligence and gross negligence on the part of indemnified
parties. Clean Diesel has entered into indemnification
agreements with each of its directors and officers, which may,
in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require Clean Diesel, among
other things, to indemnify each director and officer against
certain liabilities that may arise by reason of their status or
service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature) and to advance
such persons expenses incurred as a result of any
proceeding against him or her as to which such person could be
indemnified.
Section 145 of the Delaware General Corporation Law
authorizes a court to award, or a corporations board of
directors to grant, indemnification to directors and officers in
terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement
for expenses incurred) arising under the Securities Act.
Article VII of Clean Diesels Bylaws provides for
indemnification of its directors, officers, employees or agents
to the maximum extent permitted under the Delaware General
Corporation Law. Clean Diesel has entered into indemnification
agreements with its officers and directors, which are intended
to provide Clean Diesels officers and directors with
indemnification to the maximum extent permitted under the
Delaware General Corporation Law.
At present, there is no pending litigation or proceeding
involving a director, officer, employee or other agent of Clean
Diesel in which indemnification is being sought, nor is Clean
Diesel aware of any threatened litigation that may result in a
claim for indemnification by any director, officer, employee or
other agent of Clean Diesel.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers or persons controlling the registrant pursuant to the
foregoing provisions, the registrant has been informed that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
II-1
|
|
ITEM 21.
|
EXHIBITS AND
FINANCIAL STATEMENTS SCHEDULES
|
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
5
|
.1
|
|
Opinion of Finn Dixon & Herling LLP (to be filed by
amendment)
|
|
23
|
.1
|
|
Consent of Eisner LLP, Independent Registered Public Accountants
|
|
23
|
.2
|
|
Consent of KPMG LLP, Independent Registered Public Accountants
|
|
23
|
.3
|
|
Consent of Ardour Capital Investments, LLC
|
|
23
|
.4
|
|
Consent of Marshall & Stevens, Inc.
|
|
23
|
.5
|
|
Consent of Finn Dixon & Herling LLP (to be included in
Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney (included on signature page)
|
The undersigned registrant hereby undertakes:
(a) That, for purposes of determining any liability under
the Securities Act of 1933, each filing of the registrants
annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plans
annual report pursuant to section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(b) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part
of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the
applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(c) That every prospectus (i) that is filed pursuant
to paragraph (b) immediately preceding, or (ii) that
purports to meet the requirements of section 10(a)(3) of
the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(d) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business
day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means.
This includes information contained in documents filed
subsequent to the effective date of the registration statement
through the date of responding to the request.
(e) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bridgeport, Connecticut, on this
14th day
of May, 2010.
CLEAN DIESEL TECHNOLOGIES, INC.
Michael L. Asmussen
President
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Charles W.
Grinnell and Michael L. Asmussen, and each of them, his true and
lawful attorney-in-fact, with full power of substitution and
resubstitution, to act for him and in his name, place and stead,
in any and all capacities to sign any and all amendments
(including post-effective amendments) to this registration
statement and to file the same, with all exhibits thereto, and
all documents in connection therewith, with the SEC, granting
unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and
thing which they, or any of them, may deem necessary or
advisable to be done in connection with this registration
statement as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them, or any
substitute or substitutes for any or all of them, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Michael
L. Asmussen
Michael
L. Asmussen
|
|
Chief Executive Officer, President and Director
(Principal Executive Officer)
|
|
May 14, 2010
|
|
|
|
|
|
/s/ John
B. Wynne, Jr.
John
B. Wynne, Jr.
|
|
Interim Chief Financial Officer, Vice President and Treasurer
(Principal Financial Officer)
|
|
May 14, 2010
|
|
|
|
|
|
/s/ Derek
R. Gray
Derek
R. Gray
|
|
Director
|
|
May 14, 2010
|
|
|
|
|
|
/s/ Charles
W. Grinnell
Charles
W. Grinnell
|
|
Director, Vice President and Corporate Secretary
|
|
May 14, 2010
|
|
|
|
|
|
/s/ David
F. Merrion
David
F. Merrion
|
|
Director
|
|
May 14, 2010
|
|
|
|
|
|
/s/ Mungo
Park
Mungo
Park
|
|
Director, Non-Executive Chairman of the Board of Directors
|
|
May 14, 2010
|
II-3
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
5
|
.1
|
|
Opinion of Finn Dixon & Herling LLP (to be filed by
amendment)
|
|
23
|
.1
|
|
Consent of Eisner LLP, Independent Registered Public Accountants
|
|
23
|
.2
|
|
Consent of KPMG LLP, Independent Registered Public Accountants
|
|
23
|
.3
|
|
Consent of Ardour Capital Investments, LLC
|
|
23
|
.4
|
|
Consent of Marshall & Stevens, Inc.
|
|
24
|
.1
|
|
Power of Attorney (included on signature page)
|