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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No. 0-20404
December 31, 1996
ENVIROGEN, INC.
(Registrant)
Delaware 22-2899415
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(State of Incorporation) (IRS Employer Identification No.)
4100 Quakerbridge Road
Lawrenceville, NJ 08648
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(Address of principal executive (Zip code)
offices)
Registrant's telephone number, including area code: (609) 936-9300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share Common Stock Purchase Warrants
- -------------------------------------- ------------------------------
(Title of Class) (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
The aggregate market value of the registrant's Common Stock (its only
voting stock) held by non-affiliates of the registrant as of February 28, 1997
was approximately $25,747,700. (Reference is made to p. 14 herein for a
statement of the assumptions upon which this calculation is based.)
The number of shares of the registrant's Common Stock outstanding as of
February 28, 1997 was 12,873,340.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating to
its scheduled April 9, 1997 Annual Meeting of Stockholders (which proxy
statement is expected to be filed with the Commission not later than 120 days
after the end of the registrant's last fiscal year) are incorporated by
reference in Part III of this report.
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PART I
ITEM 1. BUSINESS
Envirogen, Inc. ("Envirogen" or the "Company") is an environmental biotechnology
company combining unique scientific, engineering and management expertise to
provide innovative solutions for treating hazardous wastes. Envirogen's
strategic approach includes isolating natural organisms, enhancing their
performance, and then developing engineered systems to optimize their activity
for biodegradation. Envirogen also employs complementary, non-biological
technologies where the combinations produce synergistic results. Envirogen
offers solutions for both pollution prevention and remediation problems of
corporations and government agencies.
Envirogen's capabilities mirror the needs of the marketplace, and its
acceleration into commercial activity could not be more timely. The
Environmental Protection Agency (the "EPA") is currently believed to be more
receptive to innovative approaches than at any time before. In addition, new
regulations that create more stringent requirements for chemical releases, and
that now require the destruction of specific, difficult compounds, have produced
a need for new biological systems to cost-effectively meet these standards.
Envirogen's capabilities for providing technologies to reduce remediation and
operating costs, and for destroying recalcitrant contaminants, are well suited
to meet these growing market needs. During 1996, Envirogen spent approximately
$2.4 million on research and development projects.
GROWTH STRATEGY
Envirogen remains confident in its mission to provide innovative, economic
solutions for both the prevention and remediation of hazardous wastes. Over the
past several years, Envirogen has developed its business systems and
successfully expanded its marketing and sales efforts, resulting in a rapid
acceleration of commercial sales. In addition to this internal growth strategy,
Envirogen has developed and is implementing an external growth strategy to
accelerate revenue growth and the commercialization of its technologies. This
external growth strategy includes selectively acquiring companies with
complementary, non-biological technologies aimed at producing synergistic
results, as well as entering into joint ventures and collaborative arrangements
with major firms that are interested in exploring and developing alternative
remediation and pollution prevention technologies. In connection with this
external growth strategy, Envirogen has accomplished the following in the past
24 months:
. Formed a joint venture with nv VAM of the Netherlands to supply
advanced biofiltration systems and services for the treatment of
odors, air toxics and volatile organic contaminants to the air
pollution control market;
. Acquired MWR, Inc. of Lansing, Michigan, a leading provider of in situ
remediation services with particular expertise in soil vapor
extraction and with 1996 revenues of approximately $4 million;
. Entered into a three-year collaborative marketing agreement with Dow
Environmental Inc., a division of Dow Chemical Company of Midland,
Michigan, to pursue specific remediation and pollution prevention
opportunities; and
. Entered into a development agreement with Rhone-Poulenc Inc. to
develop and supply advanced high-performance biological technologies
and systems for the industrial wastewater treatment market.
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Consistent with this strategy, Envirogen has entered into a Merger Agreement to
acquire Fluid Management, Inc. ("FMI"), a full-service environmental consulting
and engineering firm with revenues of approximately $21.6 million and pre-tax
net income of approximately $4.3 million during 1996. See Item 7 of this report
(Management's Discussion and Analysis of Financial Condition and Results of
Operations) and Note 1 of the Company's consolidated financial statements
appearing elsewhere in this report.
THE TECHNOLOGIES
The distinctiveness of Envirogen's technologies is based on two elements: 1)
microorganisms (biocatalysts) with exceptional degradative abilities; and 2)
engineered systems, including proprietary bioreactors and processes, to mix in a
controlled environment its microorganisms with contaminated air, water, or soil
to maximize the degradative properties of the microorganisms. To achieve this
goal, Envirogen has conducted extensive testing of microorganisms and
bioreactors and has assembled a staff of scientists, engineers and consultants
with expertise in biochemistry, molecular biology, microbiology, chemical and
mechanical engineering and systems design.
Microorganisms
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Envirogen's biodegradation processes are based on naturally occurring
microorganisms that are found in soil, water and sediments at the hazardous
waste site or are transported to the site for controlled usage by Envirogen.
The microorganisms under development primarily are bacteria, which are
microscopic, single-cell organisms that under defined conditions can break down
contaminants into simpler substances to support the organism's growth. For
example, if the contaminant is benzene, the byproducts from its complete
degradation are carbon dioxide and water. In other cases, for example
trichloroethylene ("TCE"), microorganisms may break down a contaminant without
supporting the organism's growth in a process called cometabolism, resulting in
carbon dioxide, water and chloride salts.
There are naturally occurring bacteria capable of degrading nearly all natural
organic compounds. However, highly effective naturally occurring bacteria
capable of degrading many of the synthetic substances (such as polychlorinated
biphenyls ("PCBs") and TCE) are not as common and can be difficult to utilize.
These synthetic compounds were designed to be chemically stable, which means
that it may take years before they are naturally degraded.
Envirogen has isolated natural strains of bacteria that partially or completely
degrade or accelerate the degradation of a number of recalcitrant hazardous
wastes, including PCBs, TCE, chloroform and other chlorinated solvents, methyl
tertiary butyl ether ("MTBE," a gasoline octane enhancer),
hydrochlorofluorocarbons ("HCFCs," ozone-depleting refrigerants) and polycyclic
aromatic hydrocarbons ("PAHs"). These bacteria have been isolated using
specialized enrichment techniques that allow Envirogen to select, isolate and
optimize the superior strains from the general population of bacteria found at
the sites. Envirogen is also designing and testing genetically-modified bacteria
that may have several advantages over naturally occurring bacteria. These
advantages include the ability to degrade wastes faster and to lower
concentration levels, reducing the overall cost of biodegradation.
Engineered Systems
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Envirogen has designed and constructed several different engineered systems
using bioreactors to enhance the biodegradative capabilities of the
microorganisms when they make contact with the contaminated air, water or soil.
By using a bioreactor, variables such as temperature and pH (acidity or
alkalinity) can be
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controlled, and measured amounts of oxygen and nutrients can be added to the
mixture of microorganisms and contaminated materials, thereby optimizing the
degradation environment.
Envirogen believes that the engineering and design of a variety of bioreactors
is an important factor in its ability to develop and sell commercially viable
systems for the biodegradation of hazardous wastes. The design of a bioreactor
to be used at a particular site will depend on the types of wastes to be
degraded, the media (e.g., soil type) in which the wastes are located, the
concentration of the targeted waste and the combination of other chemical wastes
associated with the targeted waste. Envirogen continues to develop and test
bench-scale and pilot-scale bioreactors utilizing naturally occurring and
genetically-modified bacteria for the degradation of PCE, TCE, MTBE, air toxics,
industrial wastewater effluents, and groundwater contaminants and has conducted
field trials with pilot-scale bioreactors for the degradation of industrial air
toxics, soil and groundwater contaminants, and industrial wastewater streams.
In 1996, Envirogen successfully completed a field demonstration of its MTBE
bioremediation technologies, utilizing a reactor based system for contaminated
groundwater. The system included a ceramic membrane subsystem supplied by
Rhone-Poulenc.
BUSINESS AREAS
Envirogen is organized along three separate but interrelated product areas
consistent with the three states of matter: soils/sediments (solids), water
(liquids) and air (gases). Each specific product area is described below:
SOILS
Commercial Programs
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Hydrocarbons
Many of industry's environmental problems are the result of the release of
simple hydrocarbons. When pollutants such as gasoline or heating oil are
spilled into the environment, indigenous soil bacteria may quickly adapt to this
new "food source" and begin the biodegradation process to break down the
contaminant into its core components of carbon and hydrogen. The efforts of
Envirogen's technical team are aimed at optimizing this natural process and
therefore accelerating the cleanup of the site. This optimization requires the
control of such variables as temperature and pH, and the control and delivery of
nutrients and oxygen.
Substantial cost reductions can be realized by the destruction of these
contaminants in situ (in place). To realize effective in situ remediation
requires an understanding of efficient microbial activity combined with
engineered control and delivery systems. Envirogen's acquisition of Vapex
Environmental Technologies, Inc. in 1991 was aimed at developing the capability
to use the underground as a bioreactor for in situ contaminant destruction. The
results of this unique combination of engineering and scientific capabilities is
apparent with Envirogen receiving awards as prime contractor for the cleanup of
several Superfund sites for groups of prestigious Fortune 100 clients. The
success of the Vapex acquisition prompted Envirogen to acquire MWR in February
1996. MWR has very similar engineering capabilities to those offered by
Envirogen but offers different geographical and client coverage. Envirogen, by
leveraging its engineering and scientific capabilities through its existing
business and the newly-acquired MWR operation, made significant progress in 1996
in expanding both its client base and geographic coverage.
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Nitroaromatics
Envirogen has continued to develop technologies to biodegrade such nitroaromatic
contaminants as the herbicide dinoseb and the explosive trinitrotoluene (TNT).
Nitroaromatics have become serious environmental problems at many military
installations worldwide where explosives are manufactured and stored, and in
agricultural areas where pesticides have been in widespread use. Efforts in
this area have included a collaborative marketing agreement with the J.R.
Simplot Company, as well as the ongoing development and marketing of Envirogen's
own technologies.
Developmental Programs
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PCBs
PCBs are a family of compounds that have been used extensively in many
industrial applications, which included electrical fluids, hydraulic fluids,
paints, cutting oils, antidusting agents and others. The discovery of
widespread environmental impact and concerns due to their toxicity and hazardous
effects on ecosystems led to a ban on the use and production of PCBs in 1979.
In spite of this ban, PCBs continue to persist in the environment due to their
low water solubility, strong adsorption to soils or sediments, low volatility
and low chemical reactivity. These qualities, which made PCBs so attractive to
industry, are precisely the qualities that make PCBs so persistent in the
environment. The United States General Accounting Office has estimated that 150
million pounds of PCB wastes have entered the environment.
Today the accepted means of disposal of PCBs are incineration or landfilling.
Landfilling transfers the problem from one site to another without destroying
the PCBs, and incineration is extremely costly. Heeding the call for more
economical and effective solutions, Envirogen has been developing alternative
remedial technologies for PCB cleanups.
Microbiology and process engineering have played a key role in Envirogen's goal
of producing a commercial PCB destruction technology. The scientific challenge
is that PCBs remain persistent in the environment because they are resistant to
microbial degradation. Expanding on work begun at General Electric and several
university laboratories, Envirogen has isolated superior and novel strains of
PCB-degrading microorganisms, has established conditions for optimal microbial
activity, and has explored the potential barrier-breaking advantages of
genetically-modified bacterial strains.
Systems engineering has played a vital role in developing commercially viable,
cost-effective systems for the biodegradation of PCBs. Envirogen has developed
soil slurry bioreactors that are designed to use superior strains of
microorganisms for on-site destruction of PCBs. In addition, Envirogen is
aggressively pursuing in situ applications, which offer the most cost-effective
solution to the destruction of PCBs. Field testing of both in situ and ex situ
biotreatment techniques have been completed. Finally, Envirogen has engineered
and patented a novel solid phase extraction process, called SoPE(TM), which can
be used as a stand-alone treatment or in conjunction with bioremediation. Field
tests of SoPE(TM) successfully demonstrated the efficacy and cost benefits of
this technology. Envirogen is currently discussing commercial opportunities for
the SoPE(TM) process with several clients.
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Advanced Technologies
Envirogen's commitment to developing leading edge technologies is nowhere more
evident than in the advanced technology development areas. The development of
advanced technology not only serves to provide new business opportunities for
Envirogen, but has also helped establish Envirogen as the leader in
environmental biotechnology. One of the major areas of focus for this program
has been the development and testing of advanced in situ bioremediation
technologies such as bioaugmentation, whereby highly efficient microorganisms
are injected directly into a contaminated aquifer. In 1996, Envirogen
successfully demonstrated this technology, in combination with complementary
delivery technologies, at two sites, one of which was for a Fortune 100
petroleum company. This work for the Fortune 100 petroleum company is
significant because it is for the destruction of chlorinated organics at a
geologically-complex site. Additional field tests are underway for the U.S. Air
Force at the other site.
As mentioned earlier, economic factors have forced pollution generators to seek
lower-cost alternatives to their hazardous waste problems. In particular,
various agencies of the federal government have been early and strong supporters
of innovative technologies aimed at achieving this goal. This support is
evident through the government's Small Business Innovation Research (SBIR)
program, which awards grants of various sums to companies for specific areas of
research and development. Envirogen was awarded three two-year Phase II SBIR
contracts in 1995, one in 1996, one in 1997 and one more is scheduled to start
early in 1997 for the development of advanced technologies. One SBIR, for the
Department of Defense, is to develop and test specialized microorganisms for
destroying chlorinated solvents, the most significant class of groundwater
contaminants in the United States. Another SBIR, for the Department of Energy,
is for the development of gene probe technology to improve and document in situ
bioremediation. The third SBIR, for the National Science Foundation, is for
the development of a system to degrade the ozone-depleting chemicals, HCFCs.
The fourth SBIR, for the Department of Defense, is for the development and
testing of biofiltration technology for toxic and odorous air-borne chemicals.
These examples, along with many other existing projects still under development,
all lay the scientific groundwork which, when combined with appropriate
engineered systems, lead the way to safer, more responsive commercial
applications. The result is a cleaner environment achieved with cost-savings
for the end-user.
WATER
Commercial Program
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The enforcement of more rigorous regulations has created a need for specialized
bioreactor systems and biocatalysts to degrade difficult contaminants in
groundwater and industrial effluent streams. Envirogen is taking advantage of
this favorable market situation to provide high performance aqueous bioreactor
systems, including fluidized bed reactors and membrane bioreactors ("MBRs"). To
increase its momentum in the water treatment program, Envirogen signed an
agreement with Rhone-Poulenc in November 1996 to work collaboratively to
commercialize and market MBRs. Following an 18-month business development
period, the agreement calls for the two parties to form a joint venture.
Envirogen is contributing its expertise in the biological treatment of
wastewater with particular emphasis on its high-performance bioreactors, such as
the membrane and fluidized bed bioreactors. Rhone-Poulenc is supplying
marketing, project and engineering support as well as membrane systems to the
project. Envirogen and Rhone-Poulenc have already conducted joint sales
training, design, cost estimating and marketing efforts and are currently
working on projects that integrate their respective technologies.
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Envirogen, with its advanced knowledge of biocatalysis, is able to determine
which microorganism is appropriate to degrade a specific contaminant and combine
the right microorganism with the right bioreactor design, based on specific
operational guidelines, to optimize the destruction of that contaminant. The
combination of system improvements and specialized microorganisms is providing
Envirogen's clients with smaller, and therefore less costly, equipment with
lower operating costs than is achievable with conventional systems such as
incineration and carbon adsorption. These system improvements and specialized
microorganisms allow Envirogen to address difficult contaminant and performance
requirements more effectively than can be done with conventional systems.
Envirogen's development efforts have included the commercialization of the
fluidized bed reactor system ("FBR"), which effectively destroys recalcitrant
compounds in water streams at costs lower than conventional technologies.
Several years of laboratory development and successful field demonstrations of
this process resulted in the sale of Envirogen's first full-scale FBR in 1994.
The design, delivery and installation of this $1.2 million system for aniline
and nitrobenzene destruction from groundwater was completed in 1996 at an
industrial site in New Jersey. Start-up of this system is expected to be
completed in 1997. It was estimated by the client that this system will save at
least $1.8 million in capital and operating costs during the life of the project
when compared to conventional technologies. Envirogen completed installation in
1996 of another FBR at Wright-Patterson Air Force Base for the destruction of
chlorinated solvents and other hydrocarbons in groundwater. In 1996, Envirogen
also completed the process engineering and design of a large FBR for industrial
wastewater treatment for a Fortune 100 petrochemical company.
The Rhone-Poulenc agreement will also build upon Envirogen's technological
breakthrough of degrading MTBE in an economical membrane bioreactor system,
designed and built in collaboration with Rhone-Poulenc, using their membranes.
Envirogen has successfully demonstrated the system for a Fortune 100 oil company
in Texas and has also completed the design of a full-scale system. This
breakthrough is significant because no economical removal technology is known to
exist for MTBE.
Developmental Program
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TCE, a suspected carcinogen, is one of the most prevalent contaminants in
groundwater, yet is often highly resistant to natural biodegradation. Envirogen
began a program targeting TCE destruction with a technology license from Amgen.
The program progressed through reactor design and scale-up and resulted in a
successful field demonstration at Robins Air Force Base. This work continued in
1996 with the successful completion of a project at the F.E. Warren Air Force
Base to develop a technology to treat soil vapors contaminated with TCE and
other chlorinated solvents. This contract was funded by the Air Force Center
for Environmental Excellence. Envirogen continues to develop technologies
targeting TCE destruction under funding from the U.S. Air Force.
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AIR
The biological control of airborne toxic compounds is now beginning to be
recognized in the United States as a cost effective alternative to physical and
chemical treatment methods such as incineration, adsorption, and wet chemical
scrubbing. Biotreatment of easier to degrade compounds, such as odor-causing
hydrogen sulfide, has been commercially successful in Europe for more than ten
years.
Motivated by the 1990 Clean Air Act Amendments ("CAAA"), which increasingly
regulate toxic organic compound releases, Envirogen has embarked upon a program
to commercialize biotechnology to treat both odor-causing chemicals and volatile
organic compounds. After a series of laboratory and field pilot projects,
Envirogen understands the optimal conditions required by naturally occurring
microorganisms to effectively degrade organic compounds listed under the CAAA.
During the early 1990's, Envirogen targeted specific contaminants such as
hydrogen sulfide, carbon disulfide, styrene, terpenes, alcohol, aldehydes,
isobutane, isopentane, the mixed solvents associated with the printing and
surface coating industries, and hydrocarbons associated with remediation. These
early projects resulted in two full-scale bioreactor designs: the biofilter and
the biotrickling filter.
In biofiltration systems, microorganisms in the form of a moistened biofilm
layer attached to an organic, porous filter substrate, are used to catalyze
beneficial chemical reactions. As a contaminated vapor stream passes through
the filter bed, pollutants are transferred from the vapor to the biolayer and
are consumed by the microorganisms. Biotrickling filters are similar to
biofilters, but contain a synthetic packing material instead of compost or peat,
and operate with a greater liquid flow over the packing to facilitate mass
transfer. The biotrickling filter expands the benefits and capabilities of
biofiltration systems with certain contaminants.
As a result of Envirogen's experience with the destruction of hydrogen sulfide
and carbon disulfide, Envirogen was awarded a contract from the Nylonge
Corporation, a synthetic sponge manufacturer located in Ohio, to design and
install a biofiltration system to control a 30,000 cfm exhaust air flow. The
system suffered a shutdown in January 1996 shortly after installation which the
Company believes was primarily caused by a failure of internal grating material
supplied by third parties. Throughout 1996 Envirogen investigated the cause of
the failure, redesigned the internal grating and rebuilt and restarted the
system at a cost of approximately $650,000. While the ultimate responsibility
for this cost has not yet been determined, Envirogen is actively pursuing
reimbursement of these expenses from third parties.
Envirogen also received an order from ABTco, a decorative hardwood panel
manufacturer, to design and construct a $1,800,000 biofiltration system at its
Michigan facility. In 1996, this system was completed and is now fully
operational. The system processes 50,000 cfm of air and is the first operating
biofilter in the forest products industry in the U.S. Additionally, Envirogen
has commercialized the biotrickling filter technology for styrene applications,
for isopentane and isobutane used as the blowing agents in foam manufacturing,
and for other selected chemical compounds. Envirogen is also field testing the
biotrickling filter for a large chemical company for the treatment of a methyl
chloride stream.
In May 1995, Envirogen formed a joint venture with nv VAM of the Netherlands to
expand and enhance Envirogen's portfolio of air treatment products and services.
The venture company, CVT America LLC, is owned 50% by Envirogen and 50% by VAM
and provides patented modular biofiltration systems and other services for the
treatment of odors, air toxics and volatile organic contaminants to specific
segments of the air pollution control market. Envirogen and VAM, which has a
well-established presence in the European biofiltration market, have combined
their complementary biotreatment capabilities to provide a leadership position
in the air pollution control market. CVT America realized initial revenues in
1995
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on sales of its products and services and substantially increased its revenues
in 1996. CVT America signed an agreement in 1996 with Davis Water, now a
division of U.S. Filter, pursuant to which CVT provides biofilters to Davis
Water to cover specific market segments. The agreement has already resulted in
several systems sales, and CVT America began recognizing revenue from such sales
in January 1997.
GOVERNMENTAL REGULATION
The federal and state environmental laws regulating Envirogen's current and
proposed biodegradation systems are complex, subject to varying interpretations
and continually evolving. Compliance with these laws, rules and regulations is
expected to be time consuming and expensive. Any failure to comply with these
requirements, even if unintentional, could give rise to liabilities, penalties
or fines that could materially adversely affect Envirogen's financial condition
and its reputation.
Under the Toxic Substances Control Act ("TSCA"), the EPA has the authority to
regulate the use of chemicals for commercial purposes. A premanufacture notice
("PMN") is required to be filed with the EPA 90 days in advance of the
manufacture for commercial purposes of any "new" chemical substance. To date,
the EPA has not asserted that isolated strains of naturally-occurring
microorganisms are chemical substances under TSCA. Since 1986, however,
genetically-modified microorganisms, with certain limited exceptions, have been
considered "new" chemical substances by the EPA. As a result, Envirogen's
manufacture of genetically-modified microorganisms for commercial use or the
release of genetically-modified microorganisms into the environment will require
the filing of a PMN, subject Envirogen to the EPA's premanufacturing review
process and require the development of risk assessment information. Depending on
the nature of the microorganism, this process may be time-consuming and costly.
Envirogen has been advised by the EPA that Envirogen's proposed use of
genetically-modified microorganisms in a bioreactor is a "contained" use for
purposes of research and development. The EPA has proposed new regulations for
its TSCA biotechnology program that if adopted, would define the criteria under
which the use of genetically-modified microorganisms in a bioreactor will be
considered "contained." If the regulations are adopted, Envirogen believes the
time and cost of obtaining EPA approval for its commercial systems may be
reduced. Envirogen continues to monitor regulatory approvals required by the
EPA under TSCA and by various state and local authorities related to Envirogen's
intended use of genetically-modified bacteria.
Recombinant DNA research conducted with grants from the National Institute of
Health ("NIH") must comply with NIH's Guidelines for Research Involving
Recombinant DNA Molecules (the "Guidelines"). Although compliance with the
Guidelines is not currently mandated for entities that do not receive any NIH
funding, Envirogen has conducted its research involving genetically-modified
microorganisms in compliance with the Guidelines. The Guidelines prohibit or
restrict certain recombinant DNA experiments, set forth levels of biological and
physical containment of recombinant DNA molecules for various types of research
and require that institutional biosafety committees, composed of representatives
of Envirogen and the public, approve certain experiments before they are
initiated.
Envirogen's research and development activities on PCBs currently require a
permit under TSCA, and certain of its other research activities on other
hazardous substances require state permits. These permits have been obtained.
Additionally, other permits may be required from the EPA and various state and
local agencies in connection with the installation, use or operation of
Envirogen's biodegradation systems.
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Envirogen's biodegradation systems, whether used at a hazardous waste
generator's facility or at a hazardous waste site, also may be subject to
permitting under the Resource Conservation and Recovery Act ("RCRA") as a
Treatment, Storage or Disposal Facility ("TSD facility"). The field
demonstration of a bioreactor system may also require a permit under RCRA.
Obtaining a TSD facility permit can be a time consuming and expensive process,
requiring considerable documentation, including process information, waste
specifications and information regarding compliance assessments, security
procedures, emergency plans and insurance, as well as local public hearings.
Local public opposition may delay the issuance of a TSD facility permit for a
number of years or even cause the EPA to deny the permit.
Envirogen's systems may also be subject to other environmental regulations
including mandatory destruction levels and prohibitions on the release of
significant levels of hazardous wastes into the environment.
Envirogen's vapor extraction technology is subject to strict enforcement of
various EPA and state environmental regulations and various site specific
permitting requirements. EPA or state regulatory agency review of the remedial
action plan is a prerequisite to installation of a full-scale vapor extraction
system. In addition, the vapor extraction system must comply with federal and
state air and water pollution control standards and an air emissions permit is
often required. In some instances, the system will require a permit in order to
discharge the treated waste stream into ground or surface waters.
Federal and state safety and health regulations require Envirogen to train its
employees for work at hazardous waste sites and require the preparation of
health and safety plans for each individual project.
Management believes that Envirogen is in compliance with all material regulatory
requirements.
COMPETITION
The environmental remediation industry is highly fragmented and competitive.
Competitors include engineering and construction firms, environmental management
service firms and specialized technology companies, including companies focusing
on developing advanced biological remediation technologies similar to
Envirogen's technologies. As technological advances are made and become more
widely known, the larger environmental firms may acquire these companies and
technologies and offer such technologies as part of an overall solution to a
hazardous waste remediation project. Because these companies have significantly
greater financial resources than Envirogen and can offer a wider range of
services, Envirogen may be at a competitive disadvantage.
In general, competition in the hazardous waste management industry is based
primarily upon the cost of the volume of waste treated, contained or removed.
Where the waste is removed, customers are typically charged on a per ton basis
on contaminated soil excavated and transported to a hazardous waste landfill.
Additional competitive factors include corporate presence in a geographic area,
regulatory support, performance standards and technical reliability and
competence. Envirogen's competitive position is premised upon the lower-cost
treatment approach traditionally associated with conventional biodegradation
techniques, but focus upon Envirogen's distinctive approach to degrading
recalcitrant hazardous waste.
Certain environmental companies offer full-service, turn-key approaches that are
capable of providing an overall solution to a hazardous waste remediation
project. Where appropriate, Envirogen teams with larger environmental service
firms to offer consulting, engineering, project management, materials handling
and other complementary techniques that are provided by the larger firm in
conjunction with Envirogen's biodegradation technology. To date, Envirogen has
been able to establish acceptable levels of such teaming arrangements on
satisfactory terms.
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In response to the search for alternatives to incineration, deep-well injection
and hazardous waste landfills, various developmental chemical and physical
treatment technologies are being explored by sources within industry, university
research centers and the EPA. Any of these alternative technologies, if found
to be effective and cost efficient, may directly or indirectly compete with
Envirogen's technologies. Certain present remediation alternatives are under
regulatory review and, as in the case of incineration, their availability may be
limited or restricted in the future, thereby increasing the need to develop
acceptable alternatives.
Envirogen is aware of a number of potential competitors seeking to develop
commercial systems employing biological degradation technology, many of which
have considerably greater financial resources than Envirogen. Some of these
companies are focusing directly on the enhancement of the degradative activities
of indigenous microorganisms, and some have isolated strains of microorganisms
that alone or in combination with other isolated strains of bacteria will
degrade certain hazardous wastes. Envirogen does not expect that other entities
seeking solely to enhance conventional biological treatment systems will be able
to demonstrate these systems' effectiveness in degrading the more recalcitrant
hazardous chemicals targeted by Envirogen. There are, however, a number of
companies attempting to develop advanced biological treatment techniques similar
to those of Envirogen for treatment of these recalcitrant chemicals. The less
stable hydrocarbon wastes are not particularly difficult to degrade using
conventional biological methods, and Envirogen expects greater competition in
that market sector.
Envirogen is aware of other companies that have targeted the biodegradation of
TCE and have performed various degrees of testing. Envirogen is not aware of
any competitor that has had substantial positive results in the biodegradation
of PCB wastes, although Envirogen believes that various companies have targeted
the PCB biodegradation market. Envirogen is aware of and expects continued
competition in the areas of remediation of industrial air toxics, industrial
wastewaters, groundwater and nitroaromatics.
In addition, there are a significant number of companies that offer soil vapor
extraction and related remediation services. The EPA has rated soil vapor
extraction as one of the top innovative technologies. Changes in governmental
regulations, the enforcement of regulations or advances in technology may result
in a decrease in the demand for vapor extraction services or affect the
competitive environment in which Envirogen operates.
EMPLOYEES
As of December 31, 1996, Envirogen had 100 full-time employees, including 40 in
engineering, 24 in research and development, 22 in administration and finance
and 14 in marketing. Doctoral degrees are held by ten employees and encompass
the disciplines of biochemistry, molecular biology, chemical engineering,
microbiology and microbial physiology. Each of Envirogen's key employees is
subject to a confidentiality agreement with Envirogen covering Envirogen's
processes and plans relating to its business and activities. Envirogen is not
subject to any collective bargaining agreements and believes that its
relationship with its employees is excellent.
11
<PAGE>
ENVIRONMENTAL LIABILITY AND INSURANCE
Envirogen could be held strictly liable under various laws and regulations if
microorganisms or hazardous wastes cause harm to humans or the environment, even
if Envirogen were not negligent. Although Envirogen has a $5,000,000 combined
professional liability and contractor's pollution liability insurance program
that also provides limited product liability coverage, there can be no
assurance that environmental liabilities that may be incurred by Envirogen will
be covered by its insurance or that the dollar amount of covered liabilities
will not exceed policy limits. Accordingly, a partially or completely uninsured
judgment against Envirogen could have a materially adverse effect on Envirogen.
Liability insurance market conditions may make it impossible or uneconomical for
Envirogen to obtain combined professional and contractor's pollution liability
or product liability insurance, which may adversely affect its ability to market
its products and services. Although Envirogen attempts to mitigate some of the
uninsured risks by typically not taking title to its customers' waste or
transporting such waste, such measures are not sufficient to avoid all potential
liability.
Envirogen may be required to indemnify its customers against losses and fines
associated with work under certain of its contracts in the event that
Envirogen's performance under such contract or contracts is faulty or not
conducted in compliance with deadlines. Although Envirogen will make every
effort to mitigate losses under indemnification clauses contained in its
contracts, a claim, if successful and of sufficient magnitude, could have a
materially adverse effect on the business or financial condition of Envirogen.
ITEM 2. PROPERTIES
Envirogen's headquarters and Midatlantic Operations Group are located in
Lawrenceville, New Jersey, where it leases 35,000 square feet of office space
for its administrative, laboratory and pilot facilities. Envirogen leases
27,000 square feet of office and warehouse space in Lansing, Michigan for its
MWR Operations Group. Envirogen also leases 10,400 square feet of office space
in Canton, Massachusetts for its Northeast Operations Group. Another 2,200
square feet of office space is leased in Houston, Texas for its Gulf Coast
Operations Group. Management believes that Envirogen's facilities are adequate
and suitable for Envirogen's current and proposed operations for the immediately
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Envirogen knows of no material litigation or other legal proceedings pending or
threatened to which it is, or may become, a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
12
<PAGE>
ADDITIONAL INFORMATION
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company serve at the discretion of the Board of
Directors. There are no family relationships between any of the executive
officers of the Company. The following information indicates the position and
age of the Company's executive officers as of the date of this report and their
previous business experience.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Harcharan S. Gill, Ph.D. 56 President, Chief Executive Officer and Director
Ronald Unterman, Ph.D. 51 Vice President and Chief Scientific Officer
David N. Enegess 50 Vice President-Marketing and Commercial
Development
</TABLE>
Harcharan S. Gill has been a director, President and Chief Executive Officer of
the Company since August 1994. Prior to joining the Company, from 1971 to July
1994, Dr. Gill held a number of positions with Dames & Moore, a leading
environmental engineering company. From February 1988 to March 1991, he was
General Manager in Toronto, Canada of Trow Dames & Moore, a joint venture of
Trow Consulting Engineers and Dames & Moore. From April 1991 to March 1992, he
returned to the United States in the capacity as General Manager of the Dames &
Moore Florida and Caribbean Region. After Dames & Moore became a public company
in 1992, Dr. Gill was Vice President and General Manager of Dames & Moore's
Southern Region, and from April 1994 until July 1994, he served as Vice
President in Dames & Moore's Corporate Development Group. Dr. Gill received a
Ph.D. in Civil Engineering from Cornell University.
Ronald Unterman is a founder of the Company and was Vice President of Research
and Development from August 1988 until March 1995, at which time he was
appointed Vice President and Chief Scientific Officer. From 1981 until he joined
the Company, Dr. Unterman served as a staff scientist (from November 1981 to
December 1987) and as a manager (from January 1988 to July 1988) of the
Environmental Technology Program at General Electric Company. His primary area
of research expertise is in the development of methods for biodegrading PCBs.
Dr. Unterman received a B.A. in biology from Haverford College, studied under a
Molecular Biology Fellowship at Rockefeller University and holds a Ph.D. in
biochemistry from Columbia University.
David N. Enegess is a founder of the Company and has been its Vice President of
Marketing and Commercial Development since its incorporation in June 1988. From
1982 until he joined the Company, he served in various capacities, most recently
as Vice President of Corporate Development, for American NuKEM Corporation
(formerly known as WasteChem Corporation), a company which sells equipment,
systems and services for the treatment of hazardous wastes. Mr. Enegess
received his undergraduate and masters degrees in chemical engineering from
Tufts University.
13
<PAGE>
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Envirogen's Common Stock and Common Stock Purchase Warrants are traded in the
Nasdaq SmallCap Market under the symbols "ENVG" and "ENVGW," respectively. Each
Common Stock Purchase Warrant entitles the holder to purchase one-half of one
share of Common Stock at an exercise price of $5.20 per full share, subject to
adjustment, until October 13, 1998. The Common Stock prices are inter-dealer
prices, without retail markup, markdown or commission, and may not necessarily
represent actual transactions. The following table sets forth for the periods
indicated the high and low closing prices for Envirogen's Common Stock as
reported by Nasdaq.
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ----- ----
<S> <C> <C>
1st Quarter $4.00 $2.50
2nd Quarter $4.63 $2.38
3rd Quarter $4.00 $2.13
4th Quarter $3.75 $2.38
1995
----
1st Quarter $1.88 $1.38
2nd Quarter $2.25 $1.75
3rd Quarter $4.25 $1.50
4th Quarter $3.75 $2.50
</TABLE>
The closing price for the Common Stock on February 28, 1997 was $2.63. For
purposes of calculating the aggregate market value of the shares of Common Stock
of the Company held by nonaffiliates, as shown on the cover page of this report,
it has been assumed that all the outstanding shares were held by nonaffiliates
except for the shares held by directors and executive officers of the Company
and stockholders owning 10% or more of outstanding shares. However, this should
not be deemed to constitute an admission that all such persons are, in fact,
affiliates of the Company, or that there are not other persons who may be deemed
to be affiliates of the Company. Further information concerning ownership of
the Company's securities by executive officers, directors and principal
stockholders will be included in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission.
The number of stockholders of record as of December 31, 1996 was approximately
290, which includes stockholders whose shares were held in nominee name. The
number of beneficial stockholders at that date was over 1650.
Envirogen has never declared or paid cash or other dividends on its Common
Stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend upon Envirogen's earnings, capital
requirements, financial condition and other relevant factors. Envirogen
presently intends to retain all earnings, if any, for future use in its business
and does not anticipate paying dividends in the foreseeable future.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected financial data for each of the Company's
last five fiscal years. This data should be read in conjunction with the
Company's consolidated financial statements and related notes appearing
elsewhere in this report and with Item 7 of this report.
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 12,919,594 $ 8,033,698 $ 6,134,577 $ 4,714,752 $ 3,386,459
Costs and expenses 15,689,306 10,279,694 10,503,989 9,879,694 7,693,633
Interest, net 170,783 169,972 111,659 216,696 235,128
Equity in loss of
joint venture (52,629) (93,437) - - -
Other, net 7,601 16,961 - - -
------------- ------------- ------------- ------------- -------------
Net loss (2,643,957) (2,152,500) (4,257,753) (4,948,246) (4,072,046)
Preferred stock
dividends (36,458) (233,333) - - -
------------- ------------- ------------- ------------- -------------
Net loss applicable to
Common Stock ($ 2,680,415) ($ 2,385,833) ($ 4,257,753) ($ 4,948,246) ($ 4,072,046)
============= ============= ============= ============= =============
Net loss per share
applicable to
Common Stock ($0.24) ($0.31) ($0.57) ($0.79) ($0.79)
======= ======= ======= ======= =======
</TABLE>
SUMMARY OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $ 12,716,624 $ 8,585,233 $ 6,704,806 $ 11,945,079 $ 10,505,940
Working capital 7,094,266 4,934,700 3,628,377 8,204,251 8,145,091
Long-term obligations 42,176 60,951 177,704 298,709 175,352
Redeemable convertible
Preferred Stock - 1,728,621 - - -
Stockholders' equity 10,047,233 4,863,357 5,400,207 9,694,715 9,523,971
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in this report.
GENERAL
- -------
The source of the Company's revenues to date includes (i) commercial sales of
the Company's biological degradation systems, (ii) remediation services,
including both in situ and ex situ bioremediation, and (iii) funds received from
third parties and government agencies to conduct specific research and
development programs. While the Company has realized significant commercial
revenues for several years from remediation services, it has only recently seen
the first substantial revenues from sales of full-scale biological degradation
systems for the treatment of contaminated air and water streams. Although great
strides have been made in the commercialization of these systems, significant
expenditures will be required for continued research and development, additional
marketing activities and ultimately the development of manufacturing
capabilities for the further commercialization of the Company's biodegradation
systems. The amount and timing of such expenditures will vary depending on
several factors, including the progress of development and testing, funding
from third parties, the level of enforcement of environmental regulations by
federal and state agencies, technological advances, changing competitive
conditions and determinations with respect to the commercial potential of the
Company's systems. The amount and timing of such expenditures cannot be
predicted.
On January 14, 1997, Envirogen entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Fluid Management, Inc., a Wisconsin-based, full service
environmental consulting firm ("FMI"), and the stockholders of FMI, pursuant to
which, among other things, FMI will be merged with and into Envirogen (the
"Merger"), with Envirogen being the surviving corporation. In the Merger, the
stockholders of FMI will have the right to receive 4,190,477 shares of Common
Stock and $11,000,000 of cash, subject to adjustment pursuant to the Merger
Agreement. In order to fund the cash portion of the merger consideration and to
provide additional working capital for Envirogen, Envirogen entered into a
Securities Purchase Agreement on January 14, 1997 with Warburg, Pincus Ventures,
L.P., a Delaware limited partnership ("Warburg"), pursuant to which, among other
things, Envirogen will issue and sell to Warburg 6,095,238 shares of Common
Stock for an aggregate cash purchase price of $16,000,000 (the "Warburg
Transaction"). The closing of the Merger and the Warburg Transaction is
expected to occur in April 1997, subject to the approval of the stockholders of
Envirogen and other contingencies customary for a transaction such as the Merger
and the Warburg Transaction. Accordingly, no assurance can be given that the
Merger and the Warburg Transaction will be consummated.
RESULTS OF OPERATIONS
- ---------------------
1996 COMPARED TO 1995
- ---------------------
The Company reported revenues in 1996 of $12,919,594, an increase of 61% from
1995. The net loss in 1996 increased 12% to $2,680,415, while the net loss per
share was $0.24 compared to $0.31 in 1995. The decrease in net loss per share
is due to a greater number of shares outstanding resulting from the issuance of
Common Stock in May 1996.
Commercial revenues increased 82% to $10,892,871 from $5,971,278 in 1995 while
revenues from corporate and government research and development contracts
decreased 2% to $2,026,723 from $2,062,420 in 1995. The increase in commercial
revenues is due primarily to revenues of approximately
16
<PAGE>
$3.4 million from the Company's MWR subsidiary that was acquired in February
1996 combined with increased systems sales of approximately $1.6 million by the
Company's Commercial Air Group related to the ABTco biofilter project. Revenues
from remediation activities accounted for 81% of the Company's commercial
revenues during 1996.
Revenues from corporate and government research and development contracts
decreased slightly from last year as revenues from numerous new projects
partially offset the loss of revenues due to the conclusion in December 1995 of
PCB work the Company performed for the Texas Eastern Transmission Corporation.
The Company's Phase II Department of Energy Small Business Innovative Research
Grant (SBIR), Phase II Department of Defense SBIR and Phase II National Science
Foundation SBIR all contributed significantly to 1996 results. The Company also
recorded initial revenues in 1996 under a new Phase I grant from the Department
of Energy, a new Phase I grant from the National Science Foundation and a new
Phase II grant from the Department of Defense.
Total costs and expenses increased 53% to $15,689,306 in 1996 from $10,279,694
in 1995, due primarily to the increased cost of commercial services and products
associated with the higher revenue levels. The cost of commercial operations
increased 89% to $9,676,960 due to higher revenue levels, a greater proportion
of which were attributable to lower margin systems sales. Research and
development expenses decreased 2% to $2,403,566. General and administrative
expenses increased 24% to $1,965,369 due largely to the increased amortization
of intangible assets associated with the acquisition of MWR in February 1996,
increased legal expenses associated with patent applications and the growth of
the Company. Marketing expenses decreased 10% to $993,411 due primarily to
reduced personnel related costs combined with other cost reduction efforts. In
January 1996, a biofiltration system installed by the Company for the Nylonge
Corporation suffered a shutdown, which the Company believes was primarily caused
by a failure of internal grating material supplied by third parties. Throughout
1996 the Company investigated the cause of the failure, redesigned the internal
grating and rebuilt and restarted the system at a cost of approximately
$650,000. While the ultimate responsibility for these expenses has not yet been
determined, the Company is actively pursuing reimbursement of these expenses
from third parties. However, there can be no assurance that any such recoveries
will be attained.
Interest income decreased by 4% to $193,776 due to the decreased interest rates
available on the Company's cash balances. Equity in loss of joint venture,
which resulted from the Company's participation in the CVT America joint
venture, decreased 44% to $52,629. Prior to the conversion of the Company's
preferred stock in May 1996, the Company paid dividends on the preferred stock
of $36,458 in 1996.
1995 COMPARED TO 1994
- ---------------------
The Company reported revenues in 1995 of $8,033,698, an increase of 31% from
1994. The net loss in 1995 decreased by 44% to $2,385,833, while the net loss
per share was $0.31 compared to $0.57 in 1994. In the third quarter of 1994,
the Company underwent a strategic restructuring of its operations to increase
efficiencies and decrease costs. The restructuring resulted in cost reductions
that are reflected in the improved 1995 performance.
Commercial revenues increased by 47% to $5,971,278 from $4,061,432 in 1994,
while revenues from corporate and government research and development contracts
decreased slightly to $2,062,420 from $2,073,145 in 1994. The $1,909,846
increase in commercial revenues was due primarily to approximately $1,000,000 of
increased sales of the Company's commercial air and water systems and an
increase in demand for remediation services in its Midatlantic and Northeastern
Operations Groups. Commercial revenues were significantly improved versus 1994,
despite the fact that inconclusive test results from a field treatability study
for the treatment of airborne odor-causing effluents at a large industrial
chemical
17
<PAGE>
company in New Jersey caused the Company and the client to jointly terminate, in
the second quarter of 1995, a September 1994 contract valued at approximately
$1,000,000. Revenues from remediation services accounted for 81% of the
Company's 1995 commercial revenues.
Revenues from corporate and government research and development contracts
remained relatively unchanged as the Company was able to replace several
completed large projects, which contributed significant revenues in 1994, with
several new multi-year grants and contracts. The Company recorded initial
revenues in 1995 under two new Phase I SBIR grants and a multi-year Phase II
SBIR contract from the National Science Foundation, a multi-year Phase II SBIR
grant as well as separate research and consulting contracts from the Department
of Energy, and two Phase I and multi-year Phase II contracts from the Department
of Defense.
Total costs and expenses decreased by 2% to $10,279,694 in 1995 from $10,503,989
in 1994. The cost of commercial operations increased by 53% to $5,126,901 due
to higher revenue levels and other expenses associated with the continued
commercialization of new technologies, including the design and cost of
production of the Company's biological degradation systems, as well as the
realignment of personnel that resulted in increased headcounts in Commercial
Operations and reduced headcounts in Administration, Marketing and Research and
Development. Research and development expenses decreased by 26% to $2,459,580,
general and administrative expenses decreased by 31% to $1,583,383 and marketing
expenses decreased by 29% to $1,109,830 due primarily to staff reductions
(realignment of personnel and layoffs) and other cost reduction efforts
resulting from the Company's strategic restructuring of its operations during
the third quarter of 1994.
Interest income increased by 22% to $201,130 due to the increased cash available
for investment as a result of the April 1995 private placement of preferred
stock. Equity in loss of affiliate of $93,437 is due to the Company's
participation in the CVT America joint venture. Dividends of $233,333 were
recognized on the convertible preferred stock, consisting of $116,666 of regular
dividends and $116,667 for a special dividend paid in connection with the
voluntary conversion of 50% of the preferred stock to common stock in December
1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has funded its operations to date primarily through public offerings
and private placements of equity securities, research and development agreements
with major industrial companies, research grants from government agencies and
revenues from commercial services and sales of biological degradation systems.
At December 31, 1996 the Company had cash and cash equivalents of $4,614,062 and
working capital of $7,094,266. Additionally, the Company had restricted cash of
$309,300 that was being used to collateralize a bond for a large commercial
project. Cash and cash equivalents increased by $865,865 from December 31, 1995
to December 31, 1996 due to the net proceeds of $4,607,984 from the May 1996
private placement of Common Stock which offset the cash payment of $1,332,000
for the purchase of MWR, Inc. in February 1996, cash used by operations of
$2,054,402, capital expenditures of $102,744, an advance to affiliate of
$100,000, capital lease principal repayments of $124,020 and cash dividends on
preferred stock of $51,041. The Company expects to incur additional capital
expenditures in connection with the continued development and commercialization
of its technologies. The timing and amount of such expenditures will fluctuate
depending on the timing of field tests, systems development activity, the
rapidity with which the Company's biodegradation systems can be further
commercialized and the availability of capital. Furthermore, future projects
may require the Company to set aside additional capital to collateralize
performance bonds.
18
<PAGE>
Revenue from certain of the Company's contracts is recognized as services are
provided and costs are incurred. For fixed-price contracts, revenue is
recognized on the percentage-of-completion method, measured by the percentage
relationship of costs incurred from contract inception to date to the estimated
total costs for each contract. The asset "Unbilled revenue" represents revenues
recognized in excess of amounts billed. Correspondingly, the liability "Deferred
revenue" represents billings in excess of costs and estimated earnings. The
balance in these accounts will fluctuate depending on a number of factors,
including the number and size of fixed-price contracts, contract terms and other
timing and cost issues. At December 31, 1996, unbilled revenue was $437,772
greater than at December 31, 1995 due primarily to the acquisition of MWR.
Accounts receivable increased by $1,524,783 from December 31, 1995 to December
31, 1996 primarily due to the acquisition of MWR. Accounts payable increased by
$563,865 and accrued expenses and other liabilities increased by $342,195 in the
same period due primarily to the acquisition of MWR.
If the Merger and the Warburg Transaction are consummated, of which there can be
no assurance, Envirogen's available capital resources are expected to consist of
the following: (a) Envirogen's and FMI's cash and cash equivalents on hand
immediately following the Closing, including the net proceeds from the Warburg
Transaction (after the payment of the cash portion of the merger consideration,
the repayment of all outstanding indebtedness of FMI for borrowed money on the
Closing Date and the payment by Envirogen of transaction costs incurred by
Envirogen, FMI (not to exceed $350,000) and Warburg (not to exceed $50,000) in
connection with the Merger and the Warburg Transaction); and (b) the expected
generation of cash from the combined operations of Envirogen and FMI after the
Closing Date. In addition, Envirogen intends to supplement its working capital
with a credit facility. There can be no assurance that any such credit facility
will be obtained or, if obtained, will be on terms advantageous to Envirogen.
If the Merger and the Warburg Transaction are not consummated, (a) Envirogen
will continue to incur operating losses during the period of development and
commercialization of its technologies relating to the treatment of hazardous
wastes and industrial pollutants; (b) although it is unable to predict with
certainty, Envirogen believes it will have sufficient capital to meet its
operating requirements at least through 1998; (c) if Envirogen is unable to
obtain continued funding for the development of these technologies through
research and development agreements and increased commercial revenues, it will
be necessary to obtain funding from other sources; and (d) there can be no
assurance that Envirogen will be able to obtain additional funds to meet its
capital requirements or, if successful, the terms of such financing may not be
advantageous to Envirogen.
OTHER MATTERS
- -------------
As of December 31, 1996, the Company had a net operating loss carryforward of
approximately $19,300,000 for federal income tax reporting purposes available to
offset future taxable income, if any, through 2011. The timing and manner in
which these losses may be utilized are limited under Section 382 of the Internal
Revenue Code of 1986 to approximately $1,700,000 per year based on preliminary
calculations of certain ownership changes to date. The Company's net operating
losses may be further limited in the event of additional ownership changes, if
any, as a result of future equity issuances in addition to the shares to be
issued in the Merger and the Warburg Transaction.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,614,062 $ 3,748,197
Accounts receivable, net of allowance for doubtful
accounts of $245,138 in 1996 and $131,381 in 1995 3,100,447 1,575,664
Unbilled revenue 1,776,004 1,338,232
Inventory 55,027 44,430
Prepaid expenses and other current assets 175,941 160,481
------------ ------------
Total current assets 9,721,481 6,867,004
Property and equipment, net 922,320 1,074,660
Restricted cash 309,300 309,300
Investment in and advances to joint venture 228,934 181,563
Intangible assets, net 1,348,677 26,099
Other, principally deposits 185,912 126,607
------------ ------------
Total assets $12,716,624 $ 8,585,233
============ ============
LIABILITIES
Current liabilities:
Accounts payable $1,335,954 $ 772,089
Accrued expenses and other liabilities 955,886 613,691
Deferred revenue 312,784 424,588
Current portion of note payable 4,287 4,333
Current portion of capital lease obligations 18,304 103,020
Preferred Stock dividends payable 14,583
------------ ------------
Total current liabilities 2,627,215 1,932,304
Deferred rent 12,222 48,890
Note payable, net of current portion 4,287
Capital lease obligations, net of current portion 29,954 7,774
------------ ------------
Total liabilities 2,669,391 1,993,255
------------ ------------
Commitments and contingencies (see Note 11)
Redeemable Cumulative Convertible
Preferred Stock 1,728,621
STOCKHOLDERS' EQUITY
Common stock 129,319 90,495
Additional paid-in capital 31,925,861 24,100,394
Accumulated deficit (22,001,997) (19,321,582)
Less: Treasury stock (5,950) (5,950)
------------ ------------
Total stockholders' equity 10,047,233 4,863,357
------------ ------------
Total liabilities, redeemable cumulative convertible
preferred stock and stockholders' equity $12,716,624 $ 8,585,233
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Commercial operations $10,892,871 $5,971,278 $4,061,432
Research and development services 2,026,723 2,062,420 2,073,145
--------------- -------------- --------------
Total revenues 12,919,594 8,033,698 6,134,577
--------------- -------------- --------------
Cost of commercial operations 9,676,960 5,126,901 3,358,730
Provision for contract claim 650,000
Research and development costs 2,403,566 2,459,580 3,311,301
General and administrative expenses 1,965,369 1,583,383 2,279,502
Marketing expenses 993,411 1,109,830 1,554,456
--------------- -------------- --------------
Total costs and expenses 15,689,306 10,279,694 10,503,989
--------------- -------------- --------------
Other income (expense):
Interest income 193,776 201,130 164,886
Interest expense (22,993) (31,158) (53,227)
Equity in loss of joint venture (52,629) (93,437)
Other, net 7,601 16,961
--------------- -------------- --------------
Other income, net 125,755 93,496 111,659
--------------- -------------- --------------
Net loss (2,643,957) (2,152,500) (4,257,753)
Preferred stock dividends (36,458) (233,333)
--------------- -------------- --------------
Net loss applicable to Common Stock ($2,680,415) ($2,385,833) ($4,257,753)
=============== ============== ==============
Net loss per share applicable to
Common Stock ($0.24) ($0.31) ($0.57)
=============== ============== ==============
Weighted average number of shares of
Common Stock outstanding 11,374,922 7,669,639 7,461,821
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated Treasury Stock
-------------------- -------------------------
Shares Amount Capital Deficit Shares Amount
---------- -------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 7,499,250 $74,992 $22,303,219 ($12,677,996) (55,000) ($5,500)
Net loss (4,257,753)
Expenses from issuance of Common
Stock and warrants (58,541)
Exercise of stock options/ other 45,500 455 21,781
Treasury stock repurchases (4,500) (450)
---------- -------- ----------- ------------- -------- --------
BALANCE AT DECEMBER 31, 1994 7,544,750 $75,447 $22,266,459 ($16,935,749) (59,500) ($5,950)
Net loss (2,385,833)
Conversion of Convertible
Preferred Stock 1,400,000 14,000 1,697,121
Issuance of Common Stock for
interest in joint venture 58,140 582 124,418
Exercise of stock options 46,570 466 12,396
---------- -------- ----------- ------------- -------- --------
BALANCE AT DECEMBER 31, 1995 9,049,460 $90,495 $24,100,394 ($19,321,582) (59,500) ($5,950)
Net loss (2,680,415)
Conversion of Convertible
Preferred Stock 1,400,000 14,000 1,714,621
Issuance of Common Stock for cash 2,000,000 20,000 4,587,984
Issuance of Common Stock to
acquire MWR, Inc. 456,500 4,565 1,506,450
Exercise of stock options 25,980 259 16,412
---------- -------- ----------- ------------- -------- --------
BALANCE AT DECEMBER 31, 1996 12,931,940 $129,319 $31,925,861 ($22,001,997) (59,500) ($5,950)
========== ======== =========== ============= ======== ========
</TABLE>
Preferred Stock: Authorized 2,000,000 shares, par value $.01 per share. 140,000
shares of Series C Convertible Preferred Stock outstanding
at December 31, 1995. No preferred shares issued or
outstanding at December 31, 1994 and 1996.
Common Stock: Authorized 20,000,000 shares, par value $.01 per share.
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994
------------ ------------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($2,643,957) ($2,152,500) ($4,257,753)
Adjustments to reconcile net loss to cash used by
operating activities:
Depreciation and amortization 992,697 574,183 542,984
Provision for doubtful accounts 84,800 60,000 17,700
Equity in loss of joint venture 52,629 93,437
Other (8,521) (1,941)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (850,546) (12,759) 58,881
(Increase) decrease in unbilled revenue 107,213 (793,410) (352,017)
(Increase) decrease in prepaid expenses and other assets 272,694 (63,031) (6,044)
(Increase) decrease in inventory 48,606 (44,430)
(Increase) in restricted cash (309,300)
Increase (decrease) in accounts payable 182,942 349,877 (643,770)
Increase (decrease) in accrued expenses and other liabilities (181,155) 65,380 (71,476)
Increase (decrease) in deferred revenue (111,804) 347,978 (91,297)
----------- ---------- -----------
Net cash used by operating activities (2,054,402) (1,577,216) (5,112,092)
----------- ---------- -----------
Cash flows from investing activities:
Capital expenditures (102,744) (94,742) (392,180)
Investment in and advances to joint venture (100,000) (150,000)
Purchase of MWR, Inc. (1,332,000)
Purchase of marketable securities (1,958,720)
Proceeds from maturities of marketable securities 1,958,720
Proceeds from sale of property and equipment 9,750 3,000
----------- ---------- ----------
Net cash used in investing activities (1,524,994) (241,742) (392,180)
----------- ---------- ----------
Cash flows from financing activities:
Debt repayment (4,333) (4,002) (3,397)
Capital lease principal repayments (124,020) (128,084) (135,825)
Net proceeds from issuance of Common Stock 4,607,984
Net proceeds from issuance of Redeemable
Cumulative Convertible Preferred Stock 3,457,242
Expenses of converting 50% of Redeemable
Cumulative Convertible Preferred Stock (17,500)
Expenses of issuing Common Stock and warrants (58,541)
Net proceeds from exercise of stock options 16,671 12,862 21,786
Cash dividends paid on Redeemable Cumulative
Convertible Preferred Stock (51,041) (218,750)
----------- ---------- ----------
Net cash provided by (used in) financing activities 4,445,261 3,101,768 (175,977)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 865,865 1,282,810 (5,680,249)
Cash and cash equivalents at beginning of year 3,748,197 2,465,387 8,145,636
----------- ---------- -----------
Cash and cash equivalents at end of year $ 4,614,062 $3,748,197 $2,465,387
=========== ========== ===========
Supplemental disclosures of cash flow information:
- -------------------------------------------------
Cash paid for interest $23,041 $31,061 $43,538
=========== ========== ===========
Cash paid for income taxes $2,110 $200 $0
=========== ========== ===========
Supplemental disclosures of non-cash investing and financing activities:
- ------------------------------------------------------------------------
- -The Company entered into capital lease obligations amounting to $48,932 and
$42,924 for the years ended December 31, 1996 and 1995, respectively.
- -In February 1996, the Company acquired MWR, Inc. for $1,332,000 in cash and
456,500 shares of Common Stock valued at $1,511,015.
- -In December 1995, there was a voluntary conversion of 140,000 shares of Series
C Convertible Preferred Stock into 1,400,000 shares of Common Stock. In May
1996, there was a voluntary conversion of the remaining 140,000 shares of
Series C Convertible Preferred Stock into 1,400,000 shares of Common Stock.
- -In May 1995, the Company and nv VAM of the Netherlands formed a joint venture,
CVT America, L.L.C. For its 50% interest, the Company paid $48,250 in cash and
issued 58,140 shares of Envirogen common stock to VAM valued at $125,000.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________
1. BUSINESS AND ORGANIZATION
-------------------------
Envirogen, Inc. ("Envirogen") is an environmental biotechnology company
engaged in the development and design of advanced biological systems
to treat and degrade hazardous wastes. The Company has also been engaged
in commercial remediation activities through Vapex Environmental
Technologies, Inc. ("Vapex"), a wholly-owned subsidiary that was merged
into Envirogen effective December 31, 1994, and through MWR, Inc. ("MWR")
of Lansing, Michigan, a wholly-owned subsidiary that was acquired on
February 9, 1996 (see Note 3). The Company also entered into a joint
venture during 1995 (see Note 18).
On January 14, 1997, Envirogen entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Fluid Management, Inc., a Wisconsin-based,
full service environmental consulting firm ("FMI"), and the stockholders of
FMI, pursuant to which, among other things, FMI will be merged with and
into Envirogen (the "Merger"), with Envirogen being the surviving
corporation. In the Merger, the stockholders of FMI will have the right to
receive 4,190,477 shares of Common Stock and $11,000,000 of cash, subject
to adjustment pursuant to the Merger Agreement. In order to fund the cash
portion of the merger consideration and to provide additional working
capital for Envirogen, Envirogen entered into a Securities Purchase
Agreement on January 14, 1997 with Warburg, Pincus Ventures, L.P., a
Delaware limited partnership ("Warburg"), pursuant to which, among other
things, Envirogen will issue and sell to Warburg 6,095,238 shares of Common
Stock for an aggregate cash purchase price of $16,000,000 (the "Warburg
Transaction"). The closing of the Merger and the Warburg Transaction is
expected to occur in April 1997, subject to the approval of the
stockholders of Envirogen and other contingencies customary for a
transaction such as the Merger and the Warburg Transaction. Accordingly,
no assurance can be given that the Merger and the Warburg Transaction will
be consummated.
While the activities of Vapex and MWR are principally commercial
remediation, a significant portion of the activities of Envirogen to date
have been related to research with corporate and governmental sponsors and
the determination of the feasibility of designed and advanced biological
systems to treat and degrade hazardous wastes. Certain of Envirogen's
bioremediation systems will require substantial additional research,
development and testing to determine their commercial viability and will
require significant additional financing. The Company is subject to a
number of other risks similar to those of other companies in similar stages
of development, including but not limited to short operating history
including losses to date, future capital needs (particularly if the Merger
and the Warburg Transaction are not consummated), dependence on key
personnel, competition, risk of technological obsolescence, governmental
regulations and approvals and limited manufacturing and marketing
capabilities.
24
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vapex and
MWR. All material intercompany balances and transactions are eliminated in
consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior year's
presentation with the 1996 financial statement presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates in the preparation of these financial
statements include provisions made for doubtful accounts and contracts and
amortization periods for intangibles.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
INVENTORY
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists primarily of office
and laboratory equipment and leasehold improvements. Leasehold
improvements are amortized over the shorter of the terms of the related
leases or the estimated useful lives of the assets. Depreciation and
amortization is calculated on the straight-line method over the estimated
useful lives of the assets which range from three to five years. Gains and
losses on disposals are recognized in the year of disposal. Repair and
maintenance expenditures are expensed as incurred; significant renewals and
betterments are capitalized. Property and equipment leased under capital
leases are capitalized at the lower of the present value of minimum lease
payments or the fair value of the leased property.
INTANGIBLE ASSETS
Intangible assets are recorded at cost and are amortized using the
straight-line method over their estimated useful lives. The Company
reviews these items on a regular basis for realization.
25
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
__________________
DEFERRED RENT
The Company has received rent abatements for limited periods in connection
with the lease for certain office and laboratory space. Costs associated
with this lease recorded on a straight-line basis over the full lease term
resulted in deferred rent liability of $12,222 and $48,890 at December 31,
1996 and 1995, respectively.
REVENUE RECOGNITION
Revenue from certain contracts is recognized as services are provided and
costs are incurred. For fixed-price contracts, revenue is recognized on
the percentage-of-completion method, measured by the percentage of costs
incurred over the estimated total costs for each contract. This method is
used because management considers expended costs to be the best available
measure of progress on these contracts. Contract costs include all
direct material and labor costs and those indirect costs related to
contract performance. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The asset "unbilled revenue" represents revenues recognized in excess of
amounts billed. Unbilled revenue generally represents work currently
billable and such work is usually billed through the normal billing
process. Correspondingly, the liability "deferred revenue" represents
billings in excess of revenues recognized.
Balances billed but not paid by customers pursuant to retainage provisions
in contracts will be due upon completion of the contracts and acceptance by
the owner. The retainage balance at December 31, 1996 of $311,615 is
expected to be collected within the next 12 months.
An allowance for doubtful accounts has been established based on
management's assessment of the collectibility of all amounts billed and
unbilled (including amounts subject to retainage) as of December 31, 1996.
RESEARCH AND DEVELOPMENT
All costs relating to research and development activities are expensed as
incurred.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the net loss by the
weighted-average shares of common stock outstanding during the year.
Preferred Stock, options and warrants have been excluded from the
calculation of common and common stock equivalent shares because they are
antidilutive.
26
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
__________________
3. BUSINESS ACQUISITION
--------------------
On February 9, 1996, the Company purchased all of the outstanding capital
stock of MWR, Inc. for approximately $2,843,000. The purchase price
included 456,500 shares of Company Common Stock valued at approximately
$1,511,000. MWR is a provider of in situ remediation services with
particular expertise in soil vapor extraction. The acquisition has been
accounted for by the purchase method of accounting. The excess of the
aggregate purchase price over the fair market value of net assets acquired
resulted in goodwill of $1,063,615 and a covenant not to compete of
$232,000. These intangibles are being amortized over 10 and 5 years,
respectively.
The operating results of the acquisition are included in the Company's
consolidated results of operations from the date of acquisition. The
following pro forma financial information assumes the acquisition occurred
at the beginning of the periods presented and does not purport to be
indicative of what would have occurred had the acquisition been made as of
those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------------- ------------------
<S> <C> <C>
Net revenues $ 13,198,361 $ 12,740,698
Net loss ($ 2,659,069) ($ 2,745,200)
Net loss per share applicable to
Common Stock ($ 0.23) ($ 0.34)
</TABLE>
4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment, net at December 31, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Computer equipment $ 283,624 $ 238,368
Acquired computer software 210,000 210,000
Laboratory and field equipment 1,650,326 1,068,665
Equipment and vehicles under
capital leases 598,975 565,597
Furniture and office equipment 278,551 278,038
Leasehold improvements 542,030 537,837
Construction in progress 12,839 65,232
------------- -------------
3,576,345 2,963,737
Less: Accumulated depreciation and
amortization 2,654,025 1,889,077
------------- -------------
$ 922,320 $ 1,074,660
============= =============
</TABLE>
Accumulated amortization on equipment under capital leases amounted to
$397,524 and $345,867 at December 31, 1996 and 1995, respectively.
Depreciation and amortization expense amounted to $797,049, $569,590 and
$537,808 for the years ended December 31, 1996, 1995 and 1994,
respectively. No interest has been capitalized in 1996, 1995 or 1994.
27
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
__________________
5. INTANGIBLE ASSETS
-----------------
Intangible assets, net at December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Goodwill $1,108,361 $44,746
Patents 222,611
Covenant not to compete 232,000
Organizational costs 5,428 5,428
Licensing agreement 3,500 3,500
---------- -------
1,571,900 53,674
Less: Accumulated amortization 223,223 27,575
---------- -------
$1,348,677 $26,099
========== =======
</TABLE>
Amortization expense for intangible assets amounted to $195,648, $4,593 and
$5,176 for the years ended December 31, 1996, 1995 and 1994, respectively.
6. ACCRUED EXPENSES AND OTHER LIABILITIES
--------------------------------------
Accrued expenses and other liabilities at December 31, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Salaries, benefits and payroll taxes $279,933 $164,953
Taxes 417,618 319,641
Professional fees 75,000 69,000
Contracts accrual 178,075 50,000
Other 5,260 10,097
-------- --------
$955,886 $613,691
======== ========
</TABLE>
7. NOTE PAYABLE
------------
In December 1992, the Company borrowed $20,000 to fund certain leasehold
improvements to its office and laboratory facilities. The note payable is
a five-year term note bearing 8% interest. The balance at December 31,
1996 of $4,287 will mature in 1997.
8. INCOME TAXES
------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 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. Under this
method, 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. The Company has provided a full
valuation allowance against the net deferred tax debits due to the
uncertainty of realization. The change in the valuation allowance for the
year ended December 31, 1996 was an increase of $836,264.
28
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
__________________
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
Deferred Tax Deferred Tax
Assets (Liabilities) Assets (Liabilities)
-------------------- --------------------
<S> <C> <C>
Accrued liabilities $ 216,702 $ 157,383
Contract reserve 60,546 17,000
Deferred rent 4,155 16,623
Depreciation 266,502 153,496
Amortization (41,769) 11,894
Bad debts 69,615 44,670
Partnership interest (18,243)
Net operating loss - federal 6,613,615 5,984,000
State taxes 1,397,461 1,347,254
Tax credits 297,187 297,187
----------- -----------
Total 8,865,771 8,029,507
Valuation allowance - federal (7,468,310) (6,682,253)
Valuation allowance - state (1,397,461) (1,347,254)
----------- -----------
Total deferred taxes $ 0 $ 0
=========== ===========
</TABLE>
As of December 31, 1996, the Company had a net operating loss carryforward
of approximately $19,300,000 for Federal income tax purposes which is
available to offset future taxable income, if any, between the years 1997
and 2011. The timing and manner in which these losses may be utilized are
limited to approximately $1,700,000 per year based on preliminary
calculations of ownership changes to date by Internal Revenue Code Section
382.
9. COMMON STOCK
------------
On May 24, 1996, the Company successfully completed the private placement
of 2,000,000 shares of Common Stock resulting in net proceeds of
$4,607,984. Allen & Company Incorporated ("Allen & Company"), a principal
stockholder of the Company, acted as the placement agent. An officer of
Allen & Company is also a director of the Company.
SERIES C CONVERTIBLE PREFERRED STOCK
------------------------------------
On April 27, 1995, the Company completed the private placement of 280,000
shares of Series C Convertible Preferred Stock ("Preferred Stock") for
$12.50 per share, resulting in net proceeds of $3,457,242. Allen &
Company, a principal stockholder of the Company, acted as the placement
agent and purchased 138,000 shares of Preferred Stock for its own account.
An officer of Allen & Company is a director of the Company. The following
directors of the Company at that time also purchased the indicated number
of shares of Preferred Stock in the private placement: James A. Courter
(8,000), Harcharan S. Gill (8,000), Robert F. Hendrickson (8,000), Robert
F. Johnston (16,000), Seymour L. Meisel (10,000) and Robert C. Miller
(10,000). The shares of Preferred Stock were convertible at the option of
each holder at a conversion rate of ten shares of Common Stock for each
share of Preferred Stock and were subject to mandatory conversion in April
1997 upon the fulfillment of certain conditions. Quarterly dividends on
the Preferred Stock were payable at a rate of $.625 per share per annum.
The Preferred Stock was redeemable by the
29
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________
holders if certain financial covenants were not met. The Company was in
compliance with all covenants at December 31, 1995. On December 28, 1995,
Preferred Stockholders voluntarily converted 50% of their shares of
Preferred Stock into 1,400,000 shares of Common Stock, and in consideration
of such voluntary conversion, a special dividend of $116,667 was paid. In
May 1996, the remainder of the Preferred Stock was converted into an
additional 1,400,000 shares of Common Stock. Regular Preferred Stock
dividends of $36,458 and $116,666 were recognized in 1996 and 1995,
respectively. Holders also have certain registration rights with respect
to the shares of Common Stock issued upon conversion of the Preferred
Stock.
10. OPTIONS AND WARRANTS
--------------------
In April 1990, the Company adopted the 1990 Incentive Stock Option and Non-
Qualified Stock Option Plan (the "Plan") which expires in March 2000.
Under the amended terms of the Plan, the Company's Stock Option Committee
is authorized to grant incentive stock options ("ISOs") to officers and
other key employees, as well as non-qualified stock options ("NQSOs") to
key employees, directors, scientific advisory board members and consultants
to purchase an aggregate of 2,000,000 shares of Common Stock (3,500,000
shares, subject to stockholder approval). Standard provisions of the Plan,
which may vary with Board and stockholder approval, require that the term
of each grant not exceed ten years.
In May 1993, the Company adopted the 1993 Directors' Non-Qualified Stock
Option Plan (the "1993 Plan") which expires in May 2003. Under the amended
terms of the 1993 Plan, an option to purchase 15,000 shares of Common Stock
shall be automatically granted to each new Non-Employee Director on the day
the Non-Employee Director is first elected as a member of the Board of
Directors. Thereafter, an option to purchase 5,000 shares of Common Stock
shall be granted on June 1 of each year to each Non-Employee Director who
is elected at subsequent annual meetings of stockholders, except that the
Chairman of the Board shall be granted an option to purchase 7,500 instead
of 5,000 shares of Common Stock. Non-Employee Directors who are not
initially elected at an Annual Meeting of Stockholders will receive a pro
rata portion of 5,000 shares (or 7,500 shares with respect to the Chairman
of the Board) of Common Stock based on the number of full months remaining
from the date of election until the next Annual Meeting of Stockholders
divided by twelve. Any fractional shares resulting from such calculation
shall be rounded up to the nearest whole number.
In 1995, the Board of Directors approved a plan allowing employees with
stock options issued in 1992 and 1993 with exercise prices of $5.00 or more
per share to exchange such options for new options at the then-current
market price. Participating employees received new stock options with an
exercise price of $3.22 per share for 90% of the options they surrendered.
Participating employees also agreed to a new five-year vesting schedule
(20% per year) commencing on September 19, 1995. As a result, options for
49,750 shares were forfeited in exchange for new options to purchase 44,775
shares.
Generally, options granted become exercisable at a rate of 20% per annum
from the date of grant, and the option price may not be less than 100% and
75% of the fair market value on the date of grant for ISOs and NQSOs,
respectively. The annual Non-Employee Director grants vest at the end of
the first year of grant.
30
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
__________________
Following is a summary of the stock option transactions for 1994, 1995 and 1996:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Fair Value
Shares Price Per Option per Option
Outstanding Share Price Range Granted
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance December 31, 1993 527,500 $ 3.04 $ 0.20 - $ 7.50
Granted 238,750 $ 3.11
Forfeited ( 150,980) $ 3.96
Exercised ( 45,500) $ 0.49
----------
Balance December 31, 1994 569,770 $ 3.04 $ 0.20 - $ 7.50
----------
Granted 391,750 $ 2.02 $ 1.25
Forfeited ( 106,000) $ 5.04
Exercised ( 46,570) $ 0.28
----------
Balance December 31, 1995 808,950 $ 2.44 $ 0.20 - $ 7.25
----------
Granted 779,665 $ 3.17 $ 1.96
Forfeited ( 31,300) $ 3.31
Exercised ( 25,980) $ 0.64
----------
Balance December 31, 1996 1,531,335 $ 2.83 $ 0.20 - $ 7.25
==========
Exercisable at December 31, 1993 128,800 $ 1.59
Exercisable at December 31, 1994 180,980 $ 2.37
Exercisable at December 31, 1995 207,360 $ 2.36
Exercisable at December 31, 1996 333,770 $ 2.56
</TABLE>
The weighted average remaining contractual lives of outstanding options at
December 31, 1996 was approximately 6.5 years.
The Company applies the provisions of APB 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
has been recognized in the financial statements in respect to the above plans.
Had compensation costs for the above plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
of Statement of Financial Accounting Standards No. 123 "Accounting for Stock
Based Compensation", the Company's net loss and net loss per share would have
been increased to the pro forma amounts below:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Pro forma net loss applicable to ($3,031,940) ($2,449,400)
Common Stock
Pro forma net loss per share applicable to ($0.27) ($0.32)
Common Stock
</TABLE>
As options vest over a varying number of years, and awards are generally made
each year, the pro forma impacts shown here are likely to increase given the
same level of activity in the future.
31
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
__________________
The pro forma compensation expense of $351,525 and $63,567 for 1996 and
1995, respectively, was calculated based on the fair value of each option
grant using the Black-Scholes model with the following weighted-average
assumptions used for grants:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Dividend yield 0 0
Expected volatility 41.9% 45.3%
Risk free interest rate 6.53% 6.28%
Expected option lives 6.5 years 6.5 years
</TABLE>
In October 1993, the Company issued 790,148 redeemable Common Stock
Purchase Warrants. Each warrant entitles the holder to purchase one-half of
one share of Common Stock for $5.20 per full share subject to adjustment.
The warrants are exercisable for five years.
In May 1996, the Company issued warrants to purchase an aggregate of
200,000 shares of the Company's Common Stock at an exercise price of $2.50
per share, including warrants to purchase 150,000 shares to a principal
stockholder. The warrants expire seven years from date of issuance. See
Note 13 for additional information regarding the Company's other warrants.
11. COMMITMENTS AND CONTINGENCIES
-----------------------------
LEASES
The Company is party to various operating leases relating to office,
laboratory and pilot plant facilities, as well as automobiles and
equipment. All leases expire prior to 2005. The leases include escalation
clauses and require that the Company pay for certain operating costs. It
is expected that in the normal course of business the majority of the
leases will be renewed or replaced by other leases. The Company also has
capitalized leases consisting principally of leases for computers and field
equipment.
Future minimum payments under capital and noncancelable operating leases
consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------------ ------------
<S> <C> <C>
1997 $ 23,766 $ 782,401
1998 19,644 668,189
1999 9,048 539,854
2000 5,527 550,534
2001 - 608,757
Thereafter - 1,408,381
------------ ------------
Total minimum lease payments 57,985 $4,558,116
============
Less amount representing interest ( 9,727)
------------
Present value of net minimum capital
lease payments $ 48,258
============
</TABLE>
Rent expense for operating leases was $700,985, $557,361 and $577,471 for
the years ended December 31, 1996, 1995 and 1994, respectively.
32
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
__________________
LICENSES
Pursuant to a license agreement with Amgen, Inc. ("Amgen") dated February
27, 1990, the Company was granted an exclusive license to use naturally
occurring and genetically-modified TCE-degrading bacteria and a non-
exclusive license to use and sell naturally occurring and genetically-
modified pesticide-degrading bacteria. The licenses are royalty-free and
cover use of the bacteria in the United States and Canada. The Company
issued Amgen 35,000 shares of Common Stock valued at $3,500 as
consideration for the licenses. The licenses terminate in each country
upon the later of the expiration of the last remaining licensed patent or
ten years following the first commercial use of the technology in such
country.
The Company has granted a major customer, exclusively for its own
operations, an irrevocable, non-exclusive, nontransferable license to use
all presently existing and any future technology that the Company may own
relating to PCB remediation and that it is not otherwise subject to
restrictions imposed by third parties. With certain limited exceptions,
the Company is required to pay the major customer a royalty based on gross
revenues received by the Company from the utilization of any jointly-owned
technology or any PCB-related remediation technology owned, developed or
obtained by the Company. The maximum aggregate royalty payable to the
major customer by the Company under the technology agreement may not exceed
the development funding received by the Company from the major customer.
At December 31, 1996, the Company had no obligations under the royalty
agreement and had received development funding from the inception of the
development work in 1990 of approximately $3,523,000.
ENVIRONMENTAL LIABILITY AND INSURANCE
The Company could be held liable under various laws and regulations if
microorganisms or hazardous wastes cause harm to humans or the environment,
even if the Company were not negligent. Although the Company has a
$5,000,000 contractor's pollution liability insurance policy, there can be
no assurance that environmental liabilities that may be incurred by the
Company will be covered by its insurance or that the dollar amount of
covered liabilities will not exceed policy limits.
12. RESEARCH AND DEVELOPMENT CONTRACTS
----------------------------------
The Company contracts with major corporations and government entities to
conduct feasibility studies, sponsored research and development and to
remediate contamination problems. Pursuant to the Company's contracts, the
work is generally conducted in phases beginning with feasibility studies to
demonstrate that the Company's bacteria will degrade the targeted waste.
Each sponsoring corporation or governmental entity may terminate the work
being conducted by the Company upon the completion of each phase and each
additional phase generally is separately contracted for by the sponsoring
corporation or governmental entity.
13. RELATED PARTY TRANSACTIONS
--------------------------
A related party received, among other compensation, warrants to purchase
123,000 shares of the Company's Common Stock at an exercise price of $8.75
per share for acting as representative of the underwriters of the Company's
initial public offering in August 1992. The warrants expire five years from
date of issuance.
33
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
__________________
In April 1995, a principal stockholder of the Company acted as the
placement agent for the Company's private placement of 280,000 shares of
Series C Convertible Preferred Stock. An officer of the placement agent is
also a director of the Company. The placement agent received warrants to
purchase 140,000 shares of Common Stock at an exercise price of $1.25 per
share. The warrants expire five years from date of issuance. See Note 9
for additional information on related parties who purchased Preferred Stock
in the private placement. In April 1995, the Company entered into a two-
year financial advisory agreement with the placement agent and agreed to
pay an annual fee of $100,000.
In March 1996, the Company issued options for 100,000 shares of Common
Stock at $2.82 per share to one of its directors under the 1990 Incentive
Stock Option and Non-Qualified Stock Option Plan. The options vest one
year from date of grant and expire ten years from date of issuance. The
director is an officer of a principal stockholder.
In May 1996, a principal stockholder of the Company acted as the placement
agent for the Company's private placement of 2,000,000 shares of Common
Stock. An officer of the placement agent is also a director of the
Company. The placement agent received a placement fee of $300,000, was
reimbursed for certain legal fees and other expenses and received warrants
to purchase 150,000 shares of the Company's Common Stock at an exercise
price of $2.50 per share. The warrants expire seven years from date of
issuance.
In December 1996, the Company engaged a principal stockholder to provide
financial advisory services, including the preparation and delivery of an
opinion to the Company's Board of Directors regarding the fairness, from a
financial point of view, of the terms of the proposed Merger and the
Warburg Transaction (see Note 1). The Company agreed to pay the stockholder
$250,000. An officer of the stockholder is also a director of the Company.
14. EMPLOYEE BENEFITS
-----------------
The Company sponsors a combined 401(k) employee savings and retirement plan
and profit sharing plan covering all employees who are at least 21 years of
age and have completed one year of service. The Company's contribution
expense related to the 401(k) savings plan was $81,630, $53,992 and $54,516
for the years ended December 31, 1996, 1995 and 1994, respectively. There
was no contribution expense related to the profit sharing plan. The
Company does not maintain other pension or postretirement benefit plans.
In 1995 and 1994 the Company maintained an Executive Bonus Plan. The plan
was administered by the compensation committee, which set the performance
targets for each year and authorized bonuses to the extent to which those
targets were met. The Company incurred no expenses relating to the plan
during those years.
15. CONCENTRATION OF CREDIT RISK/OTHER
----------------------------------
The Company provides credit to customers on an unsecured basis after
evaluating customer credit worthiness. The Company also provides a reserve
for bad debts for accounts receivable where there is a possibility of loss.
34
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
__________________
The Company maintains demand deposits with one major bank and money market
accounts with two financial institutions. At December 31, 1996 and 1995,
substantially all of the Company's cash and cash equivalents were held in
these money market accounts.
The Company performs contracts for various federal government agencies.
Revenue recognized under these contracts for the years ended December 31,
1996, 1995 and 1994 was $1,417,059, $834,818 and $869,254, respectively.
These revenues are primarily from research and development contracts.
16. RESTRICTED CASH
---------------
At December 31, 1996 and 1995, the Company had $309,300 of restricted cash
classified as a non-current asset. These funds serve as collateral on a
performance bond for a major contract.
17. INDUSTRY SEGMENT AND MAJOR CUSTOMER DATA
----------------------------------------
The Company's operations are conducted within one business segment. There
are minimal revenues attributable to foreign customers. Customers
comprising 10% or greater of the Company's revenues are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Customer A 12%
Customer B 21% 13%
Customer C 10% 19%
</TABLE>
18. JOINT VENTURE
-------------
On May 5, 1995, the Company and nv VAM of the Netherlands formed a joint
venture, CVT America, L.L.C. ("CVT America"), to supply advanced
biofiltration systems and services for the treatment of odors, air toxics
and volatile organic contaminants to the air pollution control market in
North and South America. Under the terms of the transaction, VAM
transferred to CVT America substantially all of the assets, including a
license agreement for the technology related to the biological treatment of
chemical contaminants in air streams, of its wholly-owned subsidiary, CVT
Air Technologies. For its 50% interest in CVT America, the Company paid
$48,250 in cash and issued 58,140 shares of Envirogen common stock (valued
at $125,000) to VAM and made an initial capital contribution to CVT America
of $3,500. Additional capital contributions totaling $98,250 were made in
the second half of 1995. In April 1996, the Company made an interest
bearing loan of $100,000 to CVT America. The Company also entered into a
sublicense agreement with CVT America for the technology licensed from VAM.
The joint venture has an initial term of three years, subject to renewal.
The difference between the carrying value and the underlying equity in the
net assets was $87,687 at the inception of the joint venture. This
difference is being amortized over the initial three year term of the joint
venture. The amount amortized through December 31, 1996 amounted to
$48,715. CVT America's place of business is located at the Company's
headquarters in Lawrenceville, New Jersey.
35
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------
19. PROVISION FOR CONTRACT CLAIM
----------------------------
In January 1996, a biofiltration system installed by the Company for the
Nylonge Corporation suffered a shutdown, which the Company believes was
primarily caused by a failure of internal grating material supplied by
third parties. Throughout 1996, the Company investigated the cause of the
failure, redesigned the internal grating and rebuilt and restarted the
system at a cost of approximately $650,000.
20. SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
-------------------------------------------------
Maintenance and repairs expense for the years ended December 31, 1996, 1995
and 1994 was $79,325, $44,356 and $82,588, respectively.
36
<PAGE>
Schedule II
Envirogen, Inc.
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance Balance
beginning costs and other account booked for at end of
Description period expenses -describe acquisition period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $131,381 $84,800 $17,043 (a) $46,000 (b) $245,138
Tax valuation allowance 8,029,507 836,264 8,865,771
Year ended December 31, 1995:
Allowance for doubtful accounts $107,932 $60,000 $36,551 (a) $131,381
Tax valuation allowance 7,155,060 874,447 8,029,507
Year ended December 31, 1994:
Allowance for doubtful accounts $120,366 $17,700 $30,134 (a) $107,932
Tax valuation allowance 5,199,227 1,955,833 7,155,060
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Uncollectible accounts charged off
(b) Balance in the financial statements of MWR, Inc. at acquisition
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Envirogen, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Envirogen, Inc. as listed in Item 14(a) of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Envirogen, Inc. as
of December 31, 1996 and 1995 and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Princeton, New Jersey
February 20, 1997
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
INCORPORATED BY REFERENCE
The information called for by Item 10 "Directors and Executive Officers of the
Registrant" (other than the information concerning executive officers set forth
after Item 4 herein), Item 11 "Executive Compensation", Item 12 "Security
Ownership of Certain Beneficial Owners and Management" and Item 13 "Certain
Relationships and Related Transactions" is incorporated herein by reference to
the Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on April 9, 1997 which definitive proxy statement is
expected to be filed with the Commission not later than 120 days after the end
of the fiscal year to which this report relates.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Envirogen, Inc.
Dated: March 11, 1997 By: /s/ Harcharan S. Gill
---------------------------------
Harcharan S. Gill
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on behalf of the registrant, in the capacities indicated,
on the 11th day of March, 1997.
Signature Title
--------- -----
Harcharan S. Gill* President, Chief Executive
- ---------------------------------------
Officer and Director
Harcharan S. Gill (Principal Executive Office)
/s/ Patricia A. McQueary Controller (Principal Financial
- ----------------------------------------
and Accounting Officer)
Patricia A. McQueary
Robert F. Hendrickson* Chairman of the Board and Director
- -----------------------------------------
Robert F. Hendrickson
Robert F. Johnston* Director
- -----------------------------------------
Robert F. Johnston
Seymour L. Meisel* Director
- -----------------------------------------
Seymour L. Meisel
Robert C. Miller* Director
- -----------------------------------------
Robert C. Miller
Peter J. Neff* Director
- -----------------------------------------
Peter J. Neff
___________
*Harcharan S. Gill, pursuant to a Power of Attorney executed by each of the
directors noted above and filed with the Securities and Exchange Commission as
Exhibit 24 to this Annual Report on Form 10-K, by signing his name hereto, does
hereby sign and execute this Annual Report on Form 10-K on behalf of each of the
persons noted above, in the capacities indicated, and does hereby sign and
execute this Annual Report on Form 10-K on his own behalf, in the capacities
indicated.
/s/ Harcharan S. Gill
-----------------------------------
Harcharan S. Gill
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as a part of this Report.
1. Financial Statements:
---------------------
Consolidated Balance Sheets as of December 31, 1996 and 1995....... 20
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994................................... 21
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994............... 22
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994................................... 23
Notes to Consolidated Financial Statements......................... 24
2. Financial Statement Schedules:
------------------------------
II. Valuation and Qualifying Accounts............................. 37
Report of Independent Accountants.................................. 38
All other schedules not listed above have been omitted, since they are not
applicable or are not required, or because the required information is
included in the consolidated financial statements or notes thereto.
3. Exhibits:
---------
Exhibit No. Description Location
---------- ----------- --------
2.1 Stock Purchase Agreement dated February 9, 1996
by and among ETG Environmental, Inc., MWR, Inc.
and the Registrant................................ (8) (Exh. 2)
2.2 Agreement and Plan of Merger dated January 14, 1997
by and among Fluid Management, Inc., William C.
Smith,Douglas W. Jacobson, Gary W. Hawk, Richard W.
Schowengerdt and the Registrant (the "Merger
Agreement")....................................... (11) (Exh.2.1)
3.1(a) Restated Certificate of Incorporation dated
September 5, 1991................................. (2) (Exh. 3.1(a))
3.1(b) Certificate of Amendment to Restated
Certificate of Incorporation dated August 18, 1992 (2) (Exh. 3.1(c))
3.2 By-Laws, as amended............................... (2) (Exh. 3.2)
41
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Location
- ---------- ----------- --------
<S> <C> <C>
3.3 Certificate of Designation, Preferences and
Rights of Series C Convertible Preferred Stock of
the Company as filed with the Delaware
Secretary of State on April 26, 1995................... (6) (Exh. 3)
3.4 Form of Certificate of Merger to be filed with the
Delaware Secretary of State pursuant to the Merger
Agreement.............................................. (1)
10.1 License Agreement dated February 27, 1990 between the
Company and Amgen, Inc., as amended March 4, 1992...... (2) (Exh. 10.12)
10.2 Lease dated July 13, 1990 between the Company and
United States Land Resources, L.P. for office and
laboratory facilities in Lawrence Township, New
Jersey, as amended..................................... (2) (Exh. 10.15)
10.3 Lease dated November 15, 1991 between the Company and
United States Land Resources, L.P. for pilot
facilities in Lawrence Township, New Jersey............ (2) (Exh. 10.16)
10.4 Envirogen, Inc. 401(k) Plan............................ (2) (Exh. 10.18)
10.5 Registration Rights Agreement dated April 25, 1990
between the Company and the investors listed thereon... (2) (Exh. 10.19)
10.6 Form of Employee Nondisclosure and Development
Agreement dated April 25, 1990 between the Company and
David N. Enegess and Ronald Unterman*.................. (2) (Exh. 10.20)
10.7 Form of Non-Competition Agreement dated April 25, 1990
between the Company and David N. Enegess and
Ronald Unterman*....................................... (2) (Exh. 10.21)
10.8 Form of Confidentiality and Non-Compete Agreement dated
October 31, 1991 between Vapex and Michael C. Marley,
Bruce L. Cliff and Peter Nangeroni..................... (2) (Exh. 10.26)
10.9 Licensing Agreement between the Company and
Environmental Research Laboratory-Gulf Breeze
dated March 10, 1993................................... (3) (Exh. 10.30)
10.10 Collaborative Marketing Agreement between the Company
and J.R. Simplot Company dated as of June 15, 1993..... (4)
10.11(a) Employment Agreement dated June 22, 1994 between the
Company and Harch S. Gill ("Previous Agreement")*...... (5) (Exh. 10.26)
10.11(b) Employment Agreement dated June 1, 1996 between the
Company and Harcharan S. Gill (replaces Previous
Agreement)*............................................ (1)
10.12 Registration Rights Agreement dated as of July 11, 1994 between the
Company and the investors listed
thereon................................................ (5) (Exh. 10.27)
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Location
- ----------- ------------ --------
<S> <C> <C>
10.13 Agreement between Baker Environmental, Inc. and the
Company dated November 8, 1994................................. (5) (Exh. 10.29)
10.14 Preferred Stock Purchase Agreement between the Company
and the several purchasers set forth on Schedule 1.1 thereto,
dated April 27, 1995............................................ (6) (Exh. 10.1)
10.15 Registration Rights Agreement among the Company and each
of the shareholders set forth thereon, dated April 27, 1995..... (6) (Exh. 10.2)
10.16 Financial Advisor Services Agreement between the Company
and Allen & Company, Incorporated, dated April 27, 1995......... (6) (Exh. 10.4)
10.17 Operating Agreement of CVT America, L.L.C. dated
May 5, 1995..................................................... (6) (Exh. 10.5)
10.18 Sublicense Agreement between CVT America, L.L.C. and
the Company dated as of May 5, 1995............................. (6) (Exh. 10.6)
10.19 Agreement between the Department of the Air Force and the
Company dated September 21, 1995................................ (7) (Exh. 10.1)
10.20 Agreement between the Department of Energy and the Company
dated September 25, 1995........................................ (7) (Exh. 10.2)
10.21 Registration Rights Agreement dated February 9, 1996 by and
between ETG Environmental, Inc. and the Company................. (8) (Exh. 99)
10.22 Envirogen, Inc. 1990 Incentive Stock Option and Non-
Qualified Stock Option Plan, as amended*........................ (1)
10.23 Envirogen, Inc. 1993 Director's Non-Qualified Stock
Option Plan, as amended*........................................ (9) (Exh. 10.27)
10.24 1995 Activation Orders between the Company and Texas
Eastern Transmission Corporation dated February 10, 1995........ (9) (Exh. 10.28)
10.25 Agreement between ABTco and the Company dated
October 30, 1995................................................ (9) (Exh. 10.29)
10.26 Collaborative Marketing Agreement between the Company
and Dow Environmental Inc. dated December 28, 1995.............. (9) (Exh. 10.30)
10.27 Development agreement dated November 7, 1996 between
Envirogen, Inc. and Rhone-Poulenc Inc........................... (10) (Exh. 10.2)
10.28 Securities Purchase Agreement dated January 14, 1997 by
and between Warburg, Pincus Ventures, L.P. and the
Registrant...................................................... (11) (Exh. 2.2)
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Location
- ----------- ----------- --------
<S> <C> <C>
21 Subsidiaries of the Company........................ (1)
23 Consent of Coopers & Lybrand L.L.P................ (1)
24 Powers of Attorney................................. (1)
</TABLE>
_______________________
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-48576) which became
effective on August 11, 1992.
(3) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1992.
(4) Incorporated by reference to the indicated exhibit to the Company's
Registration on Form S-1 (File No. 33-65430) which became effective
on October 13, 1993.
(5) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1994.
(6) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended March 31, 1995.
(7) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended September 30, 1995.
(8) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 5, 1996.
(9) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1995.
(10) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended September 30, 1996.
(11) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 14, 1997.
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year covered by this report.
44
<PAGE>
EXHIBIT INDEX
Sequential
- ----------
Exhibit No. Description
- ----------- -----------
2.1 Stock Purchase Agreement dated February 9, 1996
by and among ETG Environmental, Inc., MWR, Inc.
and the Registrant, (8)
2.2 Agreement and Plan of Merger dated January 14, 1997 by and
among Fluid Management, Inc., William C. Smith,
Douglas W. Jacobson, Gary W. Hawk, Richard W. Schowengerdt
and the Registrant, (11)
3.1(a) Restated Certificate of Incorporation dated
September 5, 1991, (2)
3.1(b) Certificate of Amendment to Restated
Certificate of Incorporation dated August 18, 1992, (2)
3.2 By-Laws, as amended, (2)
3.3 Certificate of Designation, Preferences and
Rights of Series C Convertible Preferred Stock of
the Company as filed with the Delaware
Secretary of State on April 26, 1995, (6)
3.4 Form of Certificate of Merger to be filed with the Delaware
Secretary of State pursuant to the Merger Agreement, (1)
10.1 License Agreement dated February 27, 1990 between the
Company and Amgen, Inc., as amended March 4, 1992, (2)
10.2 Lease dated July 13, 1990 between the Company and
United States Land Resources, L.P. for office and
laboratory facilities in Lawrence Township, New
Jersey, as amended, (2)
10.3 Lease dated November 15, 1991 between the Company and
United States Land Resources, L.P. for pilot
facilities in Lawrence Township, New Jersey, (2)
10.4 Envirogen, Inc. 401(k) Plan, (2)
10.5 Registration Rights Agreement dated April 25, 1990
between the Company and the investors listed thereon, (2)
45
<PAGE>
Sequential
- ----------
Exhibit No. Description
- ----------- -----------
10.6 Form of Employee Nondisclosure and Development
Agreement dated April 25, 1990 between the Company and
David N. Enegess and Ronald Unterman*, (2)
10.7 Form of Non-Competition Agreement dated April 25, 1990
between the Company and David N. Enegess and Ronald
Unterman*, (2)
10.8 Form of Confidentiality and Non-Compete Agreement dated
October 31, 1991 between Vapex and Michael C. Marley,
Bruce L. Cliff and Peter Nangeroni, (2)
10.9 Licensing Agreement between the Company and Environmental
Research Laboratory-Gulf Breeze dated March 10, 1993, (3)
10.10 Collaborative Marketing Agreement between the Company and
J.R. Simplot Company dated as of June 15, 1993, (4)
10.11(a) Employment Agreement dated June 22, 1994 between the Company
and Harch S. Gill, ("Previous Agreement")*, (5)
10.11(b) Employment Agreement dated June 1, 1996 between the
Company and Harcharan S. Gill (replaces Previous Agreement)*, (1)
10.12 Registration Rights Agreement dated as of July 11, 1994 between
the Company and the investors listed thereon, (5)
10.13 Agreement between Baker Environmental, Inc. and the Company
dated November 8, 1994, (5)
10.14 Preferred Stock Purchase Agreement between the Company
and the several purchasers set forth on Schedule 1.1 thereto,
dated April 27, 1995, (6)
10.15 Registration Rights Agreement among the Company and each
of the shareholders set forth thereon, dated April 27, 1995, (6)
10.16 Financial Advisor Services Agreement between the Company
and Allen & Company, Incorporated, dated April 27, 1995, (6)
10.17 Operating Agreement of CVT America, L.L.C. dated
May 5, 1995, (6)
10.18 Sublicense Agreement between CVT America, L.L.C. and
the Company dated as of May 5, 1995, (6)
46
<PAGE>
Sequential
- ---------
Exhibit No. Description
- ----------- -----------
10.19 Agreement between the Department of the Air Force and the
Company dated September 21, 1995, (7)
10.20 Agreement between the Department of Energy and the Company
dated September 25, 1995, (7)
10.21 Registration Rights Agreement dated February 9, 1996 by and
between ETG Environmental, Inc. and the Company, (8)
10.22 Envirogen, Inc. 1990 Incentive Stock Option and Non-
Qualified Stock Option Plan, as amended*, (1)
10.23 Envirogen, Inc. 1993 Director's Non-Qualified Stock
Option Plan, as amended*, (9)
10.24 1995 Activation Orders between the Company and Texas
Eastern Transmission Corporation dated February 10, 1995, (9)
10.25 Agreement between ABTco and the Company dated
October 30, 1995, (9)
10.26 Collaborative Marketing Agreement between the Company
and Dow Environmental Inc. dated December 28, 1995, (9)
10.27 Development agreement dated November 7, 1996 between
Envirogen, Inc. and Rhone-Poulenc Inc., (10)
10.28 Securities Purchase Agreement dated January 14, 1997 by
and between Warburg, Pincus Ventures, L.P. and the
Registrant, (11)
21 Subsidiaries of the Company, (1)
23 Consent of Coopers & Lybrand L.L.P., (1)
24 Powers of Attorney, (1)
__________________________
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-48576) which became
effective on August 11, 1992.
(3) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1992.
(4) Incorporated by reference to the indicated exhibit to the Company's
Registration on Form S-1 (File No. 33-65430) which became effective
on October 13, 1993.
47
<PAGE>
(5) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1994.
(6) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended March 31, 1995.
(7) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended September 30, 1995.
(8) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 5, 1996.
(9) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1995.
(10) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended September 30, 1996.
(11) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 14, 1997.
* Indicates a management contract or compensatory plan or arrangement.
48
<PAGE>
EXHIBIT 3.4
-----------
CERTIFICATE OF MERGER
OF
FLUID MANAGEMENT, INC.
INTO
ENVIROGEN, INC.
*******
ENVIROGEN, INC. hereby certifies that:
(1) The name and state of incorporation of each of the constituent
corporations of the merger are:
(a) Fluid Management, Inc., a Wisconsin corporation ("FMI"); and
(b) Envirogen, Inc., a Delaware corporation ("Envirogen").
(2) An Agreement and Plan of Merger dated January 14, 1997 among FMI,
Envirogen and William C. Smith, Douglas W. Jacobson, Gary W. Hawk and Richard W.
Schowengerdt (the "Merger Agreement") has been approved, adopted, certified,
executed and acknowledged by Envirogen and by FMI in accordance with the
provisions of Section 252(c) of the General Corporation Law of the State of
Delaware.
(3) The name of the surviving corporation of the merger is Envirogen, Inc.
(the "Surviving Corporation")
(4) The Certificate of Incorporation of Envirogen shall be amended so that
the Article Fourth shall be amended and restated in its entirety as follows:
"FOURTH: The aggregate number of shares of stock which the
Corporation shall have authority to issue is 52,000,000 shares,
divided into two classes, one class consisting of 50,000,000 shares of
common stock, par value $.01 per share, and the other class consisting
of 2,000,000 shares of preferred stock, par value $.01 per share.
The Board of Directors of the Corporation is hereby expressly
authorized, at any time and from time to time, to divide the preferred
stock into one or more
<PAGE>
series, to issue from time to time in whole or in part the stock of
any such series, and in the resolution or resolutions providing for
the issue of stock of a series to fix and determine the dividend
rates, voting rights, designations, preferences, qualifications,
privileges, limitations, options, conversion rights, redemption
rights, restrictions and special or relative rights of the series that
may be desired.
Except for and subject to the rights expressly granted to the holders
of preferred stock or any series thereof, pursuant to the authority
hereby vested in the Board of Directors, and except as may be provided
by the laws of the State of Delaware, the holders of common stock
shall have exclusively the rights of stockholders."
The Certificate of Incorporation of Envirogen, as so amended, as in effect
immediately prior to the date hereof shall thereafter continue in full force and
effect as the Certificate of Incorporation of the Surviving Corporation until
altered or amended as provided therein or by law.
(5) The executed Merger Agreement is on file at an office of the Surviving
Corporation located at 4100 Quakerbridge Road, Lawrenceville, New Jersey 08648.
(6) A copy of the Merger Agreement will be furnished by the Surviving
Corporation, on request and without cost, to any stockholder of FMI or
Envirogen.
(7) The authorized capital stock of FMI is 560,000 shares of common stock,
par value $.10 per share.
IN WITNESS WHEREOF, Envirogen, Inc. has caused this Certificate of Merger
to be signed by Harch S. Gill, its President, on ____________________, 1997.
ENVIROGEN, INC.
By:________________________________
Harch S. Gill
President
<PAGE>
EXHIBIT 10.11(b)
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of this 1st day of June, 1996, between
Envirogen, Inc., a Delaware corporation ("Envirogen"), and Harcharan S. Gill
(the "Executive").
Recitals
--------
The Executive currently serves Envirogen as its President and Chief
Executive Officer, without contract. Envirogen and the Executive desire to
reduce the terms of the Executive's employment with Envirogen to a written
agreement.
Agreement
---------
Now, therefore, in good and valuable consideration, the receipt and legal
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
1. EMPLOYMENT.
A. Agreement. Envirogen hereby agrees to employ the Executive, and the
---------
Executive hereby agrees to serve Envirogen, all on the terms and conditions set
forth herein.
B. Expiration Date. The employment of the Executive by Envirogen shall be
---------------
for the period commencing on June 1, 1996 and expiring on May 31, 1999 (the
"Expiration Date"), unless such employment shall have been extended or sooner
terminated as hereinafter set forth. On the Expiration Date, the Agreement
shall be renewed automatically for successive terms of one year each unless
either party hereto shall have given notice to the other party at least three
months prior to the end of the then current Expiration Date that the Agreement
shall not be renewed. Upon each such automatic renewal, the Expiration Date
shall become the first anniversary of the last Expiration Date then in effect.
As used herein, the term "Contract Year" means the twelve-month period beginning
June 1 of each year this Agreement is in effect.
2. POSITION AND DUTIES. The Executive shall serve in the capacity or
capacities and have the duties of the President and Chief Executive Officer of
Envirogen, as such duties are set forth in the bylaws of Envirogen, and shall
report to, be accountable to and subject to the supervision of, and shall also
have such other powers, duties and responsibilities as may from time to time be
prescribed by, the Board of Directors of
<PAGE>
Envirogen, provided that such other duties and responsibilities are not
inconsistent with the Executive's position and those duties set forth herein and
in the bylaws of Envirogen.
The Executive shall perform and discharge, faithfully, diligently and to
the best of his ability, such duties and responsibilities. The Executive shall
not accept a position on the Board of Directors of any company other than
Envirogen or a subsidiary thereof without the prior consent of the Board of
Directors of Envirogen. The Executive shall devote substantially all his
working time and efforts to the business and affairs of Envirogen and its
subsidiaries and affiliates.
The Executive represents to Envirogen that on the date hereof he is not
party to any agreement which conflicts with his obligations hereunder and that
he will not become party to any such agreement; should this representation prove
false at any time, then Envirogen shall have no further obligations hereunder.
3. COMPENSATION
A. Salary. During the term of his employment hereunder, the Executive
------
shall receive a Base Salary at the initial annual rate of $190,000. Such
initial Base Salary shall be subject to increase, but not decrease, by the Board
of Directors of Envirogen upon prior recommendation of the Executive
Compensation and Stock Option Committee thereof. Base Salary shall be payable
in substantially equal bi-weekly installments, less any amounts required to be
withheld under applicable law. In the event that, during the term hereof,
Envirogen shall determine to make salary payments to its executives at intervals
other than bi-weekly, Envirogen may adjust the intervals at which it makes
payments of Base Salary hereunder to such intervals as are consistent with the
intervals at which other executives of Envirogen are then compensated. Except
as otherwise provided in this Agreement, the Base Salary shall be pro-rated for
any period of service less than a full Contract Year.
B. Bonuses; Stock Options. The Executive will be eligible to receive an
----------------------
annual incentive bonus for each fiscal year of Envirogen this agreement is in
effect based upon the obtainment of corporate and individual performance goals
fixed by the Board of Directors of Envirogen upon the prior recommendation of
the Executive Compensation and Stock Option Committee thereof. The Executive
will also be eligible to receive grants of stock options under such stock option
plans of Envirogen as are in effect from time to time in such amounts, and on
such terms, as the committee or committees administering such plans may fix and
determine.
C. Expenses. During the term of his employment hereunder, the Executive
--------
shall be entitled to receive prompt reimbursement
-2-
<PAGE>
for all reasonable business expenses incurred by him on behalf of Envirogen (in
accordance with the policies and procedures established by the Board of
Directors of Envirogen from time to time for Envirogen's senior executive
officers) in performing services hereunder, provided that the Executive properly
accounts therefor in accordance with requirements for federal income tax
deductibility and Envirogen's policies and procedures.
D. Fringe Benefits. During the term of his employment hereunder, the
---------------
Executive shall be entitled to participate in or receive such benefits as other
executives and key employees of Envirogen are entitled to receive from time to
time, including but not limited to life insurance, health and accident plans,
retirement programs or other arrangements made generally available by Envirogen
to its executives and key management employees, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. Nothing herein shall preclude Envirogen, during the term
hereof, from amending, modifying or eliminating any such benefits so long as any
such changes apply consistently to all executives and key employees of
Envirogen.
E. Vacations. During the term of his employment hereunder, the Executive
---------
shall be entitled to twenty (20) paid vacation days in each calendar year (less,
in 1996, those vacation days taken by the Executive in 1996 prior to the date
hereof in respect of 1996 and, in any other year, prorated for any partial
calendar year this Agreement is in effect), and shall also be entitled to all
paid holidays given by Envirogen to its employees generally. Vacation days
allotted in any calendar year and not used in such year shall expire if not used
by March 31 of the immediately following calendar year.
4. CONFIDENTIALITY; UNAUTHORIZED DISCLOSURE. During the term hereof and
following the Expiration Date, the Executive shall not, without the written
consent of the Board of Directors of Envirogen or a person duly authorized
thereby, disclose to any person, other than an employee or professional adviser
of Envirogen or other person to whom disclosure is in the reasonable judgment of
the Executive necessary or appropriate in connection with the performance by the
Executive of his duties as an executive officer of Envirogen, any information
obtained by him while in the employ of Envirogen the disclosure of which he
knows or, in the exercise of reasonable care, should know may be damaging to, or
otherwise adverse to the interests of, Envirogen; provided, however, that such
-------- -------
information shall not include any information known generally to the public,
known generally within the Envirogen's industry (other than as a result of
unauthorized disclosure by the Executive), or provided to the Executive by a
source other than Envirogen or its agents (other than in breach of an obligation
of confidentiality of that source to Envirogen); and provided, further, that the
-------- -------
Executive's duties under this
-3-
<PAGE>
Section 4 shall not extend to any disclosures that may be required by law in
connection with any judicial or administrative proceeding or inquiry.
5. CONFLICT OF INTEREST.
A. Pre-Termination. During the term of the Executive's employment
---------------
hereunder, the Executive shall devote all of his professional time to the
furtherance of Envirogen's interests and the Executive shall not directly or
indirectly (a) own, manage, operate, control or participate in any manner in the
ownership, management, operation or control of, or be connected as an officer,
employee, partner, director, principal, consultant, agent or otherwise with, or
have any financial interest in, or aid or assist anyone else in the conduct of,
any business, venture or activity which is engaged, anywhere in (i) the 50
states of the United States, (ii) all of the provinces of Canada, and (iii) any
other jurisdiction in which Envirogen derived in excess of $250,000 in revenues
during the period this Agreement was in effect, in any business in which
Envirogen or any of its subsidiaries or Affiliates (as hereinafter defined) are
engaged on such Date of Termination, or (b) recruit or otherwise seek to induce
any employees of Envirogen or any of its subsidiaries to terminate their
employment or violate any agreement with or duty to Envirogen or any of its
subsidiaries or affiliates; provided, however, that the Executive may own, as a
-------- -------
passive investor, the lesser of (x) securities of a company which have a fair
market value of not more than $50,000, and (y) securities which represent no
more than one percent (1%) of the equity of a company, whether or not such
company engaged in the same business as Envirogen. As used herein, the term
"Affiliate" shall mean any company controlling, controlled by, or under common
control with, Envirogen.
B. Post-Termination. In addition to the provisions of Section 4 hereof,
----------------
for a period of two (2) years following termination of this Agreement for any
reason, the Executive shall not, directly or indirectly, (i) call on, solicit,
divert or take away any of the customers, business or patrons of Envirogen, or
(ii) offer employment to, or solicit the employment of, any person employed by
Envirogen, with whom or which, in either case, the Executive first became
acquainted while in the employ of Envirogen.
6. TERMINATION.
A. Death. The Executive's employment hereunder shall terminate upon his
-----
death.
B. Incapacity. If in the reasonable judgment of the Board of Directors of
----------
Envirogen, as a result of the Executive's incapacity due to physical or mental
illness or otherwise, the
-4-
<PAGE>
Executive shall for three consecutive months during the term of this Agreement
have been unable to perform satisfactorily all of his duties hereunder on a
full-time basis after taking into account such accommodation for any physical or
mental illness as may be required by law, Envirogen may terminate the
Executive's employment hereunder by notice to the Executive.
C. Cause. Envirogen may terminate the Executive's employment hereunder
-----
for Cause. For the purposes of this Agreement, Envirogen shall have "Cause" to
terminate the Executive's employment hereunder upon the Executive's (i) material
failure, refusal or neglect to perform and discharge his duties and
responsibilities hereunder, or willful action that is materially inconsistent
with the terms hereof, or material breach of his fiduciary duties as an officer
or as a director of Envirogen, or (ii) gross misconduct that is injurious to
Envirogen, or (iii) unethical business conduct, or (iv) conviction of a felony.
Notwithstanding any other provision of this Agreement, Envirogen shall provide
written notice to the Executive its intent to terminate for Cause and of the
specific Cause for termination. Upon the Executive's receipt of such written
notice, he shall have ten (10) business days in which to cure, correct or remedy
any stated act or omission constituting Cause. If the Executive cures, corrects
or remedies such act or omission within such ten (10) business day period to the
full satisfaction of the Board of Directors of Envirogen, there shall be no
termination for the stated Cause, and this Agreement shall continue in full
force and effect according to its terms.
D. Termination by the Executive. The Executive may terminate his
----------------------------
employment hereunder for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean (A) any removal of the Executive from the position indicated
in Section B of Appendix I hereof, except in connection with termination of the
Executive's employment for incapacity or Cause, or (B) a reduction in the
Executive's Base Salary below that set forth in Section 3.A. hereof, or (C) any
other action by Envirogen that is in material breach of the terms of this
Agreement or (D) a decision made in good faith by the Executive within six (6)
months following a "Change in Control" that he has been assigned, without his
prior written consent, duties or responsibilities inconsistent with his
positions, duties, responsibilities and status immediately prior to the Change
in Control. As used herein, the term "Change in Control" shall have the meaning
set forth in Appendix I hereto.
E. Date of Termination; Term of Employment. The term "Date of
---------------------------------------
Termination" shall mean the earlier of (i) the Expiration Date or (ii) if the
Executive's employment is terminated (a) by his death, the date of his death, or
(b) for any other reason whether or not specified in this Section 6 or for no
reason, the date on which such termination is to be
-5-
<PAGE>
effective pursuant to the notice of termination given by the party terminating
the employment relationship. For all purposes of this Agreement, references to
the "term" of the Executive's employment hereunder shall mean the period
commencing on June 1, 1996 and ending on the Date of Termination.
7. COMPENSATION UPON TERMINATION.
A. Death or Incapacity. Notwithstanding any other provision of this
-------------------
Agreement, if the Executive's employment shall be terminated by reason of his
death or incapacity, Envirogen shall pay or cause to be paid all sums accrued
and unpaid to the Date of Termination under Sections 3.A, 3.C, 3.D and 3.E (in
respect of accrued and unused vacation). In the event of the Executive's death,
unexpired stock options held at his death shall remain exercisable for such
period or periods as are set forth in the plan or plans under which they were
granted. In the event of termination by reason of incapacity, Envirogen shall
continue to pay the Executive the Base Salary as then in effect for the twelve
month period following the Date of Termination and shall, during such same
twelve month period, continue in effect all medical and life insurance which was
maintained by Envirogen for the benefit of the Executive on the Date of
Termination.
B. Cause or Executive's Termination other than for Good Reason.
-----------------------------------------------------------
Notwithstanding any other provision of this Agreement, if Envirogen shall
terminate the Executive's Employment for Cause, or if this Agreement shall
terminate by reason of the Executive's determination not to renew or by reason
of the Executive's termination of this Agreement other than for Good Reason,
Envirogen shall pay Executive all sums accrued and unpaid to the Date of
Termination under Sections 3.A, 3.C, 3.D and 3.E (in respect of accrued and
unused vacation) and shall permit the Executive to exercise any stock options
vested to the Date of Termination to the extent permitted by the terms of such
options. Envirogen shall thereafter have no further obligations to the
Executive under this Agreement.
C. Good Reason or Other Termination. If Envirogen shall determine not to
--------------------------------
renew this Agreement on any Expiration Date or shall terminate the Executive's
employment other than pursuant to Paragraph A, B or C of Section 6 hereof or if
the Executive shall terminate his employment for Good Reason, then Envirogen
shall pay to the Executive all sums accrued under Section 3.A, 3.C, 3.D and 3.E
hereof through the Date of Termination. In addition, Envirogen shall pay
severance pay to Executive, bi-weekly, at a rate equal to Executive's Base
Salary as in effect on the Date of Termination, (A) in the case of termination
arising from Envirogen's notice of election not to renew, for a period of twelve
months following the Expiration Date; (B) in the case of any other termination
by Envirogen other than by reason of paragraphs A, B, or C of Section 6 hereof,
for a period of twelve
-6-
<PAGE>
months following the Date of Termination; and (C) in the case of termination by
the Executive by reason of paragraph D of Section 6 hereof, for a period of
twelve months following the Date of Termination. In addition, if this Agreement
is terminated by reason of clause (A), (B) or (C) of the preceding sentence, (X)
Envirogen shall continue all medical and life insurance benefits maintained by
it for the benefit of the Executive on the Date of Termination for a period of
twelve months following the Date of Termination, and (Y) all options held by the
Executive which would vest in the twelve month period following the Date of
Termination shall become exercisable on the Date of Termination. In addition,
if this Agreement is terminated by the Executive by reason of clause (D) of
paragraph D. Section 6, then, subject to the next sentence, during the period
commencing twelve months following the Date of Termination and ending twenty-
four months following the Date of Termination, Envirogen shall continue to pay,
on a bi-weekly basis, the amounts described in the second preceding sentence and
provide the benefits provided in clause (X) of the immediately preceding
sentence for so long as, during such period, the Executive is unable to obtain
satisfactory full-time employment during such period, provided he continuously
and diligently seeks the same. Anything in this paragraph C of this Section 7
to the contrary notwithstanding, in the event this Agreement is terminated by
the Executive by reason of clause (D) of paragraph D. of Section 6 and the sum
of the aggregate of the salary continuation payments and the value of the
accelerated options which would be payable under this paragraph C of the Section
7 would result in the inability of Envirogen to deduct any such amounts so paid
from its taxable income for federal income tax purposes by reason of the
provisions of Section 280G of the Internal Revenue Code of 1986, as amended, or
under any provision successor thereto, and the regulations of the Internal
Revenue Service thereunder, then the aggregate of such salary continuation
payments and other payments or benefits in the nature of compensation (including
the value of accelerated options) shall be reduced by the minimum amount as may
be necessary so that all such amounts shall be eligible for deduction by
Envirogen from its taxable income for federal income tax purposes. The payments
provided for in this paragraph under the circumstances set forth in this
paragraph shall constitute the sole obligation of Envirogen to the Executive for
any termination of Employment referred to in this paragraph.
8. BINDING AGREEMENT. This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. This Agreement shall inure to the benefit
of Envirogen and its corporate successors and permitted assigns; provided that
Envirogen may not assign its rights or obligations hereunder without the prior
consent of the Executive. This Agreement and the provisions of Appendix I hereto
represent the
-7-
<PAGE>
sole agreements between Envirogen and the Executive relating to the Executive's
employment by Envirogen and supersede all prior agreements and communications,
oral and written to the extent that they relate to any terms and conditions of
the Executive's proposed employment with Envirogen. No provision of this
Agreement may be modified, waived, or discharged unless such waiver,
modification or discharge is approved by the Board of Directors and agreed to in
writing signed by the Executive and such officer as may be specifically
authorized by the Board of Directors. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
9. EFFECTIVE DATE AND EFFECTIVENESS. This Agreement shall take effect as of
the date hereof.
10. NOTICES. For all purposes of this Agreement, notices and all other
communications to either party hereunder provided
for in this Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States certified or registered mail,
return receipt requested, postage prepaid, addressed, in the case of Envirogen,
to the Chairman of the Board of Directors of Envirogen at the principal place of
business of Envirogen, or in the case of the Executive, to the Executive at his
principal residence address as on file with Envirogen at the time such notice is
given; or to such other address as either party shall designate by giving like
notice of such change to the other party.
11. ARBITRATION; INJUNCTION. Subject to the provisions of the last sentence of
this Section 11, any disputes or controversies arising with respect to the
provisions or operation of this Agreement shall be settled by binding
arbitration by a single arbitrator in Philadelphia, Pennsylvania, under the
commercial arbitration rules of the American Arbitration Association then in
effect. Judgment on the award may be entered in any court of competent
jurisdiction. In the event that the Executive is the prevailing party in any
such proceeding, Envirogen shall pay the reasonable fees of the Executive's
counsel. Anything in the foregoing to the contrary notwithstanding, the
Executive acknowledges and agrees that, because Envirogen's legal remedies would
be inadequate in the event of a breach of, or other failure to perform, any of
the covenants and agreements set forth in Sections 4 and 5 hereof by the
Executive, Envirogen may, in addition to obtaining any other remedy or relief
available to it under this Section 11 (including without limitation damages at
law), enforce the provisions of said Sections 4 and 5 by injunction and other
equitable relief in any court of competent jurisdiction.
-8-
<PAGE>
12. INDEMNIFICATION; INSURANCE. Envirogen shall indemnify the Executive to
the extent set forth in the By-Laws of Envirogen as in effect from time to time.
Envirogen shall use its best efforts to maintain a level of directors and
officers liability insurance equivalent to that in effect on the date hereof.
13. MISCELLANEOUS. Executive acknowledges that amounts which become payable
hereunder will be subject to withholding to the extent provided in the Internal
Revenue Code of 1986 and analogous provisions of state and local law. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the domestic substantive laws of the State of New Jersey without
giving effect to any choice or conflict of laws provision or rule that would
cause the application of the domestic substantive laws of any other
jurisdiction.
14. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect, and in the event that any provision hereof shall be determined to be
invalid or unenforceable for any reason, such provision shall be construed by
limiting it so as to be valid and enforceable to the fullest extent compatible
with and possible under applicable law.
15. COUNTERPARTS. This Agreement may be executed in any one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands, as of
the date first above written.
ENVIROGEN, INC.,
a Delaware corporation
By: /s/ Robert F. Hendrickson
-----------------------------
Name: Robert F. Hendrickson
Title: Chairman of the Board
of Directors
/s/ Harcharan S. Gill
-----------------------------
Harcharan S. Gill
-9-
<PAGE>
APPENDIX I
"Change in Control" shall mean:
(A) The acquisition by any person, entity or "group" required to file a
Schedule 13D or Schedule 14D-1 promulgated under the Securities Exchange Act of
1934 (the "Exchange Act") (excluding, for this purpose, the Company, its
subsidiaries, or any employee benefit plan of the Company or its subsidiaries
which acquires beneficial ownership of voting securities of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 51% or more of either the then outstanding shares of common
stock or the combined voting power of the Company's then outstanding voting
securities entitled to vote generally in the election of directors; or
(B) The election or appointment to the Board of Directors, or resignation
of or removal from the Board of Directors, of directors by virtue of which the
individuals who as of the date hereof constituted the Board of Directors (the
"Incumbent Board") no longer constitute at least a majority of the Board,
provided that any person who becomes a director subsequent to the date hereof
whose appointment, election, or nomination for election by the Company's
stockholders, was nominated by or approved by a vote of at least a majority of
the Incumbent Board (other than an appointment, election or nomination of an
individual whose initial assumption of office is in connection with an actual or
threatened election contest relating to the election of the directors of the
Company, as such terms are used in Rule 14a-1 promulgated under the Exchange
Act) shall be, for purposes of this Agreement, considered as though such person
were a member of the Incumbent Board; or
(C) Approval by the stockholders of the Company of: (i) a reorganization,
merger or consolidation by reason of which persons who were the stockholders of
the Company immediately prior to such reorganization, merger or consolidation do
not, immediately thereafter, own more than 51% of the combined voting power of
the reorganized, merged or consolidated company's then outstanding voting
securities entitled to vote generally in the election of directors, or (ii) a
liquidation or dissolution of the Company or the sale, transfer, lease or other
disposition of all or substantially all of the assets of the Company (whether
such assets are held directly or indirectly).
-10-
<PAGE>
EXHIBIT 10.22
ENVIROGEN, INC.
1990 INCENTIVE STOCK OPTION AND
NON-QUALIFIED STOCK OPTION PLAN*
-------------------------------
(As Amended and Restated Effective February 4, 1997)
1. PURPOSE. This Envirogen, Inc. 1990 Incentive Stock Option and
-------
Non-Qualified Stock Option Plan ("Plan") is intended to provide a means whereby
Envirogen, Inc. (the "Company") may, through the grant of incentive stock
options ("ISOs") to purchase common stock of the Company ("Common Stock") to
officers and other key employees ("Key Employees") and through the grant of
nonqualified stock options ("NQSOs" and, collectively with ISOs, "Options") to
Key Employees, directors, scientific advisory board members and consultants
(together with Key Employees, "Optionees"), attract and retain such Key
Employees and other Optionees and motivate such Key Employees and other
Optionees to exercise their best efforts on behalf of the Company and of any
related corporation ("Related Corporation").
For purposes of the Plan, a Related Corporation of the Company shall
mean either a corporate subsidiary of the Company, as defined in section 424(f)
of the Internal Revenue Code of 1986, as amended ("Code"), or the corporate
parent of the Company, as defined in section 424(e) of the Code. Further, as
used in the Plan, (a) the term "incentive stock option" shall mean an option
which, at the time such option is granted under the Plan, qualifies as an ISO
within the meaning of section 422 of the Code and is designated as an ISO in the
Option Agreement (as hereinafter defined); and (b) the term "nonqualified stock
option" shall mean an option which, at the time such option is granted, does not
qualify as an ISO and/or is designated as an NQSO in the Option Agreement.
2. ADMINISTRATION. The Plan shall be administered by the Company's
--------------
Stock Option Committee ("Committee"), which shall consist of not less than three
(3) non-employee directors (within the meaning of Rule 16b-3(b)(3) under the
------------------------------------------------------------------------
Securities Exchange Act of 1934 (the "Exchange Act"), or any successor thereto)
- -------------------------------------------------------------------------------
who are also outside directors (within the meaning of Treas. Reg. (S)1.162-
27(e)(3), or any successor thereto) of the Company who shall be appointed by,
and shall serve at the pleasure of, the Company's Board of Directors ("Board").
Each member of such Committee, while serving as such, shall be deemed to be
acting in his capacity as a director of the Company.
The Committee shall have full authority, subject to the terms of the
Plan, to select the Key Employees and other Optionees to be granted ISOs and
NQSOs under the Plan, to grant options on behalf of the Company and to set the
date of grant and the other terms of such Options. The Committee also shall
have the authority to establish such rules and regulations, not inconsistent
with the provisions of the Plan, for the proper administration of the Plan, and
to amend, modify or rescind any such rules and regulations, and to make such
determinations and interpretations under, or in connection with, the Plan, as it
deems necessary or advisable. All such rules, regulations, determinations and
interpretations shall be binding and conclusive upon the Company, its
stockholders and all employees, and upon their
__________________________
* The underscored language indicates amendments proposed to be adopted as
described in Proposal 4.
F-1
<PAGE>
respective legal representatives, beneficiaries, successors and assigns and upon
all other persons claiming under or through any of them.
3. ELIGIBILITY. The class of employees who shall be eligible to
-----------
receive ISOs under the Plan and the class of persons who shall be eligible to
receive NQSOs under the Plan shall be, respectively, the Key Employees of the
Company and/or a Related Corporation and the other Optionees employed by or
otherwise associated with the Company and/or of a Related Corporation. More
than one Option may be granted to an Optionee under the Plan.
4. STOCK. Options may be granted under the Plan to purchase up to a
-----
maximum of three million five hundred thousand (3,500,000) shares of the
-----------------------------------------------
Company's Common Stock, par value $.01 per share, subject to adjustment as
hereinafter provided; provided, however that no Key Employee shall receive
Options for more than one million (1,000,000) shares of the Company's Common
-----------------------
Stock. Shares issuable under the Plan may be authorized but unissued shares or
reacquired shares, and the Company may purchase shares required for this
purpose, from time to time, if it deems such purchase to be advisable.
If any Option granted under the Plan expires or otherwise terminates
for any reason whatever (including, without limitation, the Optionee's surrender
thereof) without having been exercised, the shares subject to the unexercised
portion of such Option shall continue to be available for the granting of
Options under the Plan as fully as if such shares had never been subject to an
Option; provided, however, that (a) if an Option is cancelled, the cancelled
Option is counted against the maximum number of shares for which Options may be
granted to a Key Employee, and (b) if the Option price is reduced after the date
of grant, the transaction is treated as a cancellation of an Option and the
grant of a new Option for purposes of counting the maximum number of shares for
which Options may be granted to a Key Employee.
5. GRANTING OF OPTIONS. From time to time until the expiration or
-------------------
earlier suspension or discontinuance of the Plan, the Committee may, on behalf
of the Company, grant to Optionees under the Plan such Options as it determines
are warranted; provided, however, that grants of ISOs and NQSOs shall be
separate and not in tandem. The granting of an Option under the Plan shall not
be deemed either to entitle the Optionee to, or to disqualify the Optionee from,
any participation in any other grant of Options under the Plan. In making any
determination as to whether an Optionee shall be granted an Option and as to the
number of shares to be covered by such Option, the Committee shall take into
account the duties of the Optionee, his present and potential contributions to
the success of the Company or a Related Corporation, and such other factors as
the Committee shall deem relevant in accomplishing the purposes of the Plan.
Moreover, the Committee may provide in the Option that said Option may be
exercised only if certain conditions, as determined by the Committee, are
fulfilled.
6. ANNUAL LIMIT.
------------
a. ISOs.
----
The aggregate fair market value (determined as of the time the ISO is
granted) of the Common Stock with respect to which ISOs are exercisable for the
first time by a Key Employee during any calendar year (under this Plan and any
other ISO plan of the Company or a Related Corporation) shall not exceed one
hundred thousand dollars ($100,000).
F-2
<PAGE>
b. NQSOs.
-----
The annual limits set forth above for ISOs shall not apply to
NQSOs.
7. TERMS AND CONDITIONS OF OPTIONS. The Options granted pursuant to
-------------------------------
the Plan shall expressly specify whether they are ISOs or NQSOs. In addition,
the Options granted pursuant to the Plan shall include expressly or by reference
the following terms and conditions, as well as such other provisions not
inconsistent with the provisions of this Plan and, for ISOs granted under this
Plan, the provisions of section 422(b) of the Code, as the Committee shall deem
desirable:
a. Number of Shares.
----------------
A statement of the number of shares to which the Option pertains.
b. Price.
-----
A statement of the Option price which shall be determined and
fixed by the Committee in its discretion but, in the case of an ISO, shall not
be less than the higher of one hundred percent (100%) (one hundred ten percent
(110%) in the case of more than ten percent (10%) stockholders as discussed in
(j) below) of the fair market value of the optioned shares of Common Stock, or
the par value thereof, on the date the ISO is granted and, in the case of an
NQSO, shall not be less than the higher of seventy-five percent (75%) of the
fair market value of the optioned shares of Common Stock, or the par value
thereof, on the date the NQSO is granted.
The fair market value of the optioned shares of Common Stock
shall be arrived at by a good faith determination of the Committee and shall be
(i) the mean between the highest and lowest quoted selling price, if there is a
market for the Common Stock on a registered securities exchange or in an over
the counter market, on the date of grant, or (ii) the weighted average of the
means between the highest and lowest sales on the nearest date before and the
nearest date after the date of grant, if there are no sales on the date of grant
but there are sales on dates within a reasonable period both before and after
the date of grant, or (iii) the means between the bid and asked prices, as
reported by the National Quotation Bureau on the date of grant, if actual sales
are not available during a reasonable period beginning before and ending after
the date of grant, or (iv) such other method of determining fair market value as
shall be authorized by the Code, or the rules or regulations thereunder, and
adopted by the Committee. Where the fair market value of the optioned shares of
Common Stock is determined under (ii) above, the average of the means between
the highest and lowest sales on the nearest date before and the nearest date
after the date of grant is to be weighted inversely by the respective numbers of
trading days between the date of grant and such sales dates, in accordance with
Treas. Reg. (S) 20.2031-2(b)(1).
c. Term.
----
Subject to earlier termination as provided in Subsections (e),
(f), (g) and (j) below and in Section 9 hereof, the term of each Option shall be
not more than ten (10) years (five (5) years in the case of ISOs granted to more
than ten percent (10%) stockholders as discussed in (j) below) from the date of
grant.
F-3
<PAGE>
d. Exercise.
--------
Options shall be exercisable in such installments and on such
dates as the Committee may specify, provided that (i) unless approved by the
Stock Option Committee, in no event shall any Option become exercisable at a
rate in excess of 20% per annum from the date of grant (except that all
outstanding Options shall be immediately exercisable in the case of merger,
consolidation, or other business combination involving the sale or transfer of
all (or substantially all) of the assets of the Company, or other business
combination involving the sale or transfer of all (or substantially all) of the
capital stock of the Company in which the Company is not the surviving entity,
or, if it is the surviving entity, either (a) does not survive as an operating
ongoing concern in substantially the same line of business, or (b) is controlled
by persons or entities previously unaffiliated with the Company), (ii) in the
case of new Options granted to an Optionee in replacement for options (whether
granted under the Plan or otherwise) held by the Optionee, the new Options may
be made exercisable, if so determined by the Committee, in its discretion, at
the earliest date the replaced options were exercisable, but not earlier than
three (3) months from the date of grant of the new Options, and (iii) the
Committee may accelerate the exercise date of any outstanding Options, in its
discretion, if it deems such acceleration to be desirable. Any Option shares,
the right to the purchase of which has accrued, may be purchased at any time up
to the expiration or termination of the Option. Exercisable Options may be
exercised, in whole or in part, from time to time by giving written notice of
exercise to the Company at its principal office, specifying the number of shares
to be purchased and accompanied by payment in full of the aggregate Option price
for such shares. Only full shares shall be issued under the Plan, and any
fractional share which might otherwise be issuable upon exercise of an Option
granted hereunder shall be forfeited.
The Option price shall be payable (i) in cash or its equivalent,
(ii) in the discretion of the Committee, in Company Common Stock previously
acquired by the Optionee, provided that if such shares of Common Stock were
acquired through exercise of an ISO and are used to pay the Option price of an
ISO, such shares have been held by the Key Employee for a period of not less
than the holding period described in section 422(a)(1) of the Code on the date
of exercise, or if such shares of Common Stock were acquired through exercise of
an NQSO or of an option under a similar plan, such shares have been held by the
Optionee for a period of more than one (1) year on the date of exercise, (iii)
in the discretion of the Committee, in any combination of (i) and (ii) above, or
(iv) in the discretion of the Committee, by delivering a properly executed
notice of exercise of the Option to the Company and a broker, with irrevocable
instructions to the broker promptly to deliver to the Company the amount of sale
or loan proceeds necessary to pay the exercise price of the Option, provided
that the payment procedure specified in this clause (iv) shall not be available
if such payment procedure would result in a violation of section 16(b) of the
Exchange Act.
In the event such Option price is paid, in whole or in part, with
shares of Common Stock, the portion of the Option price so paid shall be equal
to the "fair market value" on the date of tender, as such "fair market value" is
determined in Subsection (b) above, of the Common Stock so tendered in payment
of such Option price.
e. Termination of Employment.
-------------------------
If an Optionee's employment by the Company (and Related
Corporations) is terminated by either party prior to the expiration date fixed
for this Option for any reason other than death or disability, such Option may
be exercised, to the extent of the number of shares with respect to which the
Optionee could have exercised it on the date of such termination, by the
Optionee at any time prior to
F-4
<PAGE>
the earlier of (i) the expiration date specified in such option, or (ii) 30 days
after the date of the Optionee's termination of employment, or (iii) an
accelerated termination date of the option determined by the Committee, in its
discretion, except that such accelerated termination date shall not be earlier
than the date of the Optionee's termination of employment.
For purposes of this Plan, in the case of an Optionee who is a
director or a scientific advisory board member of the Company or a Related
Corporation but who is not an employee of the Company or a Related Corporation,
such Optionee's "employment" with the Company and all related Corporations shall
be deemed to terminate when such Optionee ceases to be a director or a
scientific board member of the Company and all Related Corporations, and is no
longer providing ongoing consulting or advisory services to the Company and all
Related Corporations. For purposes of this Plan, in the case of an Optionee who
is a consultant to the Company or a Related Corporation, such Optionee's
"employment" with the Company and all Related Corporations shall be deemed to
terminate when such Optionee is no longer providing ongoing consulting or
advisory services to the Company and all Related Corporations.
f. Exercise upon Disability of Optionee.
------------------------------------
If an Optionee shall become disabled (within the meaning of section
22(e)(3) of the Code) during his employment and, prior to the expiration date
fixed for his Option, his employment is terminated as a consequence of such
disability, such Option may be exercised, to the extent of the number of shares
with respect to which the Optionee could have exercised it on the date of such
termination, or to any greater extent permitted by the Committee, by the
Optionee at any time prior to the earlier of (i) the expiration date specified
in such Option, or (ii) an accelerated termination date determined by the
Committee, in its discretion, except that such accelerated termination date
shall not be earlier than the date of the Optionee's termination of employment
by reason of disability, and in the case of ISOs, such date shall not be later
than one (1) year after such termination of employment. In the event of the
Optionee's legal disability, such Option may be so exercised by the Optionee's
legal representative.
g. Exercise upon Death of Optionee.
-------------------------------
If an Optionee shall die during his employment and prior to the
expiration date fixed for his Option, or if an Optionee whose employment is
terminated by reason of Optionee's disability (as described in Subsection (f)
above) shall die following his termination of employment but prior to the
earliest of (i) the expiration date fixed for his Option, or (ii) the expiration
of the period determined under Subsection (f) above, or (iii) in the case of an
ISO, three (3) months following termination of employment, such Option may be
exercised, to the extent of the number of shares with respect to which the
Optionee could have exercised it on the date of his death, or to any greater
extent permitted by the Committee, by the Optionee's estate, personal
representative or beneficiary who acquired the right to exercise such option by
bequest or inheritance or by reason of the death of the Optionee, at any time
prior to the earlier of (i) the expiration date specified in such Option or (ii)
an accelerated termination date determined by the Committee, in its discretion,
except that such accelerated termination date shall not be later than one (1)
year after the date of death.
h. Non-Transferability.
-------------------
No Option shall be assignable or transferable by the Optionee
otherwise than by will or by the laws of descent and distribution, and during
the lifetime of the Optionee, the Option shall be
F-5
<PAGE>
exercisable only by him or by his guardian or legal representative. If the
Optionee is married at the time of exercise and if the Optionee so requests at
the time of exercise, the certificate or certificates shall be registered in the
name of the Optionee and the Optionee's spouse, jointly, with right of
survivorship.
i. Rights as a Stockholder.
-----------------------
An Optionee shall have no rights as a stockholder with respect to any
shares covered by his Option until the issuance of a stock certificate to him
for such shares.
j. Ten Percent Stockholder.
-----------------------
If the Key Employee owns more than ten percent (10%) of the total
combined voting power of all shares of stock of the Company or of a Related
Corporation at the time an ISO is granted to him, the Option price for the ISO
shall be not less than one hundred ten percent (110%) of the fair market value
of the optioned shares of Common Stock on the date the ISO is granted, and such
ISO, by its terms, shall not be exercisable after the expiration of five (5)
years from the date the ISO is granted. The conditions set forth in this
Subsection (j) shall not apply to NQSOs.
k. Listing and Restriction of Shares.
---------------------------------
Each Option shall be subject to the requirement that, if at any time
the Committee shall determine, in its discretion, that the listing, registration
or qualifications of the shares covered thereby upon any securities exchange or
under any state or federal law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such Option or the purchase of shares thereunder, or that
action by the Company or by the Optionee should be taken in order to obtain an
exemption for any such requirement, no such Option may be exercised, in whole or
in part, unless and until such action shall have been effected, obtained, or
taken under conditions acceptable to the Committee. Without limiting the
generality of the foregoing, each Optionee or his legal representative or
beneficiary may also be required to give satisfactory assurance that shares
purchased upon exercise of an Option are being purchased for investment and not
with a view to distribution, and certificates representing such shares may be
legended accordingly.
l. Withholding and Use of Shares to Satisfy Tax Obligations.
--------------------------------------------------------
The obligation of the Company to deliver shares of Common Stock upon
the exercise of any Option shall be subject to applicable federal, state and
local tax withholding requirements.
If the exercise of any Option is subject to the withholding
requirements of applicable federal tax laws, the Committee, in its discretion
(and subject to such withholding rules ("Withholding Rules") as shall be adopted
by the Committee), may permit the Optionee to satisfy the federal withholding
tax, in whole or in part, by electing to have the Company withhold (or by
returning to the Company) shares of Common Stock, which shares shall be valued,
for this purpose, at their fair market value on the date the amount of tax
required to be withheld is determined (the "Determination Date"). Such election
must be made in compliance with and subject to the Withholding Rules, and the
Company may not withhold shares in excess of the number necessary to satisfy the
minimum federal income tax withholding requirements. In the event shares of
Common Stock acquired under the exercise of an ISO are used to satisfy such
withholding requirement, such shares of Common Stock must have been held by the
Key Employee for a period of not less than the holding period described in
section 422(a)(1) of the
F-6
<PAGE>
Code on the Determination Date. In the event shares of Common Stock acquired
through exercise of an NQSO or of an option under a similar plan are used to
satisfy such withholding requirements, such shares must have been held by the
Optionee for a period of more than one (1) year on the Determination Date.
8. OPTION INSTRUMENTS - OTHER PROVISIONS. Options granted under the
-------------------------------------
Plan shall be evidenced by written documents ("Option Agreements") in such form
as the Committee shall, from time to time, approve, which Option Agreements
shall contain such provisions, not inconsistent with the provisions of the Plan
for NQSOs granted pursuant to the Plan, and such conditions, not inconsistent
with the provisions of the Plan and section 422(b) of the Code for ISOs granted
pursuant to the Plan, as the Committee shall deem advisable, and which Option
Agreements shall specify whether the Option is an ISO or NQSO. Each Optionee
shall enter into, and be bound by, such Option Agreements, as soon as
practicable after the grant of an Option.
9. CAPITAL ADJUSTMENTS. The number of shares which may be issued
-------------------
under the Plan, as stated in Section 4 hereof, and the maximum number of shares
with respect to which options may be granted to any Key Employee under the Plan
as stated in Section 4 hereof, and the number of shares issuable upon exercise
of outstanding Options under the Plan (as well as the Option price per share
under such outstanding Options), shall, subject to the provisions of section
424(a) of the Code, be proportionately adjusted, as may be deemed appropriate by
the Committee, to reflect any stock dividend, stock split, share combination, or
similar change in the capitalization of the Company.
10. AMENDMENT OR DISCONTINUANCE OF THE PLAN.
---------------------------------------
(a) GENERAL. The Board from time to time may suspend or discontinue
-------
the Plan or amend it in any respect whatsoever, except that the following
amendments shall require stockholder approval (given in the manner set forth in
Section 10(b) below):
(i) With respect to ISOs, any amendment which would: (A) change
the class of employees eligible to participate in the Plan, (B) except
as permitted under Section 9 hereof, increase the maximum number of
shares of Common Stock with respect to which ISOs may be granted under
the Plan, or (C) extend the duration of the Plan under Section 15
hereof with respect to any ISOs granted hereunder; and
(ii) With respect to Options, any amendment which would require
stockholder approval pursuant to Treas. Reg. (S) 1.162-27(e)(4)(vi) or
any successor thereto.
Notwithstanding the foregoing, no such suspension, discontinuance or amendment
shall materially impair the rights of any holder of an outstanding Option
without the consent of such holder.
(b) STOCKHOLDER APPROVAL REQUIREMENTS. The approval of stockholders
---------------------------------
must comply with all applicable provisions of the corporate charter, bylaws, and
applicable state law prescribing the method and degree of stockholder approval
required for the issuance of corporate stock or options. If the applicable
state law does not prescribe a method and degree of stockholder approval in such
case, the approval of stockholders must be effected:
(i) By a method and in a degree that would be treated as
adequate under applicable state law in the case of an action
requiring stockholder approval (i.e., an action
---
F-7
<PAGE>
on which stockholders would be entitled to vote if the action
were taken at a duly held stockholders' meeting); or
(ii) By a majority of the votes cast at a duly held
stockholders' meeting at which a quorum representing a majority
of all outstanding voting stock is, either in person or by proxy,
present and voting on the plan.
11. RIGHTS. Neither the adoption of the Plan nor any action of the
------
Board or the Committee shall be deemed to give any individual any right to be
granted an Option, or any other right hereunder, unless and until the Committee
shall have granted such individual an Option, and then his rights shall be only
such as are provided by the Option Agreement.
Any Option under the Plan shall not entitle the holder thereof to any
rights as a stockholder of the Company prior to the exercise of such Option and
the issuance of the shares pursuant thereto. Further, notwithstanding any
provisions of the Plan or the Option Agreement with an Optionee, the Company
shall have the right, in its discretion, to retire an Optionee at any time in
accordance with its policies or otherwise to terminate his employment at any
time in accordance with its policies for any reason whatsoever.
12. APPLICATION OF FUNDS. The proceeds received by the Company from
--------------------
the sale of Common Stock pursuant to Options granted under the Plan shall be
used for general corporate purposes. Any cash received in payment for shares
upon exercise of an Option to purchase Common Stock shall be added to the
general funds of the Company and shall be used for its corporate purposes. Any
Common Stock received in payment for shares upon exercise of an Option to
purchase Common Stock shall become treasury stock.
13. EFFECTIVE DATE. This Plan shall become effective on April 20,
--------------
1990 (the date the Plan was adopted by the Board and by the stockholders).
14. NO OBLIGATION TO EXERCISE OPTION. The granting of an Option
--------------------------------
shall impose no obligation upon an Optionee to exercise such Option.
15. TERMINATION OF THE PLAN. Unless earlier terminated as provided
-----------------------
in the Plan, the Plan and all authority granted hereunder shall terminate
absolutely at 12:00 midnight on March 31, 2000, which date is within ten (10)
years after the date the Plan was adopted by the Board, and no Options hereunder
shall be granted thereafter. Nothing contained in this Section 15, however,
shall terminate or affect the continued existence of rights created under
Options issued hereunder and outstanding on March 31, 2000, which by their terms
extend beyond such date.
16. GOVERNING LAW. With respect to any ISOs granted pursuant to the
-------------
Plan and the Option Agreements thereunder, the Plan, such Option Agreements and
any ISOs granted pursuant thereto shall be governed by the applicable Code
provisions to the maximum extent possible. Otherwise, the laws of the State of
Delaware shall govern the operation of, and the rights of Optionees under, the
Plan, the Option Agreements and any Options granted thereunder.
F-8
<PAGE>
EXHIBIT 21
ENVIROGEN, INC. - SUBSIDIARIES OF THE COMPANY
MWR, Inc., a Michigan corporation.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the registration statements of
Envirogen, Inc. on Form S-8 (File 333-09267), Form S-8 (File No. 33-54708), Form
S-3 (File No. 333-12883), Form S-3 (File No. 333-6991), and Form S-3 (File No.
33-78982) of our report dated February 20, 1997, on our audits of the
consolidated financial statements and financial statement schedule of Envirogen,
Inc. as of December 31, 1996 and 1995, and the years ended December 31, 1996,
1995 and 1994, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Princeton, New Jersey
March 11, 1997
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Harcharan S. Gill and Patricia McQueary, or
either of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, to do any and all acts, including
the execution of documents, which said attorneys, or either of them, may deem
necessary or advisable to enable Envirogen, Inc. (the "Company") to comply with
the Securities Exchange Act of 1934, as amended, and the rules and regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing under such Act of an annual report of the Company on Form 10-K for
the year ended December 31, 1996, including the power and authority to sign in
the name and on behalf of the undersigned, in any and all capacities in which
the signature of the undersigned would be appropriate, such annual report and
any and all amendments thereto and generally to do and perform all things
necessary to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
24th day of February, 1997.
/s/ Robert F. Hendrickson
------------------------------------------------
Robert F. Hendrickson
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Harcharan S. Gill and Patricia McQueary, or
either of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, to do any and all acts, including
the execution of documents, which said attorneys, or either of them, may deem
necessary or advisable to enable Envirogen, Inc. (the "Company") to comply with
the Securities Exchange Act of 1934, as amended, and the rules and regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing under such Act of an annual report of the Company on Form 10-K for
the year ended December 31, 1996, including the power and authority to sign in
the name and on behalf of the undersigned, in any and all capacities in which
the signature of the undersigned would be appropriate, such annual report and
any and all amendments thereto and generally to do and perform all things
necessary to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
24th day of February, 1997.
/s/ Robert F. Johnston
----------------------------------------------
Robert F. Johnston
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Harcharan S. Gill and Patricia McQueary, or
either of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, to do any and all acts, including
the execution of documents, which said attorneys, or either of them, may deem
necessary or advisable to enable Envirogen, Inc. (the "Company") to comply with
the Securities Exchange Act of 1934, as amended, and the rules and regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing under such Act of an annual report of the Company on Form 10-K for
the year ended December 31, 1996, including the power and authority to sign in
the name and on behalf of the undersigned, in any and all capacities in which
the signature of the undersigned would be appropriate, such annual report and
any and all amendments thereto and generally to do and perform all things
necessary to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
24th day of February, 1997.
/s/ Seymour L. Meisel
------------------------------------------
Seymour L. Meisel
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Harcharan S. Gill and Patricia McQueary, or
either of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, to do any and all acts, including
the execution of documents, which said attorneys, or either of them, may deem
necessary or advisable to enable Envirogen, Inc. (the "Company") to comply with
the Securities Exchange Act of 1934, as amended, and the rules and regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing under such Act of an annual report of the Company on Form 10-K for
the year ended December 31, 1996, including the power and authority to sign in
the name and on behalf of the undersigned, in any and all capacities in which
the signature of the undersigned would be appropriate, such annual report and
any and all amendments thereto and generally to do and perform all things
necessary to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
24th day of February, 1997.
/s/ Robert C. Miller
--------------------------------------------
Robert C. Miller
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Harcharan S. Gill and Patricia McQueary, or
either of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, to do any and all acts, including
the execution of documents, which said attorneys, or either of them, may deem
necessary or advisable to enable Envirogen, Inc. (the "Company") to comply with
the Securities Exchange Act of 1934, as amended, and the rules and regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing under such Act of an annual report of the Company on Form 10-K for
the year ended December 31, 1996, including the power and authority to sign in
the name and on behalf of the undersigned, in any and all capacities in which
the signature of the undersigned would be appropriate, such annual report and
any and all amendments thereto and generally to do and perform all things
necessary to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
24th day of February, 1997.
/s/ Peter J. Neff
--------------------------------------------
Peter J. Neff
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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0
0
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</TABLE>
