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As filed
with the Securities and Exchange Commission on August 30,
2010
Registration
No. 333-166865
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 2
Form S-4/A
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
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Price per Share
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Offering Price(2)
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Registration Fee
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Common Stock, $0.01 par value per share(3)(4)
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3,360,676
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N/A
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$
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100,820.28
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$
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7.19
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Warrants to purchase common stock(4)(5)
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2,749,770
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N/A
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N/A
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N/A
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Common Stock, $0.01 par value per share(4)(6)
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2,749,770
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N/A
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$
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82,493.10
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$
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5.88
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Common Stock, $0.01 par value per share(4)(7)
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147,519
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N/A
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$
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4,425.57
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$
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0.32
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Warrants to purchase common stock(4)(8)
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120,703
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N/A
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N/A
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N/A
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Common Stock, $0.01 par value per share(4)(9)
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120,703
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N/A
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$
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3,621.09
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$
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0.26
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Total
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$
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13.64
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(10)
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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,
and shares underlying such warrants, as well as such securities
issuable upon exercise of warrants of CSI to be assumed by Clean
Diesel upon the merger.
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(2)
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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 high and low price per share of
CSI common stock (CTSU) as reported on the Alternative
Investment Market on August 26, 2010.
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(3)
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These shares of Clean Diesel common
stock are estimated to be issuable to the holders of
Class A common stock of CSI at the effective time of the
merger.
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(4)
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Clean Diesel anticipates that prior
to the completion of the distribution of the securities covered
by this registration statement, all of Clean Diesels
common stock, including the securities covered by this
registration statement, will be combined by a reverse split into
a lesser amount of Clean Diesel common stock, and the amount of
undistributed common stock deemed to be covered by this
registration statement shall be proportionately reduced. The
warrants covered by this registration statement will also be
proportionately reduced.
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(5)
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These warrants are estimated to be
issuable to the holders of Class A common stock of CSI at
the effective time of the merger.
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(6)
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These shares are issuable upon
exercise of the warrants referred to in footnote (5).
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(7)
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These shares of Clean Diesel common
stock are issuable upon exercise of warrants of CSI to be
assumed in the merger.
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(8)
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These warrants are issuable upon
exercise of the warrants of CSI to be assumed in the merger
referred to in footnote (7).
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(9)
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These shares of Clean Diesel common
stock are issuable upon exercise of the warrants to purchase
Clean Diesel common stock issuable upon exercise of warrants of
CSI referred to in footnote (8).
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(10)
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A fee of $56.34 was previously paid.
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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
AUGUST 30, 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., or Clean Diesel, and Catalytic Solutions, Inc., or CSI,
have approved a merger transaction in which the businesses of
Clean Diesel and CSI will be combined. We refer to this business
combination throughout as the Merger. 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 the 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. The necessary approvals include a reverse stock
split and the issuance of an aggregate 13,727,658 shares of
its common stock, par value $0.01, and warrants to purchase up
to 4,000,000 shares of Clean Diesel common stock at a price
currently expected to be approximately $1.320 per share, in
each case calculated before taking into account the reverse
stock split. The reverse stock split will be in a ratio ranging
from 1-for-3 to 1-for-8, the final ratio to be determined by
Clean Diesels board of directors. Immediately following
the Merger, holders of CSI securities (including investors in
its capital raise discussed herein) and CSIs financial
advisor will collectively hold approximately 60% of the combined
company and Clean Diesel stockholders (including investors in
its Regulation S offering discussed herein) will hold the
remaining 40% of the combined company. The shares of Clean
Diesel common stock to be issued in connection with the proposed
merger will be held as follows:
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Percentage of
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Category of Holder
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Number of Shares
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Combined Company
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Holders of CSI common stock to be designated as
Class A
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3,360,676
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15
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%
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Investors in CSIs capital raise*
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9,061,160
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40
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%
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Non-employee directors in lieu of fees* (also designated
Class A)
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305,822
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1
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%
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CSIs financial advisor*
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1,000,000
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4
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%
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Total
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13,727,658
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60
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%
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*
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These shares are not being offered
pursuant to this joint proxy statement/information statement and
prospectus.
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The warrants to purchase shares of Clean Diesel common stock to
be issued in connection with the proposed Merger will be held as
follows:
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Category of Holder
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Number of Warrants
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Holders of CSI common stock to be designated as Class
A
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2,749,770
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Non-employee directors in lieu of fees#
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250,230
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CSIs financial advisor#
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1,000,000
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Total
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4,000,000
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#
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These warrants, and the shares of
Clean Diesel common stock issuable upon exercise of these
warrants, are not being offered pursuant to this joint proxy
statement/information statement and prospectus.
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CSI is holding a special meeting of its shareholders in order to
obtain the shareholder approval necessary to complete the Merger
and the conversion of CSIs secured convertible notes
issued in its capital raise as described in the accompanying
joint proxy statement/information statement and prospectus.
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 [19] 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.
This document does not constitute a prospectus within the
meaning of the EU Prospectus Directive or an Admission Document
for the purposes of the AIM Rules for Companies published by the
London Stock Exchange.
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 ,
London, England, on
[ ],
2010 at [ ] a.m., local time for the following
purposes:
1. To elect seven (7) directors;
2. To ratify the appointment of EisnerAmper LLP (formerly
known as Eisner LLP) as Clean Diesels independent auditors
for 2010;
3. Subject to approval of Proposal 4, to consider and
vote upon a proposal to effect a reverse stock split in a ratio
ranging from
1-for-3 to
1-for-8 of
all issued and outstanding shares of Clean Diesel common stock,
the final ratio to be determined within the discretion of the
Clean Diesel Board of Directors, to occur immediately before the
closing of the proposed merger transaction with CSI;
4. Subject to approval of Proposal 3, to consider and
vote upon 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);
5. 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 Proposals
3 and 4 described immediately above; and
6. 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. Proposal 3 and Proposal 4 will not be effected unless
shareholder approval is received for each of these proposals.
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 or the United Kingdom in the
enclosed business reply envelope.
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, 4 and 5
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, as
amended from time to time, (the Merger Agreement) 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 270,000,000 shares, such that
the total number of shares of all classes of capital stock that
CSI shall have authority to issue is 85,000,000 shares of
Class A common stock having no par value and
185,000,000 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 at
anytime prior to the merger of outstanding secured convertible
notes into not more than 185,000,000 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, as amended through the date
hereof, 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 F 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. 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 CSI board of directors also recommends that you 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 and FOR
Proposal No. 3 to disapply shareholder
pre-emptive
rights. Mr. Alexander Hap Ellis, III has
an interest in the secured convertible notes as described on
page 235 and elsewhere in this joint proxy
statement/information statement and prospectus. Accordingly,
Mr. Ellis abstains from recommending Proposals 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. Voting
instructions are included with your CSI proxy card.
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
ABOUT
THIS DOCUMENT
This joint proxy statement/information statement and prospectus
forms a part of a registration statement on
Form S-4
(Registration
No. 333-166865),
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 certain
securityholders of CSI in connection with the proposed Merger
and the related transactions. See CSI
Shareholders below on page 9 for more information
regarding the shares of Clean Diesel common stock that are
registered hereby.
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 proposals regarding
the issuance of Clean Diesel common stock and warrants to
purchase shares of Clean Diesel common stock in connection with
the Merger and the amendment of its certificate of incorporation
to effect 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 the
Merger. |
|
|
|
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
Clean Diesel Annual Meeting and the CSI Special
Meeting
|
|
|
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 reverse split and the issuance of shares of Clean Diesel
common stock and warrants to purchase Clean Diesel common stock
in connection with the Merger. Approval of the reverse stock
split requires the affirmative vote 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 at which a
quorum is present, whether voting in person or represented by
proxy at the Clean Diesel annual meeting. Approval of the other
proposals, including Proposal 4, requires 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. |
|
|
|
Q. |
|
What vote is required by the CSI shareholders to consummate
the Merger? |
|
|
|
A. |
|
To consummate the Merger, CSI shareholders must approve the
Merger Agreement, as well as approve two other proposals to be
considered at the CSI special meeting of shareholders. The first
of those proposals is a proposal to amend CSIs articles of
incorporation to designate CSIs outstanding common stock
as Class A common stock and to create a new
Class B common stock. The second of those
proposals is to approve the waiver of pre-emptive rights
provisions of the CSI articles of incorporation so that up to
185,000,000 shares of the new Class B common stock may
be issued at any time prior to the Merger upon conversion of
CSIs secured convertible notes. Each of the three
proposals will require approval by the affirmative vote of a
majority of the shares of CSI common stock outstanding on the
record date for the CSI special meeting, whether voting in
person or represented by proxy at the special meeting. Failure
to affirmatively vote in favor of any proposal will have the
same effect as a vote against such proposal. |
ii
|
|
|
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. |
|
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 seven (7)
directors;
|
|
|
|
|
|
FOR Proposal No. 2 to ratify the
appointment of EisnerAmper LLP (formerly known as Eisner LLP) to
be Clean Diesels auditors for 2010;
|
|
|
|
|
|
For Proposal No. 3 to effect the reverse split;
|
|
|
|
For Proposal No. 4 to approve 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. 5 to adjourn the Clean
Diesel annual meeting, if necessary, to solicit additional
proxies if there are not sufficient votes in favor of
Proposals No. 3 or No. 4.
|
|
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-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
Proposals No. 1, No. 2 and No. 3.
|
|
|
|
|
|
Note, as Mr. Alexander Hap Ellis, III, has an
interest in the secured convertible notes as described elsewhere
in this joint proxy statement/information statement and
prospectus, Mr. Ellis abstained from recommending Proposals
No. 2 and No. 3 to CSIs shareholders. |
|
|
|
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. |
|
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 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 or by facsimile, or by voting
via the Internet following the instructions on your proxy card.
If you are a holder of depositary interests representing shares
of CSI common stock, please |
iii
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|
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|
|
complete and return (or instruct your nominees to complete and
return) the form of instruction provided to you (in accordance
with the instructions set out on the form) to CSIs
registrars, Computershare or vote (or instruct your nominee to
vote via the Internet following the instructions on the form of
instruction). Computershare (acting as depositary) will then
vote the underlying shares of CSI common stock on your behalf.
Alternatively, if you are a CREST member, you may vote by using
the CREST electronic proxy appointment service. Please provide
your instructions as soon as possible so that your shares can be
voted at 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
London, England, 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. |
|
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|
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
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. |
|
Will the purchasers of Clean Diesel common stock in Clean
Diesels Regulation S offering be entitled to vote
those shares at the Clean Diesel annual meeting? |
|
|
|
A. |
|
No. Those persons who purchase shares of Clean Diesel
common stock in Clean Diesels Regulation S offering
will not be able to vote those shares at the Clean Diesel annual
meeting because those shares will not have been issued prior to
the record date for the annual meeting; however, if any such
person holds other shares of Clean Diesel on the record date for
the annual meeting, they will be able to vote such shares at the
annual meeting. |
|
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|
Q. |
|
Will the purchasers of CSI secured convertible notes in
CSIs capital raise prior to the Merger be entitled to vote
such securities at the CSI special meeting? |
|
|
|
A. |
|
No. Those persons who have committed to purchase or who
have purchased CSIs secured convertible notes in
CSIs capital raise will not be able to vote shares
issuable on conversion of the notes at the CSI special meeting
as such securities may not convert until necessary approvals are
received at such special meeting; however, any other shares of
CSI held by any of such persons on the record date for the
special meeting, will be able to vote. |
|
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|
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 |
iv
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|
|
determining whether a quorum is present at the Clean Diesel
annual meeting and will have the same effect as voting against
Proposal 3 (reverse stock split). 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. |
|
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|
|
If you are a CSI shareholder or holder of depositary interests
representing CSI shares, the failure to return your proxy or
return the form of instruction to CSIs registrars or
otherwise provide instructions or vote your shares 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. |
|
|
|
Q. |
|
May I vote in person at the Clean Diesel annual meeting of
stockholders? |
|
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. |
|
Q. |
|
May I vote in person at the CSI special meeting of
shareholders? |
|
|
|
A. |
|
If your shares of CSI common stock are registered directly in
your name with CSIs registrar, then you are considered to
be the shareholder of record with respect to those shares, and
the proxy materials and CSI proxy card 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 filling out the proxy card 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 with a voting instruction card to return to your broker
or other nominee to direct them to vote on your behalf following
their usual procedures. As the beneficial owner, you are also
invited to attend the CSI special meeting. Because a beneficial
owner is not the shareholder of record, however, you may not
vote these shares in person at the CSI special meeting unless
you obtain a proxy or letter of representation 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 or depositary interests 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. |
v
|
|
|
Q. |
|
What if I hold depositary interests representing shares of
CSI common stock? |
|
|
|
A. |
|
If you hold depositary interests representing shares of CSI
common stock, CSI requests that you complete (or instruct your
nominees to complete) the form of instruction provided to you
(in accordance with the instructions set out on the form) and
return it to CSIs registrars, Computershare, or vote (or
instruct your nominee to vote) via the Internet in accordance
with the instructions set out on the form of instruction. You
may not vote the shares of CSI common stock represented by your
depositary interests in person at the CSI special meeting unless
you obtain a letter of representation from CSIs
registrars, Computershare, giving you the right to vote the
shares at the meeting. |
|
|
|
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. |
|
|
|
|
|
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. If a holder of
depositary interests representing CSI shares wishes to change
his or her vote, such holder should contact CSIs
registrars, Computershare. |
|
|
|
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. |
|
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 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. |
vi
|
|
|
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. |
Cancellation
of CSIs Admission to AIM
|
|
|
Q. |
|
What will happen to CSIs AIM admission after the
Merger? |
|
|
|
A. |
|
CSI will become a wholly-owned subsidiary of Clean Diesel by way
of reverse merger and CSI shareholders will receive new Clean
Diesel common stock and warrants to purchase Clean Diesel common
stock in lieu of their existing shares of CSI common stock,
which will be cancelled. Accordingly, on completion of the
Merger, CSIs admission to AIM will be cancelled. Please
note that by voting in favor of the Merger, you are accepting
the cancellation of CSIs AIM securities and that there
will be no facility for trading shares of Clean Diesel common
stock or warrants to purchase shares of Clean Diesel common
stock on any market of the London Stock Exchange. Clean Diesel
has applied to list the shares of common stock (including shares
issuable upon exercise of the warrants) issued in the Merger on
NASDAQ. |
|
|
|
Q. |
|
How will CSI shareholders effect trades in their new Clean
Diesel shares after the Merger? |
|
|
|
A. |
|
On completion of the Merger, CSI shareholders shares in
CSI will be cancelled and they will receive new shares of common
stock in Clean Diesel and warrants to purchase Clean Diesel
common stock at the predetermined ratio set out in the Merger
Agreement as described elsewhere in this joint proxy
statement/information statement and prospectus. All shares of
common stock in Clean Diesel issued to existing CSI shareholders
as of the date of this joint proxy statement/information
statement and prospectus will be registered under the Securities
Act and application has been made to list all shares issued in
the Merger on the NASDAQ stock market. Former CSI shareholders
will be able to trade their new Clean Diesel shares on this
market. You should note that these shares will not be admitted
for trading on AIM and that there will be no trading facility
for these shares on any market of the London Stock Exchange.
Please contact your broker for assistance with trading your
shares of Clean Diesel common stock. |
|
|
|
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:
Capita Registrars
Corporate Actions
The Registry
34 Beckenham Road
Beckenham, Kent, BR3 4TU
or phone on 0871 664 0321 from inside the UK, or
0208 639 3399 from outside the UK. Calls to the
0871 664 0321 number cost 10 pence per minute
plus your service providers network extras. Calls may be
recorded and monitored for security and training purposes.
Capita Registrars cannot provide any financial, legal or tax
advice.
vii
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
viii
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 proposals to be considered at the Clean
Diesel annual meeting and the CSI special meeting.
Information
About Clean Diesel and CSI and Merger Sub
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 Agreement (see page 96)
Clean Diesel, CSI and CDTI Merger Sub, Inc. are parties to an
Agreement and Plan of Merger dated May 13, 2010, as such
may be amended from time to time. The Merger Agreement contains
the terms and conditions of the proposed combination of the
businesses of Clean Diesel and CSI. A copy of the Merger
Agreement is included as Annex A hereto and you are
encouraged to read it carefully.
The
Merger (see page 60)
Through a merger, CSI will become a wholly-owned subsidiary of
Clean Diesel. 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. 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
1
Merger; Recommendation of Clean Diesels Board of
Directors and The Merger CSIs
Reasons for the Merger in this joint proxy
statement/information statement and prospectus.
Capital
Raises
Both CSI and Clean Diesel intend to issue additional securities
prior to the Merger in order that they can finance current
operations.
On June 2, 2010, CSI entered into agreements with a group
of accredited investors providing for the sale of an aggregate
$4,000,000 of secured convertible notes ($2,000,000 of which has
already been issued, and the remaining $2,000,000 of which is to
be issued after CSI shareholder approval of the Merger and after
other necessary approvals under CSIs articles of
incorporation, but prior to the effective time of the Merger).
See CSI Managements Discussion and Analysis of
Financial Condition and Results of Operations Recent
Developments Capital Raise for more
information regarding CSIs capital raise. If necessary
approvals are received from CSIs shareholders, an
aggregate of approximately 150,434,943 shares of CSI common
stock (which will be a new class of CSI common stock, to be
designated Class B common stock) is expected to
be issued upon conversion of these notes.
Clean Diesels capital raise will take the form of a sale
of approximately 654,118 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
$1,000,000.
Reverse
Stock Split
The reverse stock split is the combination of the outstanding
shares of Clean Diesel common stock into a lesser number of
shares that will occur immediately prior to the effective time
of the Merger. If the reverse stock split is approved by Clean
Diesels stockholders, Clean Diesel will exchange one new
share for a number of outstanding shares to be determined when
Clean Diesels board of directors selects from among the
proposed reverse split ratios of between
1-for-3 to
1-for-8. When the reverse stock split becomes effective, the
number of Clean Diesels outstanding shares will be reduced
by the selected split ratio, but the value of each share should
be proportionately increased by that same ratio, although the
price of Clean Diesels common stock may move up or down
once the reverse stock split is effective. Clean Diesel will not
issue any fractional shares. Stockholders who would otherwise
hold fractional shares as a result of the reverse stock split
will be entitled to receive cash (without interest or deduction)
in lieu of such fractional shares from Clean Diesels
transfer agent, upon receipt by Clean Diesels transfer
agent of a properly completed and duly executed transmittal
letter, in an amount equal to the proceeds attributable to the
sale of such fractional shares following the aggregation and
sale by Clean Diesels transfer agent of all fractional
shares otherwise issuable. The reverse stock split is not
expected to impact the market value of Clean Diesel as a whole,
although the market value of Clean Diesels common stock
may move up or down once the reverse stock split is effective.
The reverse stock split is necessary to adjust the trading range
of shares owned by Clean Diesel stockholders so that the shares
to be issued in connection with the Merger can be listed on the
NASDAQ Stock Market. Listing requires a minimum bid price of
Clean Diesel common stock of $4 per share. If the reverse
stock split is not completed, Clean Diesel will not satisfy the
minimum per share bid price requirement for listing on the
NASDAQ.
In selecting the final reverse stock split ratio, the Clean
Diesel board of directors will be guided primarily by satisfying
the NASDAQ listing requirement. It is not expected that the
board will select a split ratio significantly greater than
necessary, but it may take into account trading volatility,
administrative convenience and simplicity in selecting a ratio
that would result in a trading range above $4 per share. The
board could select a split ratio that is not an integer, such as
1 for 4.5, unless reasons of administrative convenience and
simplicity dictate otherwise. It is not expected that the board
will select a split ratio that did not meet the necessary
minimum trading range. Any views expressed by the NASD would
also be taken into account.
On August 26, 2010, the closing sale price of Clean Diesel
common stock was $[1.08]. If immediately prior to the effective
time of the merger, this was the closing sale price of Clean
Diesel common stock, then a split ratio of at least one for
[3.7] would be required to meeting the $4 minimum trading range.
The board of directors may choose a higher ratio, such as
1 for [4], if required in order to be approved for listing
or for reasons of administrative convenience and simplicity.
Approval of the reverse stock split is being sought for a
2
maximum ratio of
1-for-8,
which would accommodate a bid price as low as $0.50. If the
shares of Clean Diesel common stock traded below this level,
then the maximum ratio would be insufficient, and Clean Diesel
would be required to resolicit proxies for a greater ratio, if
it chose to proceed on that basis.
If Clean Diesels Board of Directors selects a
1-for-3
reverse stock split, as a result of the proposed reverse stock
split, immediately prior to the effective time of the Merger, a
holder of 100 shares of Clean Diesel common stock would be
reduced to 33 shares of common stock of the combined
company, and such holder would receive a cash payment in lieu of
1/3
of a share. If Clean Diesels Board of Directors selects a
1-for-8
ratio, the 100 shares would be reduced to 12 shares of
common stock of the combined company, and the holder would
receive a cash payment in lieu of
1/2
of a share. If Clean Diesels Board of Directors selects a
different ratio, the 100 shares of Clean Diesel common stock
would be reduced accordingly.
Treatment
of Fractional Shares
No fractional shares will be issued in the reverse stock split
or in the Merger. In lieu of fractional shares, record
stockholders of Clean Diesel or shareholders of CSI, as
appropriate, will receive a cash payment.
No fractional warrants will be issued in the Merger, and each
warrant issued will be rounded down to the nearest whole number
of warrants.
Reverse
Stock Split
Record stockholders of Clean Diesel who would otherwise hold
fractional shares because the number of shares of common stock
they hold before the reverse stock split is not evenly divisible
by the split ratio ultimately selected by Clean Diesels
board of directors will be entitled to receive cash (without
interest or deduction) in lieu of such fractional shares from
Clean Diesels transfer agent, upon receipt by Clean
Diesels transfer agent of a properly completed and duly
executed transmittal letter, in an amount equal to the proceeds
attributable to the sale of such fractional shares following the
aggregation and sale by Clean Diesels transfer agent of
all fractional shares otherwise issuable. The ownership of a
fractional share interest will not give the holder any voting,
dividend or other rights, except the right to receive the
above-described cash payment. Clean Diesel will be responsible
for any brokerage fees or commissions related to the transfer
agents selling in the open market shares that would
otherwise be fractional shares.
Merger
Record shareholders of CSI who would otherwise hold fractional
shares because of the exchange of shares in the Merger will be
entitled to receive cash (without interest or deduction) in lieu
of such fractional shares from Clean Diesels transfer
agent, upon receipt by Clean Diesels transfer agent of a
properly completed and duly executed transmittal letter, in an
amount equal to the proceeds attributable to the sale of such
fractional shares following the aggregation and sale by Clean
Diesels transfer agent of all fractional shares otherwise
issuable. The ownership of a fractional share interest will not
give the holder any voting, dividend or other rights, except the
right to receive the above-described cash payment. Clean Diesel
will be responsible for any brokerage fees or commissions
related to the transfer agents selling in the open market
shares that would otherwise be fractional shares.
Warrants
Each warrant is initially exercisable for one share of Clean
Diesel common stock. Adjustments in the shares issuable is
possible in connection with antidilution adjustments. Fractional
shares may not be purchased upon exercise of any warrants. In
lieu of fractional shares, each share issued will be rounded
down to the nearest whole number of shares.
Escheat
Laws
Under the escheat laws of various jurisdictions, sums due for
fractional interests that are not timely claimed after the
effective time may be required to be paid to the designated
agent for each such jurisdiction, unless correspondence has been
received by Clean Diesel or its transfer agent concerning
ownership of such funds within the time permitted in such
jurisdiction. Thereafter, if applicable, stockholders who are
otherwise entitled to receive such funds, but who do not receive
them due to, for example, their failure to timely comply
3
with Clean Diesels transfer agents instructions,
will have to seek to obtain such funds directly from the state
to which they were paid.
Reasons
for the Merger (see page 67)
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, based on due diligence and discussions with
management and financial advisors, that the Merger represents
the strategic option most likely to maximize stockholder value
after consideration of risk factors associated with this
transaction and with several strategic alternatives including,
reductions in costs, liquidation and a business combination with
another merger partner;
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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 Clean Diesel after the Merger will be
better positioned to pursue and implement its business strategy;
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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;
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The complementary nature of Clean Diesels and CSIs
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 Clean Diesel and CSI;
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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 Clean
Diesels revenues, increase internal resources, reduce net
loss and provide greater operational scale and financial
stability;
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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;
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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 CSIs
products 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 that the significant disparity in the relative market
capitalizations of Clean Diesel and CSI, and the terms of the
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 and reflect the particular circumstances of the
markets for shares of Clean Diesel and CSI, and the terms of
those transactions;
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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 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 2006 Equity Compensation
Plan of CSI, 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;
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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;
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The fairness opinion obtained by Clean Diesel; and
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The belief that despite the fact that CSI and Clean Diesel have
net losses, that the combined company will be better positioned
to be profitable because of synergies.
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For more information regarding 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.
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For a complete list of CSIs reasons for approving the
Merger, see the section entitled The Merger
CSIs 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 19)
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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5
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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 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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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 with Fifth Third Bank, which is in default, expires on
August 31, 2010. If in Fifth Third Banks opinion, CSI
has a material adverse change, Fifth Third Bank may demand
payment prior to the date the current forbearance expires.
Although the lender has indicated a willingness to extend such
date to October 15, 2010 and no demand for repayment has
been made, CSI cannot guarantee that its lender will continue to
further extend its forbearance.
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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.
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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 58)
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 August 25, 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 $1.05 per share. Following the
consummation of the Merger, Clean Diesels common stock,
including the shares of Clean Diesel common stock issued in
connection with the Merger, are expected to continue to trade on
the NASDAQ Stock Market under the symbol CDTI.D, for
the first 20 days and then revert to the symbol
CDTI.
6
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.
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. The closing price
per share of CSI common stock as reported on the AIM of the
London Stock Exchange on May 13, 2010, the last full
trading day prior to the public announcement of entry into the
Merger Agreement, was GBX 1.0 (U.S. $0.01) for symbol CTS
and GBX 1.63 (U.S. $0.02) for symbol CTSU, 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. $ ) for symbol CTS and GBX
(U.S. $ ) for symbol CTSU. The exchange rate at the close
of business on May 13, 2010
and ,
2010 was GBX 1.00=U.S. $0.014894
and ,
respectively. At the effective time of the Merger, CSI will
cease trading on AIM. 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 78)
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.
Innovator Capital provided strategic advice, financial advisory
services and investment banking services to Clean Diesel in
connection with the Merger and the Regulation S offering,
but was not engaged to give an opinion as to the fairness of the
merger consideration. Please see note 2 to Notes to
Unaudited Pro Forma Condensed combined Financial Data
below with regard to the consideration for such services.
Opinion
of the Financial Advisor to the Board of Directors of CSI (see
page 82)
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
7
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.
Pursuant to a letter agreement dated March 11, 2010, and a
May 5, 2010 addendum to such letter, 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 $74,500, of which $22,000
was payable upon execution of the letter agreement, $9,500 upon
execution of the addendum, $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. To date, Marshall & Stevens has not provided
any services beyond those contemplated, and accordingly, no such
fees have been paid. 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.
Merger
Consideration
The Merger Agreement provides a formula for the issuance, at the
effective time of the Merger, of shares of Clean Diesel common
stock and warrants to purchase Clean Diesel common stock and for
the allocation of such shares and warrants. As detailed below,
the number of shares of Clean Diesel common stock is determined
primarily by reference to the number of shares of Clean Diesel
common stock that are deemed to be outstanding immediately prior
to the merger, which is then multiplied by 1.5 to determine the
number of shares of Clean Diesel common stock to be issued in
order to provide for the agreed upon 60/40 equity split. The
number of warrants is fixed at 4,000,000 (on a pre-split basis).
Allocation
of Merger Consideration
Of the aggregate number of shares of Clean Diesel common stock
to be issued in the Merger, (a) 66.0066% will be allocated
to the holders of CSIs Class B common (into which the
secured convertible notes will have been converted),
(b) 1,000,000 shares (on a pre-split basis) are to be
used as payment of fees owed to CSIs financial advisor,
Allen & Company, LLC, and (c) the balance of such
shares will be allocated to holders of CSI existing common stock
(to be designated as Class A common stock) and
the holder of the CSI in-the-money warrant. Of the
4,000,000 warrants (on a pre-split basis), 1,000,000 warrants
are to be used as payment of fees owed to CSIs financial
advisor, Allen & Company, LLC, and the balance of
3,000,000 warrants will be allocated to the holders of CSI
existing common stock (to be designated as
Class A common stock) and the holder of the CSI
in-the-money warrant. Holders of CSIs
Class B common (into which the secured convertible notes
will have been converted) will not receive any such warrants.
Share
Portion of Merger Consideration
Under the Merger Agreement, the aggregate number of shares of
Clean Diesel common stock to be issued to CSIs
shareholders, (including the holder of the CSI
in-the-money warrant) and to CSIs financial
advisor Allen & Company, LLC is determined according
to the following formula (all of which is on a pre-split basis):
(60/40
× Outstanding Clean Diesel)
Outstanding Clean Diesel for purposes of the Merger
Agreement is expected to be 9,151,772 shares (on a
pre-split basis) of Clean Diesel common stock. This is based on
an assumed 8,213,988 shares currently issued and
outstanding, plus 654,118 shares expected to be issued in
Clean Diesels Regulation S offering, plus both
194,486 shares to be issued and 89,180 shares issuable
upon the exercise of warrants to be issued to Clean
Diesels financial advisor Innovator Capital as payment for
fees (all such numbers being on a pre-split basis).
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Thus, the number of shares of Clean Diesel common stock issuable
to CSIs shareholders (including the holder of the CSI
in-the-money warrant) and Allen & Company
as the Clean Diesel common stock portion of the Merger is
expected to be 13,727,658 shares of Clean Diesel common stock,
allocable among such holders and Allen & Co. as follows
(all such numbers being on a pre-split basis):
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60/40 × 9,151,772 =
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13,727,658
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shares of Clean Diesel common stock
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of which
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9,061,160
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to be issued to CSI Class B common stock
(representing 66.0066% of 13,727,658);
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1,000,000
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to be issued to Allen & Company, LLC; and
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3,666,498
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to be issued to (or reserved for issuance to) CSI Class
A common stock and the CSI in-the-money
warrant
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Warrant
Portion of Merger Consideration
Under the Merger Agreement, the number of warrants to purchase
Clean Diesel common stock to be issued to CSIs
shareholders, to the holder of the CSI in-the-money
warrant and to CSIs financial advisor Allen &
Company, LLC is fixed at 4,000,000 (on a pre-split basis). Of
these, warrants to purchase 3,000,000 shares of Clean
Diesel common stock (on a pre-split basis) are to be issued (or
reserved for issuance) to the holders of CSIs Class A
common stock and the CSI in-the-money warrant, and
warrants to purchase 1,000,000 shares of Clean Diesel
common stock (on a pre-split basis) are to be issued to
Allen & Company, LLC.
Each of these warrants to purchase shares of Clean Diesel common
stock will have an exercise price determined by dividing
$30,000,000 by the number of shares of Clean Diesel common stock
outstanding immediately after the effective time of the Merger.
This price is currently expected to be approximately $1.320 per
share (on a pre-split basis). The exercise price per share of
the warrant and the number of shares of Clean Diesel common
stock issuable upon exercise of the warrant will be
proportionally adjusted if, in addition to the merger, Clean
Diesel effects a reclassification, split or subdivision of its
common stock.
All of the warrants to purchase shares of Clean Diesel common
stock issued as part of the merger consideration 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.
CSI
Shareholders
CSI currently only has one authorized class of common stock.
Only holders of this class of common stock on the record date
will vote to approve the Merger (among other items) at the
special meeting of CSIs shareholders. If the necessary
shareholder approvals are received at the meeting, prior to the
effective time of the Merger, CSI will amend its articles of
incorporation to create two classes of common stock:
Class A common stock and
Class B common stock. All shares of CSI common
stock issued and outstanding at the time of filing the amendment
to CSIs articles of incorporation will be designated as
Class A common stock. Subsequent to the
amendment of its articles of incorporation but prior to the
effective time of the Merger, holders of CSIs secured
convertible notes issued in its capital raise will convert into
the newly created Class B common stock. No
shares of Class B common stock will be
outstanding or entitled to vote as at the record date.
Only holders of CSIs Class A common stock
(excluding shares to be issued to CSIs non-employee
directors for accrued fees immediately prior to the Merger) will
receive shares of Clean Diesel common stock and warrants to
purchase Clean Diesel common stock in the Merger that will have
been registered under the registration statement on
Form S-4
of which this joint proxy statement/information statement and
prospectus forms a part. Shares of Clean Diesel common stock
issued to holders of CSIs Class B common stock (into
which the secured convertible notes will have been converted
prior the merger) and shares of Clean Diesel common stock and
warrants to purchase Clean Diesel common stock issued to
CSIs financial advisor Allen & Company have not
been registered under such registration statement.
9
Merger
Consideration per Class A Share
Under the Merger Agreement, the number of shares of Clean Diesel
common stock and warrants to purchase Clean Diesel common stock
to be issued for each share of CSI Class A common stock
outstanding at the time of the Merger will be determined by a
formula that divides (a) the number of shares of Clean
Diesel common stock and warrants to purchase Clean Diesel common
stock to be allocated to CSI Class A common stock as
described above under Share Portion of
Merger Consideration and
Warrant Portion of Merger
Consideration by (b) the number of shares of
CSI Class A common stock that are deemed to be outstanding
immediately prior to the effective time of the Merger, which is
referred to in the Merger Agreement as CSIs
Outstanding Common Stock.
For purposes of the Merger Agreement, CSIs
Outstanding Common Stock is expected to be
77,473,996 shares of CSI Class A common stock. This is
based on an assumed 69,761,902 shares currently issued and
outstanding, plus 1,250,000 shares issuable upon the
exercise of its
in-the-money
warrant and 6,462,094 shares expected to be issued to its
non-employee Directors for accrued fees. Accordingly, on a
pre-split basis, dividing (a) the anticipated
3,666,498 shares of Clean Diesel common stock and the
3,000,000 warrants to purchase Clean Diesel common stock to be
allocated in the aggregate to the Class A common stock and
the CSI in-the-money warrant by (b) the
anticipated 77,473,996 shares of CSI common stock that
would be deemed to be outstanding immediately prior to the
effective time of the Merger, each share of CSI Class A
common stock would be expected to convert into
0.04732553 shares of Clean Diesel Common stock and warrants
to purchase 0.03872267 shares of Clean Diesel common stock.
Merger
Consideration per Class B Share
Under the Merger Agreement, the number of shares of Clean Diesel
common stock to be issued for each share of CSI Class B
common stock outstanding at the time of the Merger will be
determined by a formula that divides (a) the number of
shares of Clean Diesel common stock to be allocated to CSI
Class B common stock as described above under
Share Portion of Merger
Consideration, which is expected to be
9,061,160 shares (on a pre-split basis) by (b) the
number of shares of CSI Class B common stock that are
outstanding immediately prior to the effective time of the
Merger, which is expected to be 150,434,943 shares (on a
pre-split basis). Accordingly, on a pre-split basis each share
of CSI Class B common stock would be expected to convert
into 0.06023308 shares of Clean Diesel Common stock.
Holders of CSIs Class B common stock do not have the
right to receive warrants to purchase Clean Diesel common stock
under the Merger Agreement.
10
Effects
of Clean Diesels Reverse Stock Split on Merger
Consideration
The following table illustrates the effects that Clean
Diesels proposed reverse stock split may have on the
number of shares of Clean Diesel common stock and warrants to
purchase Clean Diesel common stock that holders of CSI
Class A common stock, Class B
common stock and CSIs financial advisor, Allen &
Company, are expected to receive in the Merger. The table
assumes that Clean Diesel will have issued and outstanding an
aggregate 9,062,592 shares (on a pre-split basis)
immediately prior to the Merger, that Clean Diesel will issue an
aggregate 13,727,658 shares (on a pre-split basis) and
warrants to purchase 4,000,000 shares of Clean Diesel (on a
pre-split basis) at $1.320 per share (e.g.,
$30,000,000/22,731,093) in the Merger, and that CSI will have
issued and outstanding an aggregate 76,223,996 shares of
Class A common stock, one
in-the-money
warrant to acquire 1,250,000 shares of
Class A common stock and
150,434,943 shares of Class B common stock
at the effective time of the Merger. The exact number of shares
to be issued in the Merger, the exact exercise price for the
warrants, and the actual reverse stock split ratio may not be
determined until immediately prior to the Merger.
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Allen & Companys
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1,000,000 Shares of
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Clean Diesel and
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Warrants to
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1,000 Shares of CSI
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1,000 Shares of CSI
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Purchase 1,000,000
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Assumed Reverse
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Class A Common
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Class B Common
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Shares of Clean
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Split Ratio
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Stock becomes:*
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Stock becomes:*
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Diesel become:*
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None
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47 shares of Clean Diesel
common stock
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60 shares of Clean Diesel
common stock
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1,000,000 shares of Clean
Diesel common stock
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Warrants to purchase 38 shares of Clean Diesel common stock
at $1.320 per share
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No warrants to purchase Clean Diesel
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Warrants to purchase 1,000,000 shares of Clean Diesel
common stock at $1.320 per share
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1-for-3
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15 shares of Clean Diesel common stock
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20 shares of Clean Diesel common stock
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333,333 shares of Clean Diesel common stock
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(minimum reverse stock
split ratio)
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Warrants to purchase 12 shares of Clean Diesel common stock
at $3.960 per share
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No warrants to purchase Clean Diesel
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Warrants to purchase 333,333 shares of Clean Diesel
common stock at $3.960 per share
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1-for-5
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9 shares of Clean Diesel common stock
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12 shares of Clean Diesel common stock
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200,000 shares of Clean Diesel common stock
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Warrants to purchase 7 shares of Clean Diesel common stock
at $6.600 per share
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No warrants to purchase Clean Diesel
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Warrants to purchase 200,000 shares of Clean Diesel common
stock at $6.600 per share
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1-for-8
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5 shares of Clean Diesel common stock
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7 shares of Clean Diesel common stock
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125,000 shares of Clean Diesel common stock
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(maximum reverse
stock split ratio)
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Warrants to purchase 4 shares of Clean Diesel common stock
at $10.560 per share
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No warrants to purchase Clean Diesel
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Warrants to purchase 125,000 shares of Clean Diesel common
stock at $10.560 per share
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* |
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No fractional shares (or warrants to purchase fractional shares)
will be issued in the Merger. Accordingly, all share numbers and
warrant numbers are rounded down to the nearest whole number. |
CSIs
Existing Stock Options
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
11
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.
CSIs
Existing Warrants
At the effective time, 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 the other is
out-of-the-money.
The merger consideration includes shares of Clean Diesel common
stock and warrants to purchase Clean Diesel common stock that
will be reserved for issuance upon exercise of this
in-the-money
warrant. The merger consideration does not include shares of
Clean Diesel common stock and warrants to purchase Clean Diesel
common stock for issuance upon exercise of the
out-of-the-money
warrant. As such, if this
out-of-the-money
warrant is exercised, it will result in the issuance of an
additional 147,519 shares of Clean Diesel common stock and
warrants to purchase an additional 120,703 shares of Clean
Diesel common stock at the estimated $1.320 per share exercise
price (all on a pre-split basis).
General
For a more complete description of the merger consideration,
including how the amount of shares and warrants and allocation
among Class A and Class B common stock is calculated,
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.
Ownership
of the Combined Company
The Merger Agreement contains provisions regarding an adjustment
to the merger consideration based on a closing cash adjustment
depending on whether each company meets certain cash targets
determined at June 30, 2010. Each of CSI and Clean Diesel
met such cash targets at June 30, 2010, and therefore no
cash adjustment was necessary. Accordingly, CSI shareholders
(including investors in CSIs capital raise) and its
financial advisor will receive such numbers of Clean Diesel
common stock so that after the Merger they will collectively own
approximately 60% of the outstanding shares of Clean Diesel
common stock, with current Clean Diesel shareholders (including
investors in its capital raise) owning the remaining 40%.
CSIs shareholders and its financial advisor will also hold
warrants to purchase an additional 4,000,000 shares (on a
pre-split basis) of Clean Diesels common stock and
investors in Clean Diesels Regulation S offering will
also hold warrants to purchase an additional
1,000,000 shares (on a pre-split basis) of Clean
Diesels common stock. Accordingly, assuming each of CSI
and Clean Diesel completes its capital raise on the terms
described above under Capital Raises,
after the effective time of the Merger, and ownership of Clean
Diesel would be distributed approximately as follows:
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Existing CSI Shareholders
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16
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%
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(a
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CSIs financial advisor
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4
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%
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(b
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)
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Purchasers of CSI secured convertible notes
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40
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%
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(c
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)
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Existing Clean Diesel Shareholders
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37
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%
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(d
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)
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Purchasers of newly issued Clean Diesel shares
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3
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%
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(e
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)
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12
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(a) |
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Represents holders of existing CSI common stock, which will
become CSI Class A common stock immediately prior to the
merger, including holders of CSI secured convertible notes who
currently beneficially own approximately 30% of CSIs
common stock (without giving effect to shares of CSI common
stock to be received for non-employee accrued director fees).
Does not give effect to the conversion of such notes to CSI
Class B common stock and the subsequent conversion of such
stock to Clean Diesel common stock by virtue of the Merger. Does
not give effect to warrants to purchase three million shares (on
a pre-split basis) of Clean Diesel common stock to be issued as
part of the merger consideration. |
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(b) |
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Does not give effect to warrants to purchase one million shares
(on a pre-split basis) of Clean Diesel common stock to be issued
in connection with the merger. |
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(c) |
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These noteholders will become Class B
shareholders immediately prior to the Merger. Excludes amounts
that are included within the computation for Existing CSI
Shareholders, which is described in (a) above. If such
amounts were included, together with shares of CSI common stock
to be received for non-employee accrued director fees, the
noteholders would beneficially own approximately 49% of the
combined company after the Merger. |
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(d) |
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Includes 194,486 shares (on a pre-split basis) of Clean
Diesel common stock to be issued to Innovator Capital in respect
of the Merger fee. |
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(e) |
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Does not give effect to warrants to purchase one million shares
(on a pre-split basis) of Clean Diesel common stock. |
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. Neither Clean
Diesel nor CSI has any current plans to waive any conditions to
Closing. These closing conditions include each party having at
least a $1.0 million cash position at closing, obtaining
any necessary consents, absence of any material adverse change,
refinancing or further forbearance with respect to CSIs
outstanding bank debt, continued accuracy of the representations
and warranties of each company, delisting of CSI common stock
from AIM, and appointments and resignations of certain officers
and directors of Clean Diesel. 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
13
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 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 85 and
86)
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 special meeting.
If CSIs shareholders approve the proposals at CSIs
special meeting to increase CSIs authorized share capital
and disapply
pre-emptive
rights and approve the Merger, the investors in CSIs
capital raise will receive shares of CSI
Class B common stock upon conversion of their
secured convertible notes. These shares of Class B common
stock will convert into approximately 66% of the shares of Clean
Diesel common stock to be issued in the merger (and represent
approximately 40% of the outstanding shares of the combined
company). As of the record date for the CSI special shareholder
meeting, these investors, 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 special 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. Innovator Capital will receive a fee of $50,000, in
cash and 15% of the gross proceeds of the capital raise through
the issuance of 89,180 warrants to purchase common stock, in
connection with Clean Diesels capital raise and
approximately $761,000. Clean Diesel has elected to pay $500,000
of this fee in cash, and the balance of $261,000 in the form of
194,486 shares of its common stock, valued at $1.342 for this
purpose.
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Two of the directors of Clean Diesel, Mr. Park and
Mr. Gray, are expected to continue as directors of Clean
Diesel after the Merger. Mr. Timothy Rogers, Clean
Diesels Executive Vice President of International
Operations, is expected to become a director of Clean Diesel at
the effective time of the
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14
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Merger. Five of the directors of Clean Diesel,
Mr. Asmussen, Mr. Grinnell, Mr. Merrion,
Mr. Whitwell, and Mr. Gallucci are expected to resign
at the effective time of the Merger and be replaced by four
former directors of CSI.
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Mr. Grinnell, a director and officer of Clean Diesel, has
entered into a Transition Services Agreement with Clean Diesel
pursuant to the terms of which Mr. Grinnell will receive a
transition bonus of $86,730 if he remains employed by Clean
Diesel for a certain period of time following the Merger.
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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.
Material
U.S. Federal Income Tax Consequences of the Merger (see
page 93)
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). As a
reorganization under Section 368(a), 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 or loss 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). As a Merger
that qualifies as a reorganization under Section 368(a),
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 and whether CSI and Clean
Diesel will have assets at the effective time of the Merger with
a fair value in excess of their respective liabilities (the
net value test). Based on an estimated valuation,
the Merger will satisfy the continuity of interest and control
tests. CSI and CDTI have each concluded that they will also
satisfy their respective net value test. See the sections
entitled Risk Factors Risk Factors Relating to
the Underlying Business of CSI and Risk
Factors Risks Related to Clean Diesels
Financial Condition. 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
CSI common stock, 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 reported that it 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 reported that it 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.
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
15
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 90)
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.
Anticipated
Accounting Treatment (see page 92)
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 88)
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 Officers (see page 181)
Clean Diesel currently anticipates that immediately following
the effective time of the Merger, the board of directors of
Clean Diesel will be composed of the following members:
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Name
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Title
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Charles F. Call
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Director
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Alexander (Hap) Ellis, III
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Director
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Charles R. Engles, Ph.D.
|
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Director
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Bernard H. Cherry
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Director
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Mungo Park
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Director
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Derek R. Gray
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Director
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Timothy Rogers
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Director
|
For a complete discussion of the expected board of directors and
compensation of directors following the Merger, see the section
entitled Management Following the Merger.
Executive
Officers
Clean Diesel currently anticipates that immediately following
the effective time of the Merger, the executive officers of
Clean Diesel will be as follows:
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Name
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Title
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Charles F. Call
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Chief Executive Officer
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Nikhil A. Mehta
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Chief Financial Officer
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Stephen J. Golden, Ph.D.
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Chief Technical Officer
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For a complete discussion of the expected executive officers,
and compensation of executives following the Merger, see the
section entitled Management Following the Merger.
16
Comparison
of Stockholder Rights (see page 210)
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 218)
The Clean Diesel annual meeting will be held
at ,
London, England, 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 five proposals at the
Clean Diesel annual meeting. The first proposal at the Clean
Diesel annual meeting is a proposal to elect seven directors.
These directors will be the directors of Clean Diesel in the
event the Merger does not become effective. If the Merger is
effective, five 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 EisnerAmper LLP to be
Clean Diesels independent public accountants for 2010. The
third proposal is to 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, in a
ratio ranging from
1-for-3 to
1-for-8, the
final ratio to be determined within the discretion of the Clean
Diesel Board of Directors. The fourth proposal is 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 and its financial
advisor, in connection with the Merger. The fifth 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 proposals described immediately
above. Please note that Proposal No. 3 and Proposal
No. 4 are each conditioned on each other. Therefore, if
Proposal No. 3 is not approved by the stockholders, Proposal
No. 4 will automatically be deemed to have not been
approved by the stockholders, regardless of the number of shares
actually voted FOR Proposal No. 4. 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 229)
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
17
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-emptive
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.
18
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.
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.
|
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 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.
19
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.
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
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. There
20
are currently no lock up agreements or similar agreements
prohibiting management, directors and financial advisors from
selling their shares, assuming compliance with applicable
securities laws. Purchasers of CSIs secured convertible
notes have the ability to require CSI and, after the Merger,
Clean Diesel, to register the resale of their shares following
the Merger.
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 expires
August 31, 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. The current
forbearance period, which requires, CSI, amongst other terms, to
successfully recapitalize, expires on August 31, 2010.
Although the lender has indicated a willingness to extend such
date to October 15, 2010 and no demand for repayment has
been made, CSI cannot guarantee that the bank will continue to
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. For additional information regarding the Fifth Third
credit facility and the terms of the forbearance (including the
criteria for extension), see CSI Managements
Discussion and Analysis of Financial Condition and Results of
Operations Description of Indebtedness
Fifth Third Bank.
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 an approximately
$6.0 million cash position, $4.0 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. Neither Clean Diesel nor CSI has any current
plans to waive this or any other condition to the Merger. 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 an explanatory paragraph 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.
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.
21
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
July 31, 2010 and the number of shares issuable to
CSIs non-employee directors for accrued fees and to the
investors in its capital raise upon conversion of their secured
convertible notes, and assuming no options or warrants are
exercised prior to close, Clean Diesel will issue (or reserve
for issuance pursuant to the Merger Agreement), in the
aggregate, approximately 13,727,658 (pre-reverse split) shares
of Clean Diesel common stock, and warrants to purchase up to an
additional 4,000,000 shares of Clean Diesel common stock.
Following the Merger, holders of CSI stock (including investors
in its capital raise) and its financial advisor will
collectively own approximately 60% of the shares of Clean Diesel
common stock outstanding after the Merger and holders of Clean
Diesel (including investors in its Regulation S offering) stock
will 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.
The
investors in CSIs capital raise will collectively own a
large percentage of the Clean Diesel common stock after
consummation of the Merger, and, should they choose to act
together, 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, the former CSI shareholders
(including investors in CSIs capital raise) and its
financial advisor will collectively beneficially own
approximately 60% of the outstanding Clean Diesel common stock
and the current Clean Diesel stockholders (including investors
in its Regulation S offering) will beneficially own
approximately 40% of the Clean Diesel common stock.
Approximately 49% of the combined company will be collectively
beneficially owned by the purchasers of CSIs secured
convertible notes in its capital raise in light of their current
beneficial ownership of approximately 30% of CSIs common
stock, the receipt of additional shares of CSI common stock for
non-employee director fees prior to the Merger and the fact that
such purchasers will receive approximately 66% of the shares of
Clean Diesel common stock to be issued in the Merger.
Accordingly, the investors in CSIs capital raise, should
they choose to act together, 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
the investors in CSIs capital raise, should they choose to
act together, could delay or prevent a change of control of
Clean Diesel, even if such a change of control would benefit
Clean Diesels other stockholders. The
22
interests of the investors in CSIs capital raise 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. Although Clean Diesel and CSI had expected to complete
the Merger in the third quarter of 2010, it is not anticipated
that the Merger will occur prior to October 2010. Either Clean
Diesel or CSI may terminate the Merger Agreement if the Merger
has not taken place on or before September 6, 2010, unless
the Merger Agreement is amended to extend such date. Although
Clean Diesel and CSI have agreed in principle to extend the
deadline to October 15, 2010, such extension is subject to
the holders of CSIs secured convertible notes extending
the maturity date of such notes and Fifth Third Bank as
CSIs lender extending its existing forbearance period for
CSIs credit agreement, in each case to October 15,
2010. There can be no assurances that any such extension will
occur.
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
23
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 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
(including the investors in its capital raise), and may be
forced to liquidate its assets or declare bankruptcy;
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CSI would be required to pay the outstanding principal amount
under the secured convertible notes, any interest thereon and an
additional payment premium of two times (2x) the outstanding
principal amount to the investors, with the interest rate
increasing from 8% to 15%;
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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 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 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 at December 31, 2009, 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 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
25
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 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
26
may harm Clean Diesels business, financial condition,
results of operations and prospects by requiring Clean Diesel to
expend significant funds to satisfy such liability.
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. 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
27
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.
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
28
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 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:
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Actions taken by regulatory bodies relating to the verification,
registration or health effects of Clean Diesels products.
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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.
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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 August 18,
2010, the London Metal Exchange afternoon fixing (pricing) for
platinum was $1,544 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.
29
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 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
$68.1 million as of June 30, 2010, which amount
includes approximately $4.8 million of non-cash preferred
stock dividends. At the date of Clean Diesels Quarterly
Report on
Form 10-Q
for the three and six months ended June 30, 2010, Clean
Diesels cash and cash equivalents are estimated to be
sufficient for Clean Diesels needs for the next twelve
months, not including the effect of the Merger.
Clean Diesel has recognized limited revenues through
June 30, 2010 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 Clean Diesel
Business Managements Discussion and Analysis
of Financial Condition and Results of Operations.
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
30
prospects. See the discussion below under Clean Diesel
Business Managements Discussion and Analysis
of Financial Condition and Results of Operations.
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 three
and six months ended June 30, 2010, one customer accounted
for approximately 37% and 49%, respectively of Clean Diesel
revenue. 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.
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.
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
31
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. 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 expires on August 31, 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 is in place that
expires on August 31, 2010. Although no demand for
repayment has been made and the lender has indicated its
willingness to further extend the forbearance under certain
circumstances, CSI cannot guarantee that its lender will
continue to extend its forbearance, or not make a determination
that, in its opinion, CSI has a material adverse change such
that it is default under the current forbearance agreement. 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, or if Fifth
Third were to determine that CSI was in default under the
forbearance, Fifth Third may demand repayment, failing which it
could 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 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.
32
CSI
currently is in default under the terms of it secured
convertible notes, and failure to obtain a waiver of such
default and the consequences thereof will preclude consummation
of the Merger.
CSI did not repay the $2,000,000 outstanding principal amount of
its secured convertible notes or consummate the Merger prior to
the August 2, 2010 maturity date or within the subsequent
10 day grace period. Accordingly, unless waived, extended
or modified with the agreement of the noteholders, the
outstanding principal amount under the secured convertible
notes, including any interest and an additional payment premium
of two times (2x) the outstanding principal amount will be due
to the holders of the secured convertible notes and the interest
rate applicable thereto increases from 8% to 15%, and the Merger
will not be consummated.
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
($148.7 million and $3.6 million, respectively, as of
June 30, 2010). 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
June 30, 2010. 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 2006 acquisition of the assets of Applied
Utility Systems in addition to a possible earn-out amount. CSI
has not paid any amounts due and is disputing its payment
obligations. 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, which was due August 28, 2009 and
accrues interest at 5.36%. CSI has not paid the foregoing
amounts and, at June 30, 2010, CSI had accrued $624,000 of
unpaid interest. In addition to the consideration, the Asset
Purchase Agreement also contemplated the payment of an earn-out
by CSI to the seller based on the revenues and net profits from
CSIs conduct of the acquired business. The earn-out amount
is potentially payable over a period of ten years beginning
January 1, 2009. The maximum earnable under the earn-out
provision is $21,000,000 over the ten year period. CSI has not
paid any earn-out amount for the fiscal year ended
December 31, 2009 or the six months ended June 30,
2010 and the assets of the acquired business were sold on
October 1, 2009. The payment of the foregoing amounts is
the subject of an ongoing arbitration between CSI and the
seller. See CSI Business Legal
Proceedings for more information regarding the dispute.
CSI intends to vigorously assert its claims against the seller
under the Asset Purchase Agreement and to defend against any
action or arbitration by the seller to collect on the
consideration and any earn-out amounts payable under the Asset
Purchase Agreement. If CSI does not prevail in its claims and
the seller is awarded the full earn-out to which it claims it is
entitled for the full ten-year period, it would have a material
adverse effect on CSIs financial condition.
Certain of CSIs assets may be subject to a writ of
attachment issued in connection with an ongoing arbitration. If
CSI is not successful in limiting the adverse effects of the
writ of attachment, it could limit CSIs ability to conduct
its operations in the ordinary course and restrict the use of
certain of CSIs assets.
In connection with the Applied Utility Systems arbitration
proceedings (see CSI Business Legal
Proceedings), the seller sought a writ of attachment with
respect to its claims. A writ of attachment is a method used to
secure the retention of assets pending resolution of a legal
disagreement. On June 1, 2010, the arbitrator issued an
interim order granting the seller a right to a writ in the
amount of approximately $2.4 million. On June 24,
2010, the arbitrator issued an order confirming that her interim
order must be confirmed by an applicable court. The seller has
initiated an action in California Superior Court for Orange
County, and has filed a motion for the issuance of the writ of
attachment. If confirmed and imposed, $2.4 million of
CSIs assets would be subject to limitations on their use
and disposition pending resolution of
33
the underlying arbitration. CSI intends to continue to
vigorously defend its interests to limit any adverse effects of
the writ of attachment and the imposition of the writ against
any of its assets, pending any final decision on the merits of
the underlying claims in the arbitration. This arbitration is in
the preliminary stages and it is not possible 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 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.
34
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.
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.
|
35
|
|
|
|
|
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 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 (37% for the six months
ended June 30, 2010). 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
36
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
affect the markets perception of CSIs products,
which would materially impact CSIs financial condition and
operating results.
37
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 19.
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.
38
UNAUDITED
PRO FORMA CONDENSED FINANCIAL DATA
The following unaudited pro forma condensed financial data gives
effect to the proposed business combination of Clean Diesel and
CSI including related capital raise transactions that close at
or prior to the time of the Merger. 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 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.
|
Further, Clean Diesel has made preliminary estimates of the fair
values of financial instruments issued in connection with the
capital raise transactions. A final determination of the
estimated fair values will be made in connection with the
issuance of the financial statements containing such instruments.
The unaudited pro forma condensed combined financial data is
based on the pro forma financial statements of Clean Diesel and
CSI, adjusted to give effect to the acquisition of Clean Diesel
by CSI for accounting purposes. The unaudited Clean Diesel and
CSI pro forma statements reflect their historical data adjusted
to give effect to the accounting impact of their respective
capital raise transactions. The pro forma adjustments are
described in the accompanying notes.
The unaudited pro forma condensed combined balance sheet as of
June 30, 2010 gives effect to the proposed Merger as if it
occurred on June 30, 2010, and combines the unaudited pro
forma balance sheets of Clean Diesel and CSI as of June 30,
2010. The unaudited Clean Diesel and CSI pro forma balance sheet
as of June 30, 2010 adjusts the historical balance sheet of
each company, as included elsewhere in this joint proxy
statement/information statement and prospectus, to give effect
to their respective capital raise transactions as if they
occurred on June 30, 2010.
The unaudited pro forma condensed combined statement of
operations for the six months ended June 30, 2010, and the
year ended December 31, 2009 are presented as if the Merger
was consummated on January 1, 2009, and combines the
historical results of Clean Diesel and CSI for the six months
ended June 30, 2010, and the historical results of Clean
Diesel and the pro forma results of CSI for the twelve months
ended December 31, 2009. The unaudited CSI pro forma
condensed statement of operations for the six months ended
June 30, 2010 and the year ended December 31, 2009,
adjusts the historical statement of operations of CSI, included
elsewhere in this joint proxy statement/information statement
and prospectus, to give effect to its capital raise transaction
as if such transaction was consummated on January 1, 2009.
For purposes of the CSI
39
pro forma condensed statement of operations, it is assumed that
the Merger is consummated four months after the closing of the
capital raise and the secured convertible notes are converted to
equity at the end of the four-month period; therefore, there are
no resulting pro forma adjustments that impact CSIs pro
forma net income for the six months ended June 30, 2010.
Likewise, the Clean Diesel capital raise involved the issuance
of equity and there are no resulting pro forma adjustments that
impact Clean Diesel pro forma net income for the twelve months
ended December 31, 2009 nor the six months ended
June 30, 2010.
This unaudited pro forma condensed 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 or had Clean Diesel and CSI completed
their capital raise transactions on the dates noted above. 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 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 financial data
includes adjustments that give effect to the events that are
(i) directly attributable to the Merger; (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. Further, the pro forma condensed combined
financial data does not include the impact of the contemplated
reverse stock split.
40
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Unaudited
Pro Forma Condensed Balance Sheet
June 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
|
Solutions, Inc.
|
|
|
Pro Forma
|
|
|
Catalytic
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Solutions, Inc.
|
|
|
|
(Amounts in thousands)
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,887
|
|
|
$
|
500
|
(A)
|
|
$
|
3,387
|
|
Trade accounts receivable, less allowance for doubtful accounts
|
|
|
5,926
|
|
|
|
|
|
|
|
5,926
|
|
Inventories
|
|
|
5,026
|
|
|
|
|
|
|
|
5,026
|
|
Prepaid expenses and other current assets
|
|
|
1,635
|
|
|
|
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,474
|
|
|
|
500
|
|
|
|
15,974
|
|
Property and equipment, net
|
|
|
2,688
|
|
|
|
|
|
|
|
2,688
|
|
Intangible assets, net
|
|
|
4,160
|
|
|
|
|
|
|
|
4,160
|
|
Goodwill
|
|
|
4,161
|
|
|
|
|
|
|
|
4,161
|
|
Other assets
|
|
|
311
|
|
|
|
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
26,794
|
|
|
$
|
500
|
|
|
$
|
27,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
3,029
|
|
|
$
|
|
|
|
$
|
3,029
|
|
Current portion of long-term debt
|
|
|
3,000
|
|
|
|
|
|
|
|
3,000
|
|
Secured convertible notes payable
|
|
|
1,767
|
|
|
|
500
|
(A)
|
|
|
2,267
|
|
Accounts payable
|
|
|
4,449
|
|
|
|
|
|
|
|
4,449
|
|
Accrued expenses
|
|
|
6,029
|
|
|
|
|
|
|
|
6,029
|
|
Income taxes payable
|
|
|
784
|
|
|
|
|
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
19,058
|
|
|
|
500
|
|
|
|
19,558
|
|
Long-term debt
|
|
|
61
|
|
|
|
|
|
|
|
61
|
|
Deferred tax liability
|
|
|
1,283
|
|
|
|
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,402
|
|
|
|
500
|
|
|
|
20,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock, no par value
|
|
|
156,307
|
|
|
|
|
|
|
|
156,307
|
|
Historical and pro forma: Authorized 148,500,000; issued
69,761,902; and outstanding 69,761,902
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock, no par value
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical and pro forma: Authorized, issued and outstanding:
none
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock at cost (Historical: 60,000 shares)
|
|
|
(100
|
)
|
|
|
|
|
|
|
(100
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
(1,116
|
)
|
Accumulated deficit
|
|
|
(148,699
|
)
|
|
|
|
|
|
|
(148,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,392
|
|
|
|
|
|
|
|
6,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
26,794
|
|
|
$
|
500
|
|
|
$
|
27,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
0.09
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Unaudited
Pro Forma Condensed Statement of Operations
Six
Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
|
Solutions, Inc.
|
|
|
Pro Forma
|
|
|
Catalytic
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Solutions, Inc.
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
25,371
|
|
|
$
|
|
|
|
$
|
25,371
|
|
Cost of revenues
|
|
|
18,595
|
|
|
|
|
|
|
|
18,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
6,776
|
|
|
|
|
|
|
|
6,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,561
|
|
|
|
|
|
|
|
1,561
|
|
Research and development
|
|
|
2,145
|
|
|
|
|
|
|
|
2,145
|
|
General and administrative
|
|
|
4,126
|
|
|
|
|
|
|
|
4,126
|
|
Severance expense
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
Recapitalization expense
|
|
|
727
|
|
|
|
|
|
|
|
727
|
|
Gain on sale of intellectual property
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,674
|
|
|
|
|
|
|
|
4,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,102
|
|
|
|
|
|
|
|
2,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Interest expense
|
|
|
(678
|
)
|
|
|
|
|
|
|
(678
|
)
|
Other expense
|
|
|
(109
|
)
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(785
|
)
|
|
|
|
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,317
|
|
|
|
|
|
|
|
1,317
|
|
Provision for income taxes
|
|
|
510
|
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
807
|
|
|
$
|
|
|
|
$
|
807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income from continuing operations
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income from continuing operations
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
69,762
|
|
|
|
|
|
|
|
220,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
70,226
|
|
|
|
|
|
|
|
220,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Unaudited
Pro Forma Condensed Statement of Operations
Twelve
Months Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
|
Solutions, Inc.
|
|
|
Pro Forma
|
|
|
Catalytic
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Solutions, Inc.
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
50,514
|
|
|
$
|
|
|
|
$
|
50,514
|
|
Cost of revenues
|
|
|
38,547
|
|
|
|
|
|
|
|
38,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
11,967
|
|
|
|
|
|
|
|
11,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,577
|
|
|
|
|
|
|
|
3,577
|
|
Research and development
|
|
|
7,257
|
|
|
|
|
|
|
|
7,257
|
|
General and administrative
|
|
|
8,903
|
|
|
|
|
|
|
|
8,903
|
|
Severance expense
|
|
|
1,429
|
|
|
|
|
|
|
|
1,429
|
|
Recapitalization expense
|
|
|
1,258
|
|
|
|
|
|
|
|
1,258
|
|
Gain on sale of intellectual property
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,924
|
|
|
|
|
|
|
|
19,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,957
|
)
|
|
|
|
|
|
|
(7,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
(1,707
|
)(B)
|
|
|
|
|
Interest expense
|
|
|
(2,304
|
)
|
|
|
(1,342
|
)(C)
|
|
|
(5,353
|
)
|
|
|
|
|
|
|
|
(2,067
|
)(D)
|
|
|
|
|
Other expense
|
|
|
(291
|
)
|
|
|
701
|
(E)
|
|
|
(1,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(2,577
|
)
|
|
|
(4,415
|
)
|
|
|
(6,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(10,534
|
)
|
|
|
(4,415
|
)
|
|
|
(14,949
|
)
|
Income tax benefit
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(9,498
|
)
|
|
$
|
(4,415
|
)
|
|
$
|
(13,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss from continuing operations
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
69,762
|
|
|
|
|
|
|
|
220,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Notes to
Unaudited Pro Forma Condensed Financial Data
|
|
1.
|
The
Capital Raise Transaction and Basis of Presentation
|
On June 2, 2010, CSI entered into agreements with a group
of accredited investors providing for the sale of $4,000,000 of
secured convertible notes (the Notes). The Notes bear interest
at a rate of 8% per annum and provide for a maturity date of
August 2, 2010. Under the agreements, $2,000,000 of the
Notes are issued by the Company in four equal installments
($500,000 on each of June 2, 2010, June 8, 2010,
June 28, 2010 and July 12, 2010), with the remaining
$2,000,000 to be issued after all conditions precedent to the
closing of the Merger have been satisfied or waived (among other
items). Under the terms of the Notes, assuming the necessary
shareholder approvals are received at the special meeting of
CSIs shareholders to permit conversion thereof, the
$4,000,000 of Notes will be converted into newly created
Class B common stock immediately prior to the
Merger such that at the effective time of the Merger, this group
of accredited investors will receive approximately 66.0066% of
CSIs outstanding common stock on a fully diluted basis
(150,434,943 shares). Since the Merger was not completed by
August 2, 2010, a default under the Notes has occurred
triggering a penalty payment of two times (2x) the outstanding
principal amount plus interest due to the investors. The holders
of a majority of the Notes have indicated their willingness to
enter into a forbearance agreement, as discussed in Note 4
to CSIs Interim Condensed Consolidated Financial
Statements, appearing elsewhere in this joint proxy
statement/information statement and prospectus.
The CSI Class B common stock has rights identical to those
of CSI Class A common stock other than its exchange rights
into Clean Diesel stock upon the Merger. Each share of CSI
Class B common stock will be exchanged for
0.0602 shares of Clean Diesel common stock whereas each
share of CSI Class A common stock will be exchanged for
0.0473 shares of Clean Diesel common stock and warrants to
purchase 0.0387 shares of clean Diesel common stock.
Neither the CSI Class B common stock nor the CSI
Class A common stock has a right to convert into any
security of CSI.
These unaudited pro forma condensed statements reflect
CSIs historical data adjusted to give effect to the
accounting impact of the capital raise transaction described
above.
The unaudited pro forma balance sheet as of June 30, 2010
adjusts the historical balance sheet of CSI to give effect to
the July 12, 2010 fourth installment of $500,000 of the
capital raise transaction as if it occurred on June 30,
2010.
The unaudited pro forma condensed statement of operations for
the six months ended June 30, 2010, and the year ended
December 31, 2009, adjusts CSIs historical statement
of operations to give effect to the capital raise transaction as
if such transaction occurred on January 1, 2009 and assumes
that the Merger is consummated four months after the closing of
the capital raise. The historical condensed statement of
operations for the six months ended June 30, 2010 includes
the impact of the Notes from their issuance date through
June 30, 2010, which resulted in additional expense
totaling approximately $170,000. Such amount was not adjusted in
the pro forma statement of operations as it will remain an
expense of the combined entity post Merger.
These pro forma condensed financial statements include estimates
of fair value and will change, perhaps materially, based on
revisions to current estimates, facts and circumstances.
Balance Sheet Adjustments
(A) This adjustment reflects the issuance of the fourth
$500,000 installment of the Notes. The amount reflected as
secured convertible notes payable of $500,000 represents the
Note proceeds allocated to the Note payable and to the embedded
financial instruments that require separate accounting as
described below. The remaining $2,000,000 in Notes are only
issued at the time of the Merger, and therefore are not included
in CSIs pro forma condensed balance sheet; such issuance
is reflected in the Clean Diesel Technologies, Inc.
44
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Notes to
Unaudited Pro Forma Condensed Financial
Data (Continued)
unaudited pro forma condensed combined balance sheet. The
embedded financial instruments are separately valued and
included in the balance of secured convertible notes payable.
The agreements for the Notes include the following embedded
financial instruments that require separate accounting at fair
value:
a. Premium redemption feature with an initial estimated
fair value of $177,000 for the final Note issuance of $500,000
or $701,000 for the entire $2,000,000 in Notes issued. This
derivative instrument represents the additional penalty premium
of two times (2x) the outstanding principal amount plus default
interest that is due if the Notes are in default. This
instrument is considered a put option, as subsequent to
August 2, 2010, the noteholders have the option of
demanding payment or providing additional time extensions. The
fair value of the premium redemption instrument is estimated by
calculating the present value of the penalty amount ($1,000,000
plus accrued interest) based on an assumed payment date (eleven
months after default date) using a high-yield discount rate of
17%. The result is weighted for the estimated probability of its
exercise.
The Merger was not completed by August 2, 2010 and,
therefore, the Notes were in default; however, through the time
of filing none of the noteholders requested payment. CSI is
currently in the process of negotiating an extension with the
noteholders. This pro forma balance sheet assumes that CSI will
be successful in the negotiation to extend the maturity date of
the Notes, allowing sufficient time to complete the Merger. If
the extensions are not obtained, the fair value of the premium
redemption instrument would immediately increase to a liability
of $4,000,000 less any applicable discounting and result in a
charge to other expense of approximately $3,299,000.
b. Contingent equity forward with an initial fair value of
$164,000 for the final Note issuance of $500,000 or $658,000 for
the entire $2,000,000 in Notes issued. This instrument
represents the additional $2,000,000 the investors have
committed to fund immediately prior to the closing of the
Merger. It is considered a commitment to purchase equity since
the funding will only occur from the same events that will cause
the Notes to automatically convert to equity. The fair value is
estimated based on the intrinsic value of the forward discounted
at a risk free rate multiplied by the estimated probability that
such forward will fund. The intrinsic value was estimated based
on the combined market capitalizations of CSI and Clean Diesel
less the required $2,000,000 cash payment.
45
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Notes to
Unaudited Pro Forma Condensed Financial
Data (Continued)
Statement of Operations Adjustments
(B) This adjustment reflects $1,707,000 of interest expense
related to the Notes recorded over the four month period they
are assumed to be outstanding. Interest expense includes the
following items:
|
|
|
|
|
|
|
Item
|
|
Amount
|
|
|
Notes
|
|
Amortization of debt discount
|
|
$
|
1,359,000
|
|
|
As described above in adjustment (A) the Notes are initially
recorded at a value of $641,000. This adjustment reflects the
amortization of the debt discount to the face value of the debt
of $2,000,000.
|
Deferred financing costs
|
|
|
272,000
|
|
|
In order to complete the placing of the Notes, $272,000 of costs
were incurred. This adjustment reflects the full amortization
of such costs.
|
Coupon interest
|
|
|
28,000
|
|
|
The Notes include a coupon interest rate of 8%, which is
estimated to be recorded for a period of two months.
|
Default interest
|
|
|
48,000
|
|
|
The interest rate on the Notes increase to 15% in the event of a
default by CSI. The adjustment assumes that the CSI will be
required to pay the default interest rate for two months,
representing the estimated additional time after original
maturity of the Notes that is needed to complete the Merger.
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,707,000
|
|
|
|
|
|
|
|
|
|
|
(C) This adjustment reflects additional non-cash interest
expense of $1,342,000 for an embedded beneficial conversion
feature included in the Notes. The beneficial conversion is
calculated as the intrinsic value of the conversion feature at
the loan commitment date, but is limited to the amount of
proceeds allocated to the Notes of $1,342,000. The proceeds
allocated to the Notes represent the $2,000,000 cash proceeds
less the proceeds allocated to the contingent equity forward
valued of $658,000. The beneficial conversion feature is
contingent on CSIs shareholders approval of amendments to
the Articles of Incorporation and is recorded at the time of
such approval. For the purpose of this adjustment it assumed
such approval is obtained at the same time as the Merger being
approved.
(D) As described in adjustment (A), the financial
instruments embedded in the Notes are separately recorded at
fair value. Subsequent changes in fair value of these
instruments will be recorded to other income (expense) in the
statement of operations. At the time of the Merger and the
Notes conversion to equity, the embedded financial
instruments fair value will reflect their intrinsic value.
This adjustment assumes the closing of the Merger four months
after the issuance of the Notes. For the purposes of this
adjustment, the intrinsic value of the equity forward was
estimated at $2,725,000 representing the 4.5 million Clean
Diesel shares issuable to settle the forward contract multiplied
by Clean Diesels stock price on August 25, 2010 of
$1.05 less the cash purchase price of $2,000,000. The resulting
loss of $2,067,000 reflects the difference between the
$2,725,000 intrinsic value on settlement date and the initial
proceeds allocated to the instrument of $658,000.
(E) As described in adjustment (A), the financial
instruments embedded in the Notes are separately recorded at
fair value. Subsequent changes in fair value of these
instruments will be recorded to other income (expense) in the
statement of operations. At the time of the Merger and the
Notes conversion to equity, the embedded financial
instruments fair value will reflect their intrinsic value.
This adjustment assumes the closing of the Merger four months
after the issuance of the Notes. As a result, the premium
redemption
46
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Notes to
Unaudited Pro Forma Condensed Financial
Data (Continued)
instrument is assumed to expire unexercised resulting in a gain
of $701,000, representing the difference between the initial
proceeds allocated to the instrument and its ultimate fair value
of zero.
The Merger was not completed by August 2, 2010 and,
therefore, the Notes were in default; however, through the time
of filing none of the noteholders requested payment. CSI is
currently in the process of negotiating an extension with the
noteholders. This pro forma statement of operations assumes that
CSI will be successful in their negotiation to extend the
maturity date of the Notes, allowing sufficient time to complete
the Merger. If the extensions are not obtained, the fair value
of the premium redemption instrument would immediately increase
to a liability of $4,000,000 less any applicable discounting and
result in a charge to other expense of approximately $3,299,000
partially offset by decline in fair value of the forward
contract of $658,000 which would expire unsettled.
|
|
3.
|
Pro Forma
Income (Loss) Per Share
|
Weighted average shares outstanding for the twelve months ended
December 31, 2009 includes CSIs historical weighted
average shares outstanding of 69,761,902 plus an additional
150,434,943 shares from the assumed conversion of the
secured convertible notes payable including the funding of the
final $2,000,000 assuming each is outstanding for the entire
period.
Weighted average shares outstanding for the six months ended
June 30, 2010 includes CSIs historical weighted
average shares outstanding of 69,761,902 plus an additional
150,434,943 shares from the assumed conversion of the
secured convertible notes payable including the funding of the
final $2,000,000 assuming each is outstanding for the entire
period.
Diluted weighted average shares outstanding used for the six
months ended June 30, 2010 include the dilutive impact
totaling 464,000 shares from warrants expected to be
outstanding at the time of the closing of the Merger.
Diluted weighted average shares outstanding used for the six
months ended June 30, 2010 and December 31, 2009
exclude the anti-dilutive impact of approximately 3,154,615 and
4,200,227 warrants and options expected to be outstanding at the
time of the closing of the Merger.
Book value per share is calculated by dividing company
shareholders equity by common shares outstanding at the
end of the period. The calculation of book value per share
excludes the impact of 150,434,943 shares from the assumed
conversion of the convertible notes payable including the
funding of the final $2,000,000. If these amounts were included
in the calculation, book value per share would equal $0.03.
47
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Pro Forma Condensed Combined Balance Sheet
June 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Clean Diesel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clean Diesel
|
|
|
|
Clean Diesel
|
|
|
Technologies,
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
Business
|
|
|
Technologies,
|
|
|
|
Technologies,
|
|
|
Inc.
|
|
|
Clean Diesel
|
|
|
Pro Forma
|
|
|
|
|
|
Combination
|
|
|
Inc. For
|
|
|
|
Inc.
|
|
|
Pro Forma
|
|
|
Technologies,
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
Business
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Inc.
|
|
|
Solutions, Inc.
|
|
|
Subtotal
|
|
|
Adjustments
|
|
|
Combination
|
|
|
|
(In thousands except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,106
|
|
|
$
|
1,000
|
(a)
|
|
$
|
9,106
|
|
|
$
|
3,387
|
|
|
$
|
12,493
|
|
|
$
|
2,000
|
(c)
|
|
$
|
14,493
|
|
Trade accounts receivable, less allowance for doubtful accounts
|
|
|
218
|
|
|
|
|
|
|
|
218
|
|
|
|
5,926
|
|
|
|
6,144
|
|
|
|
|
|
|
|
6,144
|
|
Inventories
|
|
|
822
|
|
|
|
|
|
|
|
822
|
|
|
|
5,026
|
|
|
|
5,848
|
|
|
|
|
|
|
|
5,848
|
|
Prepaid expenses and other current assets
|
|
|
108
|
|
|
|
|
|
|
|
108
|
|
|
|
1,635
|
|
|
|
1,743
|
|
|
|
|
|
|
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,254
|
|
|
|
1,000
|
|
|
|
10,254
|
|
|
|
15,974
|
|
|
|
26,228
|
|
|
|
2,000
|
|
|
|
28,228
|
|
Property and equipment, net
|
|
|
239
|
|
|
|
|
|
|
|
239
|
|
|
|
2,688
|
|
|
|
2,927
|
|
|
|
|
|
|
|
2,927
|
|
Intangible assets, net
|
|
|
957
|
|
|
|
|
|
|
|
957
|
|
|
|
4,160
|
|
|
|
5,117
|
|
|
|
2,793
|
(d)
|
|
|
7,910
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,161
|
|
|
|
4,161
|
|
|
|
638
|
(d)
|
|
|
4,799
|
|
Other assets
|
|
|
55
|
|
|
|
|
|
|
|
55
|
|
|
|
311
|
|
|
|
366
|
|
|
|
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,505
|
|
|
$
|
1,000
|
|
|
$
|
11,505
|
|
|
$
|
27,294
|
|
|
$
|
38,799
|
|
|
$
|
5,431
|
|
|
$
|
44,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
3,243
|
|
|
$
|
|
|
|
$
|
3,243
|
|
|
$
|
3,029
|
|
|
$
|
6,272
|
|
|
$
|
|
|
|
$
|
6,272
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
3,000
|
|
Secured convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,267
|
|
|
|
2,267
|
|
|
|
(2,267
|
)(b)
|
|
|
|
|
Accounts payable
|
|
|
454
|
|
|
|
|
|
|
|
454
|
|
|
|
4,449
|
|
|
|
4,903
|
|
|
|
(599
|
)(e)
|
|
|
4,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,556
|
(f)
|
|
|
|
|
Accrued expenses
|
|
|
567
|
|
|
|
|
|
|
|
567
|
|
|
|
6,029
|
|
|
|
6,596
|
|
|
|
1,104
|
(i)
|
|
|
9,624
|
|
Income taxes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
784
|
|
|
|
784
|
|
|
|
|
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,264
|
|
|
|
|
|
|
|
4,264
|
|
|
|
19,558
|
|
|
|
23,822
|
|
|
|
162
|
|
|
|
23,984
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
61
|
|
|
|
|
|
|
|
61
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,283
|
|
|
|
1,283
|
|
|
|
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
4,264
|
|
|
$
|
|
|
|
$
|
4,264
|
|
|
$
|
20,902
|
|
|
$
|
25,166
|
|
|
$
|
162
|
|
|
$
|
25,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
(h)
|
|
|
|
|
Clean Diesel common stock par value $0.01 per share
|
|
$
|
82
|
|
|
$
|
|
|
|
$
|
82
|
|
|
$
|
|
|
|
$
|
82
|
|
|
$
|
91
|
(j)
|
|
$
|
228
|
|
Historical: Authorized 12,000,000; issued and outstanding
8,213,988 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma: Authorized 31,100,000; issued and outstanding
22,790,250 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytic Solutions Class A common stock, no par value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,307
|
|
|
|
156,307
|
|
|
|
(156,307
|
)(j)
|
|
|
|
|
Pro forma: Authorized 148,500,000; issued 76,223,996; and
outstanding none
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,267
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
(c)
|
|
|
|
|
Catalytic Solutions Class B common stock, no par value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,267
|
)(j)
|
|
|
|
|
Pro forma: Authorized 180,000,000, issued 150,434,943 and
outstanding none
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytic Solutions treasury stock at cost (Historical:
60,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
(100
|
)
|
|
|
100
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,050
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,751
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,834
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,104
|
)(i)
|
|
|
|
|
Additional paid in capital
|
|
|
74,751
|
|
|
|
1,000
|
(a)
|
|
|
75,751
|
|
|
|
|
|
|
|
75,751
|
|
|
|
160,383
|
(j)
|
|
|
170,163
|
|
Accumulated other comprehensive income (loss)
|
|
|
(449
|
)
|
|
|
|
|
|
|
(449
|
)
|
|
|
(1,116
|
)
|
|
|
(1,565
|
)
|
|
|
449
|
(g)
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(819
|
)(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(855
|
)(f)
|
|
|
|
|
Accumulated deficit
|
|
|
(68,143
|
)
|
|
|
|
|
|
|
(68,143
|
)
|
|
|
(148,699
|
)
|
|
|
(216,842
|
)
|
|
|
68,143
|
(g)
|
|
|
(150,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,241
|
|
|
|
1,000
|
|
|
|
7,241
|
|
|
|
6,392
|
|
|
|
13,633
|
|
|
|
5,269
|
|
|
|
18,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
10,505
|
|
|
$
|
1,000
|
|
|
$
|
11,505
|
|
|
$
|
27,294
|
|
|
$
|
38,799
|
|
|
$
|
5,431
|
|
|
$
|
44,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
0.76
|
|
|
|
|
|
|
$
|
0.82
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent book value per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Pro Forma Condensed Combined Statements of Operations
Six
Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Clean Diesel
|
|
|
|
Clean Diesel
|
|
|
Pro Forma
|
|
|
|
|
|
Combination
|
|
|
Technologies, Inc.
|
|
|
|
Technologies, Inc.
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
For Business
|
|
|
|
Historical
|
|
|
Solutions, Inc.
|
|
|
Subtotal
|
|
|
Adjustments
|
|
|
Combination
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
1,056
|
|
|
$
|
25,371
|
|
|
$
|
26,427
|
|
|
$
|
|
|
|
$
|
26,427
|
|
Cost of revenues
|
|
|
685
|
|
|
|
18,595
|
|
|
|
19,280
|
|
|
|
|
|
|
|
19,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
371
|
|
|
|
6,776
|
|
|
|
7,147
|
|
|
|
|
|
|
|
7,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
|
|
|
|
1,561
|
|
|
|
1,561
|
|
|
|
|
|
|
|
1,561
|
|
Research and development
|
|
|
189
|
|
|
|
2,145
|
|
|
|
2,334
|
|
|
|
|
|
|
|
2,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59
|
)(k)
|
|
|
|
|
General and administrative
|
|
|
2,695
|
|
|
|
4,126
|
|
|
|
6,821
|
|
|
|
209
|
(l)
|
|
|
6,971
|
|
Severance expense
|
|
|
(163
|
)
|
|
|
15
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
(148
|
)
|
Recapitalization expense
|
|
|
|
|
|
|
727
|
|
|
|
727
|
|
|
|
|
|
|
|
727
|
|
Gain on sale of intellectual property
|
|
|
|
|
|
|
(3,900
|
)
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,721
|
|
|
|
4,674
|
|
|
|
7,395
|
|
|
|
150
|
|
|
|
7,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2,350
|
)
|
|
|
2,102
|
|
|
|
(248
|
)
|
|
|
(150
|
)
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
91
|
|
|
|
2
|
|
|
|
93
|
|
|
|
|
|
|
|
93
|
|
Interest expense
|
|
|
|
|
|
|
(678
|
)
|
|
|
(678
|
)
|
|
|
|
|
|
|
(678
|
)
|
Other
|
|
|
(67
|
)
|
|
|
(109
|
)
|
|
|
(176
|
)
|
|
|
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
24
|
|
|
|
(785
|
)
|
|
|
(761
|
)
|
|
|
|
|
|
|
(761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(2,326
|
)
|
|
|
1,317
|
|
|
|
(1,009
|
)
|
|
|
(150
|
)
|
|
|
(1,159
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
510
|
|
|
|
510
|
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(2,326
|
)
|
|
$
|
807
|
|
|
$
|
(1,519
|
)
|
|
$
|
(150
|
)
|
|
$
|
(1,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) from continuing operations
|
|
$
|
(0.28
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) from continuing operations
|
|
$
|
(0.28
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,184
|
|
|
|
220,197
|
|
|
|
|
|
|
|
|
|
|
|
22,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
8,184
|
|
|
|
220,661
|
|
|
|
|
|
|
|
|
|
|
|
22,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Pro Forma Condensed Combined Statements of Operations
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Clean Diesel
|
|
|
|
Clean Diesel
|
|
|
Pro Forma
|
|
|
|
|
|
Combination
|
|
|
Technologies, Inc.
|
|
|
|
Technologies, Inc.
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
For Business
|
|
|
|
Historical
|
|
|
Solutions, Inc.
|
|
|
Subtotal
|
|
|
Adjustments
|
|
|
Combination
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
1,221
|
|
|
$
|
50,514
|
|
|
$
|
51,735
|
|
|
$
|
|
|
|
$
|
51,735
|
|
Cost of revenues
|
|
|
801
|
|
|
|
38,547
|
|
|
|
39,348
|
|
|
|
|
|
|
|
39,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
420
|
|
|
|
11,967
|
|
|
|
12,387
|
|
|
|
|
|
|
|
12,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
|
|
|
|
3,577
|
|
|
|
3,577
|
|
|
|
|
|
|
|
3,577
|
|
Research and development
|
|
|
386
|
|
|
|
7,257
|
|
|
|
7,643
|
|
|
|
|
|
|
|
7,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107
|
)(k)
|
|
|
|
|
General and administrative
|
|
|
6,280
|
|
|
|
8,903
|
|
|
|
15,183
|
|
|
|
417
|
(l)
|
|
|
15,493
|
|
Severance expense
|
|
|
958
|
|
|
|
1,429
|
|
|
|
2,387
|
|
|
|
|
|
|
|
2,387
|
|
Recapitalization expense
|
|
|
|
|
|
|
1,258
|
|
|
|
1,258
|
|
|
|
|
|
|
|
1,258
|
|
Gain on sale of intellectual property
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,624
|
|
|
|
19,924
|
|
|
|
27,548
|
|
|
|
310
|
|
|
|
27,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,204
|
)
|
|
|
(7,957
|
)
|
|
|
(15,161
|
)
|
|
|
(310
|
)
|
|
|
(15,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
245
|
|
|
|
18
|
|
|
|
263
|
|
|
|
|
|
|
|
263
|
|
Interest expense
|
|
|
|
|
|
|
(5,353
|
)
|
|
|
(5,353
|
)
|
|
|
|
|
|
|
(5,353
|
)
|
Change in fair value of investments and interest expense
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Other
|
|
|
112
|
|
|
|
(1,657
|
)
|
|
|
(1,545
|
)
|
|
|
|
|
|
|
(1,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
457
|
|
|
|
(6,992
|
)
|
|
|
(6,535
|
)
|
|
|
|
|
|
|
(6,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(6,747
|
)
|
|
|
(14,949
|
)
|
|
|
(21,696
|
)
|
|
|
(310
|
)
|
|
|
(22,006
|
)
|
Income tax benefit
|
|
|
|
|
|
|
(1,036
|
)
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(6,747
|
)
|
|
$
|
(13,913
|
)
|
|
$
|
(20,660
|
)
|
|
$
|
(310
|
)
|
|
$
|
(20,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations per share
|
|
$
|
(0.83
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,147
|
|
|
|
220,197
|
|
|
|
|
|
|
|
|
|
|
|
22,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
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 the
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
13,727,658 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. 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.
|
|
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 August 25, 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 at
June 30, 2010
|
|
$
|
8,625,000
|
|
Estimated fair value of Clean Diesel shares issued to accredited
investors
|
|
|
687,000
|
|
Estimated fair value of Clean Diesel shares issued to Innovator
Capital
|
|
|
204,000
|
|
Estimated fair value of Clean Diesel stock options and warrants
outstanding at June 30, 2010
|
|
|
52,000
|
|
Estimated fair value of Clean Diesel warrants issued to
Innovator Capital and accredited investors
|
|
|
403,000
|
|
|
|
|
|
|
Total estimated purchase consideration
|
|
$
|
9,971,000
|
|
|
|
|
|
|
On June 30, 2010, Clean Diesel had 8,213,988 shares of
common stock outstanding. In addition, the purchase
consideration includes 654,118 shares to be issued
immediately prior to closing to accredited investors (as
discussed in note 4(b) below) and 194,486 shares to be
issued to Innovator Capital, Clean Diesels financial
advisor, as a transaction fee for their services in connection
with the Merger. The fair value of Clean Diesel common stock
used in determining the purchase price was $1.05 per share based
on the closing price on NASDAQ on August 25, 2010.
The fair value of Clean Diesels stock options and warrants
is a preliminary estimate ($0.37). 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. The warrants are expected to have a
strike price of $1.32 per share. The warrants also include
a provision that they expire 30 days after a period where
the Clean Diesel stock price exceeds the warrant exercise price
for 10 consecutive days. To value these warrants, the
Black-Scholes Model was used with Clean
51
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
Diesels stock price of $1.05 on August 25, 2010, a
volatility of 59.9%, a risk free rate of 1.25% and a term of
3 years. In addition, warrants to purchase a total of
1,089,000 shares of Clean Diesel common stock will be
issued to accredited investors and Innovator Capital in
connection with the transactions described above.
Clean Diesel estimates that professional fees and employee
expenses related to the Merger will approximate $1,556,000.
These costs include fees for legal, accounting, and other direct
costs necessary to complete this transaction. The $1,556,000 of
transaction costs consist of $701,000 of costs expected to be
incurred by Clean Diesel and $855,000 of costs expected to be
incurred by CSI. Clean Diesels $701,000 of professional
and employee expenses will be incurred by Clean Diesel are in
addition to the estimated shares and warrants to be issued to
Innovator Capital, and these costs are included in liabilities
to 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 of Clean Diesel and warrants to purchase
an additional 1,000,000 shares of Clean Diesel. The
estimated fair value of such shares and warrants totaling
$1,418,000, of which $599,000 has been accrued at June 30,
2010, related to the closing of the Merger 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
June 30, 2010, is as follows:
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
9,106,000
|
|
Accounts receivable and other assets
|
|
|
381,000
|
|
Inventory(2)
|
|
|
822,000
|
|
Fixed assets
|
|
|
239,000
|
|
Intangible Assets
|
|
|
|
|
Customer relationships
|
|
|
180,000
|
|
Trade name
|
|
|
948,000
|
|
Patents
|
|
|
2,352,000
|
|
In-process research and development
|
|
|
270,000
|
|
Goodwill
|
|
|
638,000
|
|
|
|
|
|
|
Total Assets Acquired
|
|
|
14,936,000
|
|
Liabilities assumed
|
|
|
(4,264,000
|
)
|
Merger related liabilities
|
|
|
(701,000
|
)
|
|
|
|
|
|
Total preliminary purchase price allocation
|
|
$
|
9,971,000
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $1,000,000 of cash to be received by Clean Diesel upon
closing of sale of stock and warrants to accredited investors
described in note 4(a) below. |
|
|
|
(2) |
|
Assumed carrying value equals fair value. |
52
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
A preliminary valuation of the intangible assets of Clean Diesel
was made. Each of the intangible assets and the methodology for
the preliminary valuation is presented below.
Valuation
of Customer Relationships
The ability to use Clean Diesels relationships with its
clients provides the acquirer with a business advantage that is
distinct and separable from the goodwill acquired. The presence
of a loyal customer base provides management with the
opportunity to sell additional products into the base, and
further leverage cost efficiencies. Customer relationships are
valued using the income approach excess earnings method, based
on the operating profit of the expected revenue, less applicable
capital charges for the use of assets. Key assumptions used in
this valuation were a revenue growth rate of approximately 3%
and an annual customer attrition of 50%.
Valuation
of Trademarks and Tradenames
The fair value of the acquired trademarks or tradenames is the
relief from the royalty method. Under this method, the subject
trademark is valued by reference to the amount of royalty income
it could generate if it were licensed, in an arms-length
transaction, to a third party. Typically, a sample of a
comparable arms-length royalty or license agreement is
selected that reflects similar risk and return investment
characteristics with the subject trademark or tradename. The
royalty rate selected is then multiplied by the net revenue
expected to be generated by the trademark or tradename over the
course of the assumed life of the trademark or tradename. The
product of the royalty rate times the revenue is an estimate of
the royalty income that could be generated, hypothetically, by
licensing the subject trademark or tradename. Therefore, in
selecting a royalty rate for trademarks and tradenames,
consideration was given to the products and Clean Diesels
reputation in the marketplace, the historical and projected
operating profitability of the business and relative importance
of the name(s) compared to other factors driving profitability.
It was determined that the primary driver of operating margins
is resident in the products technological features and
capabilities. Therefore, the value of the trademarks and
tradenames would be relatively small in comparison to these
factors. As such, a royalty rate of 1.5% was used.
Valuation
of Patented Technology
To value the patent portfolio/patented technology assets, the
income approach relief from royalty method was used, similar to
that of the trademarks and tradenames. As noted earlier, market
transactions involving licensing rates for similar technology as
well as the profit split method were considered.
An examination of licensing royalty rates for similar technology
was made using information provided by Royalty
Source®
Intellectual Property Database, a third party reporting service.
The search of their database resulted in 5 guideline license
transactions for patents in similar technologies. The royalty
rates paid ranged between 3.0% and 7.0%. The median transaction
had a royalty rate of 4.0%, while the average transaction had a
royalty rate of 4.5%. Based on this information, a royalty rate
of 4% was used.
Valuation
of In-Process Technology
The fair value of in-process technology was calculated using the
income approach multi-period excess earnings method, which is
the same method used to value customer relationships. In
addition, taken into account were the costs to complete of
$250,000 for the IPR&D project expected to be launched by
the end of 2010.
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 CSI
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.
53
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
Clean Diesel Balance Sheet Adjustments
(a) On July 5, 2010, Clean Diesel entered into
agreements with a group of accredited investors providing for
the sale of 654,118 shares of Clean Diesels common
stock and warrants to purchase 1,000,000 shares of Clean
Diesels common stock, for a total purchase price of
$1,000,000, contingent upon the closing of the Merger. This
adjustment assumes the issuance of Clean Diesel stock and
warrants and the receipt of $1,000,000 cash from the investors
immediately prior to the closing of the Merger. This amount is
reflected as part of the outstanding Clean Diesel equity in the
calculation of the estimated purchase consideration described in
note 2.
Business Combination Pro forma Balance Sheet
Adjustments
(b) To record the automatic conversion of the CSI secured
convertible notes of $2,000,000 into CSI Class B common
stock immediately prior to the Merger. This adjustment reflects
reversal of the carrying amount of the notes of $2,267,000
including the fair value of embedded financial instruments.
Refer to further discussion of the secured convertible notes in
adjustment (A) of the notes of CSIs unaudited pro forma
condensed financial data.
(c) To reflect funding of the final $2,000,000 of secured
convertible notes that will automatically convert into
Class B common stock immediately prior to the Merger. Refer
to further discussion of the secured convertible notes in
adjustment (A) of the notes of CSIs unaudited pro forma
condensed financial data.
(d) To record the estimated fair value of the acquired
intangible assets totaling $3,750,000 as more fully described in
note 3. This adjustment also reverses the net book value of
Clean Diesels pre-Merger intangible assets totaling
$957,000, resulting in a net adjustment of $2,793,000. In
addition, this adjustment records goodwill of $638,000
calculated using the acquisition method of accounting more fully
described in note 3.
(e) 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, reflected as common stock
and paid in capital, and warrants, reflected as accrued expense,
have an estimated fair value of $1,050,000 and $368,000,
respectively for a total of $1,418,000. Additionally, this
adjustment reflects a reduction to accounts payable of $599,000
for settlement costs incurred and accrued prior to June 30,
2010 which results in a net reduction to accumulated deficit of
$819,000. The warrants are classified as liabilities as their
expected terms could compel cash settlement.
(f) To record an increase to Merger-related liabilities for
CSIs and Clean Diesels estimated professional and
employee related Merger costs totaling $1,556,000. These costs,
as more fully described in note 2, have not been reflected
on the pro forma condensed statements of operations as they are
non-recurring in nature. Merger related costs include fees
payable to investment bankers, legal and accounting services,
NASDAQ and other regulatory fees, printing, proxy solicitation
and other costs, including an estimated $477,000, expected to be
incurred related to employee retention and success bonuses as a
result of successful completion of the transaction. Clean
Diesels transaction costs of $701,000 will be incurred
prior to the Merger and are reflected as an accrued expense in
the allocation consideration transferred in note 3.
CSIs transaction cost of $855,000 are reflected as an
increase to accumulated deficit as they will be an expense of
the combined entity.
(g) To eliminate the pro forma Clean Diesel equity account
balances upon closing the Merger at June 30, 2010.
(h) To reflect issuance of purchase consideration of
$9,971,000 as more fully described in note 2 representing
13,727,658 shares at par value of $0.01 or $137,000 with
the remaining $9,834,000 reflected as additional paid-in capital.
(i) To record an accrued liability for $1,104,000
representing the estimated fair value of the 3,000,000 warrants
to be issued to CSI Class A stockholders upon closing of
the Merger. This transaction has been
54
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
reflected as a distribution to the shareholders of the
accounting acquirer and, accordingly, a reduction of
shareholders equity. The warrants are classified as
liabilities as they are expected to have ongoing registration
requirements, which could compel cash settlement.
(j) To recast the historical Class A common stock and
Class B common stock capital accounts of CSI to reflect the
appropriate post-Merger paid in capital of Clean Diesel.
Summary of Pro Forma Adjustments to Additional Paid in
capital
The Summary of pro forma adjustments to additional paid in
capital reflect the impact of the business combination and
associated transactions more fully described above:
|
|
|
|
|
Historical value of CSIs outstanding shares including
conversion of Notes
|
|
$
|
160,474
|
|
Fair value of shares held by Clean Diesel shareholders
|
|
|
9,971
|
|
Fair value of 1,000,000 shares issued to Allen and Co. as a
merger cost
|
|
|
1,050
|
|
Estimated fair value of 3,000,000 warrants issued to CSI
Class A Shareholders recorded
as a distribution
|
|
|
(1,104
|
)
|
Less: amount attributable to par value of shares
|
|
|
(228
|
)
|
|
|
|
|
|
|
|
$
|
170,163
|
|
|
|
|
|
|
Statements of Operations Adjustments
(k) To eliminate historical Clean Diesel amortization
expense of $59,000 for the six months ended June 30, 2010
and $107,000 for the year ended December 31, 2009.
(l) To record amortization expense based on the preliminary
estimated fair values of the underlying intangible assets to be
acquired amortized over their estimated useful lives as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Expense
|
|
|
|
|
|
|
Estimated
|
|
|
Six months
|
|
|
Twelve months
|
|
|
|
|
|
|
useful
|
|
|
ended
|
|
|
ended
|
|
|
|
Fair value
|
|
|
life
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
Customer relationships
|
|
$
|
180,000
|
|
|
|
3
|
|
|
$
|
30,000
|
|
|
$
|
60,000
|
|
Trade name
|
|
|
948,000
|
|
|
|
10
|
|
|
|
47,000
|
|
|
|
95,000
|
|
Patents
|
|
|
2,352,000
|
|
|
|
10
|
|
|
|
118,000
|
|
|
|
235,000
|
|
In-process research and development
|
|
|
270,000
|
|
|
|
10
|
|
|
|
14,000
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,750,000
|
|
|
|
|
|
|
$
|
209,000
|
|
|
$
|
417,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Pro Forma
Income (Loss) Per Share
|
Pro Forma Catalytic Solutions, Inc.
Weighted average shares outstanding for the twelve months ended
December 31, 2009 includes CSIs historical weighted
average shares outstanding of 69,761,902 plus an additional
150,434,943 shares from the assumed conversion of the
secured convertible notes payable including the funding of the
final $2,000,000 assuming each is outstanding for the entire
period.
Weighted average shares outstanding for the six months ended
June 30, 2010 includes CSIs historical weighted
average shares outstanding of 69,761,902 plus an additional
150,434,943 shares from the assumed conversion of the
secured convertible notes payable including the funding of the
final $2,000,000 assuming each is outstanding for the entire
period.
Diluted weighted average shares outstanding used for the six
months ended June 30, 2010 include the dilutive impact
totaling 464,000 shares from warrants expected to be
outstanding at the time of the closing of the Merger.
55
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
Diluted weighted average shares outstanding used for the six
months ended June 30, 2010 and for the twelve months ended
December 31, 2009 exclude the anti-dilutive impact of
approximately 3,154,615 and 4,200,227 warrants and options
expected to be outstanding at the time of the closing of the
Merger.
Pro Forma Clean Diesel Technologies, Inc. for Business
Combination
Basic weighted average shares outstanding for the six months
ended June 30, 2010 and the year ended December 31,
2009 include:
|
|
|
|
|
|
|
Pre-Reverse
|
|
|
Split
|
Clean Diesel shares outstanding
|
|
|
8,213,988
|
|
New shares to be issued in the Merger to CSI shareholders and
Allen & Company
|
|
|
13,727,658
|
|
New shares to be issued to accredited investors
|
|
|
654,118
|
|
New shares to be issued to Innovator Capital
|
|
|
194,486
|
|
|
|
|
|
|
Total
|
|
|
22,790,250
|
|
|
|
|
|
|
Diluted weighted average shares outstanding used for
June 30, 2010 and December 31, 2009 exclude the
anti-dilutive impact of approximately 6,317,000 warrants
and options expected to be outstanding at the time of the
closing of the Merger.
Pro forma income (loss) per share does not reflect the impact of
the proposed reverse stock split in a ratio ranging from
one-for-three
to
one-for-eight.
Pro forma income (loss) per share assuming the reverse stock
split at each end of the range and a point within the range are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One for
|
|
|
One for
|
|
|
One for
|
|
|
|
three
|
|
|
five
|
|
|
eight
|
|
|
Six months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.22
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.59
|
)
|
Pro forma weighted average shares outstanding (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
7,597
|
|
|
|
4,558
|
|
|
|
2,849
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma loss from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.76
|
)
|
|
$
|
(4.60
|
)
|
|
$
|
(7.36
|
)
|
Pro forma weighted average shares outstanding (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
7,597
|
|
|
|
4,558
|
|
|
|
2,849
|
|
Equivalent Pro Forma Clean Diesel Technologies, Inc. for
Business Combination
The equivalent pro forma income (loss) per share amounts are
calculated by multiplying the pro forma Clean Diesel
Technologies, Inc. for Business Combination per share amounts by
the assumed Class A exchange ratio of 0.0473.
Book value per share is calculated by dividing company
shareholders equity by common shares outstanding at the
end of the period. The equivalent pro forma book value per share
is calculated by multiplying the pro forma Clean Diesel
Technologies, Inc. for Business Combination per share amount by
the assumed Class A exchange ratio of 0.0473.
56
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
Pro forma Clean Diesel Technologies, Inc. book value per share
is calculated based on Clean Diesels historical common
shares outstanding of 8,213,988 plus the additional
654,118 shares of common stock to be issued upon closing
their capital raise.
The calculation of book value per share for Pro Forma CSI
excludes the impact of 150,434,943 shares from the assumed
conversion of the secured convertible notes payable including
the funding of the final $2,000,000. If these amounts were
included in the calculation, book value per share would equal
$0.03.
57
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
|
|
2nd
Quarter
|
|
$
|
1.78
|
|
|
$
|
0.95
|
|
3rd
Quarter (through August 18, 2010)
|
|
$
|
1.42
|
|
|
$
|
0.98
|
|
Holders
At August 18, 2010, there were 183 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.
58
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
|
|
|
$
|
1.33
|
|
|
$
|
|
|
|
$
|
|
|
2nd
Quarter
|
|
$
|
1.33
|
|
|
$
|
1.15
|
|
|
$
|
|
|
|
$
|
|
|
3rd
Quarter
|
|
$
|
1.09
|
|
|
$
|
0.85
|
|
|
$
|
1.03
|
|
|
$
|
0.92
|
|
4th
Quarter
|
|
$
|
0.70
|
|
|
$
|
0.29
|
|
|
$
|
0.78
|
|
|
$
|
0.29
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
0.26
|
|
|
$
|
0.06
|
|
|
$
|
0.26
|
|
|
$
|
0.20
|
|
2nd
Quarter
|
|
$
|
0.18
|
|
|
$
|
0.09
|
|
|
$
|
0.22
|
|
|
$
|
0.05
|
|
3rd
Quarter(2)
|
|
$
|
0.09
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.02
|
|
4th
Quarter(2)
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
2nd
Quarter
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
3rd
Quarter (through August 26, 2010)
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
|
|
(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 July 31, 2010, there were 199 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.
59
THE
MERGER
This section and the section entitled The Merger
Agreement beginning on page 96 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 18 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. As the diesel emissions reduction market has evolved and
greater focus has been placed on clean air and climate change,
state of the art clean technologies have been mandated for new
diesel engines in many parts of the world. While extremely
beneficial for all, this only addresses a fraction of the diesel
engines in use throughout the world today. As such, governments
and municipalities around the world have identified the retrofit
of in-use diesel engines as a means to make dramatic
improvements in air quality and human health. To manage this
effort, low emission zones whether on a state,
regional or city wide scale have become common and continue to
grow in number and scope. The success of these low emission
zones is dependent on the supply of cost effective, high
performing emission control technology to achieve the level of
emission reduction sought by the respective governments. As a
result, the certifying agencies require market proven technology
fit for their specific purpose. Clean Diesel is using this
opportunity to use its core IP portfolio to develop retrofit
products based on its OEM proven technology focused on the
reduction of diesel particulate matter and NOx. Core patent
families such as the ARIS injection technology, fuel borne
catalyst technology and the use of platinum/cerium additive with
diesel particulate filters have all been leveraged in Clean
Diesels recent retrofit product development projects. For
example, the ARIS system will be used in Clean Diesels
SCR/DPF product currently being developed in cooperation with
the EPA and financed with U.S. government funding. In
addition, the use of platinum/cerium fuel additive with a diesel
particulate filter is being developed in cooperation with the
California Air Resources Board and used in their ongoing
Offroad Vehicle Showcase to promote the retrofit of
off-road diesel vehicles. As the Clean Diesel retrofit product
portfolio grows, Clean Diesel will continue to develop new
patents and intellectual property based on not only the further
development of the aforementioned products, but also like
products for use in complementary applications and other
synergistic technologies. 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
60
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.
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. This term sheet proposed a 70/30 equity split in favor
of CSI. The merger process and timeline was created with input
from legal counsel and Allen & Company LLC as
CSIs advisors in this potential transaction.
61
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 business strategies of the two companies. CSI noted
that it was not interested in selling the ECS business alone. As
a result, the two teams developed a preliminary merger plan
including synergies, growth prospects and financial performance
for presentation to the respective boards.
On November 20, 2009, Innovator Capital was approved by the
Clean Diesel audit committee, consisting of John de Havilland
and Derek Gray, to begin assisting Clean Diesel in identifying
organizations that may be suitable to Clean Diesels desire
to engage in merger and acquisition activities. Mr. Park, the
Chairman of the Board of Clean Diesel, is also the Chairman of
Innovator Capital. Innovator Capital also agreed to assist Clean
Diesel in certain capital raising efforts. The committee
selected Innovator Capital based on previous services provided
by Innovator Capital to Clean Diesel, including Clean
Diesels Regulation S offering in December 2006, and
financial advisory services from 2006 through January 2009. As
compensation for such services, Clean Diesel paid, along with
travel and other expenses, $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 Capital 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 from
December 29, 2011 through December 29, 2012. Further, Clean
Diesel paid Innovator Capital $986,000 for fund raising services
in 2007. Based on Clean Diesels relationship with
Innovator Capital and its satisfaction with the services
provided by Innovator Capital, Clean Diesel did not consider
other firms.
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 Smith & Co.
(Houlihan) to complete an enterprise value study of
CSI. The intent of this study was to provide the Board an
independent view of the value of CSI. Houlihan had performed a
similar valuation study on Clean Diesel, thereby providing a
detailed comparison from which the Board could develop a view on
the
62
relative values of the two entities. Clean Diesel chose
Houlihan to perform the valuation because Houlihan had
previously completed a valuation of Clean Diesels auction
rate securities and the board of directors was impressed with
their services. The results of these valuations are described
below under the caption Houlihan Smith Valuations.
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.
The Clean Diesel Board of Directors authorized management to
continue to proceed to negotiate the transaction with CSI
including negotiating the terms of the equity split.
On January 22, 2010, the result of the Houlihan valuation
study was presented to the Clean Diesel Board of Directors. 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. 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. The Clean Diesel Board of Directors concluded
that a 50/50 equity split was appropriate and that Mr. Park
should discuss this and other matters regarding the transaction
with Mr. Quinn of Allen & Company LLC.
On January 26, 2010, a revised term sheet was sent to CSI
and the 50/50 proposal on the equity split was separately
communicated to Mr. Quinn at Allen & Company LLC by
Mr. Park on February 12, 2010 and was not part of the
revised term sheet.
On February 3, 2010, Mr. de Havilland corresponded with Clean
Diesels corporate secretary and informed him of his desire
to resign from the Board at the Clean Diesels next annual
meeting and not stand for re-election. Mr. de Havilland decided
to postpone acting on this desire.
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, in particular,
the equity split (including Clean Diesels proposal of a
50/50 equity split), potential board composition and executive
team of the new merged company.
On February 15, 2010, Mr. Park, Mr. Gray and
Mr. Asmussen of Clean Diesel met with Mr. Call at
Allen & Company LLCs offices, New York City.
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. After much discussion and
negotiation, the attendees reached agreement on the proposed
60/40 equity split provided that certain minimum cash positions
were achieved by each entity. The parties also agreed that
CSIs stockholders would receive warrants to purchase Clean
Diesel common stock to further bridge the difference between the
competing equity split proposals (the 70/30 proposed by CSI and
the 50/50 proposed by Clean Diesel). The underlying rationale
of the warrants was that if all warrants were exercised to
purchase an aggregate 5 million shares of Clean Diesel on a
pre-split basis (4 million by CSI stockholders, 1 million by
Clean Diesel Stockholders), the effective split would be
approximately 64/36. The parties also agreed that the exercise
price of the warrants would be based on an agreed $30 million
valuation for the combined company divided by the total number
of shares outstanding immediately following the merger. At the
meeting, the attendees also reached agreement on the minimum
cash position necessary to complete the merger.
On February 18, 2010, a draft term sheet was circulated to
both sides by CSI counsel.
63
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 8, 2010, Clean Diesel engaged Ardour Capital to
act as a financial advisor to review and evaluate the fairness
of the possible transaction with CSI. Although Clean Diesel was
being advised by Innovator Capital with regard to the Merger,
and Clean Diesel had engaged Houlihan and Smith to complete an
enterprise value study, the board of directors of Clean Diesel
selected Ardour Capital to conduct this fairness review because
of Ardour Capitals national reputation for financial
services, including financial valuation services, and its focus
in the energy technologies market, and because Clean Diesel had
used Ardour Capital in the past for financial advisory services
and was impressed with Ardour Capitals performance of such
services.
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 11, 2010, CSIs Board of Directors engaged
Marshall & Stevens, Inc., or Marshall &
Stevens, to advise it as to the fairness, from a financial point
of view, as to the consideration to be received by the holders
of its common stock. Even though Allen & Company, LLC
was advising CSI in connection with the Merger, the Board of
Directors selected Marshall & Stevens to conduct this
fairness review because of CSIs favorable impressions of
other financial advisory services previously provided by
Marshall & Stevens to CSI, all of which were performed
more than two years prior to its engagement for this fairness
review. The CSI Board of Directors also considered the fact
that, unlike the fee payable to Allen & Company, LLC
for its services in connection with the Merger, the fee payable
to Marshall & Stevens was not contingent on the
valuation or completion of the Merger.
On March 19, 2010, the respective working parties met to
discuss the status of the transaction and discuss the
finalization of remaining open issues. The parties also
acknowledged that they were not moving as quickly as they had
hoped to finalize the draft merger agreement and complete the
necessary legal due diligence and draft disclosure schedules,
but similarly acknowledged that each had resource constraints
due to the relative size of each entity and that such
constraints were affecting the ability of each entity to move
quickly to finalize open items.
On March 26, 2010, Clean Diesels Board met to consider the
status of the transaction and to consider extending the contract
with Innovator Capital, which had expired at the end of
February. Mr. Gray asked that the meeting be adjourned, as he
had not had time to adequately consider the terms of the
extension. Ms. Ruple requested the opportunity to make a
statement to the Board, in which she objected to the
relationship with Innovator Capital and stated her belief that
the merger was ill-advised.
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, Mr. Gray and Mr. de Havilland
participated in 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
CSIs audited financials. The discussion centered on the
fact that CSIs auditors were expected to include a going
concern explanatory paragraph in their opinion for the year
ended December 31, 2009 and the fact that CSI had a history
of operating losses. Mr. Mehta provided and discussed
CSIs financial forecasts, including its cash flow, income
statements and
64
balance sheets, for the years ending December 31, 2010 and
2011, as well as pro-forma combined forecasts for CSI and Clean
Diesel, that took into account potential synergies between the
two companies as well as the capital raises that were
contemplated by both companies. The participants in the meeting
also collectively discussed the potential favorable impact of
CSIs Catalyst division restructuring on the financial
performance of the combined entity going forward. 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.
In particular, the parties discussed CSIs financial
reporting calendar, recognizing that as an AIM-listed company,
CSI was not required to publish, and did not publish, quarterly
financial statements.
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. The
termination of Ms. Ruple was not related to her statement to the
Clean Diesel Board on March 26, 2010. The hiring of
Mr. Wynne was tied to the termination of Ms. Ruple.
Mr. Wynnes immediate tasks included financial
reporting duties with respect to Clean Diesels first
quarter and financial due diligence with respect to the merger.
In addition, because the Board felt that it would be needlessly
duplicative to hold an annual meeting on its customary timetable
and then shortly thereafter hold another meeting of shareholders
in connection with the merger, Clean Diesels Annual Report
on
Form 10-K
for the year ended December 31, 2009 needed to be amended
to include information that had been intended to be incorporated
by reference from the companys proxy statement for the
annual meeting.
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. All parties
agreed that they were committed to proceeding with the proposed
merger and to closing out open issues, but acknowledged that
both Clean Diesel and CSI had resource constraints due to the
relative size of each entity and that such constraints were
affecting the ability of each entity to move quickly to finalize
open items. The parties also recognized the recent management
change at Clean Diesel and acknowledged that Mr. Wynne
would need to focus his immediate efforts on Clean Diesels
financial reporting prior to getting up to speed on the merger.
Despite the delays, the parties agreed to work diligently to
finalize the merger agreement and proceed with the proposed
merger.
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 capital raise.
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 capital raise. The CSI Board instructed management to
proceed with the negotiation of the merger agreement.
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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 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. Mr. de Havillands
resignation cited his previously expressed desire to resign.
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 consideration. Following these
presentations, the Clean Diesel board voted unanimously to
approve the proposed merger, the form of merger agreement and
the associated transactions. The Clean Diesel board also
discussed the possibility of a 1-for-3 reverse stock split and
an increase in Clean Diesels authorized stock in
connection with the Merger. 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 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.
On July 6, 2010, CSI and Clean Diesel exchanged their
calculations of each companys cash position at
June 30, 2010 and thereafter agreed that there would be no
adjustment for cash positions as called for by the Merger
Agreement.
On July 13, 2010, the Clean Diesel Board of Directors
reviewed the nature of the reverse stock split that would be
required to satisfy NASD listing requirements and concluded a
different split might be required than the
1-for-3
split originally contemplated. It accordingly approved a
variable ratio, between
1-for-3 and
1-for-8,
with the final ratio to be selected by the Board prior to the
effective time of the Merger. The Board also determined given
the absence of the need to issue more shares due to an
adjustment for cash positions, that it was not necessary to
increase the authorized capital stock of Clean Diesel as
originally contemplated.
On July 21, 2010, Clean Diesels board of directors
formed a Special Committee of Independent Directors (the
Special Committee) to review and consider various
matters in connection with the Merger. The Special Committee was
formed at this time to assist the full board in analyzing issues
that may arise regarding the Merger.
On August 6, 2010, the Special Committee met to consider
developments in the litigation arising from CSIs
acquisition of Applied Utilities Systems, Inc. See
Information About CSI CSIs
Business Litigation. The Special Committee
consulted with Clean Diesels counsel, had presented to it
CSIs (and its counsels) analysis of the relevant
facts and law and determined that the possibility of an adverse
outcome in
66
this litigation and the range of damage awards that might
follow such an adverse ruling were not such as to make the
Merger inadvisable. The Special Committee discussed this
conclusion with the entire board at a board meeting also held on
August 6, 2010.
On or about August 25, 2010, Michael Asmussen informed the
board of directors of Clean Diesel that he had determined that
he would not join the combined company as a director or officer
after the Merger.
At a board meeting held on August 25, 2010, Clean
Diesels board of directors elected two new independent
directors to the Board of the Company: Mr. Frank J.
Gallucci and Mr. David W. Whitwell. Each of the new
directors has been appointed to the Audit Committee and the
Special Committee.
At the board meeting, Clean Diesels board of directors
approved an extension of the deadline for completing the Merger
from September 6, 2010 to October 15, 2010, subject to
obtaining agreement from CSIs board of directors,
CSIs bank and CSIs secured note holders to extend to
this date as well.
The terms of the Merger were negotiated between the boards of
Clean Diesel and CSI. Innovator Capital, through Mr. Park,
advised Clean Diesel about the Merger, the terms of Clean
Diesels Regulation S offering, and the strategic and
shareholder relations aspects of the Merger. Houlihan, beyond
its valuation studies, did not participate in the negotiation of
the Merger and did not advise Clean Diesel concerning the
Merger. Ardour Capital did not participate in the negotiation of
the Merger or recommend the amount to be paid as merger
consideration, and was retained by the Clean Diesel Board of
Directors solely for purposes of expressing an opinion as to the
fairness of the transaction to the Clean Diesel stockholders
from a financial point of view. Similarly, Allen &
Company LLC advised CSI about the Merger, certain aspects of the
terms of CSIs capital raise and the strategic and
shareholder relations aspects of the Merger.
Marshall & Stevens did not participate in the
negotiation of the Merger or recommend the amount to be paid as
merger consideration, and was retained by the CSI Board of
Directors solely for purposes of expressing an opinion as to the
fairness of the transaction to the CSI shareholders from a
financial point of view.
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:
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Improved OEM channel access for Clean Diesel intellectual
property
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Greater global scale, operating flexibility and market
credibility critical to future success
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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
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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 the following
factors:
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The belief based on due diligence, discussions with management
and financial advisors that the Merger represents the strategic
option most likely to maximize stockholder value after
consideration of risk factors associated with this transaction
and with several strategic alternatives including, reductions in
costs, liquidation and a business combination with another
merger partner;
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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 as a result of the
complementary nature of the two companies distribution
strengths in North America and Europe and the potential ability
of CSI to further commercialize Clean Diesels fuel borne
catalyst technology in North America;
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The belief that the combined company after the Merger will be
better positioned to pursue and implement its business strategy
with CSI providing manufacturing, regulatory expertise and North
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American distribution for Clean Diesel products and technologies
and Clean Diesel providing a stronger distribution capability
for CSI products in Europe and Asia;
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The belief that as a result of the synergies, the capital raises
and the increases in internal resources, the Merger would result
in a stronger and financially more stable company which would
provide a platform for growth;
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The complementary nature of Clean Diesels and CSIs
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 Clean Diesel and CSI;
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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 Clean
Diesels revenues, increase internal resources, reduce net
loss and provide greater operational scale and financial
stability because of CSIs manufacturing, regulatory
expertise and North American distribution for Clean Diesel
products and the synergistic nature of product offerings
combining Clean Diesels fuel-borne catalyst and CSIs
MPC©
after-treatment catalysts in the same system;
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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;
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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 CSIs
products 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 that the significant disparity in the relative market
capitalizations of Clean Diesel and CSI, and the terms of the
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, as explained more fully below;
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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 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 2006 Equity Compensation
Plan of CSI, 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;
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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;
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The fairness opinion obtained by Clean Diesel; and
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The belief that despite the fact that CSI and Clean Diesel have
net losses, the combined company will be profitable because of
synergies.
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The Clean Diesel board of directors recognized at an early stage
of considering the Merger, despite the consideration of the
Houlihan valuation presented to the Board at its
January 22, 2010 meeting, that the market capitalizations
of the two companies were significantly different. Clean
Diesels shares have been trading in 2010 at a level that
implied a market capitalization not significantly different than
Houlihans enterprise valuation of $14.7 million.
CSIs shares have been trading on the AIM in 2010 at a
level of one to four cents a share, which implied a market
capitalization on the order of $700,000 to $2.8 million,
significantly different than Houlihans enterprise
valuation of CSI of $14.2 million. Houlihan considered that
the stage of development of CSI and its liquidity constraints
made a market approach inappropriate and not a reasonable
estimate of value. The average daily trading volume of each
company is very low, but CSIs is significantly lower.
Clean Diesels board believed that the trading level of
CSIs shares reflected CSIs impaired financial
position, low market liquidity and the uncertainty of its
efforts at achieving its strategic objectives, rather than the
actual value of the company to Clean Diesel given its products
and revenues. Further, in evaluating the fairness of the Merger
from a financial point of view, Ardour Capital had considered
the market capitalization of the two companies an insufficient
basis for evaluation. Ardour held this view because of low daily
dollar volumes for each company, the limited number of days CSI
traded at all, and high volatility based on small volume. In
addition, the terms of Clean Diesels capital raise were
related to its market capitalization (being based on a
20 day average market price), and did not reflect any
immediate liquidity needs apart from the desirability of not
requiring an adjustment to the merger consideration. CSIs
capital raise, in which $4 million of secured convertible
notes would be convertible into approximately 66% of the equity
of CSI, also implied a valuation on the order of
$6 million, which also was significantly different than
Houlihans valuation. Clean Diesels board believed
that the terms of the CSI capital raise reflected CSIs
impaired financial position, absence of financial alternatives
and immediate liquidity needs apart from the Merger, and the
risk that the Merger might not occur. The board believed that
the Merger would alleviate these liquidity issues, and if those
issues were removed, the market capitalization would have been
more in line with the valuation analysis it had received.
Accordingly, the board considered that market capitalization was
not a reasonable basis for evaluating the contributions of each
company to the overall value of Clean Diesel after the Merger.
Clean Diesel was not privy to any valuation analyses performed
by or for CSI.
Clean Diesels board of directors and management considered
alternatives to the Merger. In particular, the board and
management considered the possibility of further reductions in
costs coupled with efforts to achieve EPA or CARB approvals of
its fuel borne catalyst products, the possibility of ceasing
operations, selling off its assets and liquidating, the
possibility of continuing its existing operations, and the
possibility of finding a different merger partner. Clean
Diesels board of directors and management believed the
Merger presented better potential value for its stockholders
than these alternatives.
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:
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The possibility that the anticipated benefits from the Merger
are not received by Clean Diesel;
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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 Clean Diesel has to pay the termination fee, it could
negatively affect Clean Diesels business operations;
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The possibility of the loss of key employees following the
Merger;
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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 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;
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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 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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For additional information concerning the above risks, see
RISK FACTORS beginning on page 19 and
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
on page 38.
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. The above discussion includes all of the
material favorable and unfavorable factors considered by Clean
Diesels Board of Directors in approving the Merger.
CSIs
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:
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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 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 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 belief that the combined company after the Merger will be
better positioned to pursue and implement its business strategy
with CSI providing manufacturing, regulatory expertise and
North American distribution for Clean Diesel products and
technologies and Clean Diesel providing a stronger distribution
capability for CSI products in Europe and Asia;
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The belief that as a result of the synergies, capital raises,
CSI cost reductions and a listing on a U.S. stock exchange, the
Merger would result in a stronger and financially more stable
company that would provide a platform for growth through
complementary acquisitions;
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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 as a result of the
complementary nature of the two companies distribution
strengths in North America and Europe and the potential
ability of CSI to further commercialize Clean Diesels fuel
borne catalyst technology in North America;
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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 as
Clean Diesels distribution strength in Europe and Asia
could increase the penetration of CSI products in those markets
and CSIs manufacturing operations would benefit from the
potential additional volume resulting from manufacturing and
sales of Clean Diesel products and technologies; the synergistic
nature of product offerings combining Clean Diesels
fuel-borne catalyst and CSIs
MPC©
after-treatment catalysts in the same system.
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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 will be satisfied or waived;
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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 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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Houlihan
Smith Valuations
In the course of considering the Merger, Clean Diesel retained
Houlihan to conduct valuations of Clean Diesel and CSI. Houlihan
was not retained to form or render a view about the fairness of
the Merger, or to provide investment banking or other advice.
Clean
Diesel
On November 4, 2009, Clean Diesel engaged Houlihan to
provide an independent comprehensive valuation report (the
Clean Diesel Valuation Opinion) as to the estimated
fair value of Clean Diesel as of September 30, 2009. On
December 14, 2010, Houlihan submitted its written opinion
to Clean Diesel. Houlihan, a Financial Industry Regulatory
Authority (FINRA) member, as part of its investment
banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers and
acquisitions, private placements, bankruptcy, capital
restructuring, solvency analyses, stock buybacks, and valuations
for corporate and other purposes. Prior to the Clean Diesel
Valuation Opinion, Houlihan had previously been engaged in
January 2009 by Clean Diesel to perform valuation services
related to its auction rate securities. Houlihan has received a
non-contingent fee from Clean Diesel relating to its services.
Upon the preparation of this Valuation Opinion, Houlihan had no
present or intended interest in Clean Diesel.
Overview
of Houlihans Valuation Opinion
In its Clean Diesel Valuation Opinion, Houlihan determined the
value of Clean Diesel via the application of widely accepted
valuation techniques, in accordance with the Uniform Standards
of Professional Appraisal Practice as required by the American
Society of Appraisers. The standard of value applied in the
Clean Diesel Valuation Opinion was fair value. The term
fair value is defined by the American Institute of
Certified Public
72
Accountants as follows: 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.
Specific methods of valuation were considered in arriving at an
estimate of the fair value of Clean Diesel. In preparing this
valuation, Houlihan used information provided by Clean Diesel.
Clean Diesels management represented that the information
is reasonably complete and accurate. Houlihan did not make any
independent examinations of the financial statements, financial
estimates, or any other information prepared by Clean
Diesels management which was relied upon for its analyses.
Accordingly, Houlihan made no representations or warranties, nor
did it express any opinion regarding the accuracy or
reasonableness of such representations or warranties. All of the
information made available to Houlihan was carefully analyzed
and reasonable attempts were made to find additional information
that could be instrumental to Houlihans analyses. In
addition, publicly available information utilized in the Clean
Diesel Valuation Opinion (e.g., economic, industry, statistical
and/or
investment information) was obtained from sources deemed to be
reliable. Houlihan deemed that it is beyond the scope of the
Clean Diesel Valuation Opinion to verify the accuracy of such
information, and Houlihan has made no representation as to its
accuracy. The Clean Diesel Valuation Opinion is based upon
business, economic, market and other conditions as they existed
as of September 30, 2009. Additional limiting conditions
and assumptions upon which the Clean Diesel Valuation Opinion is
based, include, without limitation, the following:
1. All financial projections relied upon were prepared
utilizing information and assumptions provided by Clean Diesel,
which Houlihan assumed reflects its best estimate as to the
future potential of Clean Diesel. Houlihan noted that the
forecasting of the future is a difficult and tenuous process.
Accordingly, Houlihan emphasized that disparities between the
projected figures and actual results are bound to occur, since
events and circumstances frequently do not occur as expected,
and those disparities may be material.
2. Since valuation is an imprecise science, Houlihan did
not purport to be a guarantor of value. Value is a question of
informed judgment. Houlihan did certify that this valuation
study was conducted using conceptually sound and commonly
accepted methods of valuation.
3. Houlihan did not investigate the legal and regulatory
requirements applicable to the property, including prior land
use, title, liens or encumbrances, which may be against the
property or properties on which Clean Diesel conducts business.
4. Houlihan assumed that Clean Diesel was in full
compliance with applicable federal, state, and local
environmental regulations and laws; as well as with all
applicable zoning, use, and occupancy regulations and
restrictions as stated, defined and considered in the Valuation
Opinion. It also assumed that all required licenses, permits,
consents, or other legislative or administrative authority from
any local, state, national government, or private entity
organization has been or can be obtained or renewed for any use,
which has been analyzed in the Valuation Opinion.
5. The valuation conclusions derived in the Clean Diesel
Valuation Opinion implicitly assumed that the existing
management of Clean Diesel will maintain the character and
integrity of Clean Diesel through any sale, reorganization,
offering, or diminution of the owners participation.
6. The discounted cash flow methodology in the Clean Diesel
Valuation Opinion is presented solely for use in the valuation
analysis. The discounted cash flow data did not necessarily
represent Clean Diesels forecast of future operating
results. Houlihan did not perform any additional accounting or
tax analysis.
7. Houlihan assumed that there are no hidden or unexpected
conditions of the assets of Clean Diesel that would adversely
affect its Valuation Opinion; and
8. No opinion was expressed with respect to matters that
require legal or specialized expertise, investigation or
knowledge beyond that customarily employed by financial analysts.
The following paragraphs summarize the material analyses
performed by Houlihan in arriving at the Valuation Opinion, but
do not purport to be a complete description of the analyses
performed by Houlihan.
73
Valuation
Analysis of Clean Diesel
Houlihan reviewed the background, stock price performance,
competitive position, competitive advantages, financial position
and operations of Clean Diesel. Houlihan also performed a review
of its industry. Houlihan evaluated the enterprise value of
Clean Diesel by utilizing the Guideline Public Company Approach,
the Public Market Trading Analysis Approach, and the Income
Approach. In sum, Houlihan assigned an equal weighting to each
of the three approaches and estimated that Clean Diesel has a
total enterprise value of $6.7 million and a total equity
value of $14.7 million.
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. Specifically, the Guideline
Public Company Method under the Market Approach 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.
Houlihan evaluated four comparable companies to Clean Diesel.
The Latest Twelve Months (LTM), projected 2009, and
projected 2010 revenues were deemed the most appropriate basis
from which to apply the selected guideline multiples.
Accordingly, Houlihan calculated the Enterprise Value
(EV) to LTM, projected 2009, and projected 2010
revenues multiples for the peer group. The mean multiples in
turn were applied to Clean Diesels LTM, projected 2009 and
2010 revenue values to compute unadjusted enterprise values.
Houlihan discounted the unadjusted enterprise values for lack of
marketability and added a control premium. A control premium was
incorporated as comparable public company multiples reflect a
non-controlling interest. The resulting metrics were
$2.1 million, $2.0 million, and $14.4 million,
the average of which led to a total enterprise value of
$6.2 million.
To determine the indicated equity values from each of the three
multiples, Houlihan subtracted debt and added cash to each of
the enterprise values of $2.1 million, $2.0 million,
and $14.4 million. Houlihan calculated the average of the
resulting three equity values, and arrived at a total equity
value on a non-marketable control basis of $14.4 million.
Public
Market Trading Analysis Approach
Houlihan noted that Clean Diesel is a publicly traded entity,
listed on the NASDAQ, and its shares are available for public
sale. As such, this public market provides an indication of
value. Houlihan utilized both the share price as of
September 30, 2009, as well as the calculated
Volume-Weighted Average Share Price (VWAP) for the
30 trading days prior to September 30, 2009. To calculate
Clean Diesels equity value, both the closing stock price
as of September 30, 2009 and the VWAP for the 30 trading
days prior to September 30, 2009 were multiplied by Clean
Diesels total number of shares outstanding. The average of
those two values was then utilized to result in a total
marketable minority equity value of $13.6 million. To
calculate enterprise value, Houlihan added Clean Diesels
total debt and subtracted its cash from the two equity values
derived from multiplying Clean Diesels total number of
shares outstanding by the closing stock price as of
September 30, 2009 and the VWAP for the 30 trading days
prior to September 30, 2009, respectively. Houlihan then
discounted each of the marketable minority equity values for
lack of marketability and added a control premium, since
comparable public company multiples reflect a non-controlling
interest. The average of those two values was then calculated
and resulted in a total enterprise value on a nonmarketable
control basis of $6.3 million.
74
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 under the Income Approach
estimates value based upon a companys projected future
free cash flow, discounted at a rate reflecting risks inherent
in its business and capital structure. Unlevered free cash flow
represents the amount of cash generated and available for
principal, interest and dividend payments after providing for
ongoing business operations. The discounted cash flow analysis
is dependent on projections and is further dependent on numerous
industry-specific and macroeconomic factors. Houlihan utilized
the forecasts provided by Clean Diesels management which
set forth projected future free cash flow.
In order to arrive at a present value, Houlihan calculated an
appropriate weighted average cost of capital. Houlihan began by
applying the
build-up
method to estimate the cost of equity. The
build-up
method is a widely-recognized method of determining the
after-tax net cash flow discount rate, performed by summing the
individual risks such as, the risk-free rate, equity risk
premium, industry risk premium, size premium, and company
specific risk premium associated with a particular equity
investment. Specifically, the cost of equity is the rate of
return required by holders of an equity investment to compensate
investors for the risks associated with that particular
investment. Additionally, Houlihan incorporated Clean
Diesels average cost of debt on an after-tax basis. The
cost of debt reflects the investor-required rates of return for
debt investments that are deemed similar to an investment in the
subject companys debt. Houlihan finally arrived at Clean
Diesels weighted average cost of capital
(WACC), which is the sum of the cost of equity and
the cost of debt, each weighted according to the capital
structure of Clean Diesel, of 22.8%.
Based on guidance from Clean Diesels management, no
dividends would be issued within the first five years of the
business. Therefore, Houlihan assumed all cash flows would be
reinvested in statutory capital for the projected period.
Utilizing a terminal earnings multiple (a multiple used to
capitalize earnings into perpetuity in the final year of the
projected period) of 5.0x, Clean Diesels WACC, and a
discount for lack of marketability, Houlihan arrived at an
implied enterprise value of $7.8 million. Houlihan then
deducted total debt and added cash to determine a nonmarketable
control value of equity of $16 million.
Other
Considerations
The preparation of a valuation 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 Clean Diesel Valuation Opinion is, therefore,
not necessarily susceptible to partial analysis or summary
description. Houlihan 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 the Valuation
Opinion. Houlihan 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
Valuation Opinion. In performing its analyses, Houlihan made
assumptions with respect to industry performance, general
business conditions and other matters, many of which are beyond
the control of Houlihan. Any assumed estimates implicitly
contained in Houlihans Clean Diesel Valuation Opinion or
relied upon by Houlihan in rendering its Clean Diesel Valuation
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.
CSI
On December 18, 2009, Clean Diesel engaged Houlihan to
provide an independent comprehensive valuation report (the
CSI Valuation Opinion) as to the estimated fair
value of CSI as of November 30, 2009. On February 3,
2010, Houlihan submitted its written opinion to Clean Diesel.
Houlihan has received a non-contingent fee from Clean Diesel
relating to its services. Upon the preparation of this Valuation
Opinion, Houlihan had no present or intended interest in Clean
Diesel or CSI.
75
Overview
of Houlihans Valuation Opinion
In its Valuation Opinion, Houlihan determined the value of CSI
via the application of widely accepted valuation techniques, in
accordance with the Uniform Standards of Professional Appraisal
Practice as required by the American Society of Appraisers. The
standard of value applied in the CSI Valuation Opinion was
fair value. The term fair value is defined by the
American Institute of Certified Public Accountants as follows:
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.
Specific methods of valuation were considered in arriving at an
estimate of the fair value of CSI. In preparing this valuation,
Houlihan used information provided by CSI. CSIs management
represented that the information was reasonably complete and
accurate. Houlihan did not make any independent examinations of
the financial statements, financial estimates, or any other
information prepared by CSIs management which was relied
upon for its analyses. Accordingly, Houlihan made no
representations or warranties, nor did it express any opinion
regarding the accuracy or reasonableness of such representations
or warranties. All of the information made available to Houlihan
was carefully analyzed and reasonable attempts were made to find
additional information that could be instrumental to
Houlihans analyses. In addition, publicly available
information utilized in the CSI Valuation Opinion (e.g.,
economic, industry, statistical
and/or
investment information) was obtained from sources deemed to be
reliable. Houlihan deemed that it is beyond the scope of the CSI
Valuation Opinion to verify the accuracy of such information,
and Houlihan has made no representation as to its accuracy. The
CSI Valuation Opinion is based upon business, economic, market
and other conditions as they existed as of November 30,
2009. Additional limiting conditions and assumptions upon which
the CSI Valuation Opinion is based, include, without limitation,
the following:
1. All financial projections relied upon were prepared
utilizing information and assumptions provided by CSI, which
Houlihan assumed reflects its best estimate as to the future
potential of CSI. Houlihan noted that the forecasting of the
future is a difficult and tenuous process. Accordingly, Houlihan
emphasized that disparities between the projected figures and
actual results are bound to occur, since events and
circumstances frequently do not occur as expected, and those
disparities may be material.
2. Since valuation is an imprecise science, Houlihan did
not purport to be a guarantor of value. Value is a question of
informed judgment. Houlihan did certify that this valuation
study was conducted using conceptually sound and commonly
accepted methods of valuation.
3. Houlihan did not investigate the legal and regulatory
requirements applicable to the property, including prior land
use, title, liens or encumbrances, which may be against the
property or properties on which CSI conducts business.
4. Houlihan assumed that CSI was in full compliance with
applicable federal, state, and local environmental regulations
and laws; as well as with all applicable zoning, use, and
occupancy regulations and restrictions as stated, defined and
considered in the Valuation Opinion. It also assumed that all
required licenses, permits, consents, or other legislative or
administrative authority from any local, state, national
government, or private entity organization has been or can be
obtained or renewed for any use, which has been analyzed in the
Valuation Opinion.
5. The valuation conclusions derived in the CSI Valuation
Opinion implicitly assumed that the existing management of CSI
will maintain the character and integrity of CSI through any
sale, reorganization, offering, or diminution of the
owners participation.
6. The discounted cash flow methodology in the CSI
Valuation Opinion is presented solely for use in the valuation
analysis. The discounted cash flow data did not necessarily
represent CSIs forecast of future operating results.
Houlihan did not perform any additional accounting or tax
analysis.
7. Houlihan assumed that there were no hidden or unexpected
conditions of the assets of CSI that would adversely affect its
Valuation Opinion; and
8. No opinion was expressed with respect to matters that
require legal or specialized expertise, investigation or
knowledge beyond that customarily employed by financial analysts.
76
The following paragraphs summarize the material analyses
performed by Houlihan in arriving at the Valuation Opinion, but
do not purport to be a complete description of the analyses
performed by Houlihan.
Valuation
Analysis of CSI
Houlihan reviewed the background, stock price performance,
competitive position, competitive advantages, financial position
and operations of CSI. Houlihan also performed a review of its
industry. Houlihan evaluated the enterprise value of CSI by
utilizing the Income Approach. Houlihan considered, but did not
utilize the Market Approach, due to the stage of development of
CSI and the liquidity constraints CSI faced. It also considered
a cost approach based on the amount of capital required to
create an equivalent asset, but did not utilize this approach
because it typically is not appropriate for a going concern. In
summary, Houlihan estimated that CSI had a total enterprise
value at the Valuation Date of $14.2 million.
The Income Approach is used to estimate the value of a company
based on expected future economic benefits. The Discounted Cash
Flow (DCF) method under the Income Approach
estimates value based upon a companys projected future
free cash flow, discounted at a rate reflecting risks inherent
in its business and capital structure. Unlevered free cash flow
represents the amount of cash generated and available for
principal, interest and dividend payments after providing for
ongoing business operations. The discounted cash flow analysis
is dependent on projections and is further dependent on numerous
industry-specific and macroeconomic factors. Houlihan utilized
the forecasts provided by CSIs management which set forth
projected future free cash flow.
In order to arrive at a present value, Houlihan calculated an
appropriate weighted average cost of capital. Houlihan began by
applying the
build-up
method to estimate the cost of equity. The
build-up
method is a widely-recognized method of determining the
after-tax net cash flow discount rate, performed by summing the
individual risks such as the risk-free rate, equity risk
premium, industry risk premium, size premium, and company
specific risk premium associated with a particular equity
investment. Specifically, the cost of equity is the rate of
return required by holders of an equity investment to compensate
investors for the risks associated with that particular
investment. Additionally, Houlihan incorporated CSIs
average cost of debt on an after-tax basis. The cost of debt
reflects the investor-required rates of return for debt
investments that are deemed similar to an investment in the
subject companys debt. Houlihan finally arrived at
CSIs weighted average cost of capital (WACC),
which is the sum of the cost of equity and the cost of debt,
each weighted according to the capital structure of CSI, of
13.3%.
In its application of the DCF method, Houlihan employed a
scenario analysis to take into account the range of
possibilities and outcomes inherent in CSIs business plan
and the early-stage nature of its operations. These procedures
included analysis and stress testing of key inputs presented in
CSIs management prepared financial projections. Further,
the operations of CSIs Catalyst and ECS divisions were
evaluated separately, including an enterprise valuation analysis
for each division on a standalone basis, and combined to produce
a consolidated enterprise valuation.
In each scenario, Houlihan discounted the enterprise net cash
flows for 2010 through 2014 at CSIs WACC. Based on
guidance from CSIs management, Houlihan assumed all cash
flows would be reinvested in statutory capital for the projected
period. In each scenario, Houlihan grew the 2014 enterprise net
cash flow by a long-term growth rate and applied a
capitalization multiple. Houlihan then discounted the terminal
value to the present by applying CSIs WACC. In turn,
Houlihan added the present value of the enterprise net cash
flows to the present value of the terminal value to conclude an
indicated enterprise value. For purposes of valuation, the
indicated enterprise value in each scenario was weighted at
33.3%. On a consolidated basis, Houlihan arrived at a total
enterprise value of $14.2 million.
Other
Considerations
The preparation of a valuation 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 CSI Valuation Opinion is, therefore, not
necessarily susceptible to partial analysis or summary
description. Houlihan believes that its analyses must be
77
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 the Valuation
Opinion. Houlihan 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
Valuation Opinion. In performing its analyses, Houlihan made
assumptions with respect to industry performance, general
business conditions and other matters, many of which are beyond
the control of Houlihan. Any assumed estimates implicitly
contained in Houlihans CSI Valuation Opinion or relied
upon by Houlihan in rendering its CSI Valuation 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.
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. Ardour
Capital is a full service investment bank that specializes in
the energy technologies market and provides a broad range of
financial services, including providing valuations and fairness
opinions. In March 2010, Clean Diesel engaged Ardour Capital to
act as a financial advisor to review and evaluate the fairness
of the possible transaction with CSI. The board of directors of
Clean Diesel selected Ardour Capital to conduct this fairness
review because of Ardour Capitals national reputation for
financial services, including financial valuation services, and
its focus in the energy technologies market, and because Clean
Diesel had used Ardour Capital in the past for financial
advisory services and was impressed with Ardour Capitals
performance of such services. During the last two years, Ardour
Capital 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 Capital, nor its
employees, affiliates nor shareholders shall receive a fee for
advising Clean Diesel on the proposed transaction with CSI.
Ardour Capital will receive a fee of $85,000 for issuing its
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. The terms and conditions of the Merger, including
the consideration to be paid in connection with the Merger, were
determined by negotiations between Clean Diesel and CSI. Ardour
Capital made no recommendation as to the amount of consideration
or form of consideration to be paid in 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
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.
None of the analysts involved nor any officer or director of
Ardour Capital has any financial interest in CSI or Clean
Diesel.
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;
78
(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, which represented the latest
information made available to Clean Diesels management at
that time;
(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 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 held this view because of low daily dollar volumes for
each company, the limited number of days CSI traded at all, and
high volatility based on small volume. 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
79
company analysis. Ardour Capital did not expressly take into
account in its analysis the effect of CSIs liquidity and
going concern issues.
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.
Discount rate is based on:
(i) Opportunity cost of capital
(ii) Liquidity discount This is the discount
applied by potential investors based on market illiquidity of
traded stocks. Both CDTI and CSI stocks have sparse trading (As
of May 6, 2010, the
2-month
average daily dollar volume for CDTI and CSI was $6,900 and
$1,100 respectively)
(iii) Hurdle rate This is the minimum rate of
return that a potential investor needs to get over the
hurdle of making a decision to invest.
(iv) Uncertainty of cash flow projections
The first three factors in the list above led Ardour Capital to
use a higher baseline discount rate for the two companies, and
reflected its judgment that similarly sized companies operating
in similar businesses would have costs of capital warranting a
40% discount rate. The fourth item (uncertainty of cash flow
projections) was a key factor in using a higher discount rate
for CDTI. It is Ardour Capitals opinion that potential
investors would apply a higher risk premium to CDTI as compared
to CSI based on recent operating performance, revenue trend and
forward view. This reflected Ardour Capitals judgment that
CSIs historical performance in the periods reviewed by it
and the projections given to it showed less variability, while
CDTIs historical performance in the periods reviewed by it
and the projections made by CDTI reflected much greater
variability, and thus a greater discount rate based on the
uncertainty of these cash flow projections was merited.
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.
80
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.
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 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 do survive the Merger
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Discounted
Cash Flow Assumptions
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Ardour Capital did not have CSI capital expenditures projections
at the time it did its DCF analysis and, accordingly, DCF
analysis did 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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81
Opinion
of the Financial Advisor to the Board of Directors of
CSI
In connection with the Merger, on March 11, 2010 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 Common Stockholders in the Merger,
as described in such written opinion, is fair from a financial
point of view to such Class A Common Stockholders.
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. Even though Allen &
Company, LLC was advising CSI in connection with the Merger, the
Board of Directors selected Marshall & Stevens to
conduct this fairness review because of CSIs favorable
impressions of other financial advisory services previously
provided by Marshall & Stevens to CSI, all of which
were performed more than two years prior to its engagement for
the fairness review described in this section. The CSI Board of
Directors also considered the fact that, unlike the fee payable
to Allen & Company, LLC for its services in connection
with the Merger, the fee payable to Marshall & Stevens
was not contingent on the valuation or completion of the Merger.
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
82
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 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 15% 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.
83
This approach resulted in an indicated enterprise value for CSI
on a marketable, controlling basis of approximately
$8.2 million, and an indicated enterprise value for Clean
Diesel on a marketable, controlling basis of approximately
$8.3 million.
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 DCF 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 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.
This approach resulted in an indicated enterprise value for CSI
on a marketable, controlling basis ranging from approximately
$6.9 million to $9.8 million, and an indicated
enterprise value for Clean Diesel on a marketable, controlling
basis from approximately $5.2 million to $10.0 million.
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.
This approach resulted in an indicated enterprise value for CSI
on a marketable, controlling basis ranging from approximately
$5.5 million to $10.8 million, and an indicated
enterprise value for Clean Diesel on a marketable, controlling
basis ranging from approximately $3.1 million to
$9.3 million.
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 on a
marketable, controlling basis by weighting the three approaches
by an appropriate percentage. This yields the result of an
enterprise value for CSI ranging from approximately $7.6 million
to $9.0 million and an enterprise value for Clean Diesel ranging
from approximately $6.8 million to $8.9 million. In order to
conclude on an 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. Accordingly, an equity
value for CSI ranged from approximately $1.7 million to
$3.0 million and an equity value for Clean Diesel ranged
from approximately $13.6 million to $15.6 million. In
order to assess the fairness of the transaction from a financial
point of view,
84
Marshall & Stevens also valued the warrants which would be
given to the Class A Common Stockholders as part of the Merger
consideration.
Marshall & Stevens also considered the projected value
of Clean Diesel immediately after consummation of the Merger,
using an income approach and a market approach. The income
approach resulted in a post-merger indicated enterprise value
for the combined entity on a marketable, controlling basis
ranging from approximately $21.1 million to
$24.9 million. The market approach resulted in a
post-merger enterprise value for the combined entity on a
marketable, controlling basis ranging from approximately
$23.1 million to $27.3 million. In summary, using the
income approach and the market approach, Marshall & Stevens
concluded on an enterprise value for the combined entity on a
marketable, controlling basis by weighting the two approaches by
an appropriate percentage. This yields the result of an
enterprise value for the combined entity ranging from
approximately $21.9 million to $25.8 million. In order
to conclude an equity value on a nonmarketable, controlling
basis, Marshall & Stevens subtracted debt, then applied a
marketability discount and added cash and cash equivalents to
the enterprise value. This resulted in an equity value for the
combined entity ranging from approximately $21.7 million to
$25.4 million. 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.
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 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, as amended, 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, Clean Diesels non-executive Chairman,
is chairman and principal is advising Clean Diesel with respect
to its capital raising and the
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85
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 $761,258 as
compensation for Innovators services in connection with
the Merger. Clean Diesel has elected to pay $500,000 of this fee
in cash, and the balance of $261,000 in the form of
194,486 shares of its common stock, valued at $1.342 for
this purpose.
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Two of the directors of Clean Diesel, Mr. Park and
Mr. Gray, are expected to continue as directors of Clean
Diesel after the Merger. Mr. Rogers, Clean Diesels
Executive Vice President of International Operations, is
expected to become a director of Clean Diesel at the effective
time of the Merger. Five of the directors of Clean Diesel,
Mr. Asmussen, Mr. Grinnell, Mr. Merrion,
Mr. Whitwell and Mr. Gallucci are expected to resign
at the effective time of the Merger and be replaced by four
former directors of CSI.
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Effective June 30, 2010, Clean Diesel entered into a
Transition Services Agreement with Mr. Grinnell, Vice
President, General Counsel, Corporate Secretary and a Director
of Clean Diesel. Pursuant to the Transition Services Agreement,
if Mr. Grinnell remains employed by Clean Diesel through
the earlier of (A) the six (6) month period following
the closing of the Merger or (B) the date that Clean Diesel
closes its Bridgeport, Connecticut office, Mr. Grinnell
will receive from Clean Diesel a transition bonus in the amount
of $86,730. If the Merger does not occur on or before
September 6, 2010, or such later date as determined by
Clean Diesel, the Transition Services Agreement will be void and
no transition bonus will be paid. The Transition Services
Agreement provides that Clean Diesel may enter into some future
arrangement for Mr. Grinnells services to after the
Bridgeport office closes on terms, if any, to be mutually agreed.
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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.
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:
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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 which are expected
to 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.
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
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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 effective time of the Merger;
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 effective time of the Merger.
Ownership
of the Combined Company
After the effective date of the Merger, it is anticipated that
ownership of Clean Diesel would be distributed approximately as
follows:
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Existing CSI Shareholders
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16
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%(a)
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CSIs financial advisor
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4
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%(b)
|
Purchasers of CSI secured convertible notes
|
|
|
40
|
%(c)
|
Existing Clean Diesel Shareholders
|
|
|
37
|
%(d)
|
Purchasers of newly issued Clean Diesel shares
|
|
|
3
|
%(e)
|
|
|
|
(a) |
|
Represents holders of existing CSI common stock, which will
become CSI Class A common stock immediately prior to the
merger, including holders of CSI secured convertible notes who
currently beneficially own approximately 30% of CSIs
common stock (without giving effect to shares of CSI common
stock to be received for non-employee accrued director fees).
Does not give effect to the conversion of such notes to CSI
Class B common stock and the subsequent conversion of such
stock to Clean Diesel common stock by virtue of the Merger. Does
not give effect to warrants to purchase three million shares (on
a pre-split
basis) of Clean Diesel common stock to be issued as part of the
merger consideration. |
|
|
|
(b) |
|
Does not give effect to warrants to purchase one million shares
(on a
pre-split
basis) of Clean Diesel common stock to be issued in connection
with the Merger. |
|
|
|
(c) |
|
These noteholders will become Class B
shareholders immediately prior to the Merger. Excludes amounts
that are included within the computation for Existing CSI
Shareholders, which is described in (a) above. If such
amounts were included, together with shares of CSI common stock
to be received for non-employee accrued director fees, the
noteholders would beneficially own approximately 49% of the
combined company after the Merger. |
|
|
|
(d) |
|
Includes 194,486 (on a
pre-split
basis) shares of Clean Diesel common stock that may be issued to
Innovator Capital in respect of the Merger fee. |
|
|
|
(e) |
|
Does not give effect to warrants to purchase one million shares
(on a
pre-split
basis) of Clean Diesel common stock. |
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
87
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.
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.
88
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 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.
89
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.
90
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
|
|
|
63
|
|
|
Director, Chief Executive Officer
|
Alexander Ellis, III
|
|
|
61
|
|
|
Director
|
Dr. Charles R. Engles
|
|
|
62
|
|
|
Director
|
Bernard H. Cherry
|
|
|
70
|
|
|
Director
|
Mungo Park
|
|
|
54
|
|
|
Director
|
Derek R. Gray
|
|
|
77
|
|
|
Director
|
Timothy Rogers
|
|
|
48
|
|
|
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 and
Stephen J. Golden, Ph.D. 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, existing
Clean Diesel stockholders (including investors in its
Regulation S offering) will own approximately 40% of the
outstanding shares of Clean Diesel common stock and the former
CSI shareholders (including investors in its capital raise) and
its financial advisor will collectively 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
91
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.
92
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER
The following discussion addresses the material
U.S. federal income tax consequences of the exchange of
shares of CSI common stock for shares of Clean Diesel common
stock and warrants to purchase Clean Diesel common stock
pursuant to the Merger. This discussion 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 addresses only those CSI security holders
described in the immediately preceding sentence and does not
address all aspects of U.S. federal income taxation that
may be relevant to particular CSI shareholders or warrant
holders, based on their individual circumstances including those
tax consequences that may be relevant to shareholders or warrant
holders based on the fact that they 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 or will acquire Clean
Diesel common stock or warrants as compensation.
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 and whether CSI and Clean
Diesel will have assets at the effective time of the Merger with
a fair value in excess of their respective liabilities (the
net value test). 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 valuation
date should represent approximately 92% 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, both CSI and CDTI have
concluded that both the continuity of interest and control tests
will be met.
93
CSI and CDTI have each concluded that they will meet their
respective net value test. See the sections entitled Risk
Factors Risk Factors Relating to the Underlying
Business of CSI and Risk Factors Risks
Related to Clean Diesels Financial Condition.
KPMG LLP, tax adviser to CSI, has delivered an opinion, dated as
of the date this joint proxy statement/information statement and
prospectus is first filed with the SEC, that the Merger will be
treated for U.S. federal income tax purposes as a
reorganization within the meaning of
Section 368(a) of the Code. The opinion does not address
any state, local or foreign tax consequences of the Merger. The
opinion is based on certain assumptions and representations as
to factual matters from CSI and Clean Diesel. If any of the
assumptions or representations is incorrect, incomplete,
inaccurate or is violated in any material respect, the validity
of the conclusions reached by KPMG LLP in their opinions would
be jeopardized and the tax consequences of the merger could
differ from those described in this joint proxy
statement/information statement and prospectus. Neither CSI nor
Clean Diesel is currently aware of any facts or circumstances
that would cause the assumptions or representations to be
incorrect, incomplete, inaccurate or violated in any material
respect.
Any such opinion is not binding on the IRS or any court, so
there can be no certainty that the IRS will not challenge the
conclusions reflected in the opinion or that a court would not
sustain such a challenge. Neither Clean Diesel nor CSI intends
to obtain a ruling from the IRS on the tax consequences of the
Merger. If the IRS were to successfully challenge the
reorganization status of the Merger, the Merger
would be a fully taxable transaction for the CSI shareholders
and warrantholders. Except as otherwise noted, it is assumed for
purposes of the following discussion that the Merger will be
treated as a reorganization within the meaning of
Section 368(a) of the Code.
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
As a reorganization under Section 368(a), 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 or loss
with respect to 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
As a reorganization under Section 368(a), 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
94
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
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 reported that it 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 reported that it 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.
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.
95
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, as well as all
other information included elsewhere in this joint proxy
statement/information statement and prospectus, before you
decide how to vote.
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 are intended 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.
General
Clean Diesel, CSI and CDTI Merger Sub, Inc. are parties to an
Agreement and Plan of Merger dated May 13, 2010, as such
may be amended from time to time. The Merger Agreement contains
the terms and conditions of the proposed combination of the
businesses of Clean Diesel and CSI. A copy of the Merger
Agreement is included as Annex A hereto and you are
encouraged to read it carefully. 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, will merge with and into CSI, with CSI as the
surviving corporation. In exchange for their CSI securities, the
securityholders of CSI will receive shares of Clean Diesel
common stock and each holder of shares designated as
Class A common stock (or warrants giving the right to
acquire Class A common stock) will also receive warrants to
purchase shares of Clean Diesel common stock.
Merger
Consideration
The Merger Agreement provides a formula for the issuance, at the
effective time of the Merger, of shares of Clean Diesel common
stock and warrants to purchase Clean Diesel common stock and for
the allocation of such shares and warrants. As detailed below,
the number of shares of Clean Diesel common stock is determined
primarily by reference to the number of shares of Clean Diesel
common stock that are deemed to be outstanding immediately prior
to the Merger, which is then multiplied by 1.5 to determine the
number of shares of Clean Diesel common stock to be issued in
order to provide for the agreed upon
60/40 equity
split in favor of CSI that resulted from both CSI and Clean
Diesel achieving their respective cash position targets as of
June 30, 2010. The number of warrants is fixed at 4,000,000
(on a pre-split basis).
Allocation
of Merger Consideration
Of the aggregate number of shares of Clean Diesel common stock
to be issued in the Merger, (a) 66.0066% will be allocated
to the holders of CSIs Class B common (into which the
secured convertible notes will have been converted),
(b) 1,000,000 shares (on a pre-split basis) are to be
used as payment of fees owed to CSIs financial advisor,
Allen & Company, LLC, and (c) the balance of such
shares will be allocated to holders of CSI existing common stock
(to be designated as Class A common stock) and
the holder of the CSI
in-the-money
warrant. Of the 4,000,000 warrants (on a pre-split basis),
1,000,000 warrants are to be used as payment of fees owed to
CSIs financial advisor, Allen & Company, LLC,
and the balance of 3,000,000 warrants will be allocated to the
holders of CSI existing common stock (to be designated as
Class A common stock) and the holder of the CSI
in-the-money
warrant. Holders of CSIs Class B common stock (into
which the secured convertible notes will have been converted)
will not receive any such warrants.
96
Clean
Diesel Stock Portion of Merger Consideration
Under the Merger Agreement, the number of shares of Clean Diesel
common stock to be issued in the aggregate to the holders of CSI
Class A common stock, to the holders of CSIs
Class B common stock, to the holder of the CSI
in-the-money
warrant and to CSIs financial advisor Allen &
Company, LLC is determined according to the following formula
(all of which is on a pre-split basis):
(60/40 × Outstanding Clean Diesel)
Outstanding Clean Diesel for purposes of the Merger
Agreement is expected to be 9,151,772 shares (on a
pre-split basis) of Clean Diesel common stock. This is based on
an assumed 8,213,988 shares currently issued and
outstanding, plus 654,118 shares expected to be issued in
Clean Diesels Regulation S offering, plus both
194,486 shares to be issued and 89,180 shares issuable
upon the exercise of warrants to be issued to Clean
Diesels financial advisor Innovator Capital as payment for
fees (all such numbers being on a pre-split basis).
Thus, the number of shares of Clean Diesel common stock issuable
to CSIs shareholders, to the holder of the CSI
in-the-money
warrant and to Allen & Company as the Clean Diesel
common stock portion of the Merger consideration is expected be
13,727,658 shares of Clean Diesel common stock, allocable
among such holders and Allen & Co. as follows (all
such numbers being on a pre-split basis):
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60/40 × 9,151,772 =
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13,727,658
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aggregate number of shares of Clean Diesel common stock
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of which
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9,061,160
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to be issued to CSI Class B common stock
(representing 66.0066% of 13,727,658);
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1,000,000
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to be issued to Allen & Company, LLC; and
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3,666,498
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to be issued to (or reserved for issuance to) CSI Class
A common stock and the CSI in-the-money
warrant
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Warrant
Portion of Merger Consideration
Under the Merger Agreement, the number of warrants to purchase
Clean Diesel common stock to be issued to CSIs
shareholders, to the holder of the CSI
in-the-money
warrant and to CSIs financial advisor Allen &
Company, LLC is fixed at 4,000,000 (on a pre-split basis). Of
these, warrants to purchase 3,000,000 shares of Clean
Diesel common stock (on a pre-split basis) are to be issued (or
reserved for issuance) to the holders of CSIs Class A
common stock and the CSI
in-the-money
warrant, and warrants to purchase 1,000,000 shares of Clean
Diesel common stock (on a pre-split basis) are to be issued to
Allen & Company, LLC.
Each of these warrants to purchase shares of Clean Diesel common
stock will have an exercise price determined by dividing
$30,000,000 by the number of shares of Clean Diesel common stock
outstanding immediately after the effective time of the Merger.
This price is currently expected to be approximately $1.320 per
share (on a pre-split basis). The exercise price per share of
the warrant and the number of shares of Clean Diesel common
stock issuable upon exercise of the warrant will be
proportionally adjusted if, in addition to the merger, Clean
Diesel effects a reclassification, split or subdivision of its
common stock.
All of the warrants to purchase shares of Clean Diesel common
stock issued as part of the merger consideration 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.
Two
Classes of CSI Shareholders
CSI currently only has one authorized class of common stock.
Only holders of this class of common stock on the record date
will vote to approve the Merger (among other items) at the
special meeting of CSIs shareholders. If the necessary
shareholder approvals are received at the meeting, prior to the
effective time of the Merger, CSI will amend its articles of
incorporation to create two classes of common stock:
Class A common stock and
Class B common stock. All shares of CSI common
stock issued and outstanding at the time of filing
97
the amendment to CSIs articles of incorporation will be
designated as Class A common stock. Subsequent
to the amendment of its articles of incorporation but prior to
the effective time of the Merger, holders of CSIs secured
convertible notes issued in its capital raise will convert into
the newly created Class B common stock. No
shares of Class B common stock will be
outstanding or entitled to vote as at the record date.
Only holders of CSIs Class A common stock
(excluding shares to be issued to CSIs non-employee
directors for accrued fees immediately prior to the Merger) will
receive shares of Clean Diesel common stock and warrants to
purchase Clean Diesel common stock in the Merger that will have
been registered under the registration statement on
Form S-4
of which this joint proxy statement/information statement and
prospectus forms a part. Shares of Clean Diesel common stock
issued to holders of CSIs Class B common stock (into
which the secured convertible notes will have been converted
prior the merger) and shares of Clean Diesel common stock and
warrants to purchase Clean Diesel common stock issued to
CSIs financial advisor Allen & Company have not
been registered under such registration statement.
Merger
Consideration per CSI Class A Share
Under the Merger Agreement, the number of shares of Clean Diesel
common stock and warrants to purchase Clean Diesel common stock
to be issued for each share of CSI Class A common stock
outstanding at the time of the Merger will be determined by a
formula that divides (a) the number of shares of Clean
Diesel common stock and warrants to purchase Clean Diesel common
stock to be allocated to CSI Class A common stock as
described above under Share Portion of
Merger Consideration and
Warrant Portion of Merger
Consideration by (b) the number of shares of
CSI Class A common stock that are deemed to be outstanding
immediately prior to the effective time of the Merger, which is
referred to in the Merger Agreement as CSIs
Outstanding Common Stock.
For purposes of the Merger Agreement, CSIs
Outstanding Common Stock is expected to be
77,473,996 shares of CSI Class A common stock. This is
based on an assumed 69,761,902 shares currently issued and
outstanding, plus 1,250,000 shares issuable upon the
exercise of its
in-the-money
warrant and 6,462,094 shares expected to be issued to its
non-employee Directors for accrued fees. Accordingly, on a
presplit basis, dividing (a) the anticipated
3,666,498 shares of Clean Diesel common stock and the
3,000,000 warrants to purchase Clean Diesel common stock to be
allocated in the aggregate to the Class A common stock and
the CSI
in-the-money
warrant by (b) the anticipated 77,473,996 shares of
CSI common stock that would be deemed to be outstanding
immediately prior to the effective time of the Merger, each
share of CSI Class A common stock would be expected to
convert into 0.04732553 shares of Clean Diesel Common stock
and warrants to purchase 0.03872267 shares of Clean Diesel
common stock.
Under the Merger Agreement, any share of CSI common stock that
is owned by CSI, Clean Diesel or the Merger Sub as of the
effective time of the Merger will be canceled without payment of
any consideration and thus are not included in the
77,473,996 shares of CSI Class A common stock that is
expected to be outstanding. CSI shareholders who properly demand
and perfect dissenters rights pursuant to the California
Corporations Code will be entitled to receive the consideration
provided for by the California Corporations Code in lieu of the
per share merger consideration described in the preceding
paragraph, although their shares will continue to be included
among the 77,473,996 shares of CSI Class A common
stock that is expected to be outstanding. See the section
entitled The Merger Appraisal Rights and
Dissenters Rights for additional information.
Merger
Consideration per CSI Class B Share
Under the Merger Agreement, the number of shares of Clean Diesel
common stock to be issued for each share of CSI Class B
common stock outstanding at the time of the Merger will be
determined by a formula that divides (a) the number of
shares of Clean Diesel common stock to be allocated to CSI
Class B common stock as described above under
Share Portion of Merger
Consideration, which is expected to be
9,061,160 shares (on a pre-split basis) by (b) the
number of shares of CSI Class B common stock that are
outstanding immediately prior to the effective time of the
Merger, which is expected to be 150,434,943 shares (on a
pre-split basis). Accordingly, on a pre-split basis each share
of CSI Class B common stock would be expected to convert
into
98
0.06023308 shares of Clean Diesel Common stock. Holders of
CSIs Class B common stock do not have the right to
receive warrants to purchase Clean Diesel common stock under the
Merger Agreement.
Effects
of Clean Diesels Reverse Stock Split on Merger
Consideration
The following table illustrates the effects that Clean
Diesels proposed reverse stock split may have on the
number of shares of Clean Diesel common stock and warrants to
purchase Clean Diesel common stock that holders of CSI
Class A common stock, Class B
common stock and CSIs financial advisor, Allen &
Company, are expected to receive in the Merger. The table
assumes that Clean Diesel will have issued and outstanding an
aggregate 9,062,592 shares (on a pre-split basis)
immediately prior to the Merger, that Clean Diesel will issue an
aggregate 13,727,658 shares (on a pre-split basis) and
warrants to purchase 4,000,000 shares of Clean Diesel (on a
pre-split basis) at $1.320 per share (e.g.,
$30,000,000/22,731,093) in the Merger, and that CSI will have
issued and outstanding an aggregate 76,223,996 shares of
Class A common stock, one
in-the-money
warrant to acquire 1,250,000 shares of
Class A common stock and
150,434,943 shares of Class B common stock
at the effective time of the Merger. The exact number of shares
to be issued in the Merger, the exact exercise price for the
warrants, and the actual reverse stock split ratio may not be
determined until immediately prior to the Merger.
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Allen & Companys
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1,000,000 Shares of
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Clean Diesel and
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1,000 Shares of CSI
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1,000 Shares of CSI
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Warrants to Purchase
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Assumed Reverse
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Class A Common
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Class B Common
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1,000,000 Shares of Clean
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Split Ratio
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Stock becomes:*
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Stock becomes:*
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Diesel become:*
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None
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47 shares of Clean Diesel
common stock
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60 shares of Clean Diesel
common stock
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1,000,000 shares of Clean
Diesel common stock
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Warrants to purchase 38 shares of Clean Diesel common stock
at $1.320 per share
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No warrants to purchase Clean Diesel
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Warrants to purchase 1,000,000 shares of Clean Diesel common
stock at $1.320 per share
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1-for-3
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15 shares of Clean Diesel common stock
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20 shares of Clean Diesel common stock
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333,333 shares of Clean Diesel common stock
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(minimum reverse
stock split ratio)
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Warrants to purchase 12 shares of Clean Diesel common stock
at $3.960 per share
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No warrants to purchase Clean Diesel
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Warrants to purchase 333,333 shares of Clean Diesel common stock
at $3.960 per share
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1-for-5
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9 shares of Clean Diesel common stock
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12 shares of Clean Diesel common stock
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200,000 shares of Clean Diesel common stock
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Warrants to purchase 7 shares of Clean Diesel common stock
at $6.600 per share
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No warrants to purchase Clean Diesel
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Warrants to purchase 200,000 shares of Clean Diesel common stock
at $6.600 per share
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1-for-8
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5 shares of Clean Diesel common stock
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7 shares of Clean Diesel common stock
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125,000 shares of Clean Diesel common stock
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(maximum reverse
stock split ratio)
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Warrants to purchase 4 shares of Clean Diesel common stock
at $10.560 per share
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No warrants to purchase Clean Diesel
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Warrants to purchase 125,000 shares of Clean Diesel common stock
at $10.560 per share
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* |
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No fractional shares (or warrants to purchase fractional shares)
will be issued in the Merger. Accordingly, all share numbers and
warrant numbers are rounded down to the nearest whole number. |
Treatment
of CSIs Existing Options, Restricted Stock and
Warrants
CSIs
Existing 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
effective time of Merger, 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
99
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 Merger.
CSI stock options issued under the 1997 Plan that are not
exercised prior to the effective time of Merger will be
cancelled upon the occurrence of the Merger and the holders of
such options will not receive any payment or consideration for
such cancelled options. Prior to the effective time of Merger,
CSI agreed to 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 agreed to 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
Merger will automatically vest and be settled in CSI common
stock effective as of, and conditioned upon, the occurrence of
the Merger and will be converted in Clean Diesel common stock
and warrants pursuant to the Merger Agreement.
(c) At the Merger, 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 subsidiary or any
consideration other than as discussed above.
CSIs
Existing Warrants
At the effective time, 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 held by Cycad Group, LLC and the
other is out-of-the-money and held by Capital Works
ECS Investors, LLC. The merger consideration includes shares of
Clean Diesel common stock and warrants to purchase Clean Diesel
common stock that will be reserved for issuance upon exercise of
this in-the-money warrant. The merger consideration
does not include shares of Clean Diesel common stock and
warrants to purchase Clean Diesel common stock for issuance upon
exercise of the out-of-the-money warrant. As such,
if this out-of-the-money warrant is exercised, it
will result in the issuance of an additional 147,519 shares
of Clean Diesel common stock and warrants to purchase an
additional 120,703 shares of Clean Diesel common stock at
the estimated $1.320 per share exercise price (all on a
pre-split basis).
New CDTI
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 G
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 and to CSIs financial advisor will have an
exercise price determined by dividing $30,000,000 by the number
of shares of Clean Diesel common stock outstanding immediately
after the effective time of the Merger. This price is currently
expected to be approximately $1.320 per share (on a
pre-split
basis). The exercise price per share of the warrant and the
number of shares of Clean Diesel common stock issuable upon
exercise of the warrant will be proportionally adjusted if Clean
Diesel effects a reclassification, split or subdivision of its
common stock.
100
All of the warrants to purchase shares of Clean Diesel common
stock issued as part of the merger consideration 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 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 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 or merger, 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 or merger if the warrant to
purchase shares of Clean Diesel common stock had been exercised
immediately prior to the sale or merger. 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 remains 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 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 consent or receive notice as stockholders in respect of
the meetings of stockholders or the election of directors of
Clean Diesel or any other matter.
Warrant
Certificates
Warrants to be issued as part of the merger consideration are
expected to be physically certificated. CSI record shareholders
will receive physical certificates for the warrants issuable in
connection with the Merger. CSI shareholders who hold their
shares through financial intermediaries, such as banks and
brokers, should
101
contact the financial intermediary for advice about how their
warrant entitlements will be handled. Whether the warrants will
continue to be held through the financial intermediary or will
be physically distributed to the beneficial owner will depend on
the policies of the financial intermediary.
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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102
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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 by the Merger Agreement. 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 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 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 at a ratio between
1-for-3 to
1-for-8, the
final ratio to be determined within the discretion of the Clean
Diesel board of directors.
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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 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.
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.
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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, 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, Timothy
Rogers, 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 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. Clean Diesel
and CSI contemplate extending this date to October 15, 2010
at such time as CSI is able to obtain an extension from its bank
and the investors in its capital raise to October 15, 2010
also.
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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, 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,
(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
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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.
112
INFORMATION
ABOUT CLEAN DIESEL
CLEAN
DIESEL BUSINESS
General
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. Since inception, Clean Diesel has developed a
substantial portfolio of patents and related proprietary rights
and extensive technological know-how.
Key highlights and recent activities include the following:
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Clean Diesel 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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Clean Diesel received an order from Metroline, a leading London
bus operator, valued at approximately $528,000, which amount
will be included in Clean Diesels revenue the first half
of 2010 upon fulfillment of this order. Clean Diesel views this
order as a confirmation of Clean Diesels decision to focus
new product development efforts on the global retrofit market.
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Clean Diesels 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 in revenue in 2009.
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After in-depth analysis of market dynamics and competitive
activity, Clean Diesels management has determined that
profitable growth can best be achieved by focusing on the
growing global retrofit market. Therefore, Clean Diesel has
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 Clean Diesels strategic course change, Clean
Diesel is in the process of building a portfolio of products
with verifications from government entities around the world. It
is Clean Diesels intent to leverage Clean Diesels
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, Clean Diesel restructured its 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 Clean Diesel 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
Clean Diesels technology is comprised of patents, patent
applications, trade or service marks, data and know-how. Clean
Diesels technology was initially acquired by assignment
from Fuel Tech and has subsequently been primarily developed
internally. As owner, Clean Diesel maintains the technology at
Clean
113
Diesels 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, Clean Diesel filed no U.S. or foreign patent
applications. In 2008, Clean Diesel filed 29 foreign patent
applications but no U.S. patent applications. In 2007,
Clean Diesel filed ten U.S. and two foreign patent
applications.
As of June 30, 2010, Clean Diesel held 171 granted patents,
71 pending patents and an extensive library of performance data
and technological know-how. Clean Diesel has patent coverage in
North America, Europe, Asia and South America. Clean
Diesels 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. Clean Diesel continues to make invention
disclosures for which Clean Diesel is in the process of
preparing patent applications. Clean Diesels patents have
expiration dates ranging from 2010 through 2027, with the
majority of the material patents upon which Clean Diesel relies
expiring in 2018 and beyond. Clean Diesel believes that Clean
Diesel has sufficient patent coverage surrounding Clean
Diesels core patents that effectively serves to provide
Clean Diesel longer proprietary protection.
Clean Diesel has made substantial investments in Clean
Diesels technology and intellectual property and has
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. Clean Diesels intellectual
property strategy has been to build upon Clean Diesels
base of core technology that Clean Diesel has developed or
acquired with newer advanced technology patents developed by or
purchased by Clean Diesel. In many instances, Clean Diesel has
incorporated the technology embodied in Clean Diesels core
patents into patents covering specific product applications,
including product design and packaging. Clean Diesel believes
this building-block approach provides greater protection to
Clean Diesel and Clean Diesels licensees than relying
solely on the core patents.
Clean Diesels 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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hydrocarbon (HC); and
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carbon dioxide
(CO2).
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Clean Diesels 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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Clean Diesels 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 Clean Diesels intellectual property rights is
costly and time consuming. Clean Diesel incurs 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. Clean Diesel incurs maintenance fees to maintain
Clean Diesels granted U.S. patents and annuity fees
to maintain foreign patents and the pending patent applications.
Clean Diesel relies 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 Clean Diesels proprietary
technology. Further, Clean Diesel enters into confidentiality
and invention assignment agreements with Clean Diesels
employees and confidentiality agreements with Clean
Diesels 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 Clean Diesels 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 Clean Diesel
will have adequate remedies for disclosure of Clean
Diesels trade secrets or violations of Clean Diesels
intellectual property rights.
Business
Strategy
Clean Diesels 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 Clean Diesels
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. Clean
Diesels standard licensing agreements are structured so
that Clean Diesel derives revenue from license fees and on-going
royalties. In 2010, Clean Diesel will seek broader market
coverage by not only strengthening Clean Diesels marketing
and distribution channels but also stressing value propositions
that highlight Clean Diesels unique environmental
benefits, fuel economy improvements and practical, lower cost
emission control. Clean Diesel intends to ensure that the full
value of Clean Diesels technology is realized by the end
user.
Solutions
and Products
Clean Diesel has 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, Clean Diesels products and solutions
include Clean Diesels 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
Clean Diesel has developed and patented Clean Diesels
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
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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.
Clean Diesels 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,
Clean Diesel has 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 Clean
Diesels 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.
Clean Diesel 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, Clean Diesel
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. Clean Diesel is cooperating with the EPA to plan and
conduct further definitive testing with respect to these
questions, which testing costs Clean Diesel has included in
Clean Diesels 2010 budget. As of the date hereof, the EPA
has not approved Clean Diesels test plan. 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.
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. Clean Diesels 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. Clean Diesels 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,
Clean Diesel is 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
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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
Clean Diesel received the EPAs Environmental Technology
Verification in 2003 for Clean Diesels 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 Clean
Diesels 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. Clean Diesel provided information to
the EPA based on Clean Diesels 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, Clean Diesels
verification status has been moved by the EPA to the
Formerly Verified Systems section of the EPA
website. In 2009, Clean Diesel believes the removal of the
verified status on the Purifier e2 system had an adverse impact
on Clean Diesels business.
Platinum
Plus for Fuel Economy
Clean Diesel believes 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),
Clean Diesels customers derive economic benefits from the
use of Clean Diesels 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 Clean Diesels customers derive from use
of Clean Diesels 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.
ARIS
Selective Catalytic Reduction (SCR)
The ARIS (Advanced Reagent Injection System) is Clean
Diesels 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 Clean Diesels 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
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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
Clean Diesel believes 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, Clean Diesel 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. Clean Diesel has 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 Clean Diesel.
Catalyzed
Wire Mesh Diesel Particulate Filter
The catalyzed wire mesh filter technology was initially
developed by Mitsui Co., Ltd. for use in conjunction with Clean
Diesels 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 Clean
Diesel under a technology transfer agreement with Mitsui and
PUREarth in 2005. Under the agreement, Clean Diesel 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.
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 Clean Diesel received the EPAs
Environmental Technology Verification in June 2004 for Clean
Diesels 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. Clean
Diesel provided information to the EPA based on Clean
Diesels 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
118
requirements, Clean Diesels verification status has been
moved by the EPA to the Formerly Verified Systems
section of the EPA website. Clean Diesel does not believe the
removal of the verified status on the Purifier e3 system has had
a material impact on Clean Diesels business.
The
Market and the Regulatory Environment
Clean Diesel estimates 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, Clean Diesel believes 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 Clean Diesels 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 Clean Diesels 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. Clean Diesel has
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.
Clean Diesel believes 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. Clean
Diesel believes that both 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
119
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 Clean Diesels principal strategy is the licensing
of Clean Diesels technologies, those companies that could
be considered as competitors should also be considered as Clean
Diesels potential customers.
Clean Diesel faces 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. Clean Diesel also faces indirect
competition in the form of alternative fuel consumption vehicles
such as those using hydrogen, ethanol and electricity.
Clean Diesel believes that Clean Diesels 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 Clean Diesel does 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. Clean Diesels 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 Clean
Diesel for the right to use Clean Diesels proprietary
technology for a single fluid system which requires no
compressed air.
Market
Opportunity
Clean Diesel believes its 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. Clean Diesel views 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, Clean
Diesel has continued to emphasize fuel economy in the markets
Clean Diesel serves, enabling a lowest life cycle cost.
Clean Diesels intellectual property and technologies are
now at the center of developments in the on-road diesel market.
Selective catalytic reduction which utilizes Clean Diesels
ARIS technology and diesel particulate filtration which can
utilize Clean Diesels Platinum Plus technology are core
technologies to the development of the pending generation of
cleaner diesels. Clean Diesel believes this places Clean Diesel
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 Clean Diesels
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
Clean Diesel with substantial opportunities in local markets
throughout North America, Europe and Asia.
120
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 Clean
Diesels 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 Clean
Diesels 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. Clean Diesel expects 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, Clean Diesel does not have EPA
verifications which may disadvantage Clean Diesel in attracting
customers with access to governmental funding for retrofit
programs. In 2010, Clean Diesel intends to verify Clean
Diesels Platinum Plus fuel-borne catalyst in combination
with a high performance diesel particulate filter and may also
seek to verify Clean Diesels Platinum Plus fuel-borne
catalyst with additional emissions control devices manufactured
by other vendors. Clean Diesel may receive 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.
Clean Diesel currently manufactures and ships 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, Clean
Diesel intends 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.
Clean Diesel has entered into non-exclusive worldwide license
agreements for Clean Diesels ARIS nitrogen oxides
reduction technology. Clean Diesel believes 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.
121
Clean Diesel intends to utilize Clean Diesels catalyzed
wire mesh filter technology by selling products based upon that
technology alone and in combination with Clean Diesels
Platinum Plus fuel-borne catalyst. Clean Diesel 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
Clean Diesel is subject to environmental laws in all the
countries in which Clean Diesel does business. Management
believes that Clean Diesel 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. Clean Diesel registered Clean
Diesels 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. Clean Diesel completed the required tests under
the VERT protocol in 2000 and in January 2001, the Swiss
environmental authority, BUWAL, approved Clean Diesels
Platinum Plus fuel-borne catalyst fuel additive for use with a
diesel particulate filter.
The U.K. Ministry of Healths Committee on Toxicity
reviewed Clean Diesels Platinum Plus product and all the
data submitted by Clean Diesel 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 Clean Diesels 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, Clean Diesel intends to file with the EPA completed
third-party evaluations regarding secondary emissions from Clean
Diesels fuel-born catalyst. Clean Diesel initiated
independent tests in 2005 to address questions from the EPA on
the use of Clean Diesels fuel-borne catalyst resulting
from growing commercial interest in its diesel emission control
products. The results from testing of Clean Diesels
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 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
Clean Diesel generates revenue from product sales comprised of
fuel-borne catalysts, including Clean Diesels Platinum
Plus fuel-borne catalyst products and concentrate, and hardware
(primarily, Clean Diesels patented ARIS advanced reagent
injector and dosing systems for selective catalytic reduction of
nitrogen oxides, Clean Diesels Platinum Plus Purifier
System, Clean Diesels fuel-borne catalyst and a
diesel-oxidation catalyst, and catalyzed wire mesh filters,
including catalyzed wire mesh filters used in conjunction with
Clean
122
Diesels 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 tables set forth
the percentage contribution of Clean Diesels revenue
sources in relation to total revenue for the three and six
months ended June 2010 and 2009 and the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
Product sales
|
|
$
|
370
|
|
|
|
90.0
|
%
|
|
$
|
342
|
|
|
|
91.2
|
%
|
|
$
|
982
|
|
|
|
93.0
|
%
|
|
$
|
654
|
|
|
|
90.7
|
%
|
License and royalty revenue
|
|
|
41
|
|
|
|
10.0
|
%
|
|
|
33
|
|
|
|
8.8
|
%
|
|
|
74
|
|
|
|
7.0
|
%
|
|
|
67
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
411
|
|
|
|
100.0
|
%
|
|
$
|
375
|
|
|
|
100.0
|
%
|
|
$
|
1,056
|
|
|
|
100.0
|
%
|
|
$
|
721
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Clean Diesels revenue sources during any
reporting period may have a material impact on Clean
Diesels operating results. In particular, Clean
Diesels execution of technology licensing agreements, and
the timing of the revenue recognized from these agreements, has
not been predictable. To date, Clean Diesel has been dependent
on a few customers for a significant portion of Clean
Diesels revenue (see Significant Customers in
Notes to Clean Diesels Consolidated Financial Statements).
The geographic areas from which Clean Diesels revenue was
recognized for the years ended December 31, 2009, 2008 and
2007 are outlined in Note 14 of Notes to Clean
Diesels Consolidated Financial Statements.
Clean Diesels 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. Clean
Diesels products and solutions are sold to customers
through Clean Diesels distribution network, direct sales
and the efforts of Clean Diesels sales consultants and
agents. Clean Diesel licenses 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. Clean Diesel also sells finished
ARIS-based selective catalytic reduction systems to potential
ARIS licensees and end users. Clean Diesel believes that the
ARIS system can most effectively be commercialized through
licensing several companies with a related business in these
markets. Clean Diesel is actively seeking additional ARIS
licensees for both mobile and stationary applications in the
U.S., Europe and Asia. Clean Diesel offers rights to the
catalyzed wire mesh technology through license agreements as
well as selling finished filters for use with Clean
Diesels 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 Clean Diesels product costs.
These metals are generally available from multiple sources, and
Clean Diesel believes the sources of these are adequate for
Clean Diesels 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
Clean Diesels Platinum Plus fuel-borne catalyst. Clean
Diesel has a strategy of passing Clean Diesels cost
increases along to Clean Diesels customers and has
identified opportunities to lower the lifetime platinum cost
within the overall system cost. Clean Diesel does 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 Clean Diesel has outsourcing arrangements with two
companies in the precious
123
metal refining industry to procure platinum, there are no fixed
commitments with these parties to provide supplies, and Clean
Diesel may make procurement arrangements with others to fulfill
Clean Diesels raw materials requirements. Clean Diesel
also has ample licensed and qualified manufacturers for the
manufacture on Clean Diesels behalf of hardware
components, catalysts, filters and electronics.
Research
and Development
Clean Diesel anticipates that Clean Diesel will continue to make
significant research and development expenditures to maintain
and expand competitive position. This includes improving Clean
Diesels current technologies and products, and developing
and acquiring newer technologies and products.
Clean Diesels 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. Clean
Diesels research and development expenses, totaled
approximately $136,000 and $189,000 respectively for the three
and six months ended June 30, 2010 and $127,000 and
$186,000 respectively for the three and six months ended
June 30, 2009. For the years ended December 31, 2009,
2008 and 2007, research and development expenses were $386,000,
$430,000 and $428,000, respectively.
Insurance
Clean Diesel maintains coverage for the customary risks inherent
in Clean Diesels operations. Although Clean Diesel
believes Clean Diesels 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 July 31, 2010, Clean Diesel had 11 full-time
employees and two part-time employees. Clean Diesel also retains
outside consultants, including sales and marketing consultants
and agents.
Clean Diesel enjoys good relations with Clean Diesels
employees and is not a party to any labor management agreements.
Properties
Clean Diesel has a seven-year lease which expires on
December 31, 2015 for Clean Diesels
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. Clean
Diesel has a lease for 1,942 square feet of office space
outside London, U.K. through November 2010 at an annual cost of
approximately $65,000, including utilities and parking.
Legal
Proceedings
From time to time, Clean Diesel is involved in legal proceedings
in the ordinary course of its business. The litigation process
is inherently uncertain, and Clean Diesel cannot guarantee that
the outcome of existing proceedings will be favorable for Clean
Diesel or that they will not be material to Clean Diesels
business, results of operations or financial position. However,
Clean Diesel does not currently believe these matters will have
a material adverse effect on its business, results or financial
position.
On April 30, 2010, Clean Diesel received a complaint from the
Hartford, Connecticut office of the U.S. Department of Labor
under Section 806 of the Corporate and Criminal Fraud
Accountability Act of 2001, Title VIII of the Sarbanes-Oxley Act
of 2002, alleging that Ms. Ann B. Ruple, former Vice President,
Treasurer and Chief Financial Officer of Clean Diesel, had been
subject to discriminatory employment practices. Clean
Diesels Board of Directors terminated Ms. Ruples
employment on April 19, 2010. The complainant in this proceeding
does not demand specific relief. However, the statute provides
that a prevailing employee shall be entitled to all relief
necessary to make the employee whole, including compensatory
damages which may be reinstatement, back pay with interest,
front pay, and special damages such as attorneys
124
and expert witness fees. Clean Diesel responded on June 14,
2010, denying the allegations of the complaint. Based upon
current information, management, after consultation with legal
counsel defending Clean Diesels interests, believes the
ultimate disposition will have no material effect upon Clean
Diesels business, results or financial position.
Available
Information
Clean Diesel files reports, proxy statements and other documents
with the Securities and Exchange Commission (SEC).
You may read and copy any document Clean Diesel files 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. Clean
Diesels SEC filings are also available to you on the
SECs Internet site at
http://www.sec.gov.
Clean Diesel maintains an Internet site at
http://www.cdti.com.
The information posted on Clean Diesels website is not
incorporated herein by reference.
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 Clean
Diesels 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
Clean Diesels issued and outstanding common stock less the
outstanding options, and is subject to a sufficient number of
shares of authorized capital. |
125
CLEAN
DIESEL MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Clean Diesel designs and sells environmentally-proven
technologies and solutions for the global emission reduction
market based upon Clean Diesels portfolio of patents,
extensive library of performance data and know-how. Clean Diesel
believes Clean Diesels core competencies to be the
innovation, application, development and marketing of
technological products and solutions to enable emission control.
Clean Diesels 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.
Clean Diesel believes 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. Clean Diesel
believes 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 Clean Diesels products and solutions.
Clean Diesels operating revenue consists of product sales,
technology licensing fees and royalties, and consulting and
other. The following tables set forth the percentage
contribution of Clean Diesels revenue sources in relation
to total revenue for the three and six months ended
June 30, 2010 and 2009 and for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
Product sales
|
|
$
|
370
|
|
|
|
90.0
|
%
|
|
$
|
342
|
|
|
|
91.2
|
%
|
|
$
|
982
|
|
|
|
93.0
|
%
|
|
$
|
654
|
|
|
|
90.7
|
%
|
License and royalty revenue
|
|
|
41
|
|
|
|
10.0
|
%
|
|
|
33
|
|
|
|
8.8
|
%
|
|
|
74
|
|
|
|
7.0
|
%
|
|
|
67
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
411
|
|
|
|
100.0
|
%
|
|
$
|
375
|
|
|
|
100.0
|
%
|
|
$
|
1,056
|
|
|
|
100.0
|
%
|
|
$
|
721
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Clean Diesels revenue sources during any
reporting period may have a material impact on Clean
Diesels operating results. In particular, Clean
Diesels execution of technology licensing agreements, and
the timing of the revenue recognized from these agreements, has
not been predictable.
Product sales include Clean Diesels patented Platinum
Plus®
fuel-borne catalyst products and concentrate and hardware
(primarily, Clean Diesels patented
ARIS®
advanced reagent injector and dosing systems for selective
catalytic reduction of nitrogen oxides, Clean Diesels
Platinum Plus Purifier Systems and catalyzed wire mesh filters).
Clean Diesels Platinum Plus fuel-borne catalyst is
registered with the U.S. Environmental Protection Agency
(EPA) and other environmental authorities around the world.
Clean Diesels products are
126
sold to distributors, resellers, various transportation
segments, including on-road, off-road, rail and marine, among
other end users, through Clean Diesels distribution
network and direct sales.
Clean Diesel licenses its 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. Clean Diesel also sells finished ARIS-based
SCR systems to potential ARIS licensees and end users. Clean
Diesel is actively seeking additional licensees for both mobile
and stationary applications. Clean Diesel offers rights to Clean
Diesels catalyzed wire mesh technology through license
agreements as well as selling finished filters for use with
Clean Diesels Platinum Plus fuel-borne catalyst.
Since inception, Clean Diesel has 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 and nitrogen oxides
reduction systems to control emissions from diesel engines.
Although Clean Diesel believes it has made progress in
commercializing its technologies, Clean Diesel has experienced
recurring losses from its operations. Clean Diesels
accumulated deficit amounted to approximately $68.1 million
as of June 30, 2010. The internally generated funds from
Clean Diesels revenue sources have not been sufficient to
cover Clean Diesels operating costs. The ability of Clean
Diesels revenue sources, especially product sales and
technology license fees and royalties, to generate significant
cash for Clean Diesels operations is critical to Clean
Diesels long-term success. Clean Diesel cannot predict
whether Clean Diesel will be successful in obtaining market
acceptance of Clean Diesels products or technologies or in
completing Clean Diesels current licensing agreement
negotiations. To the extent Clean Diesels internally
generated funds prove to be inadequate, Clean Diesel believes
that it may need to obtain additional working capital through
equity financings. However, Clean Diesel can give no assurance
that any additional financing will be available to Clean Diesel
on acceptable terms or at all.
Critical
Accounting Policies
The preparation of Clean Diesels financial statements in
conformity with generally accepted accounting principles
requires Clean Diesels management to make estimates and
assumptions that affect the amounts reported in Clean
Diesels 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 Clean Diesels
significant accounting policies (see Note 2 of Notes to
Clean Diesels 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 Clean Diesels products are shipped to Clean
Diesels customer, unless the purchase order or contract
specifically requires Clean Diesel to provide installation for
hardware purchases. For
127
hardware projects in which Clean Diesel is 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.
Generally, Clean Diesels 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 Clean Diesels
license agreements, Clean Diesels assigns the right to the
licensee to use Clean Diesels patented technologies. The
up-front fees are not subject to refund or adjustment. Clean
Diesel recognizes the license fee as revenue at the inception of
the license agreement when Clean Diesel has 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 Clean Diesels license
agreements, there is no significant obligation for future
performance required of the Company. Each licensee must
determine if the rights to Clean Diesels 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 Clean Diesels
patents, including significant engineering, sourcing of and
assembly of multiple components. Such investments are for the
benefit of the licensee. Clean Diesels 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
Clean Diesels 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 Clean
Diesels 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. Clean
Diesels research and development expenses were $136,000
and $189,000 for the three and six months ended June 30,
2010, respectively and $127,000 and $186,000, for the three and
six months ended June 30, 2009, respectively. Research and
development expenses were $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 three and six months ended
June 30, 2010 was $17,000 and $33,000 respectively and
$15,000 and $26,000 for the three and six months ended
June 30, 2009 respectively. For the years ended
December 31, 2009, 2008 and 2007, patent amortization
expense was $54,000, $51,000 and $41,000, respectively.
Clean Diesel evaluates the remaining useful life of Clean
Diesels 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. Clean Diesel also evaluates
Clean Diesels 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 Clean Diesel decides to abandon a patent, the patent is
written down to its fair value based upon
128
discounted cash flows. At June 30, 2010, December 31,
2009 and December 31, 2008, the Companys patents,
net, were $957,000, $1,083,000 and $1,027,000, respectively.
The types of events and changes in circumstances that would
indicate the carrying value of Clean Diesels 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
Clean Diesels technologies due to new discoveries and
inventions; and an adverse action or assessment against Clean
Diesels technologies.
Clean Diesels technology is comprised of patents, patent
applications, trade or service marks, data and know-how. Clean
Diesel considers the life of Clean Diesels technologies to
be commensurate with the remaining term of Clean Diesels
U.S. and corresponding foreign patents. Clean Diesels
patents have expiration dates ranging from 2010 through 2027,
with the majority of the material patents upon which Clean
Diesel relies expiring in 2018 and beyond. Clean Diesel believes
that Clean Diesel has sufficient patent coverage surrounding
Clean Diesels core patents that effectively serves to
provide Clean Diesel longer proprietary protection. Clean
Diesels 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). Clean Diesel monitors evolving
technologies in the automotive and other applicable industries
to evaluate obsolescence of any of Clean Diesels patents.
Although Clean Diesel has seen certain suspensions and delays in
mandated emissions requirements, Clean Diesel expects sufficient
revenue over the remaining life of the underlying patents to
recover the carrying value of Clean Diesels patents. Clean
Diesel believes the emission reduction mandates will be phased
in over time so that despite volatility in Clean Diesels
revenue streams, Clean Diesel should realize the expected
revenue from Clean Diesels patents. Clean Diesel has
consistently applied Clean Diesels methodologies used for
valuing intangible assets during the year ended
December 31, 2009 from the prior year but believes Clean
Diesel incorporated more educated assumptions about Clean
Diesels opportunities based upon the third-party market
data that Clean Diesel did not have in the prior year. Clean
Diesels intellectual property strategy has been to build
upon Clean Diesels base of core technology with newer
advanced technology patents developed or purchased by Clean
Diesel. In many instances, Clean Diesel has incorporated the
technology embodied in Clean Diesels core patents into
patents covering specific product applications, including
product design and packaging. Clean Diesel believes this
building-block approach provides greater protection to Clean
Diesel and Clean Diesels licensees than relying solely on
Clean Diesels core patents.
In evaluating the viability of Clean Diesels patents,
Clean Diesel used a cash flow model with the following
assumptions:
|
|
|
|
|
Liquidity/cash Clean Diesel will maintain Clean
Diesels patents in force in the appropriate geographical
areas by paying the required maintenance and annuity fees. Clean
Diesel expects to continue to invest in its patents to ensure
adequate coverage and protection from inventions related to
Clean Diesels existing patents. Clean Diesels
expected capital expenditures include funds for prosecution of
additional and pending patents.
|
|
|
|
Revenue/growth rates Clean Diesel based Clean
Diesels royalty revenue projections upon third-party
market data regarding volume production projections for various
engine sizes and vehicle classifications. Clean Diesel estimated
Clean Diesels market penetration rates based upon Clean
Diesels understanding of market share of Clean
Diesels current licensees and expectations of future
licensing activities. Clean Diesel recognizes certain contingent
license fee revenue once volume milestones have been achieved.
Clean Diesel 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. Clean
Diesels year over year growth rates assumed for Purifier
Systems were up to 3.5% based upon further mandated low emission
zones.
|
129
|
|
|
|
|
Sensitivity analysis Clean Diesel evaluated the
sensitivity of Clean Diesels 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. Clean
Diesel adopted the Codification for the quarter ended
September 30, 2009. Upon adoption, this standard had no
material effect on Clean Diesels 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, Clean Diesel 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 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, Clean Diesel 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, Clean Diesel 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 Clean
Diesels financial position, results of operations or cash
flows.
On January 1, 2009, Clean Diesel 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 Clean
Diesels financial position, results of operations or cash
flows.
On January 1, 2009, Clean Diesel 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
130
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 Clean Diesels financial
position, results of operations or cash flows.
On January 1, 2009, Clean Diesel 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 Clean Diesels
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 Clean Diesels 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 Clean
Diesels 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 Clean Diesels 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 Clean Diesels 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 Clean Diesels 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 Clean Diesel on October 1,
2009. The adoption of this standard had no material impact on
Clean Diesels 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 a material impact on Clean Diesels financial
position and results of operations.
Results
of Operations
Three
Months ended June 30, 2010 Compared to Three Months ended
June 30, 2009
Total revenue in the three months ended June 30, 2010 was
$411,000 compared to $375,000 in the three months ended
June 30, 2009, an increase of $36,000, or 9.6%, reflecting
increased traction in Clean Diesels attempt to establish
itself in the retrofit space. Revenue for the three months ended
June 30, 2010 consisted of
131
approximately 90.0% in product sales and 10.0% in technology
licensing fees and royalties. Of Clean Diesels operating
revenue for the three months ended June 30, 2009,
approximately 91.2% was from product sales and 8.8% was from
technology licensing fees and royalties. The mix of Clean
Diesels revenue sources during any reporting period may
have a material impact on Clean Diesels operating results.
In particular, Clean Diesels execution of technology
licensing agreements, and the timing of the revenue recognized
from these agreements, has not been predictable.
Product sales were $370,000 in the second quarter of 2010
compared to $342,000 in the same quarter of 2009, an increase of
$28,000. This increase in product sales was attributable
primarily to higher demand for Clean Diesels Platinum Plus
Purifier Systems, a product comprised of a diesel particulate
filter along with Clean Diesels Platinum Plus fuel-borne
catalyst. The sales of Clean Diesels Purifier Systems
provide Clean Diesel with recurring revenue from use of its
Platinum Plus fuel-borne catalyst that enables the regeneration
of the diesel particulate filter. Clean Diesel believes it will
have the opportunity to expand this business opportunity as it
builds the certified product portfolio and infrastructure
required to address additional low emission zones throughout the
globe.
Clean Diesels technology licensing fees and royalties were
slightly higher in 2010 with $41,000 in the three months ended
June 30, 2010 compared to $33,000 in the same quarter of
2009. These revenues are primarily attributable to royalties
related to its ARIS technologies. While Clean Diesel has not
executed new technology license agreements in 2010, Clean Diesel
continues its efforts to consummate technology license
agreements with manufacturers and component suppliers for the
use of its ARIS technologies for control of oxides of nitrogen
(NOx) using its 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.
Clean Diesels total cost of revenue was $220,000 in the
three month period ended June 30, 2010 compared to $217,000
in the three month period ended June 30, 2009. The increase
in Clean Diesels cost of sales is due to higher product
sales volume. Clean Diesels gross profit as a percentage
of revenue was 46.5% and 42.1% for the three month periods ended
June 30, 2010 and 2009, respectively.
Clean Diesels cost of revenue product sales
includes the costs Clean Diesel incurs to formulate its finished
products into saleable form for its customers, including
material costs, labor and processing costs charged to Clean
Diesel by its outsourced blenders, installers and other vendors,
packaging costs incurred by its outsourced suppliers, freight
costs to customers and inbound freight charges from its
suppliers. Clean Diesels inventory is primarily maintained
off-site by its outsourced suppliers. To date, Clean
Diesels 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 Clean Diesels warehouse of approximately
$21,000 per year were included in selling, general and
administrative expenses. Clean Diesels 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 Clean Diesel 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.
Selling, general and administrative expenses were $1,512,000 in
the three months ended June 30, 2010 compared to $1,561,000
in the comparable 2009 period, a decrease of $49,000, or 3.1%.
The decrease in selling, general and administrative costs is
primarily attributable to lower compensation and benefits,
travel, rent and related occupancy expenses. These cost
reductions were substantially offset by increased professional
132
fees incurred in connection with the proposed merger with
Catalytic Solutions, Inc. Selling, general and administrative
expenses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
647
|
|
|
$
|
1,033
|
|
Non-cash stock-based compensation
|
|
|
27
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits
|
|
|
674
|
|
|
|
1,241
|
|
Professional services
|
|
|
616
|
|
|
|
171
|
|
Travel
|
|
|
69
|
|
|
|
77
|
|
Occupancy
|
|
|
101
|
|
|
|
209
|
|
Bad debt (recovery) provision
|
|
|
|
|
|
|
(134
|
)
|
Depreciation and all other
|
|
|
52
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
$
|
1,512
|
|
|
$
|
1,561
|
|
|
|
|
|
|
|
|
|
|
Excluding the non-cash stock-based charges, compensation and
benefit expenses were $647,000 for the three months ended
June 30, 2010 compared to $1,033,000 in the comparable
prior year period. This decrease of $386,000, or 37.4%, 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.
Expenses related to professional services increased by $445,000
to $616,000 in the three months ended June 30, 2010
compared to $171,000 in the comparable prior year period. The
increase principally reflects legal, accounting and investment
banking fees incurred in connection with Clean Diesels
proposed merger with Catalytic Solutions, Inc.
Reimbursement of expenses under grant program represents amounts
reimbursed under a $961,000 diesel emissions reduction
technology development grant from the Houston Advanced Research
Center (HARC). 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. The
program is administered by HARC on behalf of the Texas
Environmental Research Consortium utilizing funding provided by
the State of Texas. Clean Diesel anticipates completing the HARC
program by the first quarter of 2011.
As a result of Clean Diesels former Chief Executive
Officers death on June 26, 2010, Clean Diesels
obligation under his severance arrangement ceased. The remaining
severance accrual of $60,000, was reversed into income during
the three months ended June 30, 2010.
Research and development expenses were $136,000 in the three
months ended June 30, 2010 compared to $127,000 in the
three months ended June 30, 2009, an increase of $9,000.
Presently, Clean Diesel is working to overcome gaps in its
technology and product portfolios brought about by volatile
markets and past development setbacks. In addition to
development of new products, Clean Diesels 2010 projects
include field testing of fuel economy and emission control
technologies in connection with Clean Diesels HARC
project. Total research and development expenses for the three
months ended June 30, 2009 included $4,000 of non-cash
charges for stock-based compensation.
Patent amortization and other patent related expense was $28,000
in the three months ended June 30, 2010 compared to
$140,000 in the same prior year period, a decrease of $112,000.
The 2009 expense includes the write-off of $133,000 in
capitalized costs related to the abandonment of certain patents
and patent applications not material to Clean Diesels
business, the continued maintenance of which was judged by
management to be uneconomic.
At each reporting period, Clean Diesel 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
133
carrying value of Clean Diesels 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
Clean Diesels technologies due to new discoveries and
inventions; and an adverse action or assessment against Clean
Diesels technologies.
Clean Diesels technology is comprised of patents, patent
applications, trade or service marks, data and know-how. Clean
Diesel considers the life of its technologies to be commensurate
with the remaining term of its U.S. and corresponding
foreign patents. Clean Diesels patents have expiration
dates ranging from 2010 through 2026, with the majority of the
material patents upon which Clean Diesel relies expiring in 2018
and beyond. Clean Diesel believes that it has sufficient patent
coverage surrounding its core patents that effectively serves to
provide Clean Diesel longer proprietary protection. Clean
Diesels 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 regulatory requirements that went into effect
starting in 2010 (EPA 2010). Clean Diesel monitors evolving
technologies in the automotive and other applicable industries
to evaluate obsolescence of any of its patents.
Although Clean Diesel has seen certain suspensions and delays in
mandated emissions requirements, it expects sufficient revenue
over the remaining life of the underlying patents to recover the
carrying value of its patents. Clean Diesel believes the
emission reduction mandates will be phased in over time so that
despite volatility in its revenue streams, Clean Diesel should
realize the expected revenue from its patents. Its intellectual
property strategy has been to build upon its base of core
technology with newer advanced technology patents developed or
purchased by it. In many instances, Clean Diesel has
incorporated the technology embodied in its core patents into
patents covering specific product applications, including
product design and packaging. Clean Diesel believes this
building-block approach provides greater protection to it and
its licensees than relying solely on its core patents.
Interest income was $31,000 in the three months ended
June 30, 2010 compared to $49,000 in the three months ended
June 30, 2009, a decrease of $18,000, or 36.7%, principally
due to lower invested balances.
Other income (expense) was ($34,000) in the three months ended
June 30, 2010 compared to $442,000 in the comparable 2009
period, a decrease of $476,000. The 2010 other income (expense)
includes foreign currency transaction losses, net of gains of
($14,000), and interest expense of ($20,000). The 2009 other
income (expense) is comprised of foreign currency transaction
gains, net of losses of $221,000, interest expense of ($12,000)
and gain on the fair value of investments of $233,000. In the
three months ended June 30, 2009, Clean Diesel had an
unrealized gain on the fair value of its investment in ARS of
$377,000 and an unrealized loss of ($144,000) on its ARSR,
resulting in a $233,000 net gain.
Six
Months ended June 30, 2010 Compared to Six Months ended
June 30, 2009
Total revenue for the first half of 2010 was $1,056,000 compared
to $721,000 in the first half of 2009, an increase of $335,000,
or 46.5%, reflecting an increase in product sales as well as
licensing fees and royalties. Operating revenue in the six
months ended June 30, 2010 consisted of approximately 93.0%
in product sales and 7.0% in technology licensing fees and
royalties. Total revenues in the six months ended June 30,
2009 consisted of approximately 90.7% in product sales and 9.3%
in technology licensing fees and royalties. The mix of Clean
Diesels revenue sources during any reporting period may
have a material impact on Clean Diesels operating results.
In particular, Clean Diesels execution of technology
licensing agreements, and the timing of the revenue recognized
from these agreements, has not been predictable.
Product sales in the six months ended June 30, 2010 were
$982,000 compared to $654,000 in the same prior year period, an
increase of $328,000 or 50.2%. The increase in product sales was
attributable primarily to higher demand for Clean Diesels
Platinum Plus Purifier Systems, a product comprised of a diesel
particulate filter along with Clean Diesels Platinum Plus
fuel-borne catalyst.
Clean Diesels technology licensing fees and royalties were
slightly higher in 2010 with $74,000 in the six months ended
June 30, 2010 compared to $67,000 in the same period of
2009. These revenues are
134
primarily attributable to royalties related to Clean
Diesels ARIS technologies. Clean Diesel has not executed
new technology license agreements in 2010.
Clean Diesels total cost of revenue was $685,000 in the
six-month period ended June 30, 2010 compared to $451,000
in the six-month period ended June 30, 2009. The increase
in Clean Diesels cost of sales is due to an increase in
sales volume. Clean Diesels gross profit as a percentage
of revenue was 35.1% and 37.4% for six-month periods ended
June 30, 2010 and 2009, respectively, with the decrease
largely attributable to the mix of revenues during the periods.
Selling, general and administrative expenses were $2,733,000 in
the six months ended June 30, 2010 compared to $3,513,000
in the comparable 2009 period, a decrease of $780,000, or 22.2%.
The decrease in selling, general and administrative costs is
primarily attributable to lower compensation and occupancy
expenses partially offset with an increase in professional
services. Selling, general and administrative expenses are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
1,267
|
|
|
$
|
2,049
|
|
Non-cash stock-based compensation
|
|
|
57
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits
|
|
|
1,324
|
|
|
|
2,459
|
|
Professional services
|
|
|
942
|
|
|
|
418
|
|
Travel
|
|
|
120
|
|
|
|
188
|
|
Occupancy
|
|
|
223
|
|
|
|
444
|
|
Bad debt (recovery) provision
|
|
|
|
|
|
|
(134
|
)
|
Depreciation and all other
|
|
|
124
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
$
|
2,733
|
|
|
$
|
3,513
|
|
|
|
|
|
|
|
|
|
|
Clean Diesels aggregate non-cash charges for the fair
value of stock options and warrants in the six months ended
June 30, 2010 were $57,000. This compares to $418,000 in
total non-cash stock-based compensation expense in the six
months ended June 30, 2009, of which $410,000 was included
in selling, general and administrative expenses and $8,000 in
research and development expenses.
Excluding the non-cash stock-based charges, compensation and
benefit expenses were $1,267,000 for the six months ended
June 30, 2010 compared to $2,049,000 in the comparable
prior year period, a decrease of $782,000, or 38.2%.
Professional services include audit-related costs, legal fees,
as well as investor relations and financial advisory fees. The
increase principally reflects legal, accounting and investment
banking fees incurred in connection with Clean Diesels
proposed merger with Catalytic Solutions, Inc.
Clean Diesel relocated its U.S. corporate offices in
January 2009 and incurred rent expense on both Clean
Diesels old and new U.S. headquarters due to the
timing of its relocation and expiration of the old lease.
Reimbursement of expenses under grant program represents amounts
reimbursed under a $961,000 diesel emissions reduction
technology development grant from the Houston Advanced Research
Center (HARC). 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. The
program is administered by HARC on behalf of the Texas
Environmental Research Consortium utilizing funding provided by
the State of Texas. Clean Diesel anticipates completing the HARC
program by the first quarter of 2011.
On February 10, 2009, Clean Diesels 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
Clean Diesel. Effective February 11, 2009, Dr. Steiner
resigned as a Director of Clean Diesel. As a consequence of his
termination of employment, Dr. Steiner was entitled to
salary of approximately $315,445
135
(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. Clean Diesel recognized a severance
charge of $510,000 in the six months ended June 30, 2009
for this obligation.
Following Dr. Steiners death on June 26, 2010,
Clean Diesels obligation to provide severance payments to
him ceased. As a result, during the six months ended
June 30, 2010, Clean Diesel reversed $163,000 of its
severance accrual to recognize a reduction in its obligations
due Dr. Steiner as well as certain severance arrangements
related to its August 2009 workforce reduction.
Research and development expenses were $189,000 in the six
months ended June 30, 2010 compared to $186,000 in the six
months ended June 30, 2009. Presently, Clean Diesel is
working to overcome gaps in its technology and product
portfolios brought about by volatile markets and past
development setbacks. Research and development expenses in the
six months ended June 30, 2009 include $8,000 of non-cash
charges for the fair value of stock options granted in
accordance with ASC 718.
The U.S. Environmental Protection Agency (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 NO2 measurement. Presently, Clean Diesel does not intend to
seek verification of these products. Clean Diesel has 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 Clean
Diesels fuel-borne catalyst.
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 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. Verification is also useful for
commercial acceptability. Clean Diesel believes that the lack of
CARB verification will result in a shift of U.S. retrofit
revenue into future periods. Clean Diesel is currently working
to achieve CARB verification and may have the opportunity to
obtain a conditional CARB verification before all of its testing
has been concluded.
Without full CARB verification, Clean Diesels
U.S. retrofit opportunities are limited although certain
jurisdictions have been satisfied with other of its
certifications. Clean Diesel 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, Clean Diesel 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, Clean Diesel received
accreditation for its Purifier System, its 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
remove the 2,000 unit restriction.
In addition to emphasis on the global retrofit market, Clean
Diesel 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
its distributors rather than through its direct selling efforts.
Clean Diesels 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, Clean Diesels
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
136
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.
Patent amortization and other patent related expense was $77,000
in the six months ended June 30, 2010 compared to $209,000
in the same prior year period, a decrease of $132,000. The 2009
expense includes the write-off of $150,000 in capitalized costs
related to the abandonment of certain patents and patent
applications not material to Clean Diesels business, the
continued maintenance of which was judged by management to be
uneconomic.
Interest income was $91,000 in the six months ended
June 30, 2010 compared to $141,000 in the six months ended
June 30,2009, a decrease of $50,000, or 35.5%, due to lower
invested balances and rates of return during the 2010 period.
Other income (expense) was ($67,000) in the six months ended
June 30, 2010 and is comprised of foreign currency
transaction losses, net of gains of ($20,000) and interest
expense of ($47,000). The 2009 other income (expense) of
$321,000 consists of foreign currency transaction gains, net of
losses of $192,000, interest expense of ($32,000) and net gain
on investments of $161,000. In the six months ended
June 30, 2009, Clean Diesel had an unrealized gain on the
fair value of its investment in ARS of $411,000 and an
unrealized loss of ($250,000) on its ARSR, resulting in a
$161,000 net gain.
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 Clean Diesels 2008 operating revenue, 94.0%
was from product sales and 6.0% was from technology licensing
fees and royalties. The mix of Clean Diesels revenue
sources during any reporting period may have a material impact
on Clean Diesels operating results. In particular, Clean
Diesels 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
Clean Diesels Platinum Plus Purifier Systems, a product
comprised of a diesel particulate filter along with Clean
Diesels 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. Clean Diesel
received approval in October 2007 from Transport for London to
supply Clean Diesels 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 Clean Diesels Purifier Systems for
compliance with the requirements of the London LEZ provide Clean
Diesel with recurring revenue from use of Clean Diesels
Platinum Plus fuel-borne catalyst that enables the regeneration
of the diesel particulate filter. Clean Diesel believes it 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%. Clean Diesels technology
licensing fees and royalties include fees upon execution of new
agreements and royalties from existing licensees, primarily for
use of Clean Diesels ARIS technologies. Clean Diesel did
not execute new technology licensing agreements in 2009. During
2008, Clean Diesel executed new technology licensing agreements
with Headway Machinery Co., Ltd. (Zhucheng City, China), Hilite
International, Inc. (Cleveland, Ohio) and Eaton Corporation
(Cleveland, Ohio)
137
and recognized revenue from license fees. Clean Diesel is
continuing its efforts to consummate technology license
agreements with manufacturers and component suppliers.
Clean Diesels total cost of revenue was $801,000 in 2009
compared to $5,717,000 for the year ended December 31,
2008. The decrease in Clean Diesels cost of sales is due
to lower product sales volume. Clean Diesels 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 2009 was $241,000, or
23.1% of product sales, compared to $1,307,000, or 18.6% in
2008. Clean Diesels 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
Clean Diesels grant revenue in 2009 was zero resulting in
$29,000 gross margin.
Clean Diesels cost of product sales includes the costs
Clean Diesel incurs to formulate its finished products into
saleable form for Clean Diesels customers, including
material costs, labor and processing costs charged to Clean
Diesel by its outsourced blenders, installers and other vendors,
packaging costs incurred by Clean Diesels outsourced
suppliers, freight costs to customers and inbound freight
charges from Clean Diesels suppliers. Clean Diesels
inventory is primarily maintained off-site by Clean
Diesels outsourced suppliers. To date, Clean Diesels
purchasing, receiving, inspection and internal transfer costs
have been insignificant and have been included in cost of
product sales. In addition, the costs of Clean Diesels
warehouse which Clean Diesel occupied through October 2009 are
included in selling, general and administrative expenses. Clean
Diesels 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 Clean Diesel 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.
Clean Diesel made a concerted effort in 2009 to contain Clean
Diesels 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. |
Clean Diesels 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
138
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.
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. Clean Diesel
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 Clean Diesels 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, Clean Diesels 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 Clean Diesel. 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. On June 26,
2010, Dr. Steiner passed away. Upon his death, payments under
his employment agreement ceased.
Clean Diesel has restructured itself 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. Clean Diesels
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).
Clean Diesel relocated its U.S. corporate offices in
January 2009 and incurred rent expense on both Clean
Diesels old and new U.S. headquarters due to the
timing of Clean Diesels 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%). Clean Diesels work for the
California Showcase is ongoing along with certain supplemental
environmental programs sponsored by California Air Resources
Board (CARB). Clean Diesel continues work to
overcome gaps in Clean Diesels technology and product
portfolios brought about by volatile markets and past
development setbacks. In addition to development of new
products, Clean Diesels 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.
139
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. Clean Diesel 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, Clean Diesel 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 Clean
Diesels consolidated statement of operations.
Clean Diesel compares 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 Clean Diesel may seek additional loan advances
from UBS based upon 75% of their ARS value. The UBS current
value of Clean Diesels ARS increased $1.7 million
from December 31, 2008 to December 31, 2009. Clean
Diesel compares 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 Clean Diesels fair value
determination, Clean Diesel considered a range of fair value
estimates with the assistance of Clean Diesels 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. Clean
Diesel believes that the use of the mid-point range is
appropriate based on the available information at
December 31, 2009.
Clean Diesel notes 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,
140
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.
Clean Diesel has not relied upon the UBS-determined values as
Clean Diesels fair value. Clean Diesel has 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. Clean Diesel continues to
caution Clean Diesels investors about the credit risk
should UBS be unable to fulfill its commitment under the Offer
for a put right permitting Clean Diesel 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 Clean Diesel the ability to
acquire the par value of its ARS upon exercise of the ARS right.
In Clean Diesels assessment of fair values, Clean Diesel
monitors developments and changes in the student loan ARS
market. Key general considerations for 2009 include the
following:
|
|
|
|
|
During 2009, indications of market liquidity have improved. ARS
spreads have continued to contract over the course of the year.
As a result, Clean Diesel has reduced the liquidity risk premium
on its student loan ARS.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
Probabilities of passing auction/return of capital within a
2-3 year period have remained stable over the year.
|
|
|
|
LIBOR interest rate forwards rose during the year at a faster
rate than treasury strip securities, which caused upward
pressure on prices.
|
|
|
|
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.
|
|
|
|
Recovery rates remained unchanged for most securities over the
course of the year.
|
|
|
|
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 Clean
Diesels ARS have been downgraded.
|
|
|
|
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.
|
Based upon the trends noted above, Clean Diesels 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.
141
Collateral:
Quality Minimal/Moderate as none of Clean
Diesels ARS experienced downgrades, thus no increases in
quality risk.
Default Minimal/Moderate; this risk
assessment remains unchanged for Clean Diesels ARS which
maintained the same credit rating.
Liquidity:
Trading Environment Moderate due to easing
liquidity pressures.
Asset Correlation High as all of Clean
Diesels ARS continued to fail auction, asset correlation
risk remained high in 2009.
Liquidity
and Capital Resources
Clean Diesel requires capital resources and liquidity to fund
its global development and for working capital. Clean
Diesels working capital requirements vary from period to
period depending upon manufacturing volumes, the timing of
deliveries and payment cycles of its customers. At June 30,
2010, Clean Diesel had cash and cash equivalents of
$4.9 million to use for its operations. Clean Diesels
working capital was $5.0 million at June 30, 2010
compared to $7.3 million at December 31, 2009
reflecting a decrease of $2.3 million primarily
attributable to Clean Diesels operating losses during the
period.
Net cash used for operating activities was $1.8 million in
the six months ended June 30, 2010 and was used primarily
to fund the net loss of $2.3 million, adjusted for non-cash
items and changes in working capital items. Included in the
non-cash items was stock-based compensation expense of $57,000
and depreciation and amortization of $94,000.
Accounts receivable, net increased $70,000 to $218,000 at
June 30, 2010 from $148,000 at December 31, 2009 due
primarily to increased sales activity. Inventories, net
decreased $237,000, reflecting increased product sales in the
retrofit-market. Other current assets and other assets decreased
$188,000 at June 30, 2010 from the December 31, 2009
levels, principally reflecting collections of other receivables.
Clean Diesels accounts payable, accrued expenses and other
liabilities increased at June 30, 2010 compared to
December 31, 2009 reflecting increases in accounts payable
that were partially 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 $11.6 million
in the six months ended June 30, 2010, principally
reflecting the sale of Clean Diesels ARS investments.
Clean Diesel also used cash for investments in Clean Diesel
patents, including patent applications in foreign jurisdictions.
Clean Diesel expects to continue to invest in its intellectual
property portfolio.
Cash used in financing activities was approximately
$4.5 million in the six months ended June 30, 2010 and
was attributable to net repayment of borrowings under Clean
Diesels demand loan facility with UBS.
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 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, Clean
Diesels (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 Clean Diesels bad debt expense in 2009
compared to 2008 was attributable to lower sales activity and
collections of past due amounts. To the extent that Clean Diesel
has past due customer balances, Clean Diesel requires prepayment
on new orders and establishment of payment plans on past due
balances. Clean Diesel is using
142
available legal remedies as needed to improve Clean
Diesels 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 Clean
Diesels inventory reserves to reflect the net realizable
value of Clean Diesels inventories for items that have
been slow moving. The increase in Clean Diesels other
current assets was primarily due to tax refunds (VAT) due Clean
Diesel 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. Clean Diesel capitalized
fixed assets and improvements associated with Clean
Diesels U.S. headquarters to which Clean Diesel
relocated in January 2009. Clean Diesel also used cash for
investments in Clean Diesels patents, including patent
applications in foreign jurisdictions. Clean Diesel expects to
continue to invest in Clean Diesels 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 Clean Diesels
demand loan facility. Clean Diesel is using the proceeds from
short-term debt for general working capital purposes. In May
2008, Clean Diesel arranged a $3 million demand loan
facility using Clean Diesels 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 Clean Diesels
Consolidated Financial Statements). In January 2009, the lender
(UBS) approved a $6.5 million credit facility. In September
2009, Clean Diesel arranged a further increase to the credit
facility to $7.7 million and drew down the additional
available cash totaling $1.3 million. Clean Diesels
ARS serve as collateral for the debt which is due upon demand.
In October 2008, the Company received an offer (the
Offer) from UBS for a put right permitting Clean
Diesel 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 Clean Diesel 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 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.
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, Clean Diesel
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.
On June 30, 2010, Clean Diesel exercised its put option
under the Offer and sold to UBS all of Clean Diesels
remaining ARS investments for approximately $5.2 million,
representing par value. Of this amount approximately
$3.2 million was used in July 2010, to pay down its
outstanding borrowings to UBS.
Clean Diesels management believes its current cash and
cash equivalents at June 30, 2010, will be sufficient to
fund Clean Diesels operations for at least the next twelve
months.
Clean Diesel has evaluated its cash burn and determined that
Clean Diesel has sufficient resources to fund operations for the
next twelve months. Clean Diesel continues to pay its
obligations in the ordinary course as obligations become due.
Clean Diesel continues the efforts begun in 2009 to contain
Clean Diesels costs and eliminate those costs that are
redundant or considered unnecessary with strict controls over
all discretionary
143
spending and travel costs. Clean Diesel has significantly
reduced its ongoing cash requirements by curtailment of expenses
and a 44% reduction in Clean Diesels work force, effective
August 7, 2009. Clean Diesel has also restructured Clean
Diesel so that each employee will manage resources based upon
data-driven revenue expectations, and Clean Diesel has
established processes to ensure organizational and individual
discipline and accountability.
Clean Diesel has incurred losses since inception aggregating
$68.1 million, which amount includes $4.8 million of
non-cash preferred stock dividends. Clean Diesel expects to
incur losses through 2010. Although Clean Diesel has generated
revenue from sales of Clean Diesels 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
Clean Diesels operating expenses, and Clean Diesel
continues to be dependent upon sources other than operations to
finance Clean Diesels working capital requirements.
Historically, Clean Diesel has 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 Clean Diesels business does not generate
sufficient cash and external financing is not available or
timely, Clean Diesel would be required to substantially reduce
Clean Diesels 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 Clean Diesels
relationships with Clean Diesels customers and suppliers.
Clean Diesels 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 Clean Diesels obligations.
No dividends have been paid on Clean Diesels common stock
and Clean Diesel does not anticipate paying cash dividends in
the foreseeable future.
Capital
Expenditures
As of June 30, 2010, Clean Diesel has no commitments for
capital expenditures and no material commitments are anticipated
in the near future.
Contractual
Obligations
The following is a summary of Clean Diesels contractual
obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
|
1 Year
|
|
|
2 to 3 Years
|
|
|
4 to 5 Years
|
|
|
Over 5 Years
|
|
|
Operating Leases
|
|
$
|
1,030
|
|
|
$
|
180
|
|
|
$
|
382
|
|
|
$
|
316
|
|
|
$
|
152
|
|
Short Term Debt
|
|
$
|
7,693
|
|
|
$
|
7,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The operating leases include Clean Diesels 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 its U.S. headquarters and 39 months under a
64-month
lease for its U.K. office.
In the first half of 2010, Clean Diesel exercised its early
termination right to cancel the U.K. operating lease effective
November 16, 2010, representing a decrease in obligation of
approximately $116,000 included in the 2 to 3 Years amount
above.
Off-Balance
Sheet Arrangements
As part of Clean Diesels on-going business, Clean Diesel
does 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 June 30, 2010, there were no
off-balance sheet transactions.
144
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.
|
|
|
|
|
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.
|
|
|
|
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.
|
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 for the year ended
December 31, 2009 and revenues of $25.4 million for
the six months ended June 30, 2010.
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 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
145
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.
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
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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
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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 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,
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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 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.
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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
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
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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.
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
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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. 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
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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 Malmö, 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 market for CSIs heavy duty diesel systems products is
heavily influenced by government funding of emissions control
projects. In addition, adoption and implementation of diesel
emission control regulations drives demand for its products.
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 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.
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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 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
154
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 June 30, 2010, CSI had 149 full time employees and 2
part time employees. Among the full time employees, 14 were
senior management, 9 were in research and development, 22 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 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
155
July 31, 2017, that is used for sales; and approximately
767 square feet of space in Tokyo, Japan under a lease
agreement that expires on June 15, 2013, which is used for
sales and marketing purposes.
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
In August 2008, CSI acquired the assets of Applied Utility
Systems, Inc. (or AUS) pursuant to an Asset Purchase
Agreement dated August 28, 2006. In connection with the
execution of the purchase agreement, the seller entered into a
consulting agreement and a non-compete agreement. These
agreements are the subject of a number of ongoing disputes as
described below and in Note 12 to CSIs Interim
Condensed Consolidated Financial Statements included elsewhere
in this joint proxy statement/information statement and
prospectus.
Under the terms of the asset purchase agreement,
$3.0 million of consideration was due the seller on
August 28, 2009, which consideration accrues interest at
5.36%. CSI has not paid the foregoing amounts and, at
June 30, 2010, CSI had accrued $624,000 of unpaid interest.
In addition to the consideration, the purchase agreement also
contemplated the payment of an earn-out by CSI to the seller
based on the revenues and net profits from CSIs conduct of
the acquired business. The earn-out amount is potentially
payable over a period of ten years beginning January 1,
2009, and is capped at $21.0 million. CSI has not paid any
earn-out amount for the fiscal year ended December 31, 2009
or the six months ended June 30, 2010 and the assets of the
business were sold on October 1, 2009.
In connection with CSIs acquisition of the assets of AUS,
the seller entered into a Consulting Agreement, pursuant to
which the seller agreed to perform consulting services. During
February 2008, CSI terminated the consulting agreement for cause
and alleged that the seller had breached his obligations
thereunder. On April 7, 2008, the matter was submitted to
binding arbitration in Los Angeles, California. On
April 13, 2010, the arbitrator rendered a final award
(a) finding that the consulting agreement was properly
terminated by CSI on February 27, 2008, (b) excusing
CSI from any obligation to make any further payments to the
seller under the consulting agreement, (c) obligating the
seller to pay CSI an amount equal to 75% of all amounts paid to
the seller by CSI under the consulting agreement, and
(d) awarding CSI attorneys fees in the amount of
$450,000, resulting in a total award of approximately
$1.2 million. At a hearing on August 2, 2010, the
court confirmed the arbitrators award in its entirety and
authorized CSI to submit a motion to recover its attorneys
fees incurred in connection with the motion to confirm the
arbitrators award. CSI has submitted such a motion to
recover attorneys fees and expenses in the amount of
$17,790. The hearing on such motion is scheduled for
September 2, 2010.
On October 8, 2009, the seller commenced an action in
California Superior Court to compel arbitration for collection
of the $3.0 million of consideration that was due in August
2009 and for a writ of attachment with respect to such
collection effort. Such action was stayed by the court and the
seller was directed to pursue any collection action through
arbitration. On March 1, 2010, the seller commenced
arbitration proceedings to collect the $3.0 million
consideration due in August 2009 and any earn-out amounts
payable under the asset purchase agreement. The seller claimed
that CSIs failure to pay the amount that was due in August
2009 constituted a breach of the asset purchase agreement and
that CSIs sale of the AUS business constituted an
anticipatory breach of CSIs obligation to pay the
earn-out. The seller is claiming that he is entitled to recover
the amount that was payable in August 2009, plus interest
thereon, and the of $21.0 million maximum amount of the
earn-out that would have been potentially payable over the
ten-year period. CSI has denied the sellers allegations
and claimed that it has defenses to any obligation to pay the
seller any further amount under the asset purchase agreement
because of the sellers breach of his obligations under the
asset purchase agreement and the other agreements related to the
transactions under the asset purchase agreement. CSI also has
counter-claimed against the seller for damages that it has
incurred as a result of the sellers breach of his
obligations under the asset purchase agreement and related
agreements. The seller has denied CSIs cross-complaint
allegations. The arbitration hearing presently is scheduled to
be held early in November 2010. This arbitration is in the
preliminary stages and it is not possible to predict the outcome
of the
156
arbitration. Under the terms of the Fifth Third Bank
forbearance agreement, described in Note 4 to CSIs
Interim Condensed Consolidated Financial Statements included
elsewhere in this joint proxy statement/information statement
and prospectus, CSI is restricted from making any payment to
unsecured creditors, including the seller, until the conditions
of the forbearance agreement have been met.
On April 29, 2010, the seller sought from the arbitrator a
writ of attachment (a method used to secure the retention of
assets pending resolution of a legal disagreement) with respect
to the foregoing amounts. On June 1, 2010, the arbitrator
issued an interim order granting seller a right to a writ of
attachment in the amount of approximately $2.4 million
(which amount was the net amount of the approximately
$3.6 million that the seller claimed was payable by CSI
during August 2009 and the amount of $1.2 million that CSI
was awarded against the seller in the separate arbitration
action described above by CSI relating to the sellers
breach of his consulting agreement with CSI). The writ of
attachment does not cover any amount that the seller has claimed
with respect to the non-payment of any earn-out amount. On
June 24, 2010, the arbitrator issued a further interim
order confirming the grant to the seller of the foregoing writ
of attachment and directing that the writ of attachment must be
confirmed by an order of an applicable court. The seller has
initiated action to California Superior Court for Orange County,
California, for the issuance of the writ of attachment. CSI has
opposed the issuance of the writ of attachment. A hearing on
such motions was held on August 18, 2010. The court has
taken it under submission but has not ruled. CSI intends to
continue to vigorously defend its interests to limit any adverse
effects of the writ of attachment and the imposition of the writ
against any of its assets, pending any final decision on the
merits of the underlying claims in the arbitration described
above, which has a hearing scheduled in early November 2010.
In connection with CSIs acquisition of the assets of AUS,
the seller entered into an agreement not to compete pursuant to
which he agreed to refrain from taking certain actions that
would be competitive with the business of AUS. CSI believes that
the seller has breached his obligations under the agreement not
to compete and on November 19, 2009 commenced suit in
California Superior Court for Orange County, California, to
enjoin any continuing breaches and to recover damages for the
alleged breaches. The seller has demurred to the complaint. A
hearing on the demurrer was held on July 26, 2010, at which
hearing the court granted the demur to CSIs claim for
breach of the agreement not to compete but allowed CSIs
claim for breach of fiduciary duty to proceed, and granted CSI
leave to file an amended complaint seeking return of
consideration paid for the agreement not to compete in light of
her ruling that such agreement was not enforceable. CSI has
filed a further amended complaint asserting a cause of action
for rescission of the agreement not to compete and the
defendants have filed a demurrer to the amended complaint and a
hearing on the demurrer is scheduled for September 14,
2010. The suit is in the preliminary stages and it is not
possible to predict the outcome of the suit.
In addition to the foregoing, 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 is likely to have, individually or in the
aggregate, a material adverse effect on its consolidated
financial condition or results of operations. For more
information relating to CSIs legal proceedings, below and
in Notes 19 and 21 to CSIs Annual Consolidated
Financial Statements and Note 12 to CSIs Interim
Condensed Consolidated Financial Statements included elsewhere
in this joint proxy statement/information statement and
prospectus.
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/information statement and
prospectus.
157
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 Annual Consolidated
Financial Statements included elsewhere in this joint proxy
statement/information statement and 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. |
158
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 annual consolidated financial
statements and related notes and interim condensed consolidated
financial statements and related notes appearing elsewhere in
this joint proxy statement/information statement and 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/information statement and prospectus and elsewhere in
this joint proxy statement/information statement and
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
and 62% of its total consolidated revenues for the six months
ended June 30, 2010.
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 and 38% of its total
consolidated revenues for the six months ended June 30,
2010.
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. CSI includes the direct material
159
costs and factory labor as well as factory overhead expense in
the cost of revenue. Indirect factory expense includes the costs
of freight (inbound and outbound for direct material and
finished good), purchasing and receiving, inspection, testing,
warehousing, utilities and deprecation of facilities and
equipment utilized in the production and distribution of
products.
Sales
and marketing expenses
CSIs sales and marketing expenses consist primarily of
compensation paid to sales and marketing personnel, and
marketing expenses. Costs related to sales and marketing are
expensed as they are incurred. These expenses include the salary
and benefits for the sales and marketing staff as well as
travel, samples provided at no-cost to customers and marketing
materials.
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. These
expenses include the salary and benefits for the research and
development staff as well as travel, research materials, testing
and legal expense related to patenting intellectual property.
Also included is any depreciation related to assets utilized in
the development of new products.
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, bad debt
and other administrative expenses. These expenses include the
salary and benefits for the administrative staff as well as
travel, legal, accounting and tax consulting. Also included is
any depreciation related to assets utilized in the general and
administrative functions.
Total
other income (expense)
CSIs total other income (expense) primarily reflects
interest expense and changes in the fair value of certain of its
financial instrument liabilities, but also includes interest
income as well as CSIs share of income and losses from its
Asian joint venture and income or losses from sale of fixed
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 Annual Consolidated Financial Statements and Note 2
to CSIs Interim Condensed Consolidated Financial
Statements, appearing elsewhere in this joint proxy
statement/information statement and 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
160
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.
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
161
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 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 using a two-step process, and more frequently
upon the occurrence of certain triggering events. Only
CSIs Heavy Duty Diesel Systems reporting unit has goodwill
subject to impairment review, which totaled $4.2 million at
December 31, 2009 and at June 30, 2010. 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 valuing the reporting unit. CSI
derived the estimated fair value of the Heavy Duty Diesel
Systems reporting unit at December 31, 2009 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 CSI. 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. CSI
further evaluated the reporting unit to assess if a triggering
event occurred subsequent to December 31, 2009 through
June 30, 2010 necessitating a detailed analysis (the first
step in the two-step process), and concluded that no such
triggering event had occurred in the Heavy Duty Diesel Systems
reporting unit.
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
162
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. These estimates and judgments are
based upon, among other things, certain assumptions about
expected future operating performance and growth rates and other
factors actual results of which may vary significantly. In light
of such analysis, in 2008, CSI recorded a $4.9 million
impairment charge and CSI wrote down the assets of its Catalyst
division to fair value. This analysis was triggered by a
combination of the following factors: historic losses in the
Catalyst division, the overall downturn in the automotive sector
and the expectation of a slow recovery in the automotive sector.
CSI utilized a discounted cash flow model to estimate the fair
value of the long-lived assets. The following two scenarios were
given equal weighting in determining the future cash flows for
purposes of both the recoverability test and fair value:
(a) the Catalyst division achieves revenue growth of
(2)%-50% per year over the next 5 years and (b) the
Catalyst division continues to experience cash flow losses and
does not achieve profitability. The cash flows were discounted
using a 1.6% risk free interest rate. This analysis indicated
that the assets of the Catalyst division were impaired and,
accordingly, CSI wrote down the assets by $4.9 million,
from $5.8 million to $0.9 million, which represented
their estimated fair value as of December 31, 2008. In 2009
and again through June 30, 2010, CSI considered whether any
events or changes in circumstance indicated that the carrying
amount of its Catalyst divisions long-lived assets,
totaling $759,000, may not be recoverable. With the recent
disruption of sales announced, CSI conducted a recoverability
test on the fixed assets of the Catalyst division and concluded
that the expected undiscounted cash flows associated with the
assets substantially exceed their carrying value. CSIs
analysis utilized two different scenarios over a five year
period with a probability weighting. One scenario assumed no
additional program wins while the other scenario was based on a
set of assumed program wins, resulting of revenue growth ranging
from zero to 35% over the next 5 years. Each scenario also
included a terminal value based upon an estimated value of
intellectual property that could be sold off. For the remaining
long-lived assets of CSI, all of which are included in the Heavy
Duty Diesel Systems reporting unit, CSI concluded the expected
undiscounted cash flows associated with these assets
substantially exceed their carrying value. In the event that
actual results differ from CSIs forecasts or the future
outlook diminishes, the future cash flows and fair value of
these assets could potentially decrease in the future, requiring
further impairment charges. 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.
Fair
Value of Embedded Financial Instruments
CSIs secured convertible notes issued to investors (see
Recent Developments Capital
Raise below) in conjunction with the agreement to merge
with Clean Diesel contain two embedded financial instruments
that require separate accounting at fair value. The instruments
requiring separate accounting are the premium redemption feature
and the contingent equity forward. The estimate of fair value of
such financial instruments involves unobservable inputs that are
considered Level 3 inputs.
The premium redemption instrument represents the fair value of
the additional penalty premium of two times (2x) the outstanding
principal amount plus the default interest that is due if the
secured convertible notes are in default. This instrument is
considered a put option, as subsequent to August 2, 2010,
the noteholders had the option of demanding payment or providing
additional time extensions. The fair value of the premium
redemption instrument is estimated by calculating the present
value of $4.0 million plus accrued interest, based on an
assumed payment date (eleven months after default date) using a
high yield discount rate of 17%, multiplied by an estimated
probability of its exercise. The fair value of this instrument
at June 30, 2010 was $528,000. A ten percentage point
change in CSIs estimated probability of exercise would
increase or decrease the fair value by approximately $260,000.
The contingent equity forward represents the additional
$2.0 million that the investors have committed to fund
immediately prior to closing of the Merger with Clean Diesel. It
is considered a commitment to purchase equity since the funding
will only occur from the same events that will cause the secured
convertible notes to
163
automatically convert to equity. The fair value is estimated
based on the intrinsic value of the forward discounted at a risk
free rate multiplied by the estimated probability that the
forward will fund. The intrinsic value is calculated based upon
the combined market capitalizations of CSI and Clean Diesel less
the required $2.0 million cash payment. The fair value of
this instrument at June 30, 2010 was $488,000. A ten
percentage point change in CSIs estimated probability of
exercise would increase or decrease the fair value by
approximately $60,000.
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-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
reporting period 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, or the low end of the
range if no amount in a range of estimated losses is more likely
than the others. 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/information statement
and 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 included such disclosures, as
required, in the notes to its June 30, 2010 condensed
consolidated financial statements.
164
For additional discussion regarding these, and other recent
accounting pronouncements, see Note 2 to CSIs Annual
Consolidated Financial Statements and Note 2 to CSIs
Interim Condensed Consolidated Financial Statements, appearing
elsewhere in this joint proxy statement/information statement
and prospectus.
Recent
Developments
Capital
Raise
On June 2, 2010, CSI entered into agreements with a group
of accredited investors providing for the sale of
$4.0 million of secured convertible notes. Under the
agreements, $2.0 million of the secured convertible notes
have been issued by CSI in four equal installments ($500,000 on
each of June 2, 2010, June 8, 2010, June 28, 2010
and July 12, 2010), with the remaining $2.0 million to
be issued after CSIs shareholders approve the Merger and
after other necessary approvals under CSIs articles of
incorporation, but prior to the effective time of the Merger.
Under the terms of the agreements, it is a condition to the
obligations of the investors with respect to the final
$2.0 million tranche that all conditions precedent to the
closing of the Merger be satisfied or waived (among other
items). Under the terms of the secured convertible notes,
assuming the necessary shareholder approvals are received at the
special meeting of CSIs shareholders to permit conversion
thereof, the $4.0 million of secured convertible notes will
be converted into newly created Class B common
stock immediately prior to the Merger such that at the effective
time of the Merger, this group of accredited investors will
receive approximately 66% of the shares of Clean Diesel common
stock (but not warrants to purchase Clean Diesel common stock)
to be issued to CSIs stockholders in the Merger.
The initial $2.0 million of this capital raise has provided
CSI with financing for its immediate working capital needs and
ensured the minimum cash position necessary such that CSI would
meet the 60/40 target so that the CDTI shares issued to CSI
shareholders (including investors in the capital raise) in the
merger (taking into account shares issued to CSIs
financial advisor for its fees) would represent collectively 60%
of the shares of Clean Diesel deemed to be outstanding after the
Merger (without taking into account the Company warrants, the
warrants issued to CSIs financial advisor or the warrants
issued to the investors in Clean Diesels Reg S offering). CSI
currently is in default under the terms of its secured
convertible notes. Unless CSI is able to obtain an extension of
the maturity date of the outstanding notes and to modify or
waive the terms thereof, the final $2.0 million will not be
funded and it is likely that the Merger will not be consummated.
One of the members of CSIs Board of Directors,
Mr. Alexander (Hap) Ellis, III, is a
partner of RockPort Capital Partners. RockPort Capital Partners
subscribed for a portion of the secured convertible notes as
part of the capital raise. For a description of the specific
terms of the secured convertible notes, see
Description of Indebtedness Secured Convertible
Notes below.
Forbearance
from Fifth Third Bank Extended to August 31,
2010
In June 2010, Fifth Third Bank, CSIs secured lender,
agreed to extend forbearance under the terms of CSIs
credit facility until August 31, 2010. Under the terms of
the current forbearance, CSIs current credit limit was
reduced to Canadian $7.0 million from Canadian
$7.5 million but the interest rate remained unchanged at
U.S./Canadian Prime Rate plus 2.75%. A further extension until
November 30, 2010 was possible if the proposed Merger was
completed by August 1, 2010, and:
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|
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as of August 31, 2010, the secured convertible notes issued
by CSI in connection with the capital raise had been converted
to common equity and the security granted to the secured
convertible note holders had been released;
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|
CSI had $3.0 million of free cash on its balance sheet;
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|
CSIs Engine Control Systems subsidiary had Canadian
$2.0 million available under the existing loan
agreement; and
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|
no default, forbearance default or event of default (as defined
in the credit and forbearance agreements) was outstanding.
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165
While the Merger was not completed by August 1, 2010, Fifth
Third Bank is currently in the process of determining the terms
and conditions for extending or amending the forbearance. For
more information relating to the credit facility, see
Description of Indebtedness Fifth Third
Bank below.
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 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 workforce by approximately 55% to eliminate excess
capacity, consolidating certain functions to eliminate
redundancies between engineering and manufacturing, 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
166
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. CSI estimates that its efforts
have reduced the cost structure of this division by
approximately $12 million on an annualized basis. 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 $4.9 million.
A reconciliation of CSIs accrued severance and related
expenses are as follows:
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Accrued severance at December 31, 2008
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$
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187,000
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|
Accrued severance expense during 2009
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|
1,429,000
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Paid severance expense during 2009
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(946,000
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)
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Accrued severance at December 31, 2009
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|
$
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670,000
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|
Accrued severance expense during the six months ended
June 30, 2010
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|
15,000
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|
Paid severance expense during the six months ended June 30,
2010
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|
|
(276,000
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)
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|
Accrued severance at June 30, 2010
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$
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409,000
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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.
Factors
Affecting Future Results
The nature of CSIs business and, in particular, its Heavy
Duty Diesel Systems division, are heavily influenced by
government funding of emissions control projects and increased
diesel emission control regulations, compliance with which
drives demand for its products. Notably, the retrofit
applications sold by the division are generally for funded
one-off projects, and typical end-user customers include school
districts, municipalities and other fleet operators. See
CSI Business Sales and Marketing for
more information regarding end users of the products of
CSIs Heavy Duty Diesel Systems division. For example, due
to the California state budget crisis in late 2008 and early
2009, a state-funded emissions control project that was
anticipated to commence in the first half of 2009, did not
receive funding and its commencement date, if ever, remains
uncertain. As such, CSIs Heavy Duty Diesel Systems
division had lower revenues than anticipated in the first half
of 2009 due to the lack of funding available to potential users
of its products. However, following the passage of the American
Recovery and Reinvestment Act of 2009 (commonly referred to as
the Stimulus Bill), government spending (both federal and state)
increased. As such, in the second half of 2009, additional
government emissions control programs were funded, including a
different California-state funded program, and consequently,
CSIs Heavy Duty Diesel Systems division revenues improved
in the second half of 2009 due to the availability of government
funding for users of its products. Future budget crises, and
changes in government funding levels will have a similar effect
on the revenues of CSIs Heavy Duty Diesel Systems division.
Because the customers of CSIs Catalyst division are auto
makers, CSIs business is also affected by macroeconomic
factors that impact the automotive industry generally, which can
result in increased or decreased purchases of vehicles, and
consequently demand for CSIs products. The global economic
crisis in the latter half of 2008 that continued through 2009
had a negative effect on CSIs customers in the automotive
industry. As such demand for its products, which its auto maker
customers incorporate into the vehicles they sell, decreased. In
the future, if similar macroeconomic factors, or other factors
affect CSIs customer base, its revenues will be similarly
affected. In addition, two auto maker customers account for a
significant portion of CSIs Catalyst division revenues
(see Note 2 to its Annual Consolidated Financial Statements
appearing elsewhere in this joint proxy statement/information
statement and prospectus). In the second half of 2010, one of
these auto makers will accelerate manufacture of a vehicle that
requires a catalyst product meeting a higher
167
regulatory standard than the product currently supplied to such
auto maker by CSIs Catalyst division. Although CSI had
already commenced the necessary testing and approval processes
for its products under the higher regulatory standard, such
processes are not yet complete. Accordingly, CSI now expects
lower revenues in its Catalyst division for the second half of
2010 and early 2011 as compared to the six months ended
June 30, 2010 on an annualized basis as this auto maker
winds down production of the vehicle that incorporates
CSIs verified product. Although CSI expects that sales of
its Catalyst products to this auto maker will resume in the
first half of 2011 once it has received the necessary regulatory
approvals and customer qualifications, there is no guarantee
that this will occur.
Results
of Operations
Comparison
of Six Months Ended June 30, 2010 to Six Months Ended
June 30, 2009
Revenue
The table below and the tables in the discussion that follows
are based upon the way CSI analyzes its business. See
Note 13 to CSIs Interim Condensed Consolidated
Financial Statements appearing elsewhere in this joint proxy
statement/information statement and prospectus for additional
information about CSIs division segments.
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% of
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% of
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June 30,
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Total
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June 30,
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Total
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2010
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Revenue
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2009
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Revenue
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$ Change
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% Change
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(Dollars in millions)
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Heavy duty diesel systems
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$
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15.8
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62.2
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%
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$
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8.8
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46.1
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%
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$
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7.0
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79.5
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%
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Catalyst
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9.9
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39.0
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%
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10.4
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54.4
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%
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(0.5
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)
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(4.8
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)%
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Intercompany revenue
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(0.3
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)
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(1.2
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)%
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(0.1
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)
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(0.5
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)%
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(0.2
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)
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200
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%
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Total revenue
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$
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25.4
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$
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19.1
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$
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6.3
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33.0
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%
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Total revenue for the six months ended June 30, 2010
increased by $6.3 million, or 33.0%, to $25.4 million
from $19.1 million for the six months ended June 30,
2009.
Revenues for CSIs Heavy Duty Diesel Systems division for
the six months ended June 30, 2010 increased
$7.0 million, or 79.5%, to $15.8 million, from
$8.8 million for the six months ended June 30, 2009.
The increase was due largely to an expansion of CSIs
distributor channels in the United States as well as continued
benefit from funding allocated to diesel emission control under
the American Recovery and Reinvestment Act of 2009 (commonly
referred to as the Stimulus Bill), which provided customers an
incentive to acquire CSIs emission control products. In
addition, revenues for the six months ended June 30, 2009
were adversely impacted by the global economic slowdown and the
California budget crisis, resulting in a favorable year over
year comparison of first half 2010 compared to first half 2009.
Revenues for CSIs Catalyst division for the six months
ended June 30, 2010 decreased $0.5 million, or 4.8%,
to $9.9 million, from $10.4 million for the six months
ended June 30, 2009. Sales for this division decreased
modestly year over year and continue to be weak due to the
continued downturn in world-wide automobile sales. CSI does not
expect Catalyst division revenues to continue at the same pace
as the first six months of 2010 for the remainder of 2010 and
anticipates a decrease in light of a decision by one of its auto
maker customers to accelerate production of a vehicle that needs
a product for which CSI has not yet received necessary customer
approvals (see Factors Affecting Future
Results above).
Intercompany sales by CSIs Catalyst division to its Heavy
Duty Diesel Systems division are eliminated in consolidation.
Cost of
revenues
Cost of revenues increased by $3.0 million, or 19.3%, to
$18.6 million for the six months ended June 30, 2010
compared to $15.6 million for the six months ended
June 30, 2009. The primary reason for the increase in costs
was higher product sales volume in CSIs Heavy Duty Diesel
Systems division.
168
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
% of
|
|
|
June 30,
|
|
|
% of
|
|
|
|
2010
|
|
|
Revenue(1)
|
|
|
2009
|
|
|
Revenue(1)
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Heavy duty diesel systems
|
|
$
|
4.8
|
|
|
|
30.3
|
%
|
|
$
|
2.8
|
|
|
|
31.7
|
%
|
Catalyst
|
|
|
2.0
|
|
|
|
20.0
|
%
|
|
|
0.8
|
|
|
|
7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
6.8
|
|
|
|
26.7
|
%
|
|
$
|
3.6
|
|
|
|
18.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Division calculation based on
division revenue. Total based on total revenue.
|
Gross profit increased by $3.2 million, or 90.2%, to
$6.8 million for the six months ended June 30, 2010,
from $3.6 million for the six months ended June 30,
2009. Gross margin increased to 26.7% for the six months ended
June 30, 2010 from 18.6% for the six months ended
June 30, 2009. The increase in gross profit was primarily
due to both the increased sales of the Heavy Duty Diesel Systems
division and reductions in manufacturing overhead costs, as well
as continued increases in efficiency in the Catalyst division
following its restructuring efforts implemented in 2008 and 2009
(described above under Recent
Developments Catalyst
Division Restructuring).
The reduction in gross margin for CSIs Heavy Duty Diesel
Systems division for the six months ended June 30, 2010 as
compared to the same period in 2009 is due to changes in overall
product mix, and reflects a higher proportion of sales of lower
margin products, as well as a higher proportion of sales through
a distributor that has a preferred purchasing arrangement, where
in exchange for higher volumes, they receive a lower sales
price, which results in lower profit to CSI.
Operating
expenses
The following table shows CSIs operating expenses and
operating expenses as a percentage of revenues for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Total
|
|
|
June 30,
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
1.6
|
|
|
|
6.3
|
%
|
|
$
|
2.1
|
|
|
|
11.0
|
%
|
|
$
|
(0.5
|
)
|
|
|
(23.8
|
)%
|
Research and development
|
|
|
2.2
|
|
|
|
8.7
|
%
|
|
|
3.7
|
|
|
|
19.4
|
%
|
|
|
(1.5
|
)
|
|
|
(40.5
|
)%
|
General and administrative
|
|
|
4.1
|
|
|
|
16.1
|
%
|
|
|
4.0
|
|
|
|
20.9
|
%
|
|
|
0.1
|
|
|
|
2.5
|
%
|
Recapitalization expenses
|
|
|
0.7
|
|
|
|
2.8
|
%
|
|
|
0.7
|
|
|
|
3.7
|
%
|
|
|
0.0
|
|
|
|
0.0
|
%
|
Gain on sale of intellectual property
|
|
|
(3.9
|
)
|
|
|
(15.4
|
)%
|
|
|
(2.5
|
)
|
|
|
(13.1
|
)%
|
|
|
(1.4
|
)
|
|
|
(56.0
|
)%
|
Severance and other charges
|
|
|
|
|
|
|
|
%
|
|
|
0.2
|
|
|
|
1.0
|
%
|
|
|
(0.2
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
4.7
|
|
|
|
18.5
|
%
|
|
$
|
8.2
|
|
|
|
42.9
|
%
|
|
$
|
(3.5
|
)
|
|
|
(42.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2010, operating expenses
decreased by $3.5 million, or 42.7%, to $4.7 million
from $8.2 million for the six months ended June 30,
2009. A significant reason for the decrease in operating
expenses was the recognition of a $3.9 million gain in the
six months ending June 30, 2010 compared to a
$2.5 million gain in the six months ended June 30,
2009, which arose from the sale of specific three-way catalyst
technology and intellectual property to TKK, CSIs Asian
joint venture partner (as described above under
Recent Developments Asian Joint Venture
Reduction of Ownership Interest to 5%), and to a lesser
extent, continued improvements in expense management as a result
of the cost reduction efforts implemented as part of the
Catalyst division restructuring.
169
Sales and
marketing expenses
For the six months ended June 30, 2010, sales and marketing
expenses decreased by $0.5 million, or 23.8%, to
$1.6 million, from $2.1 million for the six months
ended June 30, 2009. The reduction is primarily due to the
cost reduction efforts implemented in 2008 and 2009 as part of
the Catalyst division restructuring. Sales and marketing
expenses as a percentage of sales decreased to 6.3% in the six
months ended June 30, 2010 as compared to 11.0% in the six
months ended June 30, 2009.
Research
and development expenses
For the six months ended June 30, 2010, research and
development expenses decreased by $1.5 million, or 40.5%,
to $2.2 million from $3.7 million for the six months
ended June 30, 2009. The decrease in research and
development expenses was primarily attributable to the cost
reduction efforts implemented in 2008 and 2009 as part of the
Catalyst division restructuring. As a percentage of revenues,
research and development expenses were 8.7% in the six months
ended June 30, 2010, compared to 19.4% in the six months
ended June 30, 2009.
General
and administrative expenses
For the six months ended June 30, 2010, general and
administrative expenses increased only slightly by
$0.1 million, or 2.5%, to $4.1 million, from
$4.0 million for the six months ended June 30, 2009.
This increase was primarily due to higher professional fees
incurred as a result of the proposed Merger. General and
administrative expenses as a percentage of sales decreased to
16.1% in the six months ended June 30, 2010 as compared to
20.9% in the six months ended June 30, 2009.
Non-operating
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
June 30,
|
|
|
Total
|
|
|
June 30,
|
|
|
Total
|
|
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Interest expense
|
|
|
(0.7
|
)
|
|
|
(2.8
|
)%
|
|
|
(1.5
|
)
|
|
|
(7.9
|
)%
|
Other expense, net
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)%
|
|
|
(0.8
|
)
|
|
|
(4.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expense, net
|
|
$
|
(0.8
|
)
|
|
|
(3.1
|
)%
|
|
$
|
(2.3
|
)
|
|
|
(12.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
In the six months ended June 30, 2010, CSI incurred
interest expense of $0.7 million, compared to
$1.5 million in the six months ended June 30, 2009.
This decrease is a result of lower interest expense of
$0.8 million due to the reduction in outstanding
indebtedness from $16.1 million at June 30, 2009 to
$7.8 million at June 30, 2010, partially offset by
amortization of debt discount of $281,000 on the secured
convertible notes issued in June 2010. In addition, the six
months ended June 30, 2009 included $0.3 million in
acceleration of deferred financing expense due to the violation
of covenants under its borrowing agreements with Fifth Third
Bank and Cycad Group, LLC.
Other
expense
For the six months ended June 30, 2010 other expenses were
$0.1 million compared to $0.8 million for the six
months ended June 30, 2009, a decrease of
$0.7 million. This decrease was primarily a result of a
reduction in CSIs share of the net loss in its Asian joint
venture (due to the decrease in its interest in such venture),
which was $0.6 million in the six months ended
June 30, 2009 compared to only a minimal loss for the same
period in 2010, as well as approximately $0.2 million of
income in the six months ended June 30, 2010 resulting from
changes in the fair value of the derivative financial
instruments issued in connection with the secured convertible
notes issued in June 2010.
170
Income
taxes
For the six months ended June 30, 2010, CSI had an income
tax expense from continuing operations of $0.5 million
compared to $0.1 million for the six months ended
June 30, 2009. CSI has no significant tax expense in its
U.S.-based
operations. CSIs Canadian and Swedish operations have an
effective tax rate of 32%.
Net
income (loss)
For the foregoing reasons, CSI had net income of
$0.6 million for the six months ended June 30, 2010
compared to a net loss of $8.2 million for the six months
ended June 30, 2009. Excluding loss from discontinued
operations, CSI had net income from continuing operations of
$0.8 million for the six months ended June 30, 2010
compared to a net loss from continuing operations of
$7.0 million for the six months ended June 30, 2009.
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 20 to CSIs Annual Consolidated Financial
Statements appearing elsewhere in this joint proxy
statement/information statement and 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
|
|
|
|
51.2
|
%
|
|
$
|
27.1
|
|
|
|
51.5
|
%
|
|
$
|
(1.2
|
)
|
|
|
(4
|
)%
|
Catalyst
|
|
|
25.1
|
|
|
|
49.7
|
%
|
|
|
26.3
|
|
|
|
50.0
|
%
|
|
|
(1.2
|
)
|
|
|
(5
|
)%
|
Intercompany revenue
|
|
|
(0.5
|
)
|
|
|
(0.9
|
)%
|
|
|
(0.8
|
)
|
|
|
(1.5
|
)%
|
|
|
0.3
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
50.5
|
|
|
|
|
|
|
$
|
52.6
|
|
|
|
|
|
|
$
|
(2.1
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue 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, CSI benefited from increased
California funding and spending for diesel emissions control
under the Stimulus Bill during the second half of the year,
which provided funding to users of its products, and
consequently an increase in CSIs sales of such products.
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, which allowed CSI to offer its
broad product portfolio to a wider range of customers, who
funded for emissions control projects. CSI expects the benefits
from increased U.S. 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 primary reason for the decrease in
revenues was due to decreased purchases by CSIs auto maker
customers due to the significant downturn in the worldwide auto
industry, which decrease in sales was only partially offset by
an increase in CSIs customer base compared to 2008. 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.
171
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 CSIs Catalyst division (see
Recent Developments Catalyst Division
Restructuring above) coupled with a reduction in cost due
to the decline in revenue.
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(1)
|
|
|
2008
|
|
|
Revenue(1)
|
|
|
|
(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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Division calculation based on
division revenue. Total based on total revenue.
|
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. 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 in
light of its restructuring 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
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
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.
172
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.
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.
173
Non-operating
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
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
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 net loss of its Asian joint venture was $1.3 million,
which was offset by a gain on the reduction in the liability to
fund its Asian joint venture 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
The revenue that CSI generates is not sufficient to fund its
operating requirements and debt servicing needs. Notably, CSI
has suffered recurring losses and negative cash flows from
operations since inception.
174
CSIs primary sources of liquidity in recent years have
been asset sales and, to a limited extent, credit facilities and
other borrowings. Such sources of liquidity, however, have not
been sufficient to provide CSI with financing necessary to
sufficiently capitalize its operations, and consequently,
CSIs working capital is severely limited.
As of June 30, 2010, CSI had an accumulated deficit of
approximately $148.7 million and a working capital deficit
of $3.6 million. As of December 31, 2009, CSI had an
accumulated deficit of approximately $149.3 million and a
working capital deficit of $4.4 million. CSI had
$2.9 million in cash and cash equivalents at June 30,
2010 compared to $2.3 million in cash and cash equivalents
at December 31, 2009 ($6.7 million at
December 31, 2008), and total current liabilities of
$19.1 million at June 30, 2010 compared to
$22.9 million at December 31, 2009 ($35.9 million
at December 31, 2008).
In light of CSIs liquidity situation, in the first quarter
of 2009, CSI retained Allen & Company, LLC, a
U.S.-based
investment banking firm to act as a financial advisor to CSI in
exploring alternatives to recapitalize CSI. Alternatives under
consideration included the sale of CSI stock
and/or a
sale of CSIs assets, continuing to negotiate with Fifth
Third Bank and Cycad Group, LLC to modify loan terms in order to
delay repayments while alternative capital is secured, and
seeking out other alternatives, such as the proposed Merger.
During 2009, CSI took several actions to improve its liquidity.
These actions included: (i) reduction in cash used in
operations through cost reductions and improved working capital
management, in particular as part of the restructuring of its
Catalyst division (see Recent
Developments Catalyst
Division Restructuring above), but also due to
implementing policies restricting travel, improving inventory
management, and overall reductions in spending;
(ii) improved operating efficiencies in light of
installation of a new ERP system in 2008 (which lowered capital
expenditures in 2009); (iii) capital expenditures have been
reduced to necessary maintenance and targeted investments to
improve processes or products; (iv) additional asset sales,
including the sale of the assets of Applied Utility Systems and
sale of intellectual property (see Recent
Developments above); (v) repayment of debt, including
pay off of Cycad Group, LLC (see Note 8 to CSIs
Annual Consolidated Financial Statements included elsewhere in
this joint proxy statement/information statement and
prospectus), and (vi) entering into forbearance agreements
with Fifth Third Bank to temporarily suspend its rights under
CSIs credit facility for a period of time (see
Description of Indebtedness Fifth
Third Bank below). Notwithstanding the foregoing actions,
CSIs access to working capital continued to be limited and
its debt service obligations and projected operating costs for
2010 exceeded its cash balance at December 31, 2009. 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.
In the first half of 2010, CSI continued to work on its efforts
to recapitalize its business and in May 2010, entered into the
Merger Agreement and in June 2010 undertook the
$4.0 million capital raise described above under
Recent Developments Capital
Raise. However, there is no certainty that existing cash
will be sufficient to sustain operations of the combined company
without additional financing. Although it is anticipated that
the Merger would provide the combined company sufficient capital
through 2011, and position the combined company to have improved
access to development capital, there is no guarantee that the
Merger will occur. If the Merger does not occur, because CSI has
already undertaken significant structural changes in its
operations and divested a number of non-core assets to improve
its liquidity, its ability to rely on asset sales, including
sales of intellectual property and business units, to provide
liquidity in the future without changing the nature of its
business may be limited. In the event that the Merger does not
occur, and CSI is not successful in the immediate future in
undertaking other actions to recapitalize its balance sheet
(such as the sale of stock
and/or a
sale of additional assets, further negotiations with Fifth Third
Bank to modify loan terms in order to delay repayments), CSI
will be unable to continue operations and may be required to
file bankruptcy. Further, the failure of the Merger to occur
would be considered an event of default under the
current forbearance agreement in place with Fifth Third Bank. If
Fifth Third Bank does not waive this event of default, it may
seek to enforce its rights under the credit agreement, which
would include setting off against the outstanding bank debt
proceeds of CSIs accounts receivable, directing accounts
receivable to be paid to Fifth Third, limiting CSIs
ability to make further borrowings under the credit agreement,
and the seizure or sale of CSIs equipment, inventory and
general intangibles. See Description of
Indebtedness Fifth Third Bank below for more
information relating to this facility. In addition, since the
merger was not completed by
175
August 2, 2010, a default under the secured convertible
note agreements has occurred; triggering a penalty payment of
two times the principal amount becoming due. See
Description of Indebtedness
Secured Convertible Notes below for more information
relating to these notes. Such actions, if taken, would have a
material adverse effect on CSIs financial condition and
ability to continue as a going concern.
The following table summarizes CSIs cash flows for the six
months ended June 30, 2010 and 2009 and for the years ended
December 31, 2009 and 2008.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in millions)
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
0.6
|
|
|
$
|
(2.5
|
)
|
|
$
|
3.1
|
|
|
|
124.0
|
%
|
|
$
|
(7.4
|
)
|
|
$
|
(15.1
|
)
|
|
$
|
7.7
|
|
|
|
(51
|
)%
|
Investing activities
|
|
|
1.4
|
|
|
|
1.9
|
|
|
|
(0.5
|
)
|
|
|
(26.3
|
)%
|
|
|
13.4
|
|
|
|
3.6
|
|
|
|
9.8
|
|
|
|
272
|
%
|
Financing activities
|
|
|
(1.0
|
)
|
|
|
(1.8
|
)
|
|
|
(0.8
|
)
|
|
|
44.4
|
%
|
|
|
(10.5
|
)
|
|
|
2.0
|
|
|
|
(12.5
|
)
|
|
|
NM
|
|
Cash
provided by (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 provided by operating activities in the six months ended
June 30, 2010 was $0.6 million, an increase of
$3.1 million from six months ended June 30, 2009, when
CSIs operating activities used $2.5 million of cash.
This improvement was primarily due to higher gross profits and
lower operating expenses in the six months ended June 30,
2010 compared to the same period in 2009.
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 $1.4 million
in the six months ended June 30, 2010, a decrease of
$0.5 million as compared to the $1.9 million generated
by investing activities in the six months ended June 30,
2009. This decrease was primarily the result of
$2.0 million received from CSIs Asian joint venture
partner, TKK, from the sale of intellectual property in the six
months ended June 30, 2010 compared
176
to the $2.5 million in the six months ended June 30,
2009, as well as lower capital expenditures in the six months
ended June 30, 2010 of $0.2 million compared to
$0.6 million in the same period of 2009.
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. CSIs capital
expenditures have been reduced to a level to provide necessary
maintenance and targeted investments to improve processes or
products.
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 $1.0 million in
the six months ended June 30, 2010, a $0.8 million
decrease as compared to net cash used in financing activities of
$1.8 million in the six months ended June 30, 2009.
The lower usage was primarily due to the receipt of
$1.5 million of cash proceeds from the sale of the secured
convertible notes in June 2010, which was partially offset by a
higher net pay-down of a line of credit for the six months ended
June 30, 2010 as compared to the same period of 2009.
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 June 30, 2010 and
December 31, 2009 and 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Line of credit
|
|
|
3.0
|
|
|
|
5.1
|
|
|
|
8.1
|
|
Consideration payable
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
3.0
|
|
Secured convertible notes with a face value of $1.5 million
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
Term loans
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
Cycad debt facility
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Capital lease obligations
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
7.9
|
|
|
|
8.2
|
|
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177
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 2.50%
for borrowings in U.S. dollars; or (ii) the Canadian
Prime Rate plus 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 Rate plus 2.75%
for U.S. dollar borrowings and to Canadian Prime Rate plus
2.75% for Canadian dollar borrowings. At June 30, 2010, the
line of credit consisted of a Canadian $7.0 million demand
revolving line of credit.
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 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. These
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 verbally extended its forbearance until
November 30, 2009. In December 2009, 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 Rate
plus 2.5%. This conversion to a demand facility effectively
rendered the financial covenants under the original loan
agreement meaningless. 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 U.S./Canadian
Prime Rate plus 2.75%. In June 2010, in connection with the
capital raise (discussed above under Recent
Developments Capital Raise), Fifth Third Bank
agreed to further extend forbearance under the terms of its
credit facility until August 31, 2010, and reduced the
credit limit to Canadian $7.0 million, but made no further
changes to the interest rate, which remains at U.S./Canadian
Prime Rate plus 2.75%. A further extension until
November 30, 2010 was to be granted if certain criteria
were met, as described above under Recent
Developments Forbearance from Fifth Third Bank
Extended. Although the Merger was not completed by
August 1, 2010 and will not be completed before the
August 31, 2010 expiration date for the current
forbearance, Fifth Third Bank has indicated its willingness to
extend the forbearance until October 15, 2010 and, if the
Merger is completed prior to such date, for a further period of
90 days after consummation of the Merger, but the credit
limit would be further reduced to $6.0 million, the
interest rate would be increased by 0.25% to U.S./Canadian Prime
Rate plus 3.00% and, if the Merger is not
178
consummated by October 15, 2010, the interest rate would
be increased by an additional 1.00% to
U.S./Canadian
Prime Rate plus 4.00% . Fifth Third Banks willingness to
extend the forbearance, among other things, is subject to CSI
having entered into forbearance arrangements with holders of
CSIs secured convertible notes and execution of
appropriate documentation. There can be no assurance that Fifth
Third Bank or the holders of CSIs secured convertible
notes will actually enter into any such forbearance arrangements.
The current facility with Fifth Third is now effectively a
demand facility, which means that Fifth Third may demand
repayment of outstanding amounts at any time. Although CSI has
no reason to believe that Fifth Third will not continue to
extend credit to CSI on the terms set out in the forbearance
agreement, or agree to modifications to the terms to extend the
forbearance should the need arise, there is no guarantee that
Fifth Third will do so. As such, 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 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.
For further information regarding CSIs credit agreement
with Fifth Third Bank, see Note 8 to CSIs Annual
Consolidated Financial Statements and Note 4 to CSIs
Interim Condensed Consolidated Financial Statements appearing
elsewhere in this joint proxy statement/information statement
and 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 ($624,000 at June 30, 2010). In addition,
in connection with its acquisition of the assets of Applied
Utility Systems, CSI may be obligated to pay an earn-out amount
with respect to the period during which CSI operated the
acquired business. 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 12 to CSIs Interim Condensed
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/information
statement and prospectus.
Secured
Convertible Notes
In June 2010, pursuant to the terms of its capital raise
(discussed above under Recent
Developments Capital Raise), CSI agreed to
issue up to $4 million of secured convertible notes, of
which $2 million of secured convertible notes have been
issued. The secured convertible notes, as amended, bear interest
at a rate of 8% per annum, provide for a maturity date of
August 2, 2010, and are secured by a subordinated lien on
CSIs assets, but are subordinated to Fifth Third Bank.
Under the terms of the secured convertible notes, assuming the
necessary shareholder approvals are received at the special
meeting of CSIs shareholders to permit conversion thereof,
the $4.0 million of secured convertible notes will be
converted into newly created Class B common
stock immediately prior to the Merger such that at the effective
time of the Merger, this group of accredited investors will
receive approximately 66% of the shares of common stock
179
being issued by Clean Diesel to CSI shareholders in the Merger.
This group of accredited investors will not receive any of the
warrants being issued by Clean Diesel to CSI shareholders in the
Merger.
The terms of the secured convertible notes provide that CSI has
a 10-business day grace period to make payments due under the
secured convertible notes, either at maturity, a date fixed for
prepayment, or by acceleration or otherwise, before it is
considered an Event of Default as defined in the
secured convertible notes. The terms also provide that, in the
event the Merger has not occurred prior to the maturity date of
the secured convertible notes, CSI has a 10-business day grace
period, during which time it could seek the agreement of the
noteholders to extend the maturity date of the notes, before it
would be required to pay the secured convertible notes in full.
CSI did not repay the secured convertible notes or consummate
the Merger prior to the August 2, 2010 maturity date or
within the subsequent 10 day grace period. Accordingly,
unless waived, extended or modified with the agreement of the
noteholders, the outstanding principal amount under the secured
convertible notes, including any interest and an additional
payment premium of two times (2x) the outstanding principal
amount will be due to the holders of the secured convertible
notes. and the interest rate applicable thereto increases from
8.0% to 15.0%. The holders of a majority of the secured
convertible notes have indicated their willingness to forbear
from exercising any rights or remedies thereunder to
October 15, 2010, to forgo the increase in the interest
rate from 8.0% to 15.0%, to waive the applicability of the
additional payment premium, and to agree that the payment
premium would be extinguished in the event that the secured
convertible notes are converted and the Merger occurs prior to
October 15, 2010. The willingness of the holders of the
secured convertible notes to enter into these forbearance and
other arrangements, among other things, is subject to CSI having
entered into an extended forbearance arrangement with Fifth
Third Bank, the provision of interim statements as to the cash
position of Clean Diesel and CSI and the execution of
appropriate documentation. There can be no assurance that the
holders of the secured convertible notes or Fifth Third Bank
will actually enter into any such forbearance and other
arrangements.
Off-Balance
Sheet Arrangements
As of June 30, 2010 and December 31, 2009, CSI had no
off-balance sheet arrangements.
Commitments
and Contingencies
As of June 30, 2010 and 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 Annual Consolidated
Financial Statements and Interim Condensed 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 Annual
Consolidated Financial Statements appearing elsewhere in this
joint proxy statement/information statement and prospectus.
In June 2010, CSI agreed to issue up to $4 million of
secured convertible notes to a group of accredited investors.
RockPort Capital Partners subscribed for a portion of the
secured convertible notes as part of the capital raise. One of
the members of CSIs Board of Directors, Mr. Alexander
(Hap) Ellis, III, is a partner of RockPort
Capital Partners. Mr. Ellis is expected to continue to
serve on the Board of Directors of the combined company
following the Merger, and RockPort Capital Partners is expected
to be a significant shareholder of the combined company
following the Merger (see Management Following the
MergerDirectors of the Combined Company and
Principal Stockholders of Combined Company).
180
MANAGEMENT
FOLLOWING THE MERGER
Executive
Officers and Directors
Resignation
of Clean Diesels Current Executive Officers
Pursuant to the Merger Agreement, Michael L. Asmussen,
Charles W. Grinnell and John B. Wynne, executive officers of
Clean Diesel, will resign immediately prior to the completion of
the Merger. Mr. Grinnell has entered into a Transition
Services Agreement with Clean Diesel pursuant to the terms of
which Mr. Grinnell will receive a transition bonus of
$86,730 if he remains employed by Clean Diesel for a certain
period of time following the Merger.
Executive
Officers and Directors of the Combined Company Following the
Merger
Clean Diesels board of directors is currently comprised of
seven 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. Gray, Park and Rogers).
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. The following table lists the
names and ages as of August 27, 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
|
|
|
63
|
|
|
Chief Executive Officer, Director
|
Nikhil A. Mehta
|
|
|
53
|
|
|
Chief Financial Officer
|
Stephen J. Golden, Ph.D.
|
|
|
49
|
|
|
Chief Technical Officer
|
Directors
of the Combined Company
Charles
F. Call, Director and Chief Executive Officer
(Age 63)
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.
Mr. Calls experience as CSIs President and Chief
Executive Officer, along with his knowledge of CSIs
business, CSIs management, his skills, and his performance
as a member of CSIs Board led CSIs Board to conclude
that he should be nominated to continue to serve as a director
of the combined company.
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.
181
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 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.
Mr. Cherrys experience as a director of public companies,
combined with his broad experience with companies that provide
engineering services as a senior executive, his over
40 years of experience in the energy sector and his
performance as a member of CSIs Board led CSIs Board
to conclude that he should be nominated to continue to serve as
a director of the combined company.
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, a leading venture capital firm that partners
with clean tech entrepreneurs around the world. He has been a
general partner in RockPort Capital Partners 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.
Mr. Elliss experience as a director of public companies,
combined with his broad experience as a general partner of
RockPort Capital Partners in investing in clean tech companies,
as well as his ability to assist the company in fundraising and
other strategic initiatives, combined with his performance as a
member of CSIs Board led CSIs Board to conclude that
he should be nominated to continue to serve as a director of the
combined company.
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. From April to October 2008,
Dr. Engles served as Interim Chief Executive Officer of
ThermoCeramix, Inc., an advanced materials company focused on
electrical to thermal energy conversion. From September 1997 to
March 2008, Dr. Engles served as Chief Executive Officer of
Cutanix Corporation, a biopharmaceutical company focused on
dermatological drug discovery that he co-founded. From September
1994 to March 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 U.S. producer of platinum
group metals. From July 1989 until September 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.
Dr. Engles experience as a director and executive officer
of public companies, overall management experience, as well as
his scientific background and his performance as a member of
CSIs Board led CSIs Board to conclude that he should
be nominated to continue to serve as a director of the combined
company.
182
Derek R.
Gray, Director (Age 77)
Mr. Gray 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.
Mr. Grays extensive knowledge and experience in
international business and tax matters make him a valued advisor
to the Board and led Clean Diesels Board to conclude that
he should be nominated to continue to serve as a director of the
combined company.
Mungo
Park, Director (Age 54)
Mr. Park 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 Clean Diesel Board of Directors
and appointed as Chairman of the Board at the suggestion of
several significant stockholders of Clean Diesel to assist Clean
Diesel in focusing on strategic objectives and creating value
for stockholders.
Mr. Parks fundraising experience and significant
experience in advising Greentech companies on
financial matters led Clean Diesels Board to conclude that
he should be nominated to continue to serve as a director of the
combined 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 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. Mr. Rogers brings to
the Board a wealth of broad, cleantech industry knowledge as
well as significant experience consulting with global regulatory
agencies on clean air policy and the technical execution of low
emission zones.
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. Clean Diesels board of
directors has affirmatively determined that Mr. Gray is
independent as that term is defined in the Nasdaq
listing rules. Mr. Call, Mr. Park and Mr. Rogers are
not independent under Nasdaq listing standards.
Availability
The proposed directors of the combined company have all
consented to stand for election and to serve, if elected. If one
or more of the above designees becomes unavailable or declines
to accept election as a director, votes will be cast for a
substitute designee, if any, designated by the Board on
recommendation of the Compensation and Nominating Committee.
Executive
Officers of the Combined Company
Charles
F. Call, Chief Executive Officer (Age 63)
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,
183
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 49)
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.
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;
|
|
|
|
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/information statement and 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 Clean Diesel Executive
Compensation below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
Non-Equity
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
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/information statement and
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. |
184
|
|
|
|
|
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 Annual Consolidated Financial
Statements included elsewhere in this joint proxy
statement/information statement and 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 $90 for each Mr. Call
and Dr. Golden to the Topa Tower Club. |
Narrative
Discussion of CSI Summary Compensation Table
In addition to salary, which is governed by the terms of each
executives respective employment agreement, CSIs
named executive officers also participate in CSIs
short-term incentive program. Under the short-term incentive
program, each named executive officer may receive up to a stated
percentage of his base salary depending on CSIs overall
performance achieving (or exceeding) certain financial targets
and such executives achieving (or exceeding) certain
non-financial objectives. The relevant percentage for each of
CSIs named executive officers is as follows:
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Base Salary
|
Named Executive Officer
|
|
Achieve
|
|
Exceed
|
|
Charles F. Call
|
|
|
50
|
%
|
|
|
100
|
%
|
Nikhil A. Mehta
|
|
|
40
|
%
|
|
|
80
|
%
|
Stephen J. Golden, Ph.D.
|
|
|
40
|
%
|
|
|
80
|
%
|
CSI
Outstanding Equity Awards at December 31, 2009
The following table sets out outstanding CSI stock option awards
at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number of
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Unexercised
|
|
Option or
|
|
Option or
|
|
|
Options or
|
|
Options or
|
|
Options or
|
|
Warrant
|
|
Warrant
|
|
|
Warrants
|
|
Warrants
|
|
Warrants
|
|
Exercise
|
|
Expiration
|
Name
|
|
(#) Exercisable
|
|
(#) Unexercisable
|
|
(#) Unearned(1)
|
|
Price ($)
|
|
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
Annual Consolidated Financial Statements included elsewhere in
this joint proxy statement/information statement and prospectus. |
185
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. The following summarizes the potential payments upon
employment termination and change in control events, if any,
provided for in such agreements.
Charles
F. Call.
|
|
|
Reason for Termination of Employment
|
|
Benefits
|
|
Resignation for Good Reason(a)
|
|
12 months of annual base salary as severance
|
|
|
Pro rata bonus
|
|
|
12 months of health and welfare benefits
|
|
|
|
Disability(a)
|
|
6 months of annual base salary as severance
|
|
|
Pro rata bonus
|
|
|
6 months of health and welfare benefits
|
|
|
|
Without Cause (a)
|
|
6 months of annual base salary as severance
|
|
|
Up to 6 months of salary (b)
|
|
|
Up to 6 months of pro rata bonus (b)
|
|
|
Up to 6 months of health and welfare
benefits (b)
|
|
|
|
Death
|
|
Pro rata bonus
|
|
|
|
(a) |
|
Payment of benefits 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. |
|
(b) |
|
Mr. Call is entitled to 6 months notice under his
employment agreement. Salary, pro rata bonus and health and
welfare benefits are payable pro rata for the period of time
that such notice period is less than 6 months. |
Nikhil
A. Mehta.
|
|
|
Reason for Termination of Employment
|
|
Benefits
|
|
Resignation for Good Reason or Disability (a)
|
|
6 months of annual base salary as severance
|
|
|
Pro rata bonus
|
|
|
6 months of health and welfare benefits
|
|
|
|
Without Cause (a)
|
|
6 months of annual base salary as severance
|
|
|
Up to 6 months of salary (b)
|
|
|
Up to 6 months of pro rata bonus (b)
|
|
|
Up to 6 months of health and welfare
benefits (b)
|
|
|
|
Death
|
|
Pro rata bonus
|
186
|
|
|
(a) |
|
Payment of benefits 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. |
|
(b) |
|
Mr. Mehta is entitled to 6 months notice under his
employment agreement. Salary, pro rata bonus and health and
welfare benefits are payable pro rata for the period of time
that such notice period is less than 6 months. |
Stephen
J. Golden.
|
|
|
Reason for Termination of Employment
|
|
Benefits
|
|
Resignation for Good Reason(a)
|
|
24 months of annual base salary as severance
|
|
|
Pro rata bonus
|
|
|
24 months of health and welfare benefits
|
|
|
|
Disability(a)
|
|
6 months of annual base salary as severance
|
|
|
Pro rata bonus
|
|
|
6 months of health and welfare benefits
|
|
|
|
Without Cause (a)
|
|
18 months of annual base salary as severance
|
|
|
Up to 6 months of salary (b)
|
|
|
Up to 6 months of pro rata bonus (b)
|
|
|
Up to 6 months of health and welfare
benefits (b)
|
|
|
|
Death
|
|
Pro rata bonus
|
|
|
|
(a) |
|
Payment of benefits subject to a limited exception for
violations of the non-compete covenant, and covenants relating
to confidentiality and CSIs intellectual property in
Mr. Goldens employment agreement, and the signing of
a release. |
|
(b) |
|
Mr. Golden is entitled to 6 months notice under his
employment agreement. Salary, pro rata bonus and health and
welfare benefits are payable pro rata for the period of time
that such notice period is less than 6 months. |
Resignation for Good Reason is not defined in any of
the employment agreements of Messrs. Call, Mehta or Golden
to include resignation following a change in control of CSI.
Thus, no payments will be triggered upon completion of the
Merger. None of Messrs. Call, Mehta or Golden is 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.
Except as provided in the current employment contracts of
Messrs. Call, Mehta, 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
187
included in the following tables. For information regarding
compensation paid to Clean Diesels Directors who will
serve as Directors of the combined company, see
Clean Diesel Director Compensation below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Immediately prior to the Merger, CSI will
issue these non-employee Directors an aggregate of $100,000 in
cash and 6,462,094 shares of common stock (which will be
designated as Class A common stock) as payment in full for
accrued Directors fees for periods prior to January 1, 2010
(including the fees listed in the table above). |
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 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 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.
188
Clean
Diesel Directors, Executive Officers, Corporate Governance and
Director Independence
Clean
Diesel Directors and Executive Officers
The following includes a brief biography of each member of Clean
Diesels Board of Directors and Clean Diesels
executive officers, including their ages as of July 21,
2010. Each biography of each member of Clean Diesels Board
of Directors includes information regarding the specific
experience, qualifications, attributes or skills that led the
Compensation and Nominating Committee and Clean Diesels
Board of Directors to determine that the applicable director
should serve as a member of Clean Diesels 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, 40, has been President, Chief
Executive Officer and a director of Clean Diesel since February
2009. When Mr. Asmussen was appointed as Clean
Diesels Chief Executive Officer in 2009, Clean
Diesels Board of Directors determined that it was
important that Clean Diesels 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.
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.
John A. de Havilland, 72, was a director of Clean Diesel
since its inception in 1994 until May 10, 2010. 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.
Frank Gallucci, 60, joined Clean Diesel as a Director in
August 2010. Mr. Gallucci is a Managing Director and
founder of Whitestone Associates, LLC, a boutique investment
banking firm specializing in M&A services and strategic
planning, established in 1992. Since 2008, Mr. Gallucci has
also served as a Vice President-Mergers and Acquisitions for
Valhalla Management, a private equity firm based in Winnipeg,
Canada. Mr. Gallucci holds a BS degree from the State
University of New York Oneonta and an MS and MBA
from Hofstra University. Since 2003, Mr. Gallucci has
served as an adjunct professor at Adelphi Universitys
Graduate School of Business.
Derek R. Gray, 77, For information regarding
Mr. Grays business experience and qualifications, see
his biography included under Directors of the
Combined Company above.
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.
189
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, For information regarding
Mr. Parks business experience and qualifications, see
his biography included under Directors of the
Combined Company above.
David W. Whitwell, 44, joined Clean Diesel as a Director
in August 2010. Since March 2008, Mr. Whitwell has been a
Partner with B2B CFO Partners, LLC, a national firm providing
part-time senior level financial and operational advisory
services to emerging and middle market businesses. Prior to
joining B2B CFO Partners, Mr. Whitwell served as
Vice-President and Chief Financial Officer of IWT Tesoro Inc., a
publicly-traded tile and stone distribution concern, from
November 2006 through January 2008. From 1999 to November 2006,
Mr. Whitwell served as Vice-President and Chief Financial
Officer of Clean Diesel Technologies Inc. Mr. Whitwell
holds a BS degree from Pennsylvania State University and an MBA
from Lehigh University.
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, 62, 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. Dr. Steiner passed away on June 26,
2010.
Timothy Rogers, 48. For information regarding
Mr. Rogers business experience and qualifications,
see his biography included under Directors of
the Combined Company above.
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, 49, was appointed by Clean Diesels
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 under the caption Agreements with
Related Persons.
190
Committees
of the Board
The standing Committees of the Board are an Audit Committee and
a Compensation and Nominating Committee. Messrs. Gray, Gallucci,
and Whitwell are the members of the Audit Committee.
Mr. Merrion is the member of the Compensation and
Nominating Committee. Mr. Gray is Chairman of the Audit
Committee. Mr. Merrion 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 Clean Diesels web site <www.cdti.com>.
Clean Diesel 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 Clean Diesels 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.
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 Clean
Diesels 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 Clean Diesels 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 Clean Diesels 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 Clean Diesels
Board of Directors.
191
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 Clean Diesels
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 Clean Diesels website under
Investor 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,
Clean Diesel believes that all Clean Diesels officers and
directors were in compliance with 2009 filing requirements
relating to beneficial
192
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.
Director
Independence
Messrs. Gray, Merrion, Gallucci and Whitwell are
independent directors under the requirements of the NASDAQ
listing standards. The members of Clean Diesels Audit
Committee, Messrs. Gray, Gallucci and Whitwell 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.
Clean
Diesel Executive Compensation
Clean
Diesel Summary Compensation Table
The table below sets forth information for the year indicated
with respect to compensation earned by Clean Diesels Chief
Executive Officer and Clean Diesels two most highly
compensated executive officers other than Clean Diesels
Chief Executive Officer who were serving as executive officers
as of December 31, 2009, as well as Clean Diesels
former President and Chief Executive Officer who resigned in
February 2009. Clean Diesel refers 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
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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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Executive Officer
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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
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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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Executive Officer
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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,
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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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International
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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. |
193
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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 Clean Diesel 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 were approximately
$137,000. Dr. Steiner passed away on June 26, 2010. Upon
his death, payments under his employment agreement ceased. |
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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. |
Narrative
Disclosure To Clean Diesel 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 Clean
Diesels 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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Clean Diesels recent and expected overall
performance; and
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Clean Diesels 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 Clean Diesels incentive
cash bonus program, called the Management Incentive Program
(MIP).
2008
In 2008, potential cash awards under MIP, were designed to focus
Clean Diesels managers on the achievement of Clean
Diesels 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
194
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
Clean Diesels 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 Clean Diesels international business
activities and was awarded a cash bonus otherwise than pursuant
to the 2008 MIP.
Long-Term
Incentives
Clean Diesel has 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 Clean Diesels directors,
officers, employees, consultants or advisors (except consultants
or advisors in capital-raising transactions) as the directors
determine are key to the success of Clean Diesels business.
Clean Diesels long-term equity incentives are stock
options and are designed to focus management on the long-term
success of Clean Diesel as evidenced by appreciation of Clean
Diesels 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 Clean
Diesel Summary Compensation Table above.
Ownership
Guidelines
Clean Diesel does not have a stock ownership policy for Senior
Executives.
Hedging
and Insider Trading Policies
Clean Diesel does not have a formal policy on hedging. Clean
Diesel prohibits trading in its 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
195
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
Clean Diesel has 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. Clean Diesels 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, Clean Diesel matches 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, Clean Diesel
established a pension plan available for all full-time U.K.
employees who have met minimum
length-of-service
requirements. Under the pension plan, Clean Diesel will
contribute an amount equal to 3% of employees base salary
per annum. An employee may make voluntary additional
contributions which Clean Diesel will match up to a further 2%.
After five years of service, Clean Diesel 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, Clean Diesel provides
certain welfare benefit plans to its employees, which include
medical and dental insurance benefits. Clean Diesel 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 Clean Diesel Summary Compensation Table is party to
Clean Diesels form of employment agreement with similar
provisions. These agreements are for indefinite terms except for
Dr. Steiner whose agreement would have continued until
September 13, 2010. Clean Diesels 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 Clean Diesel regardless of amount; substance or
alcohol abuse; or other conduct for which dismissal has been
identified by Clean Diesel 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 for
Mr. Rogers are 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,
196
2010 for the applicable time period. For Dr. Steiner, the
remaining severance benefit under his Employment Agreement
effective March 4, 2008 which would have continued until
September 13, 2010 would be, from April 1, 2010,
approximately $137,000. Dr. Steiner passed away on June 26,
2010.
Under the several employment agreements, each of the officers is
indefinitely obligated to maintain confidentiality of Clean
Diesels proprietary information and to assign inventions
made in the course of employment by Clean Diesel. 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 Clean Diesel, 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
Clean Diesels 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 Clean Diesels
shares of Common Stock are converted to cash, securities or
other property, but not in a transaction in which Clean
Diesels stockholders have proportionately the same share
ownership before and after the transaction; or (d) Clean
Diesels stockholders approve of a plan for its liquidation
or dissolution.
Indemnification
and Insurance
Under Clean Diesels Certificate of Incorporation,
indemnification is afforded its 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. Clean Diesel is, 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 Clean Diesels
best interests, or, in the case of a settlement of a claim, such
determination is made by Clean Diesels Board.
Clean Diesel carries insurance providing indemnification, under
certain circumstances, to all of Clean Diesels 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 Clean Diesels past or
present directors or officers for such indemnification or under
any insurance policy.
Compensation
Recovery Policies
Clean Diesel maintains a policy that it 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 Clean Diesels financial results,
in accordance with section 304 of the Sarbanes-Oxley Act of
2002. If circumstances warrant, Clean Diesel will seek to
recover appropriate portions of the executive officers
compensation for the relevant period, as provided by law.
Tax
Deductibility of Executive Compensation
Clean Diesel reviews and considers the deductibility of
executive compensation under the requirements of Internal
Revenue Code Section 162(m), which provides that Clean
Diesel may not deduct compensation of more than $1,000,000 that
is paid to certain individuals. Clean Diesel believes that
compensation paid under its incentive plans is generally fully
deductible for federal income tax purposes.
Accounting
for Equity-Based Compensation
On January 1, 2006, Clean Diesel began accounting for the
equity-based compensation issued under the Incentive Plan in
accordance with FASB ASC Topic 718.
197
Clean Diesel 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 Clean Diesels 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 Clean Diesels 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 Clean Diesels 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 Clean Diesel has not paid dividends and does not expect
to pay dividends in the future.
Clean
Diesel Option Exercises And Stock Vested
As mentioned above, Clean Diesel has 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 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.
Clean
Diesel 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 |
198
|
|
|
|
|
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. |
Clean
Diesel Director Compensation
At the commencement of 2009, Clean Diesels 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 employees or executive
officers of Clean Diesel receive no compensation for their
service as directors as such, and accordingly,
Messrs. Grinnell and Asmussen are not included in the table.
As newly elected directors, each of Messrs. Gallucci and
Whitwell will be entitled to an annual retainer of $30,000 and
will also receive an annual retainer of $10,000 for serving on
the audit committee and an annual retainer of $10,000 for
serving on the special committee of independent directors, each
retainer paid quarterly in arrears.
Clean
Diesel Summary Director Compensation Table
The following table shows for Clean Diesels non-executive
directors all compensation earned in 2009 on account of fees,
whether paid in cash or stock, and stock option awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
|
or
|
|
|
Option
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Awards
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
J. A. de Havilland(5)
|
|
$
|
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. |
|
(5) |
|
Resigned as a director May 10, 2010. |
199
Clean
Diesel 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. |
200
DESCRIPTION
OF CLEAN DIESEL CAPITAL STOCK
Authorized
Capital
As of August 18, 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 August 18, 2010, there were 8,213,988 shares of
Clean Diesel common stock outstanding held of record by
approximately 183 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 August 18, 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 August 18, 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.
201
PRINCIPAL
STOCKHOLDERS OF CLEAN DIESEL
The following table sets forth information known to Clean Diesel
regarding the beneficial ownership of common stock as of
August 18, 2010 by: (i) each person owning
beneficially more than five percent of the outstanding shares of
common stock; (ii) each of the directors; (iii) the
Named Executive Officers of Clean Diesel; and (iv) all
directors and executive officers as a group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Beneficial Owner
|
|
No. of
|
|
|
Beneficially
|
|
Name and Address(1)
|
|
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
|
|
|
51,288
|
|
|
|
*
|
|
Derek R. Gray
|
|
|
193,791
|
|
|
|
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(5)
|
|
|
162,090
|
|
|
|
1.9
|
%
|
All Directors and Officers
|
|
|
|
|
|
|
|
|
As a Group (11 persons)
|
|
|
950,291
|
|
|
|
10.6
|
%
|
|
|
|
* |
|
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; 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, 38,000 shares;
Mr. Gray, 62,749 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, 710,523 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 Clean Diesels 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. |
|
(5) |
|
Dr. Steiner passed away on June 26, 2010. |
202
PRINCIPAL
SHAREHOLDERS OF CSI
The following table sets forth certain information regarding
beneficial ownership of CSIs common stock as of
July 31, 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 officers 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(d)
|
|
|
4,898,123
|
|
|
|
7.0
|
|
Advent Energy Limited(e)
|
|
|
3,543,455
|
|
|
|
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
|
|
|
|
|
(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 is
160 Federal Street, 18th Floor, Boston, Massachusetts 02110; of
Advent Energy Limited is 75 State Street, 29th Floor, Boston,
Massachusetts, 02109; 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 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 July 31, 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 July 31, 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. |
203
|
|
|
(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 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. |
204
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. The information
does not reflect the proposed reverse stock split.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
10.8
|
%
|
RockPort Capital Partners(d)
|
|
|
|
|
|
|
7.0
|
%
|
|
|
12.0
|
%
|
Emerald Technology Ventures(e)
|
|
|
|
|
|
|
2.5
|
%
|
|
|
9.5
|
%
|
Enertech Capital Partners(f)
|
|
|
|
|
|
|
3.7
|
%
|
|
|
9.8
|
%
|
Allen & Company LLC(g)
|
|
|
|
|
|
|
|
|
|
|
8.4
|
%
|
Kanis, S.A.(h)
|
|
|
|
|
|
|
|
|
|
|
6.9
|
%
|
Ruffer LLP(i)
|
|
|
14.6
|
%
|
|
|
|
|
|
|
5.3
|
%
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles F. Call (j)
|
|
|
|
|
|
|
3.0
|
%
|
|
|
*
|
|
Bernard H. Cherry
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Alexander Ellis (d)
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Charles R. Engles, PhD
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Derek Gray (k)
|
|
|
2.3
|
%
|
|
|
|
|
|
|
1.4
|
%
|
Mungo Park (l)
|
|
|
3.3
|
%
|
|
|
|
|
|
|
2.5
|
%
|
Timothy Rogers (n)
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Nikhil Mehta
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Stephen J. Golden, PhD. (m)
|
|
|
|
|
|
|
2.4
|
%
|
|
|
*
|
|
All named directors and executive officers as a group
(9 persons total)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
5.9
|
%
|
|
|
|
* |
|
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 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. |
205
|
|
|
|
|
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 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 July 31, 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 June 30, 2010 and the percent of CSI
beneficially owned is based on 69,761,902 shares of CSI
common stock issued and outstanding on July 31, 2010. The
percent of the combined company beneficially owned is based on
an estimated aggregate 23,523,553 shares of Clean Diesel
common stock of the combined company outstanding immediately
after the effective time of the Merger and assumes that CSI
stockholders (including investors in its capital raise) and its
financial advisor will collectively own 60% of the combined
company and Clean Diesel stockholders (including investors in
its Regulation S offering) will own 40% of the combined
company, and assumes that immediately prior to the Merger, CSI
issued an aggregate 6,462,094 shares of common stock (which
will be designated as Class A common stock) its non-employee
Directors as payment for accrued Directors fees and an aggregate
149,857,178 shares of Class B common stock upon
conversion of the secured convertible notes issued in its
capital raise; and that Clean Diesel issues warrants to purchase
three million shares of common stock in the Merger, warrants to
purchase 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 33,377,753 shares of Class B
common stock to be issued immediately prior to the Merger upon
the conversion of secured convertible notes to be issued in
CSIs capital raise. Also reflects 59,157 shares of
Clean Diesel common stock and warrants to purchase Clean Diesel
common stock issuable upon exercise of warrants held as a result
of assumption of its warrants to purchase 1,250,000 shares
of CSI common stock by Clean Diesel in the Merger. Also reflects
217,266 shares of Clean Diesel common stock issuable upon
exercise of warrants to be received in the Merger. |
|
|
|
(d) |
|
Reflects conversion of 33,377,753 shares of Class B
common stock to be issued immediately prior to the Merger upon
the conversion of secured convertible notes to be issued in
CSIs capital raise. Reflects 276,897 shares of Clean
Diesel common stock issuable upon exercise of warrants to be
received in the Merger held by RockPort Capital Partners, LP and
55,079 shares of Clean Diesel common stock issuable upon
exercise of warrants to be received in the Merger held by RP
Co-Investment Fund I. Combined company ownership also
reflects the conversion in the Merger of 3,675,057 shares
of CSI common stock issued to Mr. Ellis (and assigned to
RockPort Capital Partners by Mr. Ellis) as fees for Director
services, which shares were issued immediately prior the Merger
and converted to shares of Clean Diesel common stock and
warrants to purchase Clean Diesel common stock in the Merger.
Alexander (Hap) Ellis, III, a CSI Director
designee, is a general partner of RockPort Capital Partners 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 33,377,753 shares of Class B
common stock to be issued immediately prior to the Merger upon
the conversion of secured convertible notes to be issued in
CSIs capital raise. Reflects 68,281 shares of Clean
Diesel common stock issuable upon exercise of warrants to be
received in the Merger. |
|
|
|
(f) |
|
Reflects conversion of 33,377,753 shares of Class B
common stock to be issued immediately prior to the Merger upon
the conversion of secured convertible notes expected to be
issued in CSIs capital raise. Reflects 99,729 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 capital raise.
Reflects one million shares of Clean Diesel common stock and
warrants to purchase one million |
206
|
|
|
|
|
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) |
|
Includes 343,769 shares held by Kanis SA and
503,671 shares of Clean Diesel and warrants to purchase
770,000 shares of Clean Diesel to be issued in Clean
Diesels capital raise. |
|
|
|
(i) |
|
Reflects 8,090 shares of Clean Diesel common stock issuable
upon exercise of warrants. |
|
|
|
(j) |
|
Mr. Calls shares will be held jointly with his
spouse. Reflects 824 shares of Clean Diesel common stock
issuable upon exercise of warrants to be received in the Merger. |
|
|
|
(k) |
|
Reflects 62,749 shares issuable upon exercise of options or
warrants, 52,329 shares of Clean Diesel and warrants to
purchase 80,000 shares of Clean Diesel to be issued in
Clean Diesels capital raise. Does not reflect
49,215 shares, which are held by his adult children and as
to which Mr. Gray disclaims beneficial ownership. |
|
|
|
(l) |
|
Includes 283,974 warrants held by Innovator Capital Limited
of which Mr. Park is a principal. After the effective time
of the Merger includes warrants to purchase 89,180 shares
assumed to be paid to Innovator Capital for a fee associated
with Clean Diesels capital raising and 194,486 shares
issued to Innovator Capital for fees assumed to be paid in stock
for services in connection with the Merger. |
|
|
|
(m) |
|
Dr. Goldens shares will be held in the Golden Family
Trust dated May 5, 2006. Reflects 49,965 shares of
Clean Diesel common stock issuable upon exercise of warrants to
be received in the Merger. |
|
|
|
(n) |
|
Includes 65,333 shares issuable upon exercise of options. |
207
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Private
Placements
In March 2009, Clean Diesel issued 40,000 restricted shares of
its common stock under its Incentive Plan to Mr. Asmussen,
Clean Diesels President and Chief Executive Officer.
On October 1, 2009, Clean Diesels 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 Clean Diesel 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 Clean Diesel offer, were
$58,878.60. The proceeds will be used for the general corporate
purposes of Clean Diesel. 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 of Clean Diesel, is
entitled under the current directors compensation policy
of Clean Diesel 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 Clean Diesels
Board of Directors agreed to receive 50% of their annual
compensation. For the year ended December 31, 2009, Clean
Diesels 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 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 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, as amended, has
a term expiring on September 30, 2010, during which
Innovator will (i) act for Clean Diesel in arranging a
private placement financing of $1 million to $1.5 million
from the sale of Clean Diesels common stock and warrants
and (ii) assist Clean Diesel in merger and acquisition
activities.
208
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 purchase
shares of common stock of the Company 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. Issuance
of the financing warrants is contingent on the stockholders of
Clean Diesel authorizing additional common stock. Accordingly,
in connection with Clean Diesels interim capital raise,
Innovator Capital will receive a fee of $50,000 in cash and
89,180 warrants to purchase common stock at an exercise price of
$1.342.
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. Selling, general and administrative expenses for
the three months ended March 31, 2010 include $30,000
related to the services rendered by Innovator Capital under the
terms of the Engagement Letter. Accordingly, in connection with
the Merger, Innovator Capital will receive a fee of
approximately $761,000. Clean Diesel has elected to pay $500,000
of this fee in cash, and the balance of $261,000 in the form of
194,486 shares of its common stock, valued at $1.342 for
this purpose.
209
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 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. 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. The
authorized capital stock is proposed to be increased to
270,000,000 shares, such that the total number of shares of
all classes of capital stock that CSI shall have authority to
issue is 85,000,000 shares of Class A common stock
having no par value and 185,000,000 shares of Class B
common stock having no par value.
|
|
|
|
|
|
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
|
|
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
|
|
|
|
|
|
|
|
|
|
|
210
|
|
|
|
|
|
|
Clean Diesel
|
|
CSI
|
|
|
|
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).
|
|
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; 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
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211
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Clean Diesel
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CSI
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CSIs common stock; or the issuance of securities which
are to be paid up wholly or partly otherwise in cash.
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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.
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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.
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Quorum
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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.
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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.
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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.
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Each shareholder has one vote for every share of stock entitled
to vote. CSIs articles of incorporation only authorize the
issuance of common stock.
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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.
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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 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
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The entire board of directors or any individual director may be
removed from office without cause by approval of the holders of
at 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
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212
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Clean Diesel
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CSI
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|
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.
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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.
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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.
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|
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.
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Stockholder Action by Written Consent
|
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Delaware law permits the taking of any action by written consent
of the stockholders in lieu of a meeting.
|
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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
|
|
Clean Diesel reserves the right to amend, alter, change or
repeal any
|
|
CSIs articles of incorporation may be amended in
accordance with the
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213
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Clean Diesel
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CSI
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provision contained in the certificate of incorporation.
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provisions of the California Corporations Code.
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Amendment of Bylaws
|
|
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
|
|
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.
|
|
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
|
|
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.
|
|
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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Delivery and Notice Requirements of Stockholder or
Shareholder Nominations and Proposals
|
|
Clean Diesels bylaws provide that in order for
stockholders to make a proposal such proposal must be received
by Clean Diesel not less
|
|
The articles of incorporation and bylaws of CSI do not provide
for procedures with respect to
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214
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Clean Diesel
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CSI
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|
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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|
shareholder proposals or director nominations.
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Notification Requirements
|
|
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
|
|
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
|
|
The bylaws of Clean Diesel provide that, subject to applicable
law, the board of directors may declare dividends from time to
time.
|
|
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
|
|
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 determined ultimately that such
director or officer is not entitled to
|
|
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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215
|
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|
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|
|
Clean Diesel
|
|
CSI
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|
|
be indemnified under the certificate of incorporation or
otherwise.
|
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|
Anti-Takeover Provisions
|
|
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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|
|
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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
|
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216
|
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|
|
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|
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Clean Diesel
|
|
CSI
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|
stockholder for a period of three 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
|
|
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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217
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
[ ]
London, England
Purpose
of the Clean Diesel Annual Meeting
At the Clean Diesel annual meeting Clean Diesel common
stockholders will be asked:
1. To elect seven (7) directors;
2. To ratify the appointment of Eisner LLP as Clean
Diesels independent auditors for 2010;
3. Subject to approval of Proposal 4, to consider and
vote upon a proposal to effect a reverse stock split in a ratio
ranging from
1-for-3 to
1-for-8 of
all issued and outstanding shares of Clean Diesel common stock,
the final ratio to be determined within the discretion of the
Clean Diesel Board of Directors, to occur immediately before the
closing of the proposed Merger;
4. Subject to approval of Proposal 3, to consider and
vote upon 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, as such may be amended from time to time, 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);
5. 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
Clean Diesel annual 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, 4 and 5
Proposals
to be Voted on at the Clean Diesel Annual Meeting
Clean Diesel is asking you to vote for the election of seven
(7) 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. On August 25, 2010, the board of directors of
Clean Diesel voted to increase the size of the board from five
directors to seven directors.
218
The
Nominees
The nominees are Michael L. Asmussen, Frank Gallucci, Derek R.
Gray, Charles W. Grinnell, David F. Merrion and Mungo Park and
David W. Whitwell. These nominees are all incumbents.
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
|
|
Age
|
|
Director Since
|
|
Michael L. Asmussen
|
|
|
40
|
|
|
|
2009
|
|
Frank Gallucci
|
|
|
60
|
|
|
|
2010
|
|
Derek R. Gray
|
|
|
77
|
|
|
|
1998
|
|
Charles W. Grinnell
|
|
|
73
|
|
|
|
1994
|
|
David F. Merrion
|
|
|
73
|
|
|
|
2006
|
|
Mungo Park
|
|
|
54
|
|
|
|
2009
|
|
David W. Whitwell
|
|
|
44
|
|
|
|
2010
|
|
The following includes a brief biography of the nominees. Each
biography of each member of Clean Diesels Board of
Directors includes information regarding the specific
experience, qualifications, attributes or skills that led the
Compensation and Nominating Committee and Clean Diesels
Board of Directors to determine that the applicable director
should serve as a member of Clean Diesels Board of
Directors.
Michael L. Asmussen. For information regarding Mr. Asmussen
business experience and qualifications, see his biography
included under Clean Diesel Directors and
Executive Officers above.
Frank Gallucci. For information regarding
Mr. Galluccis business experience and qualifications,
see his biography included under Clean Diesel
Directors and Executive Officers above.
Derek R. Gray. For information regarding Mr. Grays
business experience and qualifications, see his biography
included under Directors of the Combined
Company above.
Charles W. Grinnell. For information regarding
Mr. Grinnells business experience and qualifications,
see his biography included under Clean Diesel
Directors and Executive Officers above.
David F. Merrion. For information regarding
Mr. Merrions business experience and qualifications,
see his biography included under Clean Diesel
Directors and Executive Officers above.
Mungo Park, For information regarding Mr. Grays
business experience and qualifications, see his biography under
Directors of the Combined Company above.
David W. Whitwell. For information regarding
Mr. Whitwells business experience and qualifications,
see his biography included under Clean Diesel
Directors and Executive Officers above.
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. Asmussen, Mr. Grinnell Mr. Merrion,
Mr. Gallucci and Mr. Whitwell will resign from the
board, and the remaining board members will elect Mr. Call,
Mr. Ellis, Dr. Engles, Mr. Cherry and
Mr. Rogers 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.
219
Plurality
Voting
A motion will be made at the Meeting for the election as
directors of the above mentioned seven (7) 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.
|
APPOINTMENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
The Audit Committee has reappointed the firm of EisnerAmper LLP
(formerly known as Eisner LLP), Certified Public Accountants
(EisnerAmper), to be Clean Diesels independent
registered public accounting firm for the year 2010 and submits
that reappointment to stockholders for ratification.
EisnerAmper, 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 EisnerAmper 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.
Audit
Fees
Fees for professional services provided by EisnerAmper LLP
(formerly known as Eisner LLP) in the last two fiscal years by
category were:
|
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|
|
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|
|
2009
|
|
|
2008
|
|
|
Audit Fees
|
|
$
|
165,300
|
|
|
$
|
224,500
|
|
Audit-Related Fees
|
|
|
1,300
|
|
|
|
11,632
|
|
Tax Fees
|
|
|
|
|
|
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|
|
All Other Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
$
|
166,600
|
|
|
$
|
236,132
|
|
|
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|
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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. EisnerAmper, 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
220
Audit Committee reviewed the scope of the audit plans of the
internal auditors and EisnerAmper. 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 EisnerAmper 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 TO EFFECT A REVERSE STOCK
SPLIT
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/information statement and 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, shares of Clean Diesel
Common Stock outstanding immediately before the split effective
time will be combined into one share at a ratio ranging from
1-for-3 to 1-for-8, the final ratio to be determined within the
discretion of the Clean Diesel board of directors.
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
Proposal No. 4 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.
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
all outstanding shares of Clean Diesel common stock in a ratio
ranging from 1-for-3 to 1-for-8, the final ratio to be
determined within the discretion of the Clean Diesel Board of
Directors.
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 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
221
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 currently has 8,213,988 shares of common stock
issued and outstanding. If the Board of Directors of Clean
Diesel selects a 1-for-3 reverse stock split, every three shares
of common stock outstanding will be converted into one share and
approximately 2,737,996 shares of Clean Diesel common stock
will be issued and outstanding as a result of and immediately
following such reverse stock split, but prior to the
consummation of the Merger. If the Board of Directors of Clean
Diesel selects a 1-for-5 reverse stock split, every five shares
of common stock outstanding will be converted into one share and
approximately 1,642,797 shares of Clean Diesel common stock
will be issued and outstanding as a result of and immediately
following such reverse stock split, but prior to the
consummation of the Merger. If the Board of Directors of Clean
Diesel selects a
one-for-eight
reverse stock split, every eight shares of common stock
outstanding will be converted into one share and approximately
1,026,748 shares of Clean Diesel common stock will be
issued and outstanding as a result of and immediately following
such reverse stock split, but prior to the consummation of the
Merger. No fractional shares will be issued, and Clean Diesel
stockholders will receive cash in lieu of fractional 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 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. Beginning at the
split effective time, each certificate representing on a
pre-split
basis shares will be deemed for all corporate purposes to
evidence ownership of post-split shares.
Immediately following the reverse stock split, stock
certificates of Clean Diesel representing on a
pre-split
basis common stock, will, without the necessity of presenting
the stock certificates for exchange, represent the number of
shares of post-split common stock into which is has been
converted based on the selected reverse split ratio.
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 on a
pre-split
basis shares not evenly divisible by the number of on a
pre-split
basis shares for which each post-split share is to be
reclassified (after aggregating fractional shares), will be
entitled to receive cash (without interest or deduction) in lieu
of such fractional shares from Clean Diesels transfer
agent, upon receipt by Clean Diesels transfer agent of a
properly completed and duly executed transmittal letter, in an
amount equal to the proceeds attributable to the sale of such
fractional shares following the aggregation and sale by Clean
Diesels transfer
222
agent of all fractional shares otherwise issuable. Existing
working capital of Clean Diesel will be used to cash out the
fractional shares. The reverse stock split will not impact the
market value of Clean Diesels company as a whole, although
the market value of Clean Diesels common stock may move up
or down once the reverse stock split is effective.
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.
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
is not completed for any reason, the board of directors expects
that this proposal will not be implemented.
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.
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.
223
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 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.
PROPOSAL NO. 4
APPROVAL OF PROPOSAL TO APPROVE THE ISSUANCE 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
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 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.
THE CLEAN DIESEL BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT CLEAN DIESELS STOCKHOLDERS VOTE FOR CLEAN
DIESEL PROPOSAL NO. 4 TO APPROVE THE ISSUANCE OF NEW
SHARES OF CLEAN DIESEL COMMON STOCK AND WARRANTS TO PURCHASE
SHARES OF CLEAN DIESEL COMMON STOCK IN CONNECTION WITH THE
MERGER.
Proposal No. 5:
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 Proposals No. 3 or
No. 4.
CLEAN DIESELS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR PROPOSAL NO. 5.
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.
224
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 Proposals 3 and 4, 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.
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.
225
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
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
In Europe:
Capita IRG
Foreign Department
The Registry
34 Beckenham Road
Beckenham, Kent BR3 4TU
as previously stated
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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.
226
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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Two of the directors of Clean Diesel, Mr. Park and
Mr. Gray, are expected to continue as directors of Clean
Diesel after the Merger. Five of the directors of Clean Diesel,
Mr. Asmussen, Mr. Grinnell, Mr. Merrion,
Mr. Gallucci and Mr. Whitwell are expected to resign.
Mr. Rogers, Clean Diesels Executive Vice President of
International Operations, is expected to become a director of
Clean Diesel at the effective time of the Merger.
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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 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 purchase
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
227
(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.
228
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
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, as such may be amended
from time to time, 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 270,000,000 shares, such that
the total number of shares of all classes of capital stock that
CSI shall have authority to issue is 85,000,000 shares of
Class A common stock having no par value and
185,000,000 shares of Class B 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, subject to certain
adjustments. If CSI had less than a $2,000,000 cash position,
then its shareholders ownership of Clean Diesel would have
been 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 undertook, a capital
raise and on June 2, 2010, entered into agreements with a
group of accredited investors providing for the sale of an
aggregate $4,000,000 of secured convertible notes. Of this
$4,000,000, $2,000,000 has already been issued, and the
remaining $2,000,000 is to be issued after CSI shareholder
approval of the Merger and after other 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. See CSI
Managements Discussion and Analysis of Financial Condition
and Results of Operations Recent
229
Developments Capital Raise for more
information regarding CSIs capital raise. The conversion
feature of such secured convertible notes is expressly
contingent upon receiving necessary shareholder approvals under
CSIs articles of incorporation to provide for sufficient
available common stock and waiver of
pre-emptive
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 secured convertible notes
to the accredited investor group, and the initial $2,000,000
tranche is required to be repaid along with interest and an
additional payment premium of 2x (two times) the outstanding
principal amount (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 class
of common stock, and not to holders of shares of common stock to
be issued upon conversion of the secured convertible notes,
CSIs Board of Directors is proposing to create two classes
of common stock. By designating the current issued and
outstanding shares of common stock as Class A common stock,
and the shares to be issued upon conversion of the secured
convertible notes as Class B common stock, this will
preserve the rights of holders of CSIs current issued and
outstanding common stock (or shares issuable upon exercise of
outstanding options and warrants to acquire shares of CSIs
current class of common stock) to receive the warrants to be
issued by Clean Diesel as part of the merger consideration.
As of July 31, 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 July 31, 2010, there were
approximately 8,593,476 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 July 31, 2010, assuming full exercise of
all outstanding options and warrants, CSI would have
approximately 78,355,378 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 capital raise, it is anticipated that there will
be approximately 75,217,472 shares of CSIs common
stock subject to issuance pursuant to then issued and
outstanding secured convertible notes, as well as an additional
75,217,472 shares of CSIs common stock subject to
issuance pursuant to secured convertible notes to be issued
immediately prior to the effective time of the Merger. The
conversion rights of these secured convertible notes is
contingent upon there being sufficient authorized shares of
common stock (this Proposal No. 2) and waiver of
pre-emptive
rights (Proposal No. 3) among other items. If
Proposal No. 2 is approved, the aggregate
approximately 150,434,943 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 secured
convertible notes, and permitting the sale of the second tranche
of $2,000,000 secured convertible notes as contemplated by the
terms of the 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 secured
convertible 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
230
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 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. Alexander Hap Ellis, III,
has an interest in the secured convertible notes. Accordingly,
Mr. Ellis abstains from recommending this Proposal
No. 2.
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 to permit the conversion of
up to $4,000,000 secured convertible notes to be issued at par
to investors in CSIs capital raise that would be
convertible at any time prior to the merger into not more than
185,000,000 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 secured convertible notes to be issued in CSIs
capital raise, is subject to these pre-emptive rights.
As described above in Proposal No. 2, in the capital
raise, CSI is expected to issue to certain accredited investors
an aggregate $4,000,000 of secured convertible notes at par. Of
this $4,000,000, $2,000,000 has already been issued, and the
remaining $2,000,000 is to be issued after CSI shareholder
approval of the Merger and after other necessary approvals under
CSIs articles of incorporation (such as
Proposal No. 2 and this Proposal No. 3), but
prior to the effective time of the Merger. See CSI
Managements Discussion and Analysis of Financial Condition
and Results of Operations Recent
Developments Capital Raise for more
information regarding CSIs capital raise. The conversion
feature of such secured convertible notes is expressly
contingent upon receiving necessary shareholder approvals under
CSIs articles of incorporation to disapply such
pre-emptive
rights (and there being sufficient authorized share capital,
among other items (Proposal No. 2)). If CSIs
shareholders do not disapply the
pre-emptive
rights, CSI is not expected to be able to sell the second
$2,000,000 tranche of secured convertible notes to the
accredited investor group, and the initial $2,000,000 tranche is
required to be repaid at par plus an additional 2x penalty
(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 secured convertible notes as contemplated
by the terms of the 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-emptive
rights provided by Article IV of CSIs articles of
incorporation.
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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 recommends that CSI shareholders
vote FOR Proposal No. 3 to disapply shareholder
pre-emptive rights. Alexander Hap Ellis, III, has an
interest in the secured convertible notes. Accordingly,
Mr. Ellis abstains from recommending this Proposal
No. 3.
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.
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.
As of the CSI record date, the investors in CSIs
$4,000,000 capital raise who will receive, in the aggregate,
150,434,943 shares of Class B common stock if the
foregoing Proposals are approved, 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 special meeting. No shares of
Class B common stock were outstanding as of the record date
or entitled to vote at the CSI special meeting.
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.
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Votes
Withheld
CSI will count a properly executed proxy marked VOTE WITHHELD
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, votes withheld 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. Votes withheld
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, votes withheld 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.
Depositary
Interests
If you hold depositary interests representing shares of CSI
common stock, the depositary will vote your shares for you only
if you provide a form of instruction instructing it how to vote,
or vote via the Internet in accordance with the instructions on
the form of instruction. Failure to complete and return the form
of instruction provided to you or vote via the Internet
regarding Proposals No. 1, No. 2 or No. 3
will have the same effect as a vote AGAINST
Proposals No. 1, No. 2 or No. 3, as the case
may be. Failure to provide voting instructions will 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, such failure 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 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.
Voting
Shares in Person that are Represented by Depositary
Interests
If you are a holder of depositary interests representing shares
of CSI common stock and you wish to vote those shares in person
at the CSI special meeting, you must obtain, from Computershare
(as depositary), a letter of representation giving you the right
to vote those shares at the CSI special meeting.
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
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attending the CSI special meeting and voting in person (your
attendance alone will not revoke your proxy).
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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. If you are a holder of depositary interests
representing shares of CSI common stock, you must contact
Computershare (as depositary) if you wish to change your voting
instructions.
Voting
by CREST Members
CREST members who hold depository interests representing shares
of CSIs common stock who wish to vote using the CREST
electronic proxy appointment service may do so by using the
procedures described in the CREST Manual (available at
www.euroclear.com). CREST personal members or other CREST
sponsored members, and those CREST members who have appointed a
service provider(s), should refer to their CREST sponsor or
voting service provider(s), who will be able to take the
appropriate action on their behalf.
In order for a proxy appointment or instruction made using the
CREST service to be valid, the appropriate CREST message (a
CREST Proxy Instruction) must be properly
authenticated in accordance with Euroclear UK &
Ireland Limited specifications and must contain the information
required for such instructions, as described in the CREST
Manual. The message must, in order to be valid, be transmitted
so as to be received by CSIs registrars, Computershare
Investor Services PLC (CREST ID 3RA50) not less than
48 hours prior to the CSI special meeting. No such message
received through the CREST network after this time will be
accepted. For this purpose, the time of receipt will be taken to
be the time (as determined by the timestamp applied to the
message by the CREST Applications Host) from which CSIs
registrars are able to retrieve the message by enquiry to CREST
in the manner prescribed by CREST. After this time any change of
voting instructions should be communicated to Computershare
through other means.
CREST members and, where applicable, their CREST sponsors, or
voting service providers should note that Euroclear
UK & Ireland Limited does not make available special
procedures in CREST for any particular message. Normal system
timings and limitations will, therefore, apply in relation to
the input of CREST Proxy Instructions. It is the responsibility
of the CREST member concerned to take (or, if the CREST member
is a CREST personal member, or sponsored member, or has
appointed a voting service provider, to procure that his CREST
sponsor or voting service provider(s) take(s)) such action as
shall be necessary to ensure that a message is transmitted by
means of the CREST system by any particular time. In this
connection, CREST members and, where applicable, their CREST
sponsors or voting system providers are referred, in particular,
to those sections of the CREST Manual concerning practical
limitations of the CREST system and timings.
CSI may treat as invalid a CREST Proxy Instruction in the
circumstances set out in Regulation 35(5)(a) of the United
Kingdom Uncertificated Securities Regulations 2001.
Required
Shareholder Vote; Quorum
In order to conduct business at the CSI special meeting, a
quorum must be present. The holders of
one-third
(1/3) 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 votes withheld 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.
234
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 required quorum.
Board of
Directors 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. 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 CSI board of directors also recommends that you 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 and FOR Proposal No. 3 to
disapply shareholder
pre-emptive
rights. Mr. Alexander Hap Ellis, III has
an interest in the secured convertible notes as described below
and elsewhere in this joint proxy statement/information
statement and prospectus. Accordingly, Mr. Ellis abstains
from recommending these Proposals 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.
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.
Related
Party Transaction
One of CSIs directors, Mr. Alexander Hap
Ellis, III, is a general partner of RockPort Capital
Partners. RockPort Capital Partners is a shareholder of CSI and
invested in the secured convertible notes issued in CSIs
capital raise described in CSIs Managements
Discussion and Analysis of Financial Condition and Results of
Operations Recent Developments Capital
Raise and elsewhere in this joint proxy
statement/information statement and prospectus. RockPort Capital
Partners acquisition of the secured convertible notes may
be deemed to be a related party transaction under the rules of
the AIM. CSIs board of directors (other than
Mr. Ellis who is deemed to be a related party for this
purpose) consider the terms of RockPort Capital Partners
subscription fair and reasonable to CSIs shareholders.
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.
235
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 amendment to CSIs
Articles of Incorporation attached to this joint proxy
statement/information statement and prospectus as
Annex F; and (vii) the form of Warrant
Certificate attached to this joint proxy information statement
and prospectus as Annex G.
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.
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.
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236
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 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/information statement and 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 EisnerAmper LLP (formerly known as 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.
The discussions included under the heading Material United
States Federal Income Tax Consequences of the Merger were
reviewed by KPMG LLP, independent registered public accounting
firm, and have been included herein upon the authority of said
firm as experts in tax matters.
237
CLEAN
DIESEL TECHNOLOGIES, INC
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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Condensed Consolidated Financial Statements (unaudited):
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F-31
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F-32
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F-33
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F-34
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F-1
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.
|
|
/s/ |
EisnerAmper LLP
(formerly known as Eisner LLP)
|
New York, New York
March 24, 2010
F-2
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-3
CLEAN
DIESEL TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-4
CLEAN
DIESEL TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-5
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-6
CLEAN
DIESEL TECHNOLOGIES, INC.
|
|
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-7
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-8
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-9
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-10
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
F-11
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
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.
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-12
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-13
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
F-14
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
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 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-15
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-16
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-17
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-18
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-19
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
F-20
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Consolidated Financial
Statements (Continued)
of unrecognized 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-21
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-22
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
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
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-23
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-24
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-25
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-26
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-27
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-28
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
|
|
|
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-29
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Accounts Receivable Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-30
PART I.
FINANCIAL INFORMATION
|
|
Item 1.
|
Condensed
Consolidated Financial Statements
|
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Condensed Consolidated Balance Sheets
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
Note 1
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,106
|
|
|
$
|
2,772
|
|
Investments
|
|
|
|
|
|
|
11,725
|
|
Accounts receivable, net of allowance of $214 and $232,
respectively
|
|
|
218
|
|
|
|
148
|
|
Inventories, net
|
|
|
822
|
|
|
|
1,059
|
|
Other current assets
|
|
|
108
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,254
|
|
|
|
15,998
|
|
Patents, net
|
|
|
957
|
|
|
|
898
|
|
Fixed assets, net of accumulated depreciation of $425 and $369,
respectively
|
|
|
239
|
|
|
|
294
|
|
Other assets
|
|
|
55
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,505
|
|
|
$
|
17,247
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
454
|
|
|
$
|
301
|
|
Accrued expenses
|
|
|
567
|
|
|
|
675
|
|
Short-term debt
|
|
|
3,243
|
|
|
|
7,693
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,264
|
|
|
|
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
|
|
|
74,751
|
|
|
|
74,694
|
|
Accumulated other comprehensive loss
|
|
|
(449
|
)
|
|
|
(381
|
)
|
Accumulated deficit
|
|
|
(68,143
|
)
|
|
|
(65,817
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,241
|
|
|
|
8,578
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
10,505
|
|
|
$
|
17,247
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-31
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
Note 1
|
|
|
|
|
|
Note 1
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
370
|
|
|
$
|
342
|
|
|
$
|
982
|
|
|
$
|
654
|
|
Technology licensing fees and royalties
|
|
|
41
|
|
|
|
33
|
|
|
|
74
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
411
|
|
|
|
375
|
|
|
|
1,056
|
|
|
|
721
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
220
|
|
|
|
217
|
|
|
|
685
|
|
|
|
451
|
|
Cost of licensing fees and royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,512
|
|
|
|
1,561
|
|
|
|
2,733
|
|
|
|
3,513
|
|
Reimbursement of expenses under grant program
|
|
|
(77
|
)
|
|
|
|
|
|
|
(115
|
)
|
|
|
|
|
Severance charge
|
|
|
(60
|
)
|
|
|
|
|
|
|
(163
|
)
|
|
|
510
|
|
Research and development
|
|
|
136
|
|
|
|
127
|
|
|
|
189
|
|
|
|
186
|
|
Patent amortization and other expense
|
|
|
28
|
|
|
|
140
|
|
|
|
77
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
1,759
|
|
|
|
2,045
|
|
|
|
3,406
|
|
|
|
4,869
|
|
Loss from operations
|
|
|
(1,348
|
)
|
|
|
(1,670
|
)
|
|
|
(2,350
|
)
|
|
|
(4,148
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
31
|
|
|
|
49
|
|
|
|
91
|
|
|
|
141
|
|
Other income (expense), net
|
|
|
(34
|
)
|
|
|
442
|
|
|
|
(67
|
)
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,351
|
)
|
|
$
|
(1,179
|
)
|
|
$
|
(2,326
|
)
|
|
$
|
(3,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted-average number of common shares
outstanding
|
|
|
8,187
|
|
|
|
8,138
|
|
|
|
8,184
|
|
|
|
8,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements
F-32
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Condensed Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
Note 1
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,326
|
)
|
|
$
|
(3,686
|
)
|
Adjustments to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
94
|
|
|
|
93
|
|
Compensation expense for options, warrants and stock awards
|
|
|
57
|
|
|
|
418
|
|
Recovery for doubtful accounts, net
|
|
|
|
|
|
|
(134
|
)
|
Unrealized gain on investments, net
|
|
|
|
|
|
|
(161
|
)
|
Loss on abandonment of patents
|
|
|
3
|
|
|
|
150
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(70
|
)
|
|
|
424
|
|
Inventories, net
|
|
|
237
|
|
|
|
51
|
|
Other current assets and other assets
|
|
|
188
|
|
|
|
53
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
45
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(1,772
|
)
|
|
|
(2,778
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Sale of investments
|
|
|
11,725
|
|
|
|
|
|
Patent costs
|
|
|
(95
|
)
|
|
|
(48
|
)
|
Purchase of fixed assets
|
|
|
(9
|
)
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities
|
|
|
11,621
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from short-term debt
|
|
|
2,161
|
|
|
|
3,471
|
|
Repayment of short-term debt
|
|
|
(6,611
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities
|
|
|
(4,450
|
)
|
|
|
3,420
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(65
|
)
|
|
|
44
|
|
Net increase in cash and cash equivalents
|
|
$
|
5,334
|
|
|
$
|
511
|
|
Cash and cash equivalents at beginning of the period
|
|
|
2,772
|
|
|
|
3,976
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$
|
8,106
|
|
|
$
|
4,487
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash activities:
|
|
|
|
|
|
|
|
|
Accumulated amortization of abandoned assets
|
|
$
|
2
|
|
|
$
|
4
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
46
|
|
|
$
|
29
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-33
CLEAN
DIESEL TECHNOLOGIES, INC.
(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.
Reclassifications:
Some amounts in the prior period financial statements have been
reclassified to conform to current period presentation.
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 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 its first quarter 2010 filing and will
revise in 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
F-34
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Condensed Consolidated Statement of Operations Three
Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Revised
|
|
|
|
(In thousands)
|
|
|
Patent amortization and other expense
|
|
$
|
37
|
|
|
$
|
103
|
|
|
$
|
140
|
|
Operating costs and expenses
|
|
|
1,942
|
|
|
|
103
|
|
|
|
2,045
|
|
Loss from operations
|
|
|
(1,567
|
)
|
|
|
(103
|
)
|
|
|
(1,670
|
)
|
Net loss
|
|
|
(1,076
|
)
|
|
|
(103
|
)
|
|
|
(1,179
|
)
|
Basic and diluted loss per common share
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
(0.14
|
)
|
Condensed Consolidated Statement of Operations Six
Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Revised
|
|
|
|
(In thousands)
|
|
|
Patent amortization and other expense
|
|
$
|
72
|
|
|
$
|
137
|
|
|
$
|
209
|
|
Operating costs and expenses
|
|
|
4,732
|
|
|
|
137
|
|
|
|
4,869
|
|
Loss from operations
|
|
|
(4,011
|
)
|
|
|
(137
|
)
|
|
|
(4,148
|
)
|
Net loss
|
|
|
(3,549
|
)
|
|
|
(137
|
)
|
|
|
(3,686
|
)
|
Basic and diluted loss per common share
|
|
|
(0.44
|
)
|
|
|
|
|
|
|
(0.45
|
)
|
Condensed Consolidated Statement of Cash Flows Six
Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
Revised
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(3,549
|
)
|
|
$
|
(137
|
)
|
|
$
|
(3,686
|
)
|
Loss on abandonment of patents
|
|
|
13
|
|
|
|
137
|
|
|
|
150
|
|
Accumulated amortization of abandoned assets
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
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
F-35
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 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.
F-36
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 six months ended
June 30, 2010, we capitalized $95,000 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 and six months ended June 30, 2010 was $17,000 and
$33,000, respectively. For the three and six months ended
June 30, 2009, amortization expense was $15,000 and
$26,000, respectively. At June 30, 2010 and
December 31, 2009, the Companys patents, net of
accumulated amortization, were $957,000 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 and six months ended
June 30, 2010 and 2009 does not include common share
equivalents associated with 768,744 and 948,078 options,
respectively, and 399,528 and 407,493 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 and six months ended June 30, 2010 and 2009,
respectively, as the result would be anti-dilutive.
Income
Taxes:
At June 30, 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.
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.
F-37
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
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 twelve
months.
At December 31, 2009, 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.
|
F-38
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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.
|
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. Investments are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Auction rate securities
|
|
$
|
|
|
|
$
|
10,577
|
|
Auction rate securities right
|
|
|
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
|
|
|
$
|
11,725
|
|
Classified as current assets
|
|
|
|
|
|
|
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.
The fair value of the ARS was approximately $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 and six months ended June 30, 2010,
recognized gains on the ARS were directly offset by losses on
the ARSR, resulting in no impact on our results of operations.
In the three and six months ended June 30, 2009, we
recorded a gain of $377,000 and $411,000, respectively, on the
ARS and a loss of $144,000 and $250,000, respectively, on the
ARSR, resulting in a $233,000 and $161,000 net gain,
respectively, included in other income (expense) on our
unaudited condensed consolidated statements of operations.
During the first quarter of 2010, UBS began purchasing certain
of our ARS investments at par value and on June 30, 2010 we
exercised our put option under the Offer and sold to UBS our
remaining ARS for
F-39
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximately $5.2 million, representing par value. Of this
amount, approximately $3.2 million was used in July 2010 to
pay down the Companys outstanding borrowings to UBS.
Interest income for the three months ended June 30, 2010
and 2009 was approximately $31,000 and 49,000, respectively, and
for the six-month periods then ended was approximately $91,000
and $141,000, respectively. Accrued interest receivable at
June 30, 2010 and December 31, 2009 was approximately
$3,000 and $7,000, respectively.
The table below includes a roll-forward of the Companys
investments in ARS and ARSR for the six months ended
June 30, 2010:
|
|
|
|
|
|
|
2010
|
|
|
|
Significant
|
|
|
|
Unobservable
|
|
|
|
Inputs
|
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
|
Fair value at beginning of period
|
|
$
|
11,725
|
|
Purchases
|
|
|
|
|
Sales
|
|
|
(11,725
|
)
|
Transfers (out) in
|
|
|
|
|
Unrealized gain (loss) included in statement of operations
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
$
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Finished Platinum Plus fuel-borne catalyst
|
|
$
|
164
|
|
|
$
|
85
|
|
Platinum concentrate/metal
|
|
|
251
|
|
|
|
449
|
|
Hardware
|
|
|
413
|
|
|
|
587
|
|
Other
|
|
|
63
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
891
|
|
|
$
|
1,132
|
|
Less: inventory reserves
|
|
|
(69
|
)
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
822
|
|
|
$
|
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.
F-40
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In November 2008, we 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 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.
The outstanding balance of the short-term debt at June 30,
2010 and December 31, 2009 was $3.2 million and
$7.7 million, respectively. In July 2010, pursuant to the
terms of our agreement with UBS, we used a portion of the
proceeds from our sale of ARS investments to pay down the
remaining UBS borrowings.
Interest expense was approximately $20,000 and $12,000 for the
three months ended June 30, 2010 and 2009, respectively and
$47,000 and $32,000 for the six months ended June 30, 2010
and 2009 respectively. Accrued interest payable at June 30,
2010 was approximately $1,000.
|
|
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 six months of 2010, 7,965 of the Companys
outstanding warrants expired. At June 30, 2010, the Company
had 399,528 warrants outstanding, exercisable at a
weighted-average exercise price of $11.52 with a
weighted-average remaining life of 2.0 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 $27,000 and $212,000 for the three months ended
June 30, 2010 and 2009, respectively and $57,000 and
$418,000 for the six months ended June 30, 2010 and 2009,
respectively. As of June 30, 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.
F-41
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information concerning stock
options outstanding including the related transactions under the
Plan for the six months ended June 30, 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
|
|
|
(6,667
|
)
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(100,999
|
)
|
|
$
|
11.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of June 30, 2010
|
|
|
768,744
|
|
|
$
|
10.26
|
|
|
|
3.7
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of June 30, 2010
|
|
|
738,411
|
|
|
$
|
10.52
|
|
|
|
3.5
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 June 30, 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 six months ended
June 30, 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,
F-42
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
On April 30, 2010, the Company received a complaint from
the Hartford, Connecticut office of the U.S. Department of
Labor under Section 806 of the Corporate and Criminal Fraud
Accountability Act of 2001, Title VIII of the
Sarbanes-Oxley Act of 2002, alleging that Ms. Ann B. Ruple,
former Vice President, Treasurer and Chief Financial Officer of
Clean Diesel, had been subject to discriminatory employment
practices. The Companys Board of Directors terminated
Ms. Ruples employment on April 19, 2010. The
complainant in this proceeding does not demand specific relief.
However, the statute provides that a prevailing employee shall
be entitled to all relief necessary to make the employee whole,
including compensatory damages which may be reinstatement, back
pay with interest, front pay, and special damages such as
attorneys and expert witness fees. The Company responded
on June 14, 2010, denying the allegations of the complaint.
Based upon current information, management, after consultation
with legal counsel defending the Companys interests,
believes the ultimate disposition will have no material effect
upon the Companys business, results or financial position.
|
|
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 (see Note 14).
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 and
six months ended June 30, 2010 include $30,000 and $60,000,
respectively, 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.
For these services, which commenced February 1, 2010 and
were
F-43
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
completed on March 16, 2010, Mr. Merrion was paid
approximately $20,000, at the rate of $300 per hour or a daily
maximum of $3,000 per day.
|
|
Note 9.
|
Significant
Customers
|
For the three and six months ended June 30, 2010 and 2009,
revenue derived from certain customers comprised 10% or more of
our consolidated revenue (significant customers) as
set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Customer A
|
|
|
36.8
|
%
|
|
|
*
|
|
|
|
49.2
|
%
|
|
|
*
|
|
Customer B
|
|
|
*
|
|
|
|
13.3
|
%
|
|
|
*
|
|
|
|
*
|
|
Customer C
|
|
|
*
|
|
|
|
26.9
|
%
|
|
|
*
|
|
|
|
14.0
|
%
|
Customer D
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
18.4
|
%
|
|
|
|
* |
|
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 June 30, 2010, Clean Diesel had two customers (not
included in the table above) that represented approximately
37.9% of its gross accounts receivable balance.
|
|
Note 10.
|
Comprehensive
Loss
|
Components of comprehensive loss follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(1,351
|
)
|
|
$
|
(1,179
|
)
|
|
$
|
(2,326
|
)
|
|
$
|
(3,686
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
14
|
|
|
|
53
|
|
|
|
68
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(1,337
|
)
|
|
$
|
(1,126
|
)
|
|
$
|
(2,258
|
)
|
|
$
|
(3,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
118
|
|
|
$
|
157
|
|
|
$
|
218
|
|
|
$
|
378
|
|
U.K./Europe
|
|
|
293
|
|
|
|
186
|
|
|
|
811
|
|
|
|
283
|
|
Asia
|
|
|
|
|
|
|
32
|
|
|
|
27
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
411
|
|
|
$
|
375
|
|
|
$
|
1,056
|
|
|
$
|
721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has patent coverage in North and South America,
Europe, Asia, Africa and Australia. As of June 30, 2010 and
December 31, 2009, the Companys assets comprise the
following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
U.S.
|
|
$
|
8,841
|
|
|
$
|
15,551
|
|
Foreign
|
|
|
1,664
|
|
|
|
1,696
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,505
|
|
|
$
|
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 was 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.
As a result of Dr. Steiners death on June 26,
2010, the Companys obligation under his severance
arrangement ceased and the remaining severance accrual of
$60,000 was reversed into income.
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.
A summary of the activity in the severance accrual is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2009
|
|
$
|
389
|
|
Provisions (Reversals)
|
|
|
(163
|
)
|
Payments
|
|
|
(226
|
)
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
|
|
|
|
|
|
|
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). Under the terms of the Merger Agreement:
|
|
|
|
|
For accounting purposes, CSI is considered to be acquiring the
Company.
|
|
|
|
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. In addition,
CSI shareholders will receive warrants to purchase up to
3 million shares of Clean Diesel common stock.
|
F-45
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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 and CSI each have $1.0 million in cash or
equivalent at the time of the Merger.
|
|
|
|
The Company will amend its certificate of incorporation to
effect a reverse stock split in a ratio ranging from
1-for-3 to
1-for-8 of
all issued and outstanding shares of Clean Diesel common stock,
the final ratio to be determined within the discretion of the
Clean Diesel Board of Directors, to occur immediately before the
closing of the Merger.
|
In connection with the Merger, if successful, Innovator Capital,
an investment banking firm described in Note 8, is
estimated to receive a fee of approximately $761,000 (see
Note 14).
The Merger Agreement may be terminated at any time prior to the
effective time of the Merger by mutual written consent. The
Merger Agreement obligates each party 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.
Both CSI and Clean Diesel intend to issue additional securities
prior to the Merger in order that they can finance current
operations. The Company 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 a Regulation S offering. Under the terms of the
Companys private placement, the closing of which is
conditioned upon the consummation of the Merger, Clean Diesel
will sell units consisting of up to 654,118 shares of its
common stock and warrants to purchase up to
1,000,000 shares of its common stock. In connection with
this offering, Innovator Capital will receive a fee of $50,000,
in cash and 15% of the gross proceeds of the capital raise
through the issuance of 89,180 warrants to purchase common stock.
In connection with the Merger, the Company has entered into
certain employee agreements, including a Transition Services
Agreement with Charles W. Grinnell, Vice President, General
Counsel, Corporate Secretary and a Director of the Registrant.
The agreements provide for aggregate retention and transition
bonuses of $250,000. Each agreement contains a termination
clause to the effect that if the Merger does not occur on or
before September 6, 2010, or such later date as determined
by the Company, the agreements will be void and no bonus will be
paid.
|
|
Note 14.
|
Subsequent
Events
|
On July 15, 2010, the Company entered into an Employment
Agreement (the Agreement) with Michael L. Asmussen,
our Chief Executive Officer, President and Director. The
Agreement will become effective upon the closing of the proposed
Merger with CSI. Pursuant to the Agreement, Mr. Asmussen
will become the Vice President and Chief Commercial Officer of
the Company and CSI, and will also be a member of the board of
directors. In addition, Mr. Asmussen will receive 40,000
restricted shares under the Companys Incentive Plan.
Mr. Asmussen is also entitled to certain relocation
benefits under the Agreement in order to facilitate
Mr. Asmussens move to the vicinity of the
Companys relocated headquarters in California following
the Merger. The Agreement will not become effective if the
Merger is not completed.
On July 21, 2010, the Companys board formed a Special
Committee of Independent Directors (Special
Committee) to review and consider various matters in
connection with the Companys proposed merger with CSI.
On August 6, 2010, based upon a recommendation from the
Special Committee, the Companys board voted to extend the
term of Innovator Capitals engagement to the earlier of
September 30, 2010 or the closing of the Merger and to
determine the form of payment of Innovator Capitals fee
for merger and acquisition services. In connection with a
successful merger with CSI, Innovator Capitals fee will be
comprised of $500,000 in cash (inclusive of monthly retainers)
and 194,486 shares of Clean Diesel common stock.
F-46
CATALYTIC
SOLUTIONS, INC.
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-48
|
|
|
|
|
F-49
|
|
|
|
|
F-50
|
|
|
|
|
F-51
|
|
|
|
|
F-65
|
|
|
|
|
F-66
|
|
|
|
|
F-67
|
|
|
|
|
F-68
|
|
|
|
|
F-69
|
|
|
|
|
F-71
|
|
F-47
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
US $000
|
|
US $000
|
|
|
(Unaudited)
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,887
|
|
|
$
|
2,336
|
|
Trade accounts receivable, net
|
|
|
5,926
|
|
|
|
8,066
|
|
Inventories
|
|
|
5,026
|
|
|
|
6,184
|
|
Prepaid expenses and other current assets
|
|
|
1,635
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,474
|
|
|
|
18,596
|
|
Property and equipment, net
|
|
|
2,688
|
|
|
|
2,897
|
|
Intangible assets, net
|
|
|
4,160
|
|
|
|
4,445
|
|
Goodwill
|
|
|
4,161
|
|
|
|
4,223
|
|
Other assets
|
|
|
311
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
26,794
|
|
|
$
|
30,243
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
3,029
|
|
|
$
|
5,147
|
|
Current portion of long-term debt
|
|
|
3,000
|
|
|
|
3,000
|
|
Secured convertible notes
|
|
|
1,767
|
|
|
|
|
|
Accounts payable
|
|
|
4,449
|
|
|
|
4,967
|
|
Deferred revenue
|
|
|
|
|
|
|
195
|
|
Accrued salaries and benefits
|
|
|
1,427
|
|
|
|
1,294
|
|
Accrued expenses
|
|
|
3,103
|
|
|
|
2,990
|
|
Deferred gain on sale of intellectual property
|
|
|
|
|
|
|
1,900
|
|
Accrued professional and consulting fees
|
|
|
1,499
|
|
|
|
2,375
|
|
Income taxes payable
|
|
|
784
|
|
|
|
1,081
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
19,058
|
|
|
|
22,949
|
|
Long-term debt, excluding current portion
|
|
|
61
|
|
|
|
75
|
|
Deferred tax liability
|
|
|
1,283
|
|
|
|
1,336
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,402
|
|
|
|
24,360
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock, no par value. Authorized 148,500,000 shares;
issued and outstanding 69,761,902 shares at June 30,
2010 and December 31, 2009
|
|
|
156,307
|
|
|
|
156,216
|
|
Treasury stock at cost (60,000 shares)
|
|
|
(100
|
)
|
|
|
(100
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,116
|
)
|
|
|
(889
|
)
|
Accumulated deficit
|
|
|
(148,699
|
)
|
|
|
(149,344
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,392
|
|
|
|
5,883
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
26,794
|
|
|
$
|
30,243
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
F-48
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US $000
|
|
|
US $000
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
$
|
25,371
|
|
|
$
|
19,144
|
|
Cost of revenues
|
|
|
18,595
|
|
|
|
15,582
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
6,776
|
|
|
|
3,562
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,561
|
|
|
|
2,113
|
|
Research and development
|
|
|
2,145
|
|
|
|
3,724
|
|
General and administrative
|
|
|
4,126
|
|
|
|
3,988
|
|
Recapitalization expense
|
|
|
727
|
|
|
|
655
|
|
Severance expense
|
|
|
15
|
|
|
|
237
|
|
Gain on sale of intellectual property
|
|
|
(3,900
|
)
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,674
|
|
|
|
8,217
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,102
|
|
|
|
(4,655
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2
|
|
|
|
13
|
|
Interest expense
|
|
|
(678
|
)
|
|
|
(1,513
|
)
|
Other
|
|
|
(109
|
)
|
|
|
(774
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(785
|
)
|
|
|
(2,274
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
1,317
|
|
|
|
(6,929
|
)
|
Income tax expense from continuing operations
|
|
|
510
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) income from continuing operations
|
|
|
807
|
|
|
|
(6,996
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Net loss from operations of discontinued Energy
|
|
|
|
|
|
|
|
|
Systems division
|
|
|
(162
|
)
|
|
|
(1,159
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
645
|
|
|
$
|
(8,155
|
)
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding (000s):
|
|
|
|
|
|
|
|
|
Basic
|
|
|
69,762
|
|
|
|
69,762
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
70,226
|
|
|
|
69,762
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
F-49
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US $000
|
|
|
US $000
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
645
|
|
|
$
|
(8,155
|
)
|
Loss from discontinued operations
|
|
|
162
|
|
|
|
1,159
|
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
619
|
|
|
|
651
|
|
(Recovery of) provision for doubtful accounts, net
|
|
|
(11
|
)
|
|
|
53
|
|
Stock-based compensation
|
|
|
91
|
|
|
|
344
|
|
Change in fair value of liability classified warrants
|
|
|
|
|
|
|
(207
|
)
|
Change in fair value of financial instruments
|
|
|
(178
|
)
|
|
|
|
|
Amortization of debt discount on convertible notes
|
|
|
281
|
|
|
|
|
|
Loss on foreign currency transactions
|
|
|
231
|
|
|
|
19
|
|
Amortization of deferred financing costs
|
|
|
56
|
|
|
|
321
|
|
Loss on unconsolidated affiliate
|
|
|
33
|
|
|
|
575
|
|
Loss on sale of property and equipment
|
|
|
34
|
|
|
|
189
|
|
Gain on sale of intellectual property
|
|
|
(3,900
|
)
|
|
|
(2,500
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
2,137
|
|
|
|
(246
|
)
|
Inventories
|
|
|
1,125
|
|
|
|
2,495
|
|
Prepaid expenses and other assets
|
|
|
1,081
|
|
|
|
2,498
|
|
Accounts payable
|
|
|
(506
|
)
|
|
|
579
|
|
Income taxes payable
|
|
|
(289
|
)
|
|
|
(115
|
)
|
Accrued expenses and other current liabilities
|
|
|
(840
|
)
|
|
|
(423
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities of continuing
operations
|
|
|
771
|
|
|
|
(2,763
|
)
|
Cash (used in) provided by operating activities of discontinued
operations
|
|
|
(161
|
)
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
610
|
|
|
|
(2,548
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(186
|
)
|
|
|
(593
|
)
|
Investment in unconsolidated affiliate
|
|
|
(413
|
)
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
10
|
|
Proceeds from sale of intellectual property
|
|
|
2,000
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities of continuing
operations
|
|
|
1,401
|
|
|
|
1,917
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of discontinued operations
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
1,401
|
|
|
|
1,866
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under line of credit
|
|
|
241
|
|
|
|
891
|
|
Proceeds from issuance of debt
|
|
|
1,500
|
|
|
|
44
|
|
Repayments under line of credit
|
|
|
(2,501
|
)
|
|
|
(2,703
|
)
|
Repayment of long-term debt
|
|
|
(14
|
)
|
|
|
|
|
Payments for debt issuance costs
|
|
|
(272
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,046
|
)
|
|
|
(1,780
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(414
|
)
|
|
|
(259
|
)
|
Net change in cash and cash equivalents
|
|
|
551
|
|
|
|
(2,721
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
2,336
|
|
|
|
6,726
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,887
|
|
|
$
|
4,005
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
258
|
|
|
$
|
667
|
|
Cash paid for income taxes
|
|
$
|
663
|
|
|
$
|
2
|
|
See accompanying notes to condensed consolidated financial
statements.
F-50
Notes to
Condensed Consolidated Financial Statements
(unaudited)
|
|
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 its 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.
|
|
b.
|
Proposed
Merger with Clean Diesel Technologies, Inc.
|
On May 14, 2010, the Company announced that it had entered
into a merger agreement with Clean Diesel Technologies, Inc., or
CDTI, a
U.S.-based
company that designs, markets and licenses patented technologies
and solutions that reduce harmful emissions from internal
combustion engines while improving fuel economy and engine power
(the Merger). The Company entered into an Agreement
and Plan of Merger (the Merger Agreement), dated as
of May 13, 2010, with CDTI and CDTI Merger Sub, Inc., a
California corporation and wholly-owned subsidiary of CDTI
(Merger Sub). The proposed Merger, to be effected by
way of a reverse merger, is a transaction that will result in
the combination of the Companys business with CDTI,
whereby the Company will become a wholly-owned subsidiary of
CDTI.
In exchange for their shares of the Companys common stock
and warrants to purchase shares of the Companys common
stock, the Companys security holders will receive shares
of CDTI common stock and (excluding investors in the capital
raise discussed below) warrants to purchase CDTI common stock.
The Companys shareholders (including investors in the
capital raise and the Companys financial advisor,
Allen & Company, LLC) will receive such numbers
of CDTI common stock so that after the Merger they will own 60%
of the outstanding shares of CDTI common stock and (excluding
investors in the capital raise and also the Companys
financial advisor) warrants to purchase up to three million
shares of CDTI common stock. The Companys financial
advisor will hold warrants to purchase an additional one million
shares of CDTI common stock.
The Merger is conditional, among other things, on obtaining the
Companys shareholder approval and CDTI stockholder
approval. The Merger Agreement contains provisions regarding an
adjustment to the merger consideration based on a closing cash
adjustment depending on whether each company meets certain cash
targets determined at June 30, 2010. Both companies have
met such cash targets at June 30, 2010, and therefore no
cash adjustment is necessary.
CDTI will use commercially reasonable efforts to cause all
shares of CDTI common stock to be issued in connection with the
Merger and all shares of CDTI common stock to be issued upon
exercise of the warrants to purchase shares of CDTI common stock
to be listed on the NASDAQ Stock Market as of the effective time
of the Merger.
Neither company will be required to complete the Merger if the
shares of CDTI 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.
Following completion of the Merger:
|
|
|
|
|
Merger Sub will merge with and into the Company and the Company
will be the surviving corporation.
|
|
|
|
As a result of the Merger, the business and assets of the
Company will be a wholly-owned subsidiary of CDTI.
|
|
|
|
The Company will cease trading on the Alternative Investment
Market (AIM).
|
F-51
|
|
|
|
|
The board of directors of the combined company is expected to
comprise seven directors, four from the Companys existing
board of directors (Charles F. Call, Alexander Ellis, III,
Charles R. Engles Ph.D. and Bernard H. Cherry) and three from
CDTI (Mungo Park, Derek R. Gray and Timothy Rogers).
|
|
|
|
|
|
The executive management team of the combined company is
expected to be composed of the following members of the current
management team of the Company: Charles F. Call, Nikhil A. Mehta
and Stephen J. Golden Ph.D.
|
CDTI has filed a
Form S-4
Registration Statement containing a joint proxy
statement/information statement and prospectus, providing the
Companys shareholders with information about the
background to and the reasons for the Merger and capital raise
(the Circular), and containing a notice of a special
meeting of the Companys shareholders to be convened on a
date to be agreed and will be sent to shareholders when declared
effective. The Circular outlining the terms of the Merger and
capital raise will seek shareholder approval to, among other
things, enable the Company to complete the Merger and capital
raise discussed below.
The Merger will be completed once both companies have approved
the Merger and the conditions are satisfied. The timing of the
shareholders meetings of both companies is dependant on
when the Registration Statement is declared effective, which
cannot be determined now. Final timing relating to the date of
the shareholders meetings and the expected completion date
for the Merger will be set out in the Circular that is
dispatched to shareholders of both companies.
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
$148.7 million at June 30, 2010. The Company has
funded its operations through equity sales, 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
June 30, 2010. As a result of this classification, the
Company has a working capital deficit of $3.6 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 4 for a discussion of the Fifth Third Bank
loan agreement). The covenants that the Company failed to
achieve are those related to the annualized earnings before
interest, tax, depreciation and amortization (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 expires on August 31, 2010, with
an additional extension through 30 November 2010, provided
certain criteria are met.
At June 30, 2010 the Company had $2.9 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 June 30, 2010.
These matters raise substantial doubt about the Companys
ability to continue as a going concern. The Company has entered
into agreements to merge with Clean Diesel Technologies, Inc.,
or CDTI, and to issue $4.0 million of secured convertible
notes to a group of qualifying investors. The Company has issued
$1.5 million of theses notes as of June 30, 2010.
These agreements are discussed in greater detail in Note 4.
However, there is no certainty that existing cash will be
sufficient to sustain operations of the combined company without
additional financing. At this time, the Company cannot provide
any assurance that the announced Merger will be approved and
completed or that the secured convertible notes will be
converted to equity. In the event that the Company is not
successful in entering into forbearance arrangements with the
noteholders in respect of the current technical default, and/or
in completion of the Merger, the secured convertible notes,
along with a premium collectively totaling $6.0 million
plus accrued interest, will be due. In such case, the Company
may not be able to continue operations and may be required to
file bankruptcy. There
F-52
can be no assurance that the Company will be able to reorganize
through bankruptcy and might be forced to effect a liquidation
of its assets. The condensed consolidated financial statements
do not include any adjustments that might result from the
outcome of this uncertainty.
|
|
d.
|
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.
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
Customer
|
|
2010
|
|
2009
|
|
A
|
|
|
22
|
%
|
|
|
24
|
%
|
B
|
|
|
15
|
%
|
|
|
26
|
%
|
The customers above are automotive original equipment
manufacturers (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:
|
|
|
|
|
|
|
|
|
Customer
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
A
|
|
|
13
|
%
|
|
|
18
|
%
|
B
|
|
|
13
|
%
|
|
|
6
|
%
|
C
|
|
|
11
|
%
|
|
|
22
|
%
|
Customer A above is a diesel systems distributor and Customers B
and C are automotive OEMs.
Certain vendors accounted for 10% or more of the Companys
raw material purchases as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
Vendor
|
|
2010
|
|
|
2009
|
|
|
A
|
|
|
22
|
%
|
|
|
7
|
%
|
B
|
|
|
14
|
%
|
|
|
19
|
%
|
C
|
|
|
10
|
%
|
|
|
11
|
%
|
D
|
|
|
6
|
%
|
|
|
11
|
%
|
Vendor A above is a catalyst supplier, vendor B is a precious
metals supplier and vendors C and D are substrate suppliers.
The preparation of financial statements in conformity with
U.S. GAAP 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
F-53
made include but are not limited to the following: impairment
of long-lived assets, stock-based compensation, the fair value
of financial 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 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
markets, foreign currency fluctuations, 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.
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 3.
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 Company determined
that no goodwill impairment existed as of December 31, 2009
or June 30, 2010; 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 adjustments to the Companys balance sheet and
statement of operations as of and for the six months ended
June 30, 2009 were not material and include:
(i) reductions to intangible assets, total assets, and
total
F-54
stockholders equity and an increase to accumulated
deficit of $0.6 million and (ii) increases to general
and administrative expenses and net loss of $0.1 million.
Loss per share and cash flows from operations are $0.01 greater
and unchanged, respectively.
|
|
e.
|
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, it is expected that
current market rates would be higher than those currently being
experienced by 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.
|
Recapitalization
Expense
|
The Company has been in the process of recapitalizing to improve
its financial stability. The recapitalization has required the
Company to hire a financial advisor, Allen & Company,
as well as legal and accounting experts to evaluate its options
and to guide it through the process of the merger with CDTI. The
Company reported expense of $727,000 and $655,000 for the six
months ended June 30, 2010 and 2009, respectively.
The exercisable warrants and their associated exercise prices
are shown below at June 30, 2010:
|
|
|
|
|
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 has outstanding warrants to purchase its common
stock held by Cycad Group, LLC, Capital Works ECS Investors, LLC
and SVB Financial Group, an affiliate of Silicon Valley Bank.
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 ECS
Investors, 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. For the six
months ended June 30, 2009, the application of
EITF 07-05
resulted in an increase to other income of $0.2 million
resulting from a decline in the fair value of the warrants
during the period. SVB Financial Group has agreed to cancel its
37,500 warrants contingent upon, and immediately prior to,
completion of the Merger.
The Company has a demand revolving credit line through Fifth
Third Bank with a maximum principal amount of Canadian
$7.0 million and availability based upon eligible accounts
receivable and inventory. At June 30, 2010, the outstanding
balance in U.S. dollars was $3.0 million with
$3.3 million available for borrowings by Engine Control
Systems in Canada. The loan is 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
June 30, 2010, the weighted average borrowing rate on the
line of credit was 5.9% compared to 4.48% as of
December 31, 2009. The Company is also subject to covenants
on minimum levels of tangible capital funds, fixed charge
coverage, EBITDA, 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
F-55
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 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 expires
on August 31, 2010. A further extension until
November 30, 2010 was to be granted if the proposed Merger
with CDTI was completed by August 1, 2010, and as of
August 31, 2010, the secured convertible notes issued by
the Company in connection with the capital raise had been
converted to common equity and the security granted to the
convertible noteholders had been released; the Company had
$3.0 million of free cash on its balance sheet; the Engine
Control Systems subsidiary had Canadian $2.0 million
available under the existing loan agreement; and no default,
forbearance default or event of default (as defined in the
credit and forbearance agreements) was outstanding. Although the
merger was not completed by August 1, 2010 and will not be
completed before the August 31, 2010 expiration date for
the current forbearance, Fifth Third Bank has indicated its
willingness to extend the forbearance until October 15,
2010 and, if the merger is completed prior to such date, for a
further period of 90 days after consummation of the merger,
but the credit limit would be further reduced to
$6.0 million, the interest rate would be increased by 0.25%
to U.S./Canadian Prime Rate plus 3.00% and, if the merger is not
consummated by October 15, 2010, the interest rate would be
increased by an additional 1.00% to U.S./Canadian Prime Rate
plus 4.00%. Fifth Third Banks willingness to extend the
forbearance, among other things, is subject to the Company
having entered into forbearance arrangements with holders of the
Companys secured convertible notes and execution of
appropriate documentation. There can be no assurance that Fifth
Third Bank or the holders of the Companys secured
convertible notes will actually enter into any such forbearance
arrangements.
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 June 30, 2010 the Company had accrued
$0.6 million of unpaid interest. In addition, the Company
may be obligated to pay in connection with its acquisition of
the assets of Applied Utility Systems in 2006 an earn-out amount
with respect to the period during which it operated the acquired
business. The Company is currently in arbitration with seller on
these matters. See further discussion in Note 12.
On June 2, 2010, the Company entered into an agreement with
a group of accredited investors providing for the sale of
$4.0 million of secured convertible notes (the Notes). The
Notes, as amended, bear interest at a rate of 8% per annum and
matured on August 2, 2010. Under the agreements,
$2.0 million of the Notes have been issued by the Company
in four equal installments ($0.5 million each on
June 2, June 8, June 28 and July 12,
2010) with the remaining $2.0 million to be issued
after all conditions precedent to the closing of the merger with
CDTI have been satisfied or waived (among other items). Under
the terms of the Notes, assuming the necessary shareholder
approvals are received at the special meeting of the
Companys shareholders to permit conversion thereof, the
$4.0 million of Notes will be converted into newly created
Class B common stock immediately prior to the
merger with CDTI such that at the effective time of the merger,
this group of accredited investors will receive approximately
66.066% of the Companys outstanding common stock on a
fully diluted basis. A total of 75,217,000 Class B shares
are issuable upon the conversion of the $2.0 million Notes
issued through July 12, 2010 and an additional 75,217,000
Class B shares are issuable upon the funding and conversion
of the final $2.0 million of Notes.
The Companys Class B common stock, if approved by the
shareholders, has rights identical to those of the
Companys existing Class A common stock other than its
exchange rights into CDTI stock upon the Merger. Each share of
the Companys Class B common stock will be exchanged
for 0.0602 shares of CDTI common stock whereas each share
of the Companys Class A common stock will be
exchanged for 0.0473 shares of CDTI common stock and
warrants to purchase 0.0387 shares of CDTI common stock.
F-56
The terms of the Notes provide that the Company has a
10-business
day grace period to make payments due under the Notes, either at
maturity, a date fixed for prepayment, or by acceleration or
otherwise, before it is considered an Event of
Default as defined in the Notes. The terms also provide
that, in the event the merger has not occurred prior to the
maturity date of the Notes, the Company has a 10-business day
grace period, during which time it could seek the agreement of
the noteholders to extend the maturity date of the Notes, before
the Company would be required to pay the Notes in full. The
Company did not repay the Notes or consummate the merger prior
to the August 2, 2010 maturity date or within the
subsequent
10-day grace
period. Accordingly, unless waived, extended or modified with
the agreement of the noteholders, the outstanding principal
amount under the secured convertible notes, including any
interest and an additional payment premium of two times (2x) the
outstanding principal amount will be due to the holders of the
secured convertible notes and the interest rate applicable
thereto increases from 8.0% to 15.0%. The holders of a majority
of the Notes have indicated their willingness to forbear from
exercising any rights or remedies thereunder to October 15,
2010, to forgo the increase in the interest rate from 8.0% to
15.0%, to waive the applicability of the additional payment
premium, and to agree that the payment premium would be
extinguished in the event that the Notes are converted and the
merger occurs prior to October 15, 2010. The willingness of
the holders of the Notes to enter into these forbearance and
other arrangements, among other things, is subject to the
Company having entered into an extended forbearance arrangement
with Fifth Third Bank, the provision of interim statements as to
the cash position of CDTI and the Company and the execution of
appropriate documentation. There can be no assurance that the
holders of the Notes or Fifth Third Bank will actually enter
into any such forbearance and other arrangements.
The Notes contain two embedded financial instruments that
require separate accounting at fair value. The instruments
requiring separate accounting are the premium redemption feature
related to the 2x premium and the contingent equity forward
related to the future funding commitment. The estimate of fair
value of such financial instruments involves unobservable inputs
that are considered Level 3 inputs.
For the $1.5 million in Notes issued through June 30,
2010, the premium redemption instrument had an initial value
upon issuance of $0.5 million and represents the fair value
of the additional penalty premium of two times (2x) the
outstanding principal amount plus the default interest that is
due if the Notes are in default. This instrument is considered a
put option, as subsequent to August 2, 2010, the
noteholders have the option of demanding payment or providing
additional time extensions. The fair value of the premium
redemption instrument is estimated by calculating the present
value of $4.0 million plus accrued interest, based on an
assumed payment date (eleven months after default date) using a
high yield discount rate of 17%, multiplied by an estimated
probability of its exercise.
The contingent equity forward has an initial value upon issuance
of $0.7 million and represents the fair value of the
additional $2.0 million that the investors have committed
to fund immediately prior to the closing of the Merger with
CDTI. It is considered a commitment to purchase equity since the
funding will only occur from the same events that will cause the
Notes to automatically convert to equity. The fair value is
estimated based on the intrinsic value of the forward discounted
at a risk free rate multiplied by the estimated probability that
the forward will fund. The intrinsic value is calculated based
upon the combined market capitalizations of the Company and CDTI
less the required $2.0 million cash payment.
The Notes include a beneficial conversion feature totaling
$1.3 million that is contingent on the approval by the
shareholders of certain amendments to the Companys
Articles of Incorporation. Once the related amendments are
approved, the beneficial conversion feature will be recorded as
additional non-cash interest expense.
The initial value of the embedded financial instruments is
recorded as a discount to the face value of the Notes and is
amortized using the effective interest method through the
original maturity date of the Notes, which was August 2,
2010. The embedded financial instruments are re-measured at fair
value at the end of the reporting period with changes in fair
value being recorded to other income (expense). While the
financial
F-57
instruments are bifurcated for measurement purposes, they are
presented on a combined basis with the debt host contract. A
summary of the accounting is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Financial
|
|
|
|
|
|
|
(net of discount)
|
|
|
Instruments
|
|
|
Total
|
|
|
|
US $000
|
|
|
US $000
|
|
|
US $000
|
|
|
Assigned value on date of issuance
|
|
|
482
|
|
|
|
1,018
|
|
|
|
1,500
|
|
Fair value of contingent equity forward issued in advance of
final $0.5 million notes
|
|
|
|
|
|
|
164
|
|
|
|
164
|
|
Amortization of discount on notes
|
|
|
281
|
|
|
|
|
|
|
|
281
|
|
Change in fair value of financial instruments
|
|
|
|
|
|
|
(178
|
)
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
|
763
|
|
|
|
1,004
|
|
|
|
1,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, long-term debt classified as current and
financial instruments at fair value at June 30, 2010 and
December 31, 2009 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Line of credit
|
|
|
3,029
|
|
|
|
5,147
|
|
Consideration payable
|
|
|
3,000
|
|
|
|
3,000
|
|
Secured convertible notes payable with a face value of
$1.5 million, net of discount of $0.7 million
|
|
|
1,767
|
|
|
|
|
|
Capital lease obligation
|
|
|
61
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,857
|
|
|
|
8,222
|
|
Less current portion
|
|
|
(7,796
|
)
|
|
|
(8,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
The Company has taken actions to reduce its cost base beginning
in 2008 and continuing into the six months ended June 30,
2010. As a result of these actions, the Company has accrued
severance costs, which are included in accrued expenses on the
accompanying consolidated balance sheets, as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Balance at beginning of period
|
|
|
670
|
|
|
|
187
|
|
Accrued severance expense
|
|
|
15
|
|
|
|
237
|
|
Paid severance expense
|
|
|
(276
|
)
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
409
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
F-58
The Company accrues warranty upon shipment of its products.
Accrued warranties are included in accrued expenses on the
accompanying consolidated balance sheets. The accrued warranty
for the six months ended June 30, 2010 and 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Balance at beginning of period
|
|
|
371
|
|
|
|
178
|
|
Accrued warranty expense
|
|
|
61
|
|
|
|
119
|
|
Warranty claims paid
|
|
|
(50
|
)
|
|
|
(97
|
)
|
Translation adjustment
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
385
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Net
Income (loss) per Share
|
Basic net income (loss) per share is computed using the weighted
average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed using the
weighted average number of common shares and dilutive potential
common shares. Diluted net income (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 include employee stock options
and other warrants that are convertible into the Companys
common stock. The Company had potential option and warrant
dilutive securities totaling 8,594,000 and 9,722,000 for the six
months ended June 30, 2010 and 2009.
For the six months ended June 30, 2010 and 2009 the effect
of the option and warrant dilutive securities totaling 7,343,000
and 9,722,000 equivalent shares, respectively, have been
excluded in the computation of net income (loss) per share and
net income (loss) from continuing operations per share as their
impact would be anti-dilutive.
In addition to the option and warrant dilutive securities, a
total of 150,434,000 Class B shares are issuable upon the
conversion of the Notes. These shares have been excluded from
the computation of net income (loss) per share and net income
(loss) from continuing operations per share as their impact
would be anti-dilutive for the Notes issued through
June 30, 2010 and the remainder is issuable upon
contingencies that have not been resolved as of June 30,
2010.
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 the three months
ended March 31, 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. The
Company recognized the gain on sale of the patents of
$3.9 million in the three months ended March 31, 2010.
As part of the transaction, the Company also sold shares in TCC,
which reduced its ownership in the joint venture to 5%.
F-59
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. In
February 2010, the Company entered into an agreement to loan
37.5 million JPY (approximately $0.4 million) to TCC
to fund continuing operations. The loan is funded in four
monthly tranches starting in February 2010 and ending in May
2010. As of June 30, 2010, the Company had loaned TCC
37.5 million JPY. If the loan is not repaid by TCC, it will
offset the Companys obligation to fund its portion of
TCCs losses. Given TCCs historical losses, the loan
has been recorded as a reduction of such obligations. At
June 30, 2010, the Companys loan to TCC less its
share of accumulated losses in the amount of $0.4 million
is included in other current assets. TCC operates with a March
31 fiscal year-end. Financial information for TCC as of and for
the six months ended June 30, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Assets
|
|
|
5,074
|
|
|
|
11,675
|
|
Liabilities
|
|
|
9,951
|
|
|
|
13,399
|
|
Deficit
|
|
|
(4,877
|
)
|
|
|
(1,724
|
)
|
Net sales
|
|
|
936
|
|
|
|
544
|
|
Gross Margin
|
|
|
670
|
|
|
|
(274
|
)
|
Net loss
|
|
|
(641
|
)
|
|
|
(2,041
|
)
|
|
|
9.
|
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
June 30, 2010 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 operations. There was no revenue included within
discontinued operations for the six month period ended
June 30, 2010. Revenue included within discontinued
operations was $8.5 million for the six months ended
June 30, 2009.
|
|
10.
|
Related-party
Transactions
|
One of the Companys Directors, Mr. Alexander
(Hap) Ellis, III, is a partner of RockPort
Capital Partners (RockPort), a shareholder in the
Company which subscribed for the secured convertible notes in
connection with the capital raise discussed in Note 4.
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 June 30, 2010 an amount of $0.5 million was
accrued for Directors fees and was due and payable to the
Directors. As part of the $4.0 million issuance of secured
convertible notes discussed in Note 4, the accrued director fees
as of December 31, 2009, which amounted to
$0.4 million, will be paid in a combination of common stock
and cash, with the cash portion being $0.1 million. The
stock portion is contemplated to be issued just prior to the
Merger and converted to CDTI common stock post merger. The
2010 director fees will be paid in cash.
F-60
|
|
11.
|
Goodwill
and Intangible Assets
|
The changes in the carrying amount of goodwill for the six
months ended June 30, 2010 are as follows:
|
|
|
|
|
|
|
US $000
|
|
|
Balance at December 31, 2009
|
|
|
4,223
|
|
Effect of translation adjustment
|
|
|
(62
|
)
|
|
|
|
|
|
Balance at June 30, 2010
|
|
|
4,161
|
|
|
|
|
|
|
Intangible assets as of June 30, 2010 and December 31,
2009 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful life
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Trade name
|
|
15-20 years
|
|
|
739
|
|
|
|
738
|
|
Patents and know-how
|
|
5-10 years
|
|
|
3,796
|
|
|
|
3,792
|
|
Customer relationships
|
|
8 years
|
|
|
1,184
|
|
|
|
1,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,719
|
|
|
|
5,736
|
|
Less accumulated amortization
|
|
|
|
|
(1,559
|
)
|
|
|
(1,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,160
|
|
|
|
4,445
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization for amortizable intangible assets, using
the straight-line amortization method for the six months ended
June 30, 2010 and 2009 was $0.3 million. Estimated
amortization expense for existing intangible assets for the next
five years is $0.5 million 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 9, 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. On April 13, 2010,
the Arbitrator 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 the Consulting Agreement, and
(d) awarding the Company attorneys fees in the amount
of $450,000, resulting in a total award of approximately
$1.2 million. A hearing was held on August 2, 2010,
during which the court confirmed the arbitrators award in
its entirety. Included in accrued liabilities at June 30,
2010, is an accrual for the consulting fees under this
arrangement totaling $1.2 million. The Company will reverse
such liability and has recorded an associated gain from
discontinued operations during the quarter ending
September 30, 2010, which represents the period in which
the court confirmed the award and the Company was legally
released from its liability.
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
June 30, 2010 the Company had accrued $0.6 million of
unpaid interest. The Company has not paid the foregoing amounts.
In addition, the Asset Purchase Agreement provides that the
Company would pay the seller an earn-out amount based on the
revenues and net profits from the conduct of the acquired
business of Applied Utility Systems. The earn-out potentially
was payable over a period of ten years beginning January 1,
2009. The Company has not paid any earn-out amount for the
fiscal year ended December 31, 2009 or the six months ended
June 30, 2010. The assets of the business were sold on
October 1, 2009 and the Company believes that it has no
obligation to pay any earn-out for any period post the sale of
the business.
F-61
The seller commenced an action in California Superior Court to
compel arbitration regarding the consideration which was due in
August 2009. Such action was stayed by the court and the seller
was directed to pursue any collection action through
arbitration. The seller has commenced arbitration proceedings to
collect the consideration which was due in August 2009 and any
earn-out amounts payable under the Asset Purchase Agreement. The
earn-out requested under the proceedings is $21.0 million,
which is the maximum earnable over the ten year period of the
earn-out defined in the Asset Purchase Agreement. The Company
has certain claims against the seller under the terms of the
Asset Purchase Agreement. While the arbitration is in the
preliminary stages and it is not possible to predict the outcome
of the arbitration, the Company intends to vigorously assert its
claims against the seller under the Asset Purchase Agreement and
to defend against any action or arbitration by the seller to
collect on the consideration and earn-out. The Company believes
the outcome of these matters will not exceed the liabilities
recorded as of June 30, 2010. In connection with the
arbitration proceedings, the seller sought a writ of attachment
with respect to the foregoing amounts. On June 24, 2010,
the arbitrator issued an interim award granting the seller a
right to a writ in the amount of approximately $2.4 million
(which amount was the net amount of the approximately
$3.6 million that the seller claimed was payable by the
Company during August 2009 and the amount of $1.2 million
that the Company was awarded against the seller in a separate
arbitration action by the Company relating to the sellers
breach of his Consulting Agreement with the Company). The seller
has initiated action to California Superior Court for Orange
County, California, and has filed a motion for the issuance of
the writ of attachment. The Company intends to continue to
vigorously defend its interests to limit any adverse effects of
the writ of attachment and the imposition of the writ against
any of the Companys assets, pending any final decision on
the merits of the underlying claims in the arbitration. A
hearing on this matter was held on August 18, 2010. The
court has taken it under submission but has not ruled. Under the
terms of the Fifth Third forbearance agreement described in
Note 4, the Company is restricted 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., the seller entered into an
agreement not to compete pursuant to which he agreed to refrain
from taking certain actions that would be competitive with the
business of Applied Utility Systems, Inc. The Company believes
that the seller has breached his obligations under the agreement
not to compete and on November 19, 2009, commenced suit in
California Superior Court for Orange County, California, to
enjoin any continuing breaches and to recover damages for the
alleged breaches. The seller has demurred to the complaint. A
hearing on the demurrer was held on July 26, 2010, at which
hearing the court granted the demur to the Companys claim
for breach of the agreement not to compete but allowed the
Companys claim for breach of fiduciary duty to proceed,
and granted the Company leave to file an amended complaint
seeking return of consideration paid for the agreement not to
compete in light of the ruling that such agreement was not
enforceable. The Company has filed a further amended complaint
asserting a cause of action for rescission of the agreement not
to compete and the seller has filed a demurrer to the amended
complaint and a hearing on the demurrer is scheduled for
September 14, 2010. The suit is in the preliminary stages
and it is not possible to predict the outcome of the suit.
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 $0.2 million 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 $0.3 million in damages, plus interest, costs
and punitive damages. The Company is unable to estimate any
potential payment for punitive damages as they have not been
quantified by Benz Air. The Company believes it is more likely
than not to prevail in this matter. The trial began on
June 14, 2010 and was postponed to October 4, 2010.
F-62
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 Corporate 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. All data reported 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 9, this division
was sold on October 1, 2009.
F-63
Summarized financial information for our reportable segments as
of and for the six months ended June 30, 2010 and 2009 are
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US $000
|
|
|
US $000
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
HDD Systems
|
|
|
15,776
|
|
|
|
8,796
|
|
Catalyst
|
|
|
9,936
|
|
|
|
10,457
|
|
Corporate
|
|
|
|
|
|
|
|
|
Eliminations (1)
|
|
|
(341
|
)
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,371
|
|
|
|
19,144
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
HDD Systems
|
|
|
1,913
|
|
|
|
(61
|
)
|
Catalyst
|
|
|
3,104
|
|
|
|
(1,768
|
)
|
Corporate
|
|
|
(2,915
|
)
|
|
|
(2,826
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,102
|
|
|
|
(4,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Elimination of Catalyst revenue related to sales to HDD Systems. |
The six months Catalyst division income from operations includes
a $3.9 million gain on sale of intellectual property to TKK
in 2010 and $2.5 million in 2009.
Net sales by geographic region based on location of sales
organization for the six months ended June 30, 2010 and
2009 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US $000
|
|
|
US $000
|
|
|
United States
|
|
|
11,346
|
|
|
|
11,880
|
|
Canada
|
|
|
11,177
|
|
|
|
5,298
|
|
Europe
|
|
|
2,848
|
|
|
|
1,966
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,371
|
|
|
|
19,144
|
|
|
|
|
|
|
|
|
|
|
The Company has evaluated subsequent events from the balance
sheet date through August 27, 2010, the date at which the
unaudited condensed consolidated financial statements were
issued, and determined there are no other items to disclose.
F-64
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 21, as to
which the date is May 14, 2010
F-65
|
|
|
|
|
|
|
|
|
|
|
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, 19 and 21)
|
|
|
|
|
|
|
|
|
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-66
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-67
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-68
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-69
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-70
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-71
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-72
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. The Companys
inventory includes precious metals (platinum, palladium and
rhodium) for use in the manufacturing of catalysts. The precious
metals are valued lower of cost or market, consistent with the
Companys other inventory. Included in raw material at
December 31, 2009 and December 31, 2008 are precious
metals of $206,000 and $262,000, respectively.
|
|
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. The Company records
depreciation expense in the expense category that primarily
utilizes the associated fixed asset. The depreciation of
manufacturing and distribution assets is included within cost of
revenues, research and development assets are included in
research and development expense and assets related to general
and administrative activities are included in general and
administrative expense. 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.
F-73
Notes to
Consolidated Financial
Statements (Continued)
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 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.
The Company includes the direct material costs and factory labor
as well as factory overhead expense in the cost of revenue.
Indirect factory expense includes the costs of freight (inbound
and outbound for direct material and finished good), purchasing
and receiving, inspection, testing, warehousing, utilities and
deprecation of facilities and equipment utilized in the
production and distribution of products.
F-74
Notes to
Consolidated Financial
Statements (Continued)
Costs related to sales and marketing are expensed as they are
incurred. These expenses include the salary and benefits for the
sales and marketing staff as well as travel, samples provided at
no-cost to customers and marketing materials.
|
|
n.
|
Research
and Development
|
Research and development costs are generally expensed as
incurred. These expenses include the salary and benefits for the
research and development staff as well as travel, research
materials, testing and legal expense related to patenting
intellectual property. Also included is any depreciation related
to assets utilized in the development of new products.
|
|
o.
|
General
and Administrative
|
These expenses include the salary and benefits for the
administrative staff as well as travel, legal, accounting and
tax consulting. Also included is any depreciation related to
assets utilized in the general and administrative functions.
|
|
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 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).
F-75
Notes to
Consolidated Financial
Statements (Continued)
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 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,
F-76
Notes to
Consolidated Financial
Statements (Continued)
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.
|
|
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.
F-77
Notes to
Consolidated Financial
Statements (Continued)
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
|
|
|
|
|
|
|
|
|
|
|
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
F-78
Notes to
Consolidated Financial
Statements (Continued)
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
|
%
|
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.
F-79
Notes to
Consolidated Financial
Statements (Continued)
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.
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 has outstanding warrants to purchase its common
stock held by Cycad Group, LLC, Capital Works ECS Investors, LLC
and SVB Financial Group, an affiliate of Silicon Valley Bank.
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 ECS
Investors, 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
F-80
Notes to
Consolidated Financial
Statements (Continued)
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 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.
F-81
Notes to
Consolidated Financial
Statements (Continued)
|
|
9.
|
Commitments
and Contingencies
|
The Company leases certain equipment and facilities under
operating leases that expire through December 2018. The Company
recognizes its minimum lease payments, including escalation
clauses, on a straight line basis over the minimum lease term of
the lease. The gross amount of assets recorded under capital
leases is $0.1 million. Future minimum lease payments under
non-cancellable operating leases (with initial or remaining
lease terms in excess of one year) and future minimum capital
lease payments as of December 31, 2009 are:
|
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
Operating leases
|
|
|
US $000
|
|
US $000
|
|
Years ending December 31:
|
|
|
|
|
|
|
|
|
2010
|
|
|
35
|
|
|
|
1,261
|
|
2011
|
|
|
32
|
|
|
|
1,107
|
|
2012
|
|
|
12
|
|
|
|
1,049
|
|
2013
|
|
|
6
|
|
|
|
646
|
|
2014
|
|
|
|
|
|
|
641
|
|
Later years, through 2031
|
|
|
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
85
|
|
|
|
5,854
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum capital lease payments
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense during 2009 and 2008 totaled $1.5 million and
$1.3 million, respectively.
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, included in accrued
expenses on the accompanying consolidated balance sheets, 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
|
|
|
|
|
|
|
F-82
Notes to
Consolidated Financial
Statements (Continued)
The Company accrues warranty upon shipment of its products.
Accrued warranties are included in accrued expenses on the
accompanying consolidated balance sheets. The accrued warranty
is as follows:
|
|
|
|
|
|
|
US $000
|
|
|
Accrued warranty at December 31, 2007
|
|
|
237
|
|
Accrued warranty expense
|
|
|
130
|
|
Claims paid
|
|
|
(143
|
)
|
Accrued warranty at December 31, 2008
|
|
|
224
|
|
Accrued warranty expense
|
|
|
372
|
|
Claims paid
|
|
|
(205
|
)
|
Accrued warranty at December 31, 2009
|
|
|
391
|
|
(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-83
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-84
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.
|
|
14.
|
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-85
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
|
)
|
|
|
16.
|
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-86
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.
|
|
17.
|
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.
|
|
18.
|
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-87
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 16, 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-88
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 Company is unable
to estimate any potential payment for punitive damages as they
have not been quantified by Benz Air. 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 21 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 16, this division was sold on October 1, 2009.
F-89
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-90
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 the Consulting Agreement, and (d) awarding the
Company attorneys fees in the amount of $450,000,
resulting in a total award of approximately $1.2 million.
The Company has initiated action to enter a judgment pursuant to
the award and Mansour, Inc. has petitioned the court to set
aside the award, which matters are scheduled for hearing on
August 2, 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. The Company will reverse such
liability and record an associated gain from discontinued
operations when the court affirms the award and the Company is
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
from the operation of the acquired business of Applied Utility
Systems. The earn-out was potentially payable over a period of
ten years beginning January 1, 2009. The Company has not
paid any earn-out amount for the fiscal year ended
December 31, 2009. The assets of the business were sold on
October 1, 2009 and the Company believes that it has no
obligation to pay any earn-out for any period post the sale of
the business. The seller commenced an action in California
Superior Court to compel arbitration regarding the consideration
which was due in August 2009. Such action was stayed by the
court and the seller was directed to pursue any collection
action through arbitration. The seller has commenced arbitration
proceedings to collect the
F-91
Notes to
Consolidated Financial
Statements (Continued)
consideration which was due in August 2009 and any earn-out
amounts payable under the Asset Purchase Agreement. The earn-out
requested under the proceedings is $21 million, which is
the maximum earnable over the ten year period of the earn-out
defined in the Asset Purchase Agreement. The Company has certain
claims against the seller under the terms of the Asset Purchase
Agreement. While the arbitration is in the preliminary stages
and it is not possible to predict the outcome of the
arbitration, the Company intends to vigorously assert its claims
against the seller under the Asset Purchase Agreement and to
defend against any action or arbitration by the seller to
collect on the consideration and earn-out. The Company believes
the outcome of these matters will not exceed the liabilities
recorded as of December 31, 2009. In connection with the
arbitration proceedings, the seller sought 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.
In connection with the Companys acquisition of the assets
of Applied Utility Systems, the seller entered into an agreement
not to compete pursuant to which he agreed to refrain from
taking certain actions that would be competitive with the
business of Applied Utility Systems. The Company believes that
the seller has breached his obligations under the agreement not
to compete and on November 19, 2009 commenced suit in
California Superior Court for Orange County, California, to
enjoin any continuing breaches and to recover damages for the
alleged breaches. The seller has demurred to the complaint. A
hearing on the demurrer was held on May 10, 2010, at which
hearing the court granted the demur but permitted the Company to
file an amended complaint. The Company has filed an amended
complaint and a further demurrer hearing is scheduled for
July 26, 2010. The suit is in the preliminary stages and it
is not possible to predict the outcome of the suit.
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-92
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
|
|
Board Approval
|
|
|
A-23
|
|
Section 3.24
|
|
Voting Requirements
|
|
|
A-23
|
|
Section 3.25
|
|
Brokers and Finders
|
|
|
A-23
|
|
Section 3.26
|
|
Related Party Transactions
|
|
|
A-23
|
|
Section 3.27
|
|
Information Supplied
|
|
|
A-24
|
|
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB
|
|
|
A-24
|
|
Section 4.1
|
|
Organization
|
|
|
A-24
|
|
Section 4.2
|
|
Capitalization.
|
|
|
A-24
|
|
Section 4.3
|
|
Subsidiaries.
|
|
|
A-25
|
|
Section 4.4
|
|
Authority
|
|
|
A-25
|
|
Section 4.5
|
|
Consents and Approvals; No Violations.
|
|
|
A-26
|
|
Section 4.6
|
|
Books and Records
|
|
|
A-26
|
|
Section 4.7
|
|
SEC Reports; Financial Statements.
|
|
|
A-26
|
|
Section 4.8
|
|
Absence of Parent Material Adverse Effect
|
|
|
A-28
|
|
Section 4.9
|
|
Employees; Employee Benefit Plans
|
|
|
A-29
|
|
Section 4.10
|
|
Labor Matters
|
|
|
A-30
|
|
Section 4.11
|
|
Contracts.
|
|
|
A-30
|
|
Section 4.12
|
|
Litigation
|
|
|
A-31
|
|
Section 4.13
|
|
Compliance with Laws.
|
|
|
A-31
|
|
Section 4.14
|
|
Taxes and Tax Returns.
|
|
|
A-32
|
|
Section 4.15
|
|
Environmental Matters.
|
|
|
A-32
|
|
Section 4.16
|
|
State Takeover Statutes
|
|
|
A-33
|
|
Section 4.17
|
|
Intellectual Property.
|
|
|
A-33
|
|
Section 4.18
|
|
Absence of Indemnifiable Claims, etc
|
|
|
A-34
|
|
Section 4.19
|
|
Insurance
|
|
|
A-34
|
|
Section 4.20
|
|
Title to Property
|
|
|
A-34
|
|
Section 4.21
|
|
Customers and Suppliers
|
|
|
A-34
|
|
Section 4.22
|
|
Opinion of Financial Advisor
|
|
|
A-34
|
|
Section 4.23
|
|
Board Approval
|
|
|
A-35
|
|
Section 4.24
|
|
Voting Requirements
|
|
|
A-35
|
|
Section 4.25
|
|
Brokers and Finders
|
|
|
A-35
|
|
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS
|
|
|
A-35
|
|
Section 5.1
|
|
Conduct of Businesses Prior to the Effective Time
|
|
|
A-35
|
|
Section 5.2
|
|
Forbearances
|
|
|
A-35
|
|
ARTICLE VI ADDITIONAL AGREEMENTS
|
|
|
A-37
|
|
Section 6.1
|
|
Regulatory Matters
|
|
|
A-37
|
|
Section 6.2
|
|
Access to Information
|
|
|
A-38
|
|
Section 6.3
|
|
Stockholders Approvals
|
|
|
A-39
|
|
Section 6.4
|
|
Legal Conditions to Merger
|
|
|
A-39
|
|
Section 6.5
|
|
Stock Exchange Listing
|
|
|
A-39
|
|
Section 6.6
|
|
Employee Benefit Plans
|
|
|
A-39
|
|
Section 6.7
|
|
Indemnification; Directors and Officers Insurance
|
|
|
A-40
|
|
Section 6.8
|
|
Additional Agreements
|
|
|
A-41
|
|
Section 6.9
|
|
Advice of Changes
|
|
|
A-41
|
|
A-3
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
Section 6.10
|
|
Officers following Effective Time
|
|
|
A-41
|
|
Section 6.11
|
|
Board of Directors
|
|
|
A-41
|
|
Section 6.12
|
|
Acquisition Proposals
|
|
|
A-42
|
|
Section 6.13
|
|
Reverse Stock Split by Parent
|
|
|
A-43
|
|
Section 6.14
|
|
Headquarters
|
|
|
A-44
|
|
Section 6.15
|
|
Section 16 Matters
|
|
|
A-44
|
|
Section 6.16
|
|
AIM Delisting
|
|
|
A-44
|
|
ARTICLE VII CONDITIONS PRECEDENT
|
|
|
A-44
|
|
Section 7.1
|
|
Conditions to Each Partys Obligation To Effect the Merger
|
|
|
A-44
|
|
Section 7.2
|
|
Conditions to Obligations of Parent
|
|
|
A-45
|
|
Section 7.3
|
|
Conditions to Obligations of the Company
|
|
|
A-45
|
|
ARTICLE VIII TERMINATION AND AMENDMENT
|
|
|
A-46
|
|
Section 8.1
|
|
Termination
|
|
|
A-46
|
|
Section 8.2
|
|
Effect of Termination
|
|
|
A-47
|
|
Section 8.3
|
|
Amendment
|
|
|
A-48
|
|
Section 8.4
|
|
Extension; Waiver
|
|
|
A-49
|
|
ARTICLE IX GENERAL PROVISIONS
|
|
|
A-49
|
|
Section 9.1
|
|
Nonsurvival of Representations, Warranties and Agreements
|
|
|
A-49
|
|
Section 9.2
|
|
Expenses
|
|
|
A-49
|
|
Section 9.3
|
|
Notices
|
|
|
A-49
|
|
Section 9.4
|
|
Interpretation
|
|
|
A-50
|
|
Section 9.5
|
|
Counterparts
|
|
|
A-50
|
|
Section 9.6
|
|
Entire Agreement
|
|
|
A-50
|
|
Section 9.7
|
|
Governing Law
|
|
|
A-50
|
|
Section 9.8
|
|
Publicity
|
|
|
A-50
|
|
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).
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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
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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.
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(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
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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
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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
A-24
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
A-25
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
A-26
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).
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(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.
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(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: Michael L. Asmussen
Title: President & CEO
CDTI MERGER SUB, INC.
Name: Michael L. Asmussen
Title: President & CEO
[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.
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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).
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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.
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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).
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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.
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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
[ ],
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 Twelve Million One Hundred Thousand (12,100,000)
Shares of the par value of $0.01 per share, amounting in the
aggregate to One Hundred Twenty One Thousand Dollars ($121,000),
and of such shares Twelve Million (12,000,000) 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 [insert number ranging from 3 to 8] 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 [insert number
ranging from 3 to 8], 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.
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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
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Title:
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Vice President and Secretary
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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
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(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
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 Two Hundred Seventy Million
270,000,000 shares. Eighty-Five Million (85,000,000) shares
shall be Class A Common Stock, and One Hundred Eighty Five
Million (185,000,000) shares shall be Class B Common Stock.
Any and all shares of the corporations Common Stock issued
and outstanding at the time of filing this Certificate of
Amendment with the Secretary of State shall be hereby
automatically changed and redesignated without further action
into fully paid and non-accessible shares of the
Corporations Class A Common Stock. As of the filing
date of this Certificate of Amendment 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
F-1
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.
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:
[ ]
F-2
Annex G
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 unless the number of remaining Shares is less than
one (1), in which case no new warrant shall be issued.
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 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
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.
G-1
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.
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
G-2
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. This Warrant may be exercised
only for an integral number of Shares, and fractional Shares may
not be purchased hereunder.
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.]
G-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:
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Title:
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Vice President & Treasurer
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Name:
G-4
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
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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.
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ITEM 21.
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EXHIBITS AND
FINANCIAL STATEMENTS SCHEDULES
|
EXHIBITS
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|
|
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Exhibit
|
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Number
|
|
Description
|
|
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2
|
.1*
|
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Merger Agreement (attached as Annex A to this
Form S-4/A)
|
|
3
|
.1
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|
Restated Certificate of Incorporation of Clean Diesel dated as
of March 21, 2007 (incorporated by reference to
Exhibit 3(i)(a) to Clean Diesels Annual Report on
Form 10-K
filed on March 30, 2007).
|
|
3
|
.2*
|
|
Proposed Certificate of Amendment to Clean Diesel Certificate of
Incorporation (attached as Annex B to this
Form S-4/A)
|
II-1
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.3
|
|
Certificate of Amendment to Clean Diesel Restated Certificate of
Incorporation dated as of June 15, 2007 (incorporated by
reference to Exhibit 3(i)(b) to Clean Diesels
Registration Statement on
Form S-1
(No. 333-144201)
dated on June 29, 2007)
|
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3
|
.4
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Certificate of Elimination of Clean Diesels Series A
Convertible Preferred Stock dated June 18, 2004
(incorporated by reference to Exhibit to Clean Diesels
Registration Statement on
Form S-8
(No. 333-117057)
dated July 1, 2004)
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3
|
.5
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Clean Diesels By-Laws as amended through November 6,
2008 (incorporated by reference to Exhibit 3.1 to Clean
Diesels Quarterly Report on
Form 10-Q
filed on November 10, 2008)
|
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4
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.1*
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Proposed Form of Warrant Certificate (attached as Annex G
to this
Form S-4/A)
|
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5
|
.1***
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Opinion of Finn Dixon & Herling LLP
|
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8
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.1*
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Form of tax opinion
|
|
10
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.1***
|
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Transition Services Agreement, dated June 30, 2010, between
Charles W. Grinnell and Clean Diesel
|
|
10
|
.3*
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|
Employment Agreement, dated October 17, 2006, between
Charles F. Call and CSI
|
|
10
|
.4*
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|
Employment Agreement, dated July 9, 2008, between
Nikhil A. Mehta and CSI
|
|
10
|
.5*
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Employment Agreement, dated October 17, 2006, between
Stephen J. Golden, Ph.D., and CSI
|
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21
|
|
|
Subsidiaries (incorporated by reference to Exhibit 21 to
Annual Report on
Form 10-K
filed on March 25, 2010).
|
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23
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.1*
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Consent of EisnerAmper LLP (formerly known as Eisner LLP),
Independent Registered Public Accountants
|
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23
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.2*
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Consent of KPMG LLP, Independent Registered Public Accountants
|
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23
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.3***
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Consent of Ardour Capital Investments, LLC
|
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23
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.4**
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Consent of Marshall & Stevens, Inc.
|
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23
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.5***
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Consent of Houlihan and Smith
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23
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.6***
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Consent of Finn Dixon & Herling LLP (included as part
of Exhibit 5.1)
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23
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.7*
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Consent of KPMG LLP (included as part of Exhibit 8.1)
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24
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.1
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Power of Attorney (included on signature page of
Form S-4
(No. 333-166865)
filed on May 14, 2010)
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99
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.1***
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Consent of Bernard H. Cherry
|
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99
|
.2***
|
|
Consent of Alexander Ellis, III
|
|
99
|
.3***
|
|
Consent of Charles R. Engles, Ph.D.
|
|
99
|
.4***
|
|
Consent of Charles F. Call
|
|
99
|
.5*
|
|
Clean Diesel Proxy Card
|
|
99
|
.6*
|
|
CSI Proxy Card
|
|
99
|
.7*
|
|
Consent of Timothy Rogers
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Previously filed with the Registration Statement on
Form S-4
(No. 333-166865),
which was filed with the Securities and Exchange Commission on
May 14, 2010. |
|
|
|
*** |
|
Previously filed with Amendment No. 1 to the Registration
Statement on
Form S-4/A
(No. 333-166865),
which was filed with the Securities and Exchange Commission on
July 22, 2010. |
II-2
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-3
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 30
day of August, 2010.
CLEAN DIESEL TECHNOLOGIES, INC.
Michael L. Asmussen
President
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)
|
|
August 30, 2010
|
|
|
|
|
|
/s/ John
B. Wynne, Jr.
John
B. Wynne, Jr.
|
|
Interim Chief Financial Officer, Vice President and Treasurer
(Principal Financial Officer)
|
|
August 30, 2010
|
|
|
|
|
|
/s/ Frank
J. Gallucci
Frank
J. Gallucci
|
|
Director
|
|
August 30, 2010
|
|
|
|
|
|
*
Derek
R. Gray
|
|
Director
|
|
August 30, 2010
|
|
|
|
|
|
*
Charles
W. Grinnell
|
|
Director, Vice President and Corporate Secretary
|
|
August 30, 2010
|
|
|
|
|
|
*
David
F. Merrion
|
|
Director
|
|
August 30, 2010
|
|
|
|
|
|
*
Mungo
Park
|
|
Director, Non-Executive Chairman of the Board of Directors
|
|
August 30, 2010
|
|
|
|
|
|
/s/ David
W. Whitwell
David
W. Whitwell
|
|
Director
|
|
August 30, 2010
|
|
|
|
|
|
|
|
*By
|
|
/s/ Michael
L. Asmussen
Michael
L. Asmussen
Attorney-in-Fact
|
|
|
|
|
II-4
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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Frank
J. Gallucci
Frank
J. Gallucci
|
|
Director
|
|
August 30, 2010
|
|
|
|
|
|
/s/ David
W. Whitwell
David
W. Whitwell
|
|
Director
|
|
August 30, 2010
|
II-5
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1*
|
|
Merger Agreement (attached as Annex A to this
Form S-4/A)
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of Clean Diesel dated as
of March 21, 2007 (incorporated by reference to
Exhibit 3(i)(a) to Clean Diesels Annual Report on
Form 10-K
filed on March 30, 2007).
|
|
3
|
.2*
|
|
Proposed Certificate of Amendment to Clean Diesel Certificate of
Incorporation (attached as Annex B to this
Form S-4/A)
|
|
3
|
.3
|
|
Certificate of Amendment to Clean Diesel Restated Certificate of
Incorporation dated as of June 15, 2007 (incorporated by
reference to Exhibit 3(i)(b) to Clean Diesels
Registration Statement on
Form S-1
(No. 333-144201)
dated on June 29, 2007)
|
|
3
|
.4
|
|
Certificate of Elimination of Clean Diesels Series A
Convertible Preferred Stock dated June 18, 2004
(incorporated by reference to Exhibit to Clean Diesels
Registration Statement on
Form S-8
(No. 333-117057)
dated July 1, 2004)
|
|
3
|
.5
|
|
Clean Diesels By-Laws as amended through November 6,
2008 (incorporated by reference to Exhibit 3.1 to Clean
Diesels Quarterly Report on
Form 10-Q
filed on November 10, 2008)
|
|
4
|
.1*
|
|
Proposed Form of Warrant Certificate (attached as Annex G
to this
Form S-4/A)
|
|
5
|
.1***
|
|
Opinion of Finn Dixon & Herling LLP
|
|
8
|
.1*
|
|
Form of tax opinion
|
|
10
|
.1***
|
|
Transition Services Agreement, dated June 30, 2010, between
Charles W. Grinnell and Clean Diesel
|
|
10
|
.3*
|
|
Employment Agreement, dated October 17, 2006, between
Charles F. Call and CSI
|
|
10
|
.4*
|
|
Employment Agreement, dated July 9, 2008, between
Nikhil A. Mehta and CSI
|
|
10
|
.5*
|
|
Employment Agreement, dated October 17, 2006, between
Stephen J. Golden, Ph.D., and CSI
|
|
21
|
|
|
Subsidiaries (incorporated by reference to Exhibit 21 to
Annual Report on
Form 10-K
filed on March 25, 2010).
|
|
23
|
.1*
|
|
Consent of EisnerAmper LLP (formerly known as 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 Houlihan and Smith
|
|
23
|
.6***
|
|
Consent of Finn Dixon & Herling LLP (included as part
of Exhibit 5.1)
|
|
23
|
.7*
|
|
Consent of KPMG LLP (included as part of Exhibit 8.1)
|
|
24
|
.1
|
|
Power of Attorney (included on signature page of
Form S-4
(No. 333-166865)
filed on May 14, 2010)
|
|
99
|
.1***
|
|
Consent of Bernard H. Cherry
|
|
99
|
.2***
|
|
Consent of Alexander Ellis, III
|
|
99
|
.3***
|
|
Consent of Charles R. Engles, Ph.D.
|
|
99
|
.4***
|
|
Consent of Charles F. Call
|
|
99
|
.5*
|
|
Clean Diesel Proxy Card
|
|
99
|
.6*
|
|
CSI Proxy Card
|
|
99
|
.7*
|
|
Consent of Timothy Rogers
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Previously filed with the Registration Statement on
Form S-4
(No. 333-166865),
which was filed with the Securities and Exchange Commission on
May 14, 2010. |
|
|
|
*** |
|
Previously filed with Amendment No. 1 to the Registration
Statement on
Form S-4/A
(No. 333-166865),
which was filed with the Securities and Exchange Commission on
July 22, 2010. |