<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Confidential, For Use of the
[x] Preliminary Proxy Statement Commission Only (as permitted by Rule
[_] Definitive Proxy Statement 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ENVIROGEN, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.10 per share ("Common Stock"), of Fluid
---------------------------------------------------------------------------
Management, Inc. ("FMI")
---------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
40,000 shares of FMI Common Stock
---------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
$.034 (one-third of the par value per share of the Common Stock)
---------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$1,334
---------------------------------------------------------------------------
(5) Total fee paid:
$.27 (1/50 of 1% of $1,334)
---------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
---------------------------------------------------------------------------
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
---------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------------
<PAGE>
"PRELIMINARY COPY"
ENVIROGEN, INC.
4100 Quakerbridge Road
Lawrenceville, New Jersey 08648
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ______________________, 1997
------------------------
To the Stockholders of Envirogen, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of Envirogen, Inc. ("Envirogen") will be held at Envirogen's
headquarters located at 4100 Quakerbridge Road, Lawrenceville, New Jersey on
_____________, 1997 at 10:00 a.m. local time for the purpose of considering and
taking action upon the following proposals:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger dated January 14, 1997 among
Envirogen, Fluid Management, Inc., a Wisconsin corporation ("FMI"),
and the stockholders of FMI (the "Merger Agreement"), and the
merger contemplated thereby (the "Merger"), pursuant to which,
among other things, FMI will be merged with and into Envirogen,
with Envirogen being the surviving corporation. In the Merger, all
of the shares of common stock of FMI outstanding at the effective
time of the Merger will be converted into the right to receive an
aggregate of 4,190,477 shares of common stock, par value $.01 per
share (the "Common Stock"), of Envirogen and $11,000,000 of cash,
subject to adjustment pursuant to the Merger Agreement. A copy of
the Merger Agreement is attached as Appendix A to, and is
summarized in, the accompanying Proxy Statement.
2. To consider and vote upon a proposal to approve and adopt a
Securities Purchase Agreement dated January 14, 1997 between
Warburg, Pincus Ventures, L.P., a Delaware limited partnership
("Warburg"), and Envirogen (the "Securities Purchase Agreement"),
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"). A
copy of the Securities Purchase Agreement is attached as Appendix D
to, and is summarized in, the accompanying Proxy Statement.
3. To consider and vote upon a proposal to approve and adopt an
amendment to Envirogen's Amended and Restated Certificate of
Incorporation, as amended, to increase the number of authorized
shares of Common Stock from 20,000,000 shares to 50,000,000 shares
(the "Charter Amendment").
4. To consider and vote upon a proposal to approve and adopt the
amended and restated Envirogen, Inc. 1990 Incentive Stock Option
and Non-Qualified Stock Option Plan (the "Amended Option Plan")
which, among other things, increases the number of shares of Common
Stock reserved for issuance upon the exercise of options granted
under the Amended Option Plan from 2,000,000 shares to 3,000,000
shares. A copy of the
<PAGE>
Amended Option Plan, as proposed to be amended, is attached as
Appendix F to, and is summarized in, the accompanying Proxy
Statement.
5. To act upon any other matters properly coming before the Special
Meeting or any adjournment or postponement thereof.
The affirmative vote of holders of a majority of the outstanding shares
of Common Stock on the record date for the Special Meeting is required to
approve and adopt the Merger Agreement and the Merger and the Charter Amendment.
The affirmative vote of holders of a majority of the outstanding shares of
Common Stock present, in person or by proxy, at the Special Meeting and entitled
to vote is required to approve and adopt the Securities Purchase Agreement and
the Amended Option Plan. Although separate stockholder approval is being
solicited with respect to the approval of the Merger Agreement and the Merger,
the Securities Purchase Agreement, the Charter Amendment and the Amended Option
Plan, consummation of these respective actions is mutually dependent and none of
these proposed actions will be taken unless all of such proposed actions are
approved by the stockholders. Management presently knows of no other business to
be presented at the Special Meeting. If any other matters come before the
Special Meeting, the persons named in the enclosed proxy will vote in accordance
with the judgement of the persons voting such proxies.
The Board of Directors has fixed the close of business on January 31,
1997 as the record date for the Special Meeting. Only stockholders of record at
that time are entitled to notice of, and all such holders of Common Stock are
entitled to vote at, the Special Meeting and any adjournment or postponement
thereof. A complete list of stockholders entitled to vote at the Special Meeting
will be available for inspection by any stockholder for any purpose germane to
the Special Meeting for ten days prior to the Special Meeting during ordinary
business hours at Envirogen's headquarters located at 4100 Quakerbridge Road,
Lawrenceville, New Jersey 08648.
If the Merger is consummated, holders of shares of Common Stock who
dissent from the proposed Merger and who comply with the requirements of Section
262 of the General Corporation Law of the State of Delaware have the right to
seek appraisal of their shares of Common Stock. For a description of the rights
of stockholders pursuant to such Section 262 and a description of the procedures
to be followed in order to obtain such appraisal, see "Proposal 1. The Merger -
Special Factors - Rights of Dissenting Stockholders" and Appendix B to the
accompanying Proxy Statement.
To assure that your vote is counted, please complete, date and sign the
enclosed proxy and return it promptly in the enclosed envelope, whether or not
you plan to attend the Special Meeting in person. A self-addressed postage paid
envelope is enclosed for your convenience. No additional postage is required if
mailed in the United States. If you do attend the Special Meeting, you may
withdraw your proxy and vote your shares in person if you so choose. In any
event, you may revoke your proxy prior to its exercise by providing written
notice to the Secretary of Envirogen or by submitting a subsequent proxy
relating to the same shares. Shares represented by proxies that are returned
properly signed but unmarked will be voted in favor of the foregoing proposals.
ENVIROGEN'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER, THE SECURITIES PURCHASE AGREEMENT, THE CHARTER AMENDMENT AND THE AMENDED
OPTION PLAN.
By Order of the Board of Directors,
Lawrenceville, New Jersey Morgan R. Jones
_________________, 1997 Secretary
2
<PAGE>
ENVIROGEN, INC.
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL INFORMATION............................................................. 1
Purpose of Special Meeting............................................... 1
Record Date; Vote Required for Approval.................................. 2
Proxies.................................................................. 2
Rights of Dissenting Stockholders........................................ 3
Available Information.................................................... 4
Forward Looking Information.............................................. 4
PROPOSAL 1. THE MERGER.............................................................. 5
SPECIAL FACTORS................................................................. 5
Certain Effects of the Merger............................................ 5
Background of the Merger and the Warburg Transaction..................... 6
Reasons for the Merger; Recommendation of the Board of Directors......... 7
Opinion of Financial Advisor............................................. 10
Rights of Dissenting Stockholders........................................ 14
Accounting Matters....................................................... 16
Required Regulatory Approvals............................................ 17
Federal Income Tax Consequences of the Merger............................ 17
THE MERGER AGREEMENT............................................................ 18
The Merger; Merger Consideration......................................... 18
Representations and Warranties........................................... 19
Certain Covenants of FMI and FMI Stockholders............................ 19
Certain Covenants of Envirogen........................................... 21
Conditions to the Merger................................................. 22
Transaction Costs........................................................ 25
Voting Agreement......................................................... 25
Employment Agreements.................................................... 25
Registration Rights Agreement............................................ 26
Waiver and Amendment..................................................... 26
Termination.............................................................. 26
General Indemnification.................................................. 27
Escrow................................................................... 28
Indemnification of FMI Officers and Directors............................ 28
BUSINESS OF ENVIROGEN........................................................... 30
General.................................................................. 30
Growth Strategy.......................................................... 30
The Technologies......................................................... 31
Business Areas........................................................... 32
Governmental Regulation.................................................. 37
Competition.............................................................. 38
Environmental Liability and Insurance.................................... 39
Legal Proceedings........................................................ 40
Properties............................................................... 40
Employees................................................................ 40
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Compensation of Directors................................................ 40
Executive Compensation................................................... 41
Employment and Noncompetition Agreements................................. 44
Principal Stockholders of Envirogen...................................... 45
SELECTED HISTORICAL FINANCIAL DATA OF ENVIROGEN................................. 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ENVIROGEN......................................... 48
General.................................................................. 48
Results of Operations.................................................... 48
Liquidity and Capital Resources.......................................... 51
Other Matters............................................................ 52
MARKET PRICE OF AND DIVIDENDS ON ENVIROGEN COMMON STOCK......................... 53
BUSINESS OF FMI................................................................. 54
General.................................................................. 54
Remediation Services..................................................... 55
Non-PECFA Service Areas.................................................. 57
Competition.............................................................. 58
Management............................................................... 59
Sales and Marketing...................................................... 60
Employee Bonus Plans..................................................... 60
Governmental Regulation.................................................. 61
Property and Equipment................................................... 62
SELECTED HISTORICAL FINANCIAL DATA OF FMI....................................... 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FMI............................................... 64
General.................................................................. 64
Results of Operations.................................................... 65
Liquidity and Capital Resources.......................................... 66
COMPARATIVE PER SHARE DATA...................................................... 67
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION........................... 68
PROPOSAL 2. THE SECURITIES PURCHASE AGREEMENT....................................... 69
The Warburg Transaction.................................................. 69
Required Regulatory Approvals............................................ 69
Representations and Warranties........................................... 70
Conditions to the Warburg Transaction.................................... 70
Certain Covenants of Envirogen and Warburg............................... 71
Registration Rights Agreement............................................ 71
Waiver and Amendment..................................................... 71
Termination.............................................................. 71
Costs and Expenses....................................................... 72
PROPOSAL 3. THE CHARTER AMENDMENT.................................................... 73
PROPOSAL 4. AMENDED OPTION PLAN..................................................... 74
OTHER MATTERS........................................................................ 78
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEX TO FINANCIAL STATEMENTS........................................................................ FS-1
APPENDICES
- ----------
Appendix A - Agreement and Plan of Merger.......................................................... A-1
- ----------
Appendix B - Section 262 of the General Corporation Law of the State of Delaware.................. B-1
- ----------
Appendix C - Fairness Opinion of Allen & Company Incorporated...................................... C-1
- ----------
Appendix D - Securities Purchase Agreement......................................................... D-1
- ----------
Appendix E - Form of Registration Rights Agreement................................................. E-1
- ----------
Appendix F - Amended and Restated Envirogen, Inc. 1990 Incentive Stock Option and
- ---------- Non-Qualified Stock Option Plan....................................................... F-1
</TABLE>
iii
<PAGE>
ENVIROGEN, INC.
4100 Quakerbridge Road
Lawrenceville, New Jersey 08648
----------------------
PROXY STATEMENT
----------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _______________, 1997
GENERAL INFORMATION
Purpose of Special Meeting
This Proxy Statement is being furnished to holders of common stock, par
value $.01 per share (the "Common Stock"), of Envirogen, Inc., a Delaware
corporation ("Envirogen"), in connection with the solicitation of proxies by the
Board of Directors of Envirogen from such holders for use at a special meeting
of stockholders of Envirogen (the "Special Meeting") to be held on
_________________, 1997 at 10:00 a.m. local time at 4100 Quakerbridge Road,
Lawrenceville, New Jersey and at any adjournment or postponement thereof. This
Proxy Statement, the enclosed Notice of Special Meeting of Stockholders and the
form of proxy are first being mailed to the stockholders of Envirogen on or
about ____________, 1997.
At the Special Meeting, stockholders of Envirogen will be asked to
consider and vote upon a proposal to approve and adopt an Agreement and Plan of
Merger dated January 14, 1997 (the "Merger Agreement") among Envirogen, Fluid
Management, Inc., a Wisconsin corporation ("FMI"), and William C. Smith, Douglas
W. Jacobson, Gary W. Hawk and Richard W. Schowengerdt, being all of the
stockholders of FMI (the "FMI Stockholders"), and the merger contemplated
thereby (the "Merger"). The Merger Agreement, a copy of which is attached as
Appendix A hereto, provides for the merger of FMI with and into Envirogen, with
Envirogen being the surviving corporation. If the Merger is consummated, all of
the shares of common stock of FMI outstanding at the effective time of the
Merger will be converted into the right to receive an aggregate of 4,190,477
shares of Common Stock and $11,000,000 of cash, subject to adjustment pursuant
to the Merger Agreement. See "Proposal 1. The Merger - The Merger Agreement."
In order to effect the Merger, stockholders of Envirogen will also be
asked to consider at the Special Meeting and vote upon (a) a proposal to approve
and adopt a Securities Purchase Agreement dated January 14, 1997 between
Warburg, Pincus Ventures, L.P., a Delaware limited partnership ("Warburg"), and
Envirogen (the "Securities Purchase Agreement"), 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"), (b) a proposal to approve and adopt an amendment to Envirogen's
Amended and Restated Certificate of Incorporation, as amended (the "Certificate
of Incorporation"), to increase the number of authorized shares of Common Stock
from 20,000,000 shares to 50,000,000 shares (the "Charter Amendment") and (c) a
proposal to approve and adopt the amended and restated Envirogen, Inc. 1990
Incentive Stock Option and Non-Qualified Stock Option Plan (the "Amended Option
Plan") which, among other things, increases the number of shares of Common Stock
reserved for issuance upon the exercise of options granted under such Option
Plan from 2,000,000 shares to 3,000,000 shares. See "Proposal 2. The Securities
Purchase Agreement," "Proposal 3. The Charter Amendment" and "Proposal 4.
Amended Option Plan."
<PAGE>
Although separate stockholder approval is being solicited with respect
to the Merger Agreement and the Merger, the Securities Purchase Agreement, the
Charter Amendment and the Amended Option Plan, consummation of these respective
actions is mutually dependent and none of these proposed actions will be taken
unless all of such proposed actions are approved by the stockholders of
Envirogen.
Record Date; Vote Required for Approval
The Board of Directors has fixed the close of business on January 31,
1997 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Special Meeting.
Accordingly, only stockholders of record at the close of business on the Record
Date shall be entitled to notice of and to vote at the Special Meeting and at
any adjournment or postponement thereof. As of the Record Date, there were
__________ shares of Common Stock issued and outstanding and held by
approximately __ holders of record.
Each share of Common Stock entitles the holder of record thereof to one
vote, exercisable in person or by properly executed proxy, on all matters that
properly come before the Special Meeting and any adjournment or postponement
thereof. The presence, in person or by proxy, of stockholders entitled to cast a
majority of the Common Stock outstanding on the record date will constitute a
quorum for purposes of voting at the Special Meeting.
Under the General Corporation Law of the State of Delaware ("DGCL"), the
affirmative vote of the holders of a majority of the issued and outstanding
shares of Common Stock on the Record Date is required to approve and adopt the
Merger Agreement and the Merger and the Charter Amendment. The affirmative vote
of holders of a majority of the outstanding shares of Common Stock present, in
person or by proxy, at the Special Meeting and entitled to vote is required
under the DGCL to approve and adopt the Securities Purchase Agreement and the
Amended Option Plan.
Pursuant to a Voting Agreement dated January 14, 1997 among Allen &
Company Incorporated ("Allen & Company") and Allen Capital L.P. ("Allen
Capital"), the record owners of an aggregate of __________ shares of Common
Stock (or approximately _____% of the outstanding shares of Common Stock) as of
the Record Date, and FMI (the "Voting Agreement"), Allen & Company and Allen
Capital have agreed to vote all of their shares of Common Stock in favor of each
of the proposals set forth herein. See "Proposal 1. The Merger - The Merger
Agreement - Voting Agreement." As of the Record Date, the directors and
executive officers of Envirogen owned beneficially (excluding shares underlying
options and the shares beneficially owned by Allen & Company and Allen Capital)
an aggregate of ______ additional shares of Common Stock (or approximately ___%
of the outstanding shares of Common Stock). The directors and executive officers
are also expected to vote their shares of Common Stock in favor of each of the
proposals set forth herein.
Proxies
The enclosed proxy is being solicited by the Board of Directors for use
in connection with the Special Meeting and any postponement or adjournment
thereof. All Common Stock represented at the Special Meeting by properly
executed proxies received prior to or at the Special Meeting or any postponement
or adjournment thereof and not revoked in the manner described below will be
voted in accordance with the instructions indicated on such proxies. If no
instructions are indicated, such proxies will be voted "FOR" approval and
adoption of the Merger Agreement and the Merger, the Securities Purchase
Agreement, the Charter Amendment and the Amended Option Plan.
2
<PAGE>
The Board knows of no matters that will be presented for consideration
at the Special Meeting other than those matters set forth in the Notice of
Special Meeting of Stockholders. If any other matters are properly presented at
the Special Meeting for consideration, the persons named in the enclosed proxy
and acting thereunder will have authority to vote on such matters in accordance
with the judgement of the persons voting such proxies.
If a proxy is marked as "Withhold Authority" or "Abstain" on any matter,
or if specific instructions are given that no vote be cast on any specific
matter (a "Specified Non-Vote"), the shares represented by such proxy will not
be voted on such matter. Abstentions will be included within the number of
shares present at the meeting and entitled to vote for purposes of determining
whether such matter has been authorized, but nominee and other Specified Non-
Votes will not be so included.
If a quorum for the Special Meeting is not obtained or, as to any one or
more proposals, if fewer shares of Common Stock are voted in favor of the
proposal than the number of shares of Common Stock required for such approval,
the Special Meeting may be adjourned for the purpose of obtaining additional
proxies or votes or for any other purpose and, at any subsequent reconvening of
the Special Meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the original meeting (except for any proxies
that have theretofore effectively been revoked or withdrawn), notwithstanding
that they may have been effectively voted on the same or any other matter at a
previous meeting.
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement, will be borne by Envirogen. In addition to
solicitation by use of the mail, proxies may be solicited by telephone,
telegraph or personally by the directors, officers and employees of Envirogen,
who will receive no extra compensation for their services. Envirogen will
reimburse banks, brokerage firms and other custodians, nominees and fiduciaries
for reasonable expenses incurred by them in sending proxy soliciting materials
to beneficial owners of shares of Common Stock.
Proxies may be revoked by those persons executing the proxies by (a)
delivering to the Secretary of Envirogen at or before the Special Meeting a
written notice of revocation bearing a later date than the proxy, (b) duly
executing a subsequent proxy relating to the same shares of Common Stock and
delivering it to the Secretary of Envirogen at or before the Special Meeting or
(c) attending the Special Meeting and voting in person (although attendance at
the Special Meeting will not in and of itself constitute revocation of a proxy).
Any written notice revoking a proxy should be delivered at or prior to the
Special Meeting to: Secretary, Envirogen, Inc., 4100 Quakerbridge Road,
Lawrenceville, New Jersey 08648.
Rights of Dissenting Stockholders
Holders of shares of Common Stock who perfect appraisal rights in
accordance with Section 262 of the DGCL will be entitled to receive, following
the commencement and conclusion of a statutory appraisal proceeding in the
Delaware Court of Chancery (the "Delaware Chancery Court"), cash in the amount
of the fair value of their shares as determined by the Delaware Chancery Court
in the appraisal proceeding. In order to demand appraisal of and payment of the
judicially determined fair value of shares of Common Stock, a stockholder must,
among other things, (a) deliver to Envirogen before the vote on the Merger
Agreement and the Merger a written demand for appraisal of such stockholder's
shares of Common Stock, (b) not vote in favor of, or abstain from voting with
respect to, the Merger Agreement and the Merger and (c) hold shares of Common
Stock of record on the date the demand for appraisal is made and continue to
hold such shares of Common Stock until the effective time of the Merger. All
written demands for appraisal should be delivered to Envirogen at its
headquarters at 4100 Quakerbridge Road, Lawrenceville, New Jersey 08648,
Attention: Secretary. Voting in favor of the Merger Agreement and the Merger or
delivering a proxy in connection with the Special Meeting that is not properly
3
<PAGE>
withdrawn prior to the vote on the Merger Agreement and the Merger (unless such
proxy votes against or expressly abstains from the vote on the Merger Agreement
and the Merger) will constitute a waiver of a stockholder's appraisal rights.
See "Proposal 1. The Merger - Special Factors -Rights of Dissenting
Stockholders" and Appendix B hereto (which contains the full text of Section 262
of the DGCL).
Available Information
Envirogen is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the offices of
the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and the following Regional Offices of the Commission: Northwest
Atrium Center, 5000 West Madison Street, Suite 1400, Chicago, Illinois 60661;
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials may be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a web site that contains reports, proxy
statements and other information regarding registrants that are filed
electronically with the Commission, and the address of such site is
(http://www.sec.gov).
All information contained in this Proxy Statement concerning FMI was
supplied by FMI and Envirogen takes no responsibility for the accuracy or
completeness of such information.
Forward-Looking Information
This Proxy Statement contains forward-looking statements and information
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Reference is made in particular to the
description of Envirogen's and FMI's plans and objectives for future
operations, assumptions underlying such plans and objectives and other
forward-looking statements included in "Proposal 1. The Merger - Special Factors
- - Reasons for the Merger; Recommendation of the Board of Directors," "-Special
Factors - Opinion of Financial Advisor," "-Management's Discussion and Analysis
of Financial Condition and Results of Operations of Envirogen" and
"-Management's Discussion and Analysis of Financial Condition and Results of
Operations of FMI" in this Proxy Statement. In addition, the words "believes,"
"intends," "estimates" and "expects" and similar expressions are also intended
to identify forward-looking statements. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties described therein that could cause actual results to differ
materially from those described in the forward-looking statements. Envirogen
does not intend to update such forward-looking statements and information.
----------------------------------------
THE MERGER AND THE OTHER TRANSACTIONS DESCRIBED IN THIS PROXY STATEMENT
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THE MERGER OR THE
OTHER TRANSACTIONS DESCRIBED IN THIS PROXY STATEMENT NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED HEREIN. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
4
<PAGE>
PROPOSAL 1. THE MERGER
SPECIAL FACTORS
Certain Effects of the Merger
The acquisition of FMI will be effected by means of the merger of FMI
with and into Envirogen, with Envirogen being the surviving corporation. In
connection with the closing of the Merger, Envirogen will execute a certificate
of merger (the "Certificate of Merger") in accordance with the DGCL, and FMI and
Envirogen will execute articles of merger (the "Articles of Merger") in
accordance with the provisions of the Business Corporation Law of the State of
Wisconsin. The Merger will become effective at the time and on the date (the
"Effective Time") that the Certificate of Merger and the Articles of Merger have
been accepted by the Secretary of State of the State of Delaware and by the
Department of Financial Institutions of the State of Wisconsin, respectively.
At the Effective Time, all of the issued and outstanding shares of FMI
common stock will be converted into the right to receive an aggregate of
4,190,477 shares of Common Stock and $11,000,000 of cash, subject to adjustment
as provided in the Merger Agreement (the "Merger Consideration"). As of the
Effective Time, all shares of FMI common stock will no longer be outstanding,
will automatically be cancelled and retired and will cease to exist, and the FMI
Stockholders will cease to have any rights with respect to thereto, except the
right to receive the Merger Consideration.
The stockholders of Envirogen will continue to own the number of shares
of Common Stock owned by them at the Effective Time. Their shares of Common
Stock will not be cancelled, converted or exchanged into any other or new
security of Envirogen or any other entity nor shall they be entitled to
additional Common Stock by virtue of the Merger.
In order to effect the Merger and the transactions contemplated by the
Merger Agreement, at the Effective Time, Envirogen's Certificate of
Incorporation as in effect immediately prior to the Effective Time will need to
be amended to increase the number of authorized shares of Common Stock from
20,000,000 shares to 50,000,000 shares. See "Proposal 3. The Charter Amendment."
Except for such amendment, the Certificate of Incorporation and By-laws of
Envirogen as in effect immediately prior to the Effective Time will thereafter
continue in full force and effect until altered or amended as provided therein
or by law.
The directors of Envirogen immediately prior to the Merger will serve as
directors of Envirogen following the Merger, except that (a) Seymour L. Meisel
has tendered his resignation as a director of Envirogen, (b) William C. Smith,
the Chairman, President and Chief Executive Officer of FMI, has been appointed
by the Board of Directors of Envirogen to fill the vacancy created thereby and
(c) Robert S. Hillas, a Partner of Warburg, Pincus & Co., the general partner of
Warburg, has been appointed by the Board of Directors of Envirogen to fill a
previously existing vacancy, in each case effective as of the Effective Time.
The officers of Envirogen immediately prior to the Merger will serve in such
capacities following the Merger, except that the Board of Directors of Envirogen
has appointed William C. Smith to serve as Chairman of the Board and Douglas W.
Jacobson, the Vice President of Sales and Marketing of FMI, to serve as Senior
Vice President of Marketing of Envirogen, in each case effective as of the
Effective Time.
5
<PAGE>
Background of the Merger and the Warburg Transaction
In July 1996, Robert S. Hillas, a Partner of Warburg, Pincus & Co., the
general partner of Warburg, informed Robert F. Johnston, a director of
Envirogen, that the FMI Stockholders were interested in selling FMI's business
and that Warburg would be interested in funding the cash portion of a possible
acquisition of FMI by Envirogen. Soon thereafter, the FMI Stockholders provided
Harch S. Gill, the President and Chief Executive Officer and a director of
Envirogen, with certain product, marketing and financial information relating to
FMI for purposes of determining if an acquisition of FMI would be beneficial to
Envirogen and its stockholders.
On August 21, 1996, Dr. Gill met with William C. Smith, the Chairman,
President and Chief Executive Officer of FMI and an FMI Stockholder, Richard W.
Schowengerdt, the Vice President of Selective Projects of FMI and an FMI
Stockholder, and other senior officers of FMI at FMI's corporate offices in
Pewaukee, Wisconsin. The purpose of this meeting was to evaluate on a
preliminary basis the strategic fit between the two companies and to conduct an
initial due diligence investigation of FMI.
On September 5, 1996, Mr. Smith and Douglas W. Jacobson, the Vice
President of Sales and Marketing of FMI and an FMI Stockholder, met with Messrs.
Hillas and Johnston, Dr. Gill and other executive officers of Envirogen at
Envirogen's offices in Lawrenceville, New Jersey. The purpose of this meeting
was to continue to evaluate the strategic fit between the two companies and to
conduct a preliminary due diligence investigation of Envirogen.
By memorandum dated September 11, 1996, Dr. Gill informed Envirogen's
Board of Directors of the proposed acquisition of FMI. At a meeting of the Board
of Directors of Envirogen on September 17, 1996, Dr. Gill provided additional
information concerning FMI's operations and financial condition. Based upon the
information provided, the Board determined to continue the preliminary due
diligence investigation of FMI and to evaluate further the advantages and
disadvantages of an acquisition of FMI.
On October 16, 1996, Messrs. Johnston and Hillas, Robert C. Miller, a
director of Envirogen and a Vice President and Director of Allen & Company, and
Ronald Unterman, the Vice President and Chief Scientific Officer of Envirogen,
visited FMI's corporate offices in Pewaukee to conduct further preliminary due
diligence investigations of FMI and to discuss the terms and conditions of the
proposed transactions.
On October 28, 1996, a conference call was convened among Messrs.
Miller, Hillas and Smith and Dr. Gill to negotiate and clarify certain points
regarding the proposed transactions. As a result of the discussions held
thereon, on November 6, 1996 Envirogen, FMI and Warburg executed a non-binding
letter of intent (the "Letter of Intent") providing, among other things, for (i)
the acquisition by Envirogen of all of the outstanding capital stock of FMI for
approximately $11,000,000 of cash and 4,190,477 shares of Envirogen Common Stock
and (ii) the purchase by Warburg of 6,095,238 shares of Envirogen Common Stock
for an aggregate cash purchase price of $16,000,000. On November 6, 1996,
Envirogen issued a press release announcing the signing of the Letter of Intent.
At a meeting of Envirogen's Board of Directors on November 19, 1996, the
Board considered the general terms and conditions of the proposed acquisition of
FMI and the Warburg Transaction. The Board analyzed the impact of the Merger on
consolidated financial performance as well as the stock ownership of Envirogen
after the proposed transactions. The Board also considered the advantages and
disadvantages to Envirogen of the Merger, the markets presently served by FMI
and the areas into which
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the combined services and technologies of FMI and Envirogen could be offered.
The Board also approved and ratified Envirogen's execution of the Letter of
Intent.
After the signing of the Letter of Intent, Envirogen's management and
Drinker Biddle & Reath, legal counsel to Envirogen, held a series of telephone
and face-to-face meetings with FMI, Warburg, Quarles & Brady, counsel to FMI,
and Willkie Farr & Gallagher, counsel to Warburg, to negotiate and finalize the
terms of the Merger Agreement, the Securities Purchase Agreement and other
related documents. During this period, Drinker Biddle & Reath and Willkie Farr &
Gallagher conducted a legal due diligence investigation of FMI, and Quarles &
Brady and Willkie Farr & Gallagher conducted a legal due diligence investigation
of Envirogen. In addition, Coopers & Lybrand L.L.P. was engaged to conduct an
audit of FMI's financial statements for the years ended 1994 and 1995.
On December 9, 1996, Envirogen's Board of Directors discussed the status
of management's due diligence investigation of FMI's business. The Board also
determined to engage Allen & Company to provide financial advisory services with
respect to the Merger and the Warburg Transaction, including the preparation and
delivery of an opinion to Envirogen's Board of Directors regarding the fairness,
from a financial point of view, of the terms of the Merger and the Warburg
Transaction to Envirogen's stockholders.
On January 3, 1997, the Envirogen Board met again, with its legal and
financial advisors present. Mr. Miller of Allen & Company made a detailed
presentation of Allen & Company's analysis of the proposed transactions and
delivered its opinion that, as of such date, the terms of the Merger and the
Warburg Transaction were fair, from a financial point of view, to the holders of
Envirogen Common Stock. The Board also considered what it regarded as the other
positive and potentially negative factors of the Merger and the Warburg
Transaction. After full discussion, the Board accepted the Allen & Company
fairness opinion, unanimously approved the Merger Agreement and the Merger, the
Securities Purchase Agreement, the Charter Agreement and the Amended Option
Plan, and authorized the appropriate officers of Envirogen to execute and
deliver such other agreements and documents and take such actions as they deem
necessary to effect the transactions contemplated thereby.
On January 14, 1997, Envirogen, Warburg and FMI and the FMI Stockholders
completed their negotiations, and the Merger Agreement, the Securities Purchase
Agreement and the Voting Agreement were executed. Envirogen announced the
execution of the Merger Agreement and the Securities Purchase Agreement through
a press release on the same day.
Reasons for the Merger; Recommendation of the Board of Directors
Envirogen's Board of Directors pursued the Merger as a strategic
acquisition consistent with its ongoing review of potential acquisition
candidates in the environmental field. In making its determination to approve
the Merger and the Warburg Transaction, the Envirogen Board reviewed and
discussed the results of management's due diligence investigation of FMI and
analyzed the business opportunities for Envirogen and certain other relevant
factors. In evaluating the terms of the proposed Merger and the Warburg
Transaction, the Board consulted with Envirogen's management, auditors and legal
counsel and with its financial advisor, Allen & Company. In reaching its
conclusion to approve the Merger and the Warburg Transaction, the Envirogen
Board considered certain material factors, including the factors listed on the
following page:
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Positive Factors
1. The strategic benefit of diversifying across technical competencies and
geographic bounds to increase market share.
2. The strategic benefit of building an integrated marketing and sales
network to expand services to existing customers using FMI's offices to
provide additional outlets for Envirogen's products and services.
3. The strategic benefit of utilizing FMI's resources and expertise to
assist in managing future Envirogen projects.
4. The economic benefits of FMI's revenue and cash flow generation and
maintenance of above-average profit margins.
5. The economic benefits from the net proceeds of the Warburg Transaction,
resulting in increased liquidity and a stronger balance sheet.
6. The potential benefits resulting from an increased market value of the
combined enterprise and the possibility of increased research coverage
and investor interest.
7. The potential benefits from the complementary nature of the businesses
of FMI and Envirogen, including the expected reduction of marginal costs
resulting from synergies of the Merger, such as the elimination of
duplicative administrative expenses and enhanced purchasing power.
8. The extensive experience and operating capabilities of FMI management,
and the fact that the FMI Stockholders, each of whom will have an
economic stake in the success of Envirogen by virtue of their ownership
of Envirogen Common Stock, will enter into employment agreements with
Envirogen upon consummation of the Merger .
9. The receipt of an opinion from Allen & Company that the terms of the
Merger and the Warburg Transaction are fair, from a financial point of
view, to the holders of Envirogen Common Stock. Allen & Company's
opinion dated January 3, 1997 is attached as Appendix C to this Proxy
Statement. See "Opinion of Financial Advisor" below.
Negative Factors
1. During 1995 and 1996, FMI derived approximately 85% and 87%,
respectively, of its revenue from its operations under the Wisconsin
Petroleum Environmental Cleanup Fund Act ("PECFA") program. Under the
PECFA program, the current rate of state reimbursement for the removal
and remediation of petroleum storage tanks for non-marketers (i.e.,
truck companies) is limited to $500,000 and for marketers (i.e., gas
stations) is limited to $1 million. For any investigation commenced
after July 1, 1998, reimbursement for non-marketers as well as marketers
is scheduled to be limited to $190,000 per site. During 1996,
reimbursement to FMI under the PECFA program averaged approximately
$300,000 per site. A proposal is pending before the Wisconsin
legislature which would extend the current reimbursement rates through
December 2001.
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Although FMI had more than 375 ongoing remediation projects at September
30, 1996, any reduction in the PECFA reimbursement rates will adversely
effect Envirogen's revenues from FMI's operations under the PECFA
program after the Closing Date. See "Business of FMI-Remediation
Services - PECFA Program."
2. Under the PECFA program, claims for reimbursement are submitted to the
Department of Commerce of the State of Wisconsin ("DCOM") upon
completion of certain remediation activities. Final review of the PECFA
claims by DCOM and determination of any ineligible costs is typically
not completed until one to three years after the related revenues have
been collected by FMI. As of the end of 1996, approximately $43 million
of previously recognized and collected revenues of FMI had not been
processed through the DCOM review procedure and remained subject to
PECFA ineligible determinations. Although FMI has maintained a reserve
against this contingent liability in an amount that it believes to be
adequate, a significant amount of FMI's collected revenues will remain
subject to PECFA ineligible determinations well beyond the closing of
the Merger.
3. Pursuant to Section 382 of the Internal Revenue Code, Envirogen's
ability to utilize its net operating losses will be limited as a result
of the Merger and the Warburg Transaction.
4. As a result of the Merger, Envirogen expects to recognize a significant
amount of goodwill that it expects to amortize over 20 years, resulting
in an annual non-cash charge to earnings during that period. See
"Accounting Matters."
5. Any claim by Envirogen for indemnification under the Merger Agreement
based upon misrepresentations or breach of warranties by FMI or the FMI
Stockholders, other than for fraud or intentional misrepresentations,
will be limited in time and amount. See "The Merger Agreement - General
Indemnification" and "-Escrow."
6. There can be no assurance that Envirogen will be successful in
integrating the operations of FMI and Envirogen or that the results of
operations of Envirogen will not be adversely affected by such
integration.
7. In connection with the Merger, Envirogen will assume all of FMI's
obligations and liabilities, including any adverse resolutions of
certain existing litigation matters.
8. Envirogen will file with the Commission, as soon as practicable after
the Merger, a registration statement relating to the offer and sale by
the FMI Stockholders and Warburg of the 4,190,477 and 6,095,238 shares
of Common Stock to be issued to the FMI Stockholders and Warburg,
respectively, in connection with the Merger and the Warburg Transaction.
Although FMI Stockholders and Warburg have agreed not to sell such
shares for a period of 12 months after the Effective Time without
Envirogen's consent, the sale of such shares, in the public market or
otherwise, could have an adverse effect on the market price of the
Common Stock. See "The Merger Agreement - Registration Rights
Agreement."
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In view of the wide variety of factors considered in connection with its
evaluation of the Merger, no one of the foregoing factors, nor any combinations
of these factors other than all the factors taken together, was determinative in
the Board's recommendation. Without giving relative weights to the respective
factors, favorable and adverse, the Board determined that the factors adverse to
the Merger were not sufficiently so to negate the potential benefits of the
Merger.
Envirogen's Board of Directors believes that the Merger and the Warburg
Transaction are fair to, and in the best interests of, Envirogen and its
stockholders for the reasons described above. Accordingly, the Board of
Directors has approved the Merger Agreement and the Securities Purchase
Agreement and the transactions contemplated thereby and has directed that the
Merger Agreement and the Securities Purchase Agreement be submitted for approval
to Envirogen's stockholders at the Special Meeting.
Opinion of Financial Advisor
At the January 3, 1997 meeting of the Board of Directors of Envirogen,
Allen & Company delivered its written opinion that, as of such date, the terms
of the Merger and the Warburg Transaction were fair, from a financial point of
view, to the holders of Envirogen Common Stock.
The full text of the written opinion of Allen & Company, dated January
3, 1997, is attached as Appendix C to this Proxy Statement and describes the
assumptions made, matters considered and limits on the review undertaken.
Envirogen stockholders are urged to read the opinion in its entirety. Allen &
Company's opinion is directed to the fairness, from a financial point of view,
of the terms of the Merger and the Warburg Transaction to the holders of
Envirogen Common Stock and does not constitute a recommendation of the Merger or
the Warburg Transaction over other courses of action that may be available to
Envirogen or constitute a recommendation to any holder of Envirogen Common Stock
concerning how such holder should vote with respect to the Merger and the
Warburg Transaction. The summary of the opinion of Allen & Company set forth in
this Proxy Statement is qualified in its entirety by reference to the full text
of such opinion.
In arriving at its opinion, Allen & Company (a) reviewed the terms and
conditions of the Merger and the Warburg Transaction, including the draft Merger
Agreement and the draft agreements ancillary thereto, as well as the draft
Securities Purchase Agreement and the draft agreements ancillary thereto; (b)
reviewed a preliminary draft of this Proxy Statement; (c) analyzed publicly
available historical business and financial information relating to Envirogen,
as presented in documents filed with the Commission; (d) analyzed certain
historical business and financial information relating to FMI furnished by FMI;
(e) reviewed certain financial forecasts and other data provided by Envirogen
and FMI relating to their respective businesses; (f) discussed with certain
members of the senior management of Envirogen and FMI the financial condition,
business operations, strategic objectives and prospects of Envirogen and FMI, as
well as trends prevailing in Envirogen's and FMI's respective industries; (g)
reviewed and analyzed public information, including certain stock market data
and financial information relating to selected public companies in lines of
business which Allen & Company believed to be comparable to those of Envirogen
and FMI; (h) reviewed trends in the waste management and environmental services
industries; (i) reviewed the trading history of the Envirogen Common Stock,
including its performance in comparison to market indices and to selected
companies in comparable businesses and the market reaction to selected public
announcements regarding Envirogen; (j) reviewed public financial and transaction
information relating to merger and acquisition transactions Allen & Company
believed to be
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comparable to the Merger; and (k) conducted such other financial analyses
and investigations as Allen & Company believed necessary or appropriate
for the purposes of its opinion.
In connection with its review, Allen & Company assumed and relied on
the accuracy and completeness of the information it reviewed for the
purpose of its opinion and did not assume any responsibility for
independent verification of such information or for any independent
evaluation or appraisal of the assets of Envirogen or FMI. With respect
to Envirogen's and FMI's financial forecasts, Allen & Company assumed that
they had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of Envirogen and FMI,
respectively, and Allen & Company expressed no opinion with respect to
such forecasts or the assumptions on which they were based. Allen &
Company's opinion was necessarily based upon business, market, economic
and other conditions as they existed on, and could be evaluated as of, the
date of its opinion.
The following is a summary of the presentation made to the Board of
Directors of Envirogen on January 3, 1997 by Allen & Company in connection
with the rendering of Allen & Company's fairness opinion:
Transaction Summary. Prior to delivering its written opinion to the
Envirogen Board of Directors, Allen & Company reviewed certain information
with the Envirogen Board relating to Envirogen and FMI, including the
financial terms of the Merger and the Warburg Transaction and the
financial analyses summarized below. Allen & Company also reviewed
certain strategic and economic benefits of, and risks related to, the
Merger, including the ability of Envirogen, as a result of the Merger, to
diversify across technical competencies and geographic bounds and to
utilize FMI's resources and expertise in order to manage future projects.
Allen & Company commented that the Merger should improve Envirogen's
competitive position and enhance its potential for developing business in
the Midwest by, among other things, being able to leverage FMI's existing
client relationships and distribution channels. Allen & Company stated
that the consummation of the Merger and the Warburg Transaction should
provide Envirogen with improved financial flexibility, earnings stability
and market penetration, and that the Merger and the Warburg Transaction
should provide Envirogen stockholders with increased liquidity for
Envirogen's securities resulting from the increased market value of the
combined entity.
Overview of FMI. Allen & Company presented an overview of FMI's
environmental consulting and engineering business, focusing on the core
services provided by FMI, which include remedial investigation and design,
construction services, air science and engineering, wastewater and
stormwater management, compliance management, and landfill management and
engineering. Allen & Company noted that storage tank removal and
remediation represents approximately 85% of FMI's revenues, with the
majority of such work eligible to be reimbursed to FMI's customers under
the PECFA program. Allen & Company stated that, according to industry
estimates, between 20,000 to 30,000 storage tank sites remain to be
remediated in Wisconsin, representing a significant market opportunity.
Allen & Company also reviewed FMI's historical operating results for the
three fiscal years ended December 31, 1993 through 1995 and its estimated
or projected operating results for the three fiscal years ending December
31, 1996 through 1998.
Transaction Analysis. Allen & Company presented to the Envirogen
Board various transaction analyses. Allen & Company estimated that the
transaction value of the Merger was approximately $29,295,000 (the
"Estimated Transaction Value") based upon (i) $11,000,000 in cash to be
paid, (ii) $11,000,000 of value for the 4,190,477 shares of Envirogen
Common Stock to be issued in the Merger
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(valued at the $2.625 price per share at which the Envirogen Common Stock
is to be issued in the Warburg Transaction (the "Exchange/Offer Value"))
and (iii) $7,295,000, representing estimates of the net debt of FMI to be
assumed by Envirogen, the present value of the limitation of Envirogen's
net operating loss utilization and the present value of the loss of
certain potential tax benefits if the parties had utilized an alternative
transaction structure.
Allen & Company analyzed such Estimated Transaction Value as
multiples of gross revenues, earnings before interest, taxes, depreciation
and amortization ("EBITDA"), earnings before interest and taxes ("EBIT")
and net income based on FMI's 1996 and 1997 estimated results of
operations. Allen & Company compared such multiples for FMI derived from
the Estimated Transaction Value to the median multiples of gross revenues,
EBITDA, EBIT and net income derived from the recent trading prices of a
group of environmental services companies deemed by Allen & Company to be
engaged in lines of business similar to the business of FMI (Dames &
Moore, Inc., EA Engineering Science & Technology, Inc., Ecology and
Environment, Inc., Emcon, Inc., Fluor Daniel/GTI, Inc., GZA
GeoEnvironmental Technologies, Inc., Harding Lawson Associates Group, ICF
Kaiser International, Inc., International Technology Corporation, OHM
Corporation, Roy F. Weston, Inc., Sevenson Environmental Services, Inc.,
Tetra Tech, Inc., TRC Companies, Inc., URS Corporation and Versar, Inc.;
herein referred to as the "FMI Comparable Companies Group"). The median
multiples for the FMI Comparable Companies Group for 1996 and 1997,
respectively, were (i) 0.4x and 0.4x of gross revenues, (ii) 6.7x and 4.6x
of EBITDA, (iii) 13.1x and 9.0x of EBIT and (iv) 16.2x and 13.4x for net
income. Allen & Company noted that such comparison demonstrates that the
valuation multiples of FMI derived from the Estimated Transaction Value
are generally less than the median trading multiples for the FMI
Comparable Companies Group.
Allen & Company also compared such multiples for FMI derived from the
Estimated Transaction Value to the median multiples of gross revenues,
EBITDA, EBIT and net income derived from the consideration paid in
selected merger and acquisition transactions in the environmental services
industry (the "Selected Industry Transactions"). The median multiples for
the Selected Industry Transactions were (i) 0.7x of gross revenues, (ii)
7.9x of EBITDA, (iii) 14.5x of EBIT and (iv) 19.1x for net income. Allen
& Company noted that such comparison demonstrates that the valuation
multiples of FMI derived from the Estimated Transaction Value are
generally less than the median multiples derived from the Selected
Industry Transactions.
Allen & Company also derived an implied valuation for FMI based upon
an average of the median multiples of gross revenues, EBITDA, EBIT and net
income estimated for 1996 and 1997 for the FMI Comparable Companies Group
and the Selected Industry Transactions. Allen & Company noted that
valuations of FMI of $42,047,000 and $44,066,000 were implied from the
multiples for the FMI Comparable Companies Group and the Selected Industry
Transactions, respectively, and that the Estimated Transaction Value
represented a discount of 30.3% and 33.5%, respectively, from such implied
valuations.
Allen & Company also performed a discounted cash flow analysis using
FMI's management projections in order to derive an implied present value
of FMI. Allen & Company noted that the Estimated Transaction Value was
less than the discounted cash flow values of $51.6 million (based upon a
20% discount rate) and $41.4 million (based upon a 25% discount rate) for
FMI derived from this analysis. Allen & Company also noted that the
Estimated Transaction Value represented a discount of 43.2% and 29.3%,
respectively, from such derived discounted cash flow values.
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Allen & Company also reviewed the pro forma income statements for the
combined company resulting from the Merger based upon the estimated
results of operations for 1996 and the projected operating results for
1997 and 1998 as provided by management of Envirogen and FMI and compared
such pro forma statements to Envirogen's estimated 1996 and projected 1997
and 1998 income statements. Allen & Company commented that such pro forma
financial statements demonstrated that the Merger would be immediately
accretive to earnings per share for the holders of Envirogen Common Stock.
Overview of Envirogen Common Stock Price Performance. Allen &
Company also reviewed stock price and trading volume data for Envirogen
Common Stock and the market reaction to selected public announcements
regarding Envirogen. Allen & Company noted that Envirogen's general
trading patterns have generally performed below the S&P 500 Index, the S&P
Pollution Control Index and an index which includes the FMI Comparable
Companies Group. Allen & Company commented that the $2.625 Exchange/Offer
Value as compared to the market price of the Envirogen Common Stock
immediately prior to the public announcement of the Merger on November 6,
1996 was within the range of discounts offered by Envirogen in recent
private placements consummated by Envirogen. In addition, Allen & Company
noted that the Exchange/Offer Value was also within the range of recent
trading prices of Envirogen Common Stock.
No company used in the comparable company analyses summarized above
is identical to FMI or Envirogen, and no transaction used in the
comparable transaction analysis summarized above is identical to the
Merger. Accordingly, any such analysis of the consideration to be paid by
Envirogen in connection with the Merger involves complex considerations
and judgments concerning differences in the potential financial and
operating characteristics of the comparable companies and transactions and
other factors in relation to the trading and acquisition values of the
comparable companies.
The preparation of a fairness opinion is not susceptible to partial
analysis or summary description. Allen & Company believes that its
analyses and the summary set forth above must be considered as a whole and
that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, could create an incomplete
view of the processes underlying the analysis set forth in its opinion.
Allen & Company has not indicated that any of the analyses which it
performed had a greater significance than any other.
In determining the appropriate analyses to conduct and when
performing those analyses, Allen & Company made numerous assumptions with
respect to industry performance, general business, financial, market and
economic conditions and other matters, many of which are beyond the
control of Envirogen or FMI. The analyses which Allen & Company performed
are not necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as part of Allen & Company's
analysis of the fairness, from a financial point of view, to the holders
of Envirogen Common Stock of the terms of the Merger and the Warburg
Transaction. The analyses do not purport to be appraisals or to reflect
the prices at which a company might actually be sold or the prices at
which any securities may trade at the present time or at any time in the
future.
Allen & Company is a nationally recognized investment banking firm
that is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and
unlisted securities, private placements and valuations for estate,
corporate and other purposes. Envirogen retained Allen &
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Company based on such qualifications as well as its familiarity with
Envirogen. Allen & Company has from time to time provided various
investment banking and financial advisory services to Envirogen. In
addition, as a part of its investment banking and securities trading
business, Allen & Company may hold positions in and trade in the
securities of Envirogen from time to time. Allen & Company and an
affiliate owned an aggregate of approximately 2,090,344 shares of
Envirogen Common Stock and warrants to purchase an additional 615,047
shares of the Envirogen Common Stock at December 31, 1996 and have agreed
to vote all shares of Envirogen Common Stock owned as of the Record Date
in favor of the Merger Agreement and the Merger, the Securities Purchase
Agreement, the Amended Charter and the Amended Option Plan. See "The
Merger Agreement - Voting Agreement." Robert C. Miller, a Vice President
and Director of Allen & Company, is also a director and stockholder of
Envirogen.
Envirogen entered into an engagement letter with Allen & Company
dated December 9, 1996, pursuant to which Allen & Company agreed to act as
Envirogen's financial advisor in connection with the Merger and the
Warburg Transaction and to evaluate the fairness, from a financial point
of view, of the terms of the Merger and the Warburg Transaction to the
holders of Envirogen Common Stock. Pursuant to such engagement letter,
Envirogen agreed, among other things, to pay Allen & Company a fee of
$250,000, of which $150,000 was payable upon submission of Allen &
Company's fairness opinion to Envirogen's Board of Directors and $100,000
is payable upon the consummation of the Merger and the Warburg
Transaction. Whether or not the Merger and the Warburg Transaction are
consummated, Envirogen has agreed, pursuant to such engagement letter, to
reimburse Allen & Company for its reasonable out-of-pocket expenses and to
indemnify Allen & Company against certain liabilities and expenses in
connection with its engagement.
Rights of Dissenting Stockholders
Holders of shares of Common Stock are entitled to appraisal rights
under Section 262 of the DGCL ("Section 262"), which is reprinted in its
entirety as Appendix B of this Proxy Statement. All references to a
"stockholder" in Section 262 and in this summary of appraisal rights are
to the record holders of shares of Common Stock as to which appraisal
rights are asserted. A person having a beneficial interest in shares of
Common Stock that are held of record in the name of another person, such
as broker or nominee, must, if he or she desires to perfect whatever
appraisal rights the beneficial owner may have, act promptly to cause the
record holder to follow the steps summarized below properly and in a
timely manner.
The following discussion is not a complete statement of the law
relating to appraisal rights and is qualified in its entirety by reference
to Appendix B attached to this Proxy Statement. This discussion and
Appendix B should be reviewed carefully by any holder who wishes to
exercise statutory appraisal rights or who wishes to preserve the right to
do so, since failure to comply with the procedures set forth herein or
therein will result in the loss of appraisal rights.
Stockholders who desire to exercise their appraisal rights under
Section 262 must:
(1) Deliver to the Secretary of Envirogen before the taking of the
vote on the Merger Agreement and the Merger a written demand for appraisal
of shares of Common Stock. This written demand for appraisal of their
shares of Common Stock must be in addition to and separate from any proxy
or vote against or abstaining from voting or failing to vote on the
Merger. Simply voting against, abstaining from voting or failing to vote
on the Merger will not constitute a demand for appraisal within the
meaning of Section 262.
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(2) Not vote for adoption and approval of the Merger Agreement and
the Merger. If a stockholder returns a signed proxy but does not specify
a vote against adoption and approval of the Merger Agreement and the
Merger or a direction to abstain, the proxy will be voted for adoption and
approval of the Merger Agreement and the Merger, which will have the
effect of waiving that stockholder's appraisal rights.
(3) Hold shares of Common Stock of record on the date the written
demand for appraisal is made and continue to hold such shares until the
Effective Time.
The written demand for appraisal must be executed by or for the
stockholder of record, fully and correctly, as such stockholder's name
appears on the certificate or certificates representing the shares of
Common Stock. If the shares of Common Stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, such
demand must be executed by the fiduciary. If the shares of Common Stock
are owned of record by more than one person, as in a joint tenancy or
tenancy in common, such demand must be executed by or for all such joint
record owners. An authorized agent, including an agent for two or more
record owners, may execute the demand for appraisal for a stockholder of
record; however, the agent must identify the record owner and expressly
disclose the fact that, in exercising the demand, such person is acting as
agent for the record owner.
A record owner, such as a broker, who holds shares of Common Stock as
a nominee for others, may exercise appraisal rights with respect to the
shares of Common Stock held for all or less than all beneficial owners of
shares of Common Stock as to which such person is the record owner. In
such case the written demand must set forth the number of shares covered
by such demand. Where the number of shares is not expressly stated, the
demand will be presumed to cover all shares of Common Stock outstanding in
the name of such record owner. Beneficial owners who are not record
owners and who intend to exercise appraisal rights should instruct their
record owners to comply strictly with the statutory requirements with
respect to the exercise of appraisal rights before the date of the Special
Meeting.
A stockholder who elects to exercise appraisal rights must deliver
his or her written demand to: Envirogen, Inc., 4100 Quakerbridge Road,
Lawrenceville, New Jersey 08648, Attention: Morgan R. Jones, Secretary.
The written demand for appraisal must specify the stockholder's name and
mailing address, the number of shares of Common Stock owned, and that the
stockholder is thereby demanding appraisal of his or her shares.
Within ten days after the Effective Time, Envirogen is required to,
and will, notify each stockholder who has complied with the required
conditions of Section 262 (and has not voted for adoption and approval of
the Merger Agreement and the Merger) of the date on which the Effective
Time occurred. Within 120 days after the Effective Time, either Envirogen
or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Court of Chancery (the
"Delaware Chancery Court") demanding a determination of the fair value of
the shares of Common Stock of the dissenting stockholders. If no such
petition is filed, appraisal rights will be lost for all stockholders who
had previously demanded appraisal of their shares.
Within 120 days after the Effective Time, any stockholder who has
theretofore complied with the applicable provisions of Section 262 will be
entitled, upon written request, to receive a statement setting forth the
aggregate number of shares of Common Stock not voted in favor of the
Merger and with respect to which written demands for appraisal were
received by Envirogen, and the number of holders of such shares. Such
statement must be mailed within ten days after the written request
therefor has been
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received by Envirogen or within ten days after expiration of the time of
delivery of demands for appraisal under Section 262, whichever is later.
If a petition for an appraisal is timely filed, after a hearing on
such petition, the Delaware Chancery Court will determine which
stockholders are entitled to appraisal rights and will appraise the shares
of Common Stock owned by such stockholders, determining the fair value of
such shares, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest to be paid, if any, upon the amount determined to be the fair
value. In determining fair value, the Delaware Chancery Court is to take
into account all relevant factors.
The cost of the appraisal proceeding may be determined by the
Delaware Chancery Court and taxed against the parties as the Delaware
Chancery Court deems equitable in the circumstances. Upon application of
a dissenting stockholder, the Delaware Chancery Court may order that all
or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including without limitation
reasonable attorneys' fees and the fees and expenses of experts, be
charged pro rata against the value of all shares of Common Stock entitled
to appraisal.
Any stockholder who has duly demanded appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote for
any purpose the shares of Common Stock subject to such demand or to
receive payment of dividends or other distributions on such shares, except
for dividends or distributions, if any, payable to stockholders of record
at a date prior to the Effective Time.
At any time within 60 days after the Effective Time, any stockholder
shall have the right to withdraw his or her demand for appraisal and to
accept the terms offered in the Merger; after this period, the stockholder
may withdraw his or her demand for appraisal only with the consent of
Envirogen (which consent Envirogen reserves the right to give or withhold,
in its discretion). If no petition for appraisal is filed with the
Delaware Chancery Court within 120 days after the Effective Time,
stockholders' rights to appraisal shall cease. Inasmuch as Envirogen has
no obligation to file such a petition, and has no present intention to do
so, any stockholder who desires such a petition to be filed is advised to
file it on a timely basis. No petition timely filed in the Delaware
Chancery Court demanding appraisal shall be dismissed as to any
stockholder without the approval of the Delaware Chancery Court, and such
approval may be conditioned upon such terms as the Delaware Chancery Court
deems just.
Accounting Matters
The Merger will be accounted for by Envirogen under the "purchase"
method of accounting in accordance with generally accepted accounting
principles. Pursuant to this method, a portion of the Merger
Consideration will be allocated to the assets acquired and liabilities
assumed based on their estimated fair values at the Effective Time. The
excess of the Merger Consideration paid for the FMI common stock over the
fair value of FMI's assets and liabilities will be recorded as an
intangible asset that will be amortized over 20 years, resulting in a non-
cash charge to Envirogen's earnings of approximately $1.1 million per
year during that period. See "Pro Forma Condensed Colsolidated Financial
Information" appearing elsewhere in this Proxy Statement.
The firm of Coopers & Lybrand L.L.P. serves as independent
accountants for Envirogen and FMI. A representative of Coopers & Lybrand
L.L.P. is expected to be present at the Special Meeting and is expected to
be available to respond to appropriate questions. The representative will
also have the opportunity to make a statement if he or she desires to do
so.
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Required Regulatory Approvals
Envirogen is aware of no federal or state regulatory requirements
that must be complied with or other approvals that must be obtained prior
to consummation of the Merger, other than (i) compliance with applicable
federal and state securities laws, (ii) the acceptance for filing of the
Certificate of Merger and the Articles of Merger as required under the
laws of Delaware and Wisconsin, respectively, and (iii) the receipt of all
permits necessary for Envirogen to qualify and act as a "service provider"
under and in accordance with PECFA. However, in connection with the
Warburg Transaction, the consummation of which is a condition to the
Merger, Envirogen and Warburg are required to file notifications and
reports under the Hart-Scott-Rodino Antitrust Improvements Act, which
notifications and reports were filed on January 17, 1997. See "The Merger
Agreement - Conditions to the Merger" and "Proposal 2. The Securities
Purchase Agreement - Required Regulatory Approvals."
Federal Income Tax Consequences of the Merger
It is intended that the Merger will be a tax-free reorganization
under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, Envirogen expects that the Merger will
not have any specific federal income tax consequences to its stockholders.
After the Merger, the stockholders of Envirogen will continue to own the
same number of shares of Common Stock as before the Merger, and the Merger
is not expected to alter the income tax effect of owning or subsequently
transferring shares of Common Stock. In view of the individual nature of
each stockholder's income tax situation, stockholders are urged to consult
their own tax advisors with respect to the specific federal, state and
local income tax consequences associated with the Merger.
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THE MERGER AGREEMENT
The terms and conditions of the proposed Merger are contained in the
Merger Agreement, a copy of which is attached as Appendix A to this Proxy
Statement. Stockholders are urged to read the Merger Agreement carefully.
The descriptions of the material terms and conditions of the Merger
Agreement are set forth below and are qualified in their entirety by
reference to the complete text of the Merger Agreement.
The Merger; Merger Consideration
The Merger Agreement provides that, at the Effective Time, FMI will
be merged with and into Envirogen, with Envirogen continuing as the
surviving corporation. In the Merger, all of the shares of common stock
of FMI outstanding at the Effective Time will be converted into the right
to receive an aggregate of 4,190,477 shares of Common Stock and
$11,000,000 of cash, subject to certain adjustments (the "Merger
Consideration"). The Merger Agreement provides that the cash portion of
the Merger Consideration will be (a) increased by the amount that all cash
and cash equivalents of FMI on the closing date of the Merger (the
"Closing Date") exceeds $50,000, (b) reduced by the amount by which all
cash and cash equivalents of FMI on the Closing Date is less than $50,000
and (c) reduced by the amount of all Company Debt that is outstanding on
the Closing Date. The term "Company Debt" is defined in the Merger
Agreement as the principal amount of all outstanding indebtedness of FMI
for borrowed money on the Closing Date, but excluding any outstanding
indebtedness of FMI for borrowed money on the Closing Date to the extent
such money has been used to distribute to the FMI Stockholders cash in an
amount equal to the FMI Stockholders' federal, state and local income
taxes attributable to FMI's Taxable Income (as defined) for the year ended
December 31, 1996, less certain amounts ($1,528,000) previously paid to
the FMI Stockholders in respect of such income taxes, or has been used by
FMI to pay on or about March 15, 1997 the accrual for unpaid bonuses under
FMI's Provisional Additional Compensation Plan for Employees and other
similar compensation arrangements (the "PAC Plans") which become payable
within 75 days of December 31, 1996 in accordance with the terms of such
PAC Plans (such excluded debt is referred to in the Merger Agreement as
"Permitted Debt"). Envirogen and FMI have agreed to calculate such income
taxes based on a combined tax rate of 46.875% of FMI's Taxable Income.
The term "Taxable Income" is defined in the Merger Agreement as FMI's net
income plus the provision for unrealized sales, in each case as reflected
on FMI's audited statement of income for the year ended December 31, 1996
to be delivered to Envirogen on the Closing Date. See "-Conditions to the
Merger" and "Business of FMI-Employee Bonus Plans."
The Merger Agreement also provides that in the event FMI's Adjusted
Net Worth is less than $2,000,000 (and, if less than $1,000,000, Envirogen
waives the closing condition that FMI's Adjusted Net Worth be at least
$1,000,000 as of the Effective Time (see "-Conditions to the Merger")),
the cash portion of the Merger Consideration will be further reduced by
the amount such Adjusted Net Worth is less than $2,000,000. The term
"Adjusted Net Worth" is defined in the Merger Agreement as the amount
equal to the excess of all assets of FMI on the Closing Date over all
liabilities of FMI on the Closing Date, except that no effect will be
given to (a) Company Debt on the Closing Date, (b) the Permitted Debt on
the Closing Date, (c) the accrual for unpaid bonuses for the years ended
December 31, 1995 and 1996 under the PAC Plans to the extent outstanding
on the Closing Date, (d) the accrual for unrealized sales on the Closing
Date less 1.86% of all of FMI's draw requests under the PECFA program that
are subject to adjustment on the Closing Date and (e) any accounting or
other effect of the transactions described in the Merger Agreement. For a
description of the PECFA program, see "Business of FMI - Remediation
Services."
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In connection with the calculation of the Merger Consideration, FMI
and the FMI Stockholders will deliver to Envirogen on the Closing Date a
certificate (the "Closing Certificate") as to, among other things, the
amount of cash and cash equivalents of FMI, a good faith estimate of the
amount of Company Debt and a good faith estimate of FMI's Adjusted Net
Worth, in each case as of the Closing Date. For purposes of confirming
the amount of Company Debt and FMI's Adjusted Net Worth set forth in the
Closing Certificate, Envirogen will prepare within 45 days following the
Closing Date a closing statement (the "Closing Statement") setting forth,
among other things, the actual amount of Company Debt and FMI's actual
Adjusted Net Worth as of the Closing Date. Any differences between the
amounts set forth in the Closing Certificate and the Closing Statement
with respect to Company Debt and FMI's Adjusted Net Worth that impact the
calculation of the Merger Consideration will result in a post-closing
adjustment to the Merger Consideration. Any disagreement between the FMI
Stockholders and Envirogen with respect to any matter on the Closing
Statement will be submitted to Price Waterhouse LLP, whose determination
will be final and binding on Envirogen and the FMI Stockholders.
The Merger Consideration will be allocated among the FMI Stockholders
in proportion to the number of shares of FMI common stock owned of record
by each FMI Stockholder at the Effective Time. At the closing of the
Merger, Envirogen will deposit with Summit Bank, as escrow agent (the
"Escrow Agent"), an aggregate amount of $1,100,000 of the cash portion of
the Merger Consideration (the "Escrow Money") and, immediately after the
delivery to the FMI Stockholders of certificates for the shares of Common
Stock to be issued by Envirogen pursuant to the Merger Agreement, the FMI
Stockholders will deposit with the Escrow Agent certificates representing
in the aggregate 419,048 shares of Common Stock (the "Escrow Shares"), in
each case to be held in escrow by the Escrow Agent as security for any
right to indemnification Envirogen may have pursuant to the Merger
Agreement and as security for the FMI Stockholders' timely performance of
their obligations in the event of a post-closing adjustment of the Merger
Consideration. See "- General Indemnification" and "-Escrow."
Representations and Warranties
In the Merger Agreement, Envirogen and FMI have each made certain
representations and warranties with respect to, among other matters, their
organization and good standing and due authorization and authority to
enter into and perform their respective obligations under the Merger
Agreement. In addition, Envirogen, FMI and the FMI Stockholders have made
certain representations and warranties regarding their respective
businesses and operations and related matters customary for a transaction
such as the Merger.
Certain Covenants of FMI and FMI Stockholders
In the Merger Agreement, FMI and the FMI Stockholders have agreed to
take or not to take certain actions prior to the Effective Time. Set
forth below is a summary of certain of such agreements and covenants.
Pursuant to Section 5.08 of the Merger Agreement, during the period
from the date of the Merger Agreement to the Effective Time, except as
provided in the Merger Agreement, FMI will, and the FMI Stockholders will
cause FMI to: (a) carry on its business in the usual, regular and ordinary
course, consistent with past practice and preserve intact its present
business organization, keep available the services of its present
officers and employees, and preserve its relationships with customers,
contractors, and others having business dealings with it to the end that
its goodwill and going business will be unimpaired at the Effective Time;
(b) pay and discharge all of its debts, liabilities and obligations as
they
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become due; (c) keep in full force and effect insurance comparable in
amount and scope of coverage to insurance now carried by it; (d) perform
all of its obligations under agreements, contracts and instruments
relating to or affecting its properties, assets and business; (e) maintain
its facilities and assets in the same state of repair, order and condition
as they were on the date of the Merger Agreement, reasonable wear and tear
excepted; (f) maintain its books of account and records in the usual,
regular and ordinary manner and to use its best efforts to maintain in
full force and effect all federal, foreign, state, local and other
governmental consents, licensees, permits, franchises, grants and
authorizations required for the operation of its business; (g) comply with
all statutes, laws, ordinances, rules and regulations applicable to it and
to the conduct of its business; (h) promptly advise Envirogen in writing
of any material adverse change in its financial condition, operations,
assets, prospects or business; (i) maintain its S corporation status for
federal and state income tax purposes; (j) not enter into, assume or amend
in any material respect certain agreements, contracts, purchase orders or
commitments except in the ordinary course of business consistent with past
practice; (k) not take, or permit to be taken, any action that is
represented and warranted not to have been taken since September 30, 1996,
except, among other things, the payment of dividends and distributions to
the FMI Stockholders and the incurrence of Company Debt or Permitted Debt
in accordance with the terms of the Merger Agreement; (l) not increase
salaries or other compensation of its officers or directors or any other
employee other than normal year-end merit increases for non-officer
employees made in the ordinary course of FMI's business consistent with
past practice; (m) not create, incur, assume, guarantee or otherwise
become directly or indirectly liable with respect to any indebtedness for
borrowed money other than (i) Company Debt, (ii) indebtedness for borrowed
money in the ordinary course of business under agreements existing on the
date of the Merger Agreement and (iii) Permitted Debt to the extent the
terms thereof are not inconsistent with the terms of FMI's indebtedness
for borrowed money outstanding on the date of the Merger Agreement and do
not provide for any premium or other penalty upon payment prior to
maturity thereof; (n) not make any change in FMI's authorized or issued
capital stock; (o) not grant any stock option or other right to purchase
shares of FMI's capital stock or other securities; (p) not issue or make
any commitment to issue any security by FMI, including any security
convertible into capital stock; (q) not grant any registration rights; (r)
not purchase, redeem, retire or make any other acquisition of any shares
of its capital stock or other securities; (s) not amend the articles of
incorporation or bylaws (or equivalent governing documents) of FMI; (t)
not enter any contract with any FMI Stockholder or any affiliate of any
FMI Stockholder; and (u) not enter into any agreement or understanding to
do or engage in any of the foregoing actions described in (j) through (t)
above.
Pursuant to Section 5.16 of the Merger Agreement, the FMI
Stockholders have agreed (a) for a period of five years from and after the
Closing Date not to directly or indirectly operate, manage, own, control,
provide consulting services to, or in any way be connected with or be
concerned with or be interested in any person, entity or business (other
than Envirogen and its affiliates) that (i) does research with respect to,
designs, develops, produces or manufactures any products which are the
same as or substantially similar to or are intended for uses similar to
those with respect to which Envirogen or any affiliate of Envirogen
designs, develops, produces or manufactures; or (ii) furnishes services
similar to those furnished by Envirogen or any affiliate of Envirogen; (b)
not to disclose directly or indirectly to any person outside of the employ
of Envirogen any customer lists, pricing strategies, customer and employee
files and records, any proprietary data or trade secrets of Envirogen, or
any financial or other information about Envirogen not in the public
domain; and (c) for a period of five years after the Closing Date, not to
engage or participate in any effort or act to induce any of the customers,
suppliers, associates, employees or independent contractors of Envirogen
to take any action or to refrain from taking any action or inaction which
might be disadvantageous to Envirogen.
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Pursuant to Section 5.06 of the Merger Agreement, FMI and the FMI
Stockholders have agreed not to, directly or indirectly, continue,
encourage, solicit, initiate or participate in discussions or negotiations
with, or provide any nonpublic information to, any person (other than
Envirogen or Warburg in connection with the transactions contemplated by
the Merger Agreement) concerning any sale of assets (other than in the
ordinary course of FMI's business consistent with past practice) or shares
of its capital stock or any merger, consolidation, recapitalization,
liquidation or similar transaction involving FMI.
Pursuant to Section 7.01(g) of the Merger Agreement, the FMI
Stockholders have agreed that they will not sell, transfer or otherwise
dispose of the shares of Common Stock to be issued by Envirogen to the FMI
Stockholders in connection with the Merger for a period of 12 months after
the Effective Time without the prior written consent of Envirogen.
Certain Covenants of Envirogen
In the Merger Agreement, Envirogen has agreed to take or not to take
certain actions prior to the Effective Time. Set forth below is a summary
of certain of such agreements and covenants.
Pursuant to Section 5.09 of the Merger Agreement, during the period
from the date of the Merger Agreement to the Effective Time, except with
the prior written consent of the FMI Stockholders, Envirogen will, and
will cause its affiliates to: (a) carry on their businesses in, and only
in, the usual, regular and ordinary course, consistent with past practice
and in substantially the same manner as heretofore conducted and, to the
extent consistent with such businesses, use their best efforts to preserve
intact their present business organizations, keep available the services
of their present officers and employees, and preserve their relationships
with customers, contractors, and others having business dealings with them
to the end that their goodwill and going business will be materially
unimpaired at the Effective Time; (b) pay and discharge all of their
debts, liabilities and obligations as they become due; (c) keep in full
force and effect insurance comparable in amount and scope of coverage to
insurance now carried by them; (d) perform all of their obligations under
agreements, contracts and instruments relating to or affecting their
properties, assets and business; (e) maintain their facilities and assets
in the same state of repair, order and condition as they were on the date
hereof, reasonable wear and tear accepted; (f) maintain their books of
account and records in the usual, regular and ordinary manner and to use
their best efforts to maintain in full force and effect all licenses,
permits and other authorizations issued to them with respect to their
assets or businesses by any government or regulatory or administrative
agency; (g) comply with all statues, laws, ordinances, rules and
regulations applicable to them and to the conduct of their businesses; (h)
promptly advise the FMI Stockholders in writing of any material adverse
change in the financial condition, operations, assets, prospects or
business of Envirogen and its affiliates, taken as a whole; (i) except as
expressly provided in the Merger Agreement, not make any change in
Envirogen's authorized capital stock or purchase, redeem retire or make
any other acquisition of any shares of Envirogen's capital stock or other
securities; (j) except as expressly provided in the Merger Agreement, not
take any action to amend Envirogen's Certificate of Incorporation or
Bylaws; (k) not take any action to amend or otherwise modify the
Securities Purchase Agreement; or (l) not enter into any agreement or
understanding to do or engage in any of the foregoing actions described in
paragraphs (i) through (k).
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Pursuant to Section 5.14 of the Merger Agreement, Envirogen has
agreed to make available to certain employees of FMI that remain with
Envirogen after the Merger options to purchase an aggregate of 600,000
shares of Common Stock under the Amended Option Plan at an exercise price
per share equal to the closing price of the Common Stock on the Closing
Date and on such other terms and conditions mutually agreed to by FMI and
Envirogen.
Pursuant to Section 5.18 of the Merger Agreement, FMI has agreed to
repay in full on or before the Closing Date all Company Debt (as defined)
outstanding as of the Closing Date, without the payment of any prepayment
premium or other similar penalty, and to obtain on or before the Closing
Date a release from each lender of any personal guarantees from the FMI
Stockholders held with respect to any indebtedness of the Company.
Pursuant to Section 5.19 of the Merger Agreement, Envirogen has
agreed that for so long as the FMI Stockholders beneficially own (within
the meaning of Rule 13d-3 under the Exchange Act), in the aggregate, at
least 7.5% of the issued and outstanding shares of Common Stock, Envirogen
will nominate and use its best efforts to elect and cause to remain as a
director on Envirogen's Board of Directors one individual as the FMI
Stockholders may designate. Such designee will be William C. Smith,
provided that Mr. Smith is willing and able to serve in such position.
Any vacancy created by Mr. Smith's unwillingness or inability to serve as
a director of Envirogen or by his death, disability, retirement,
resignation or removal will be filled by the majority vote of the number
of shares of Envirogen Common Stock owned by the FMI Stockholders on the
date of such vote.
Pursuant to Sections 5.21 and 5.22 of the Merger Agreement, at least
through December 31, 1998, Envirogen has agreed to maintain and operate
the assets, operations and business of FMI as a separate operating
division of Envirogen (the "FMI Division") and to retain the PAC Plans and
to pay bonuses to employees of the FMI Division during such period in
accordance with the provisions of the PAC Plans based on the financial
results of the FMI Division. For a description of the terms and
conditions of the PAC Plans, see "Business of FMI - Employee Bonus Plans."
Pursuant to Section 5.23 of the Merger Agreement, Envirogen has
agreed that it will make arrangements with insurers so that, as of the
Effective Time, the assets, business, operations and personnel of FMI will
be covered under a Commercial General Liability Insurance Policy and a
Combined Professional and Contractors Pollution Liability Policy for the
period after the Effective Time. Such coverage will insure the assets,
business, operations and personnel of FMI against losses associated with
any claims made after the Effective Time, whether relating to the conduct
of FMI's business prior to the Effective Time or after the Effective Time,
and will be subject to such terms and conditions as may be mutually agreed
to by FMI and Envirogen prior to the closing of the Merger.
Conditions to the Merger
The obligations of FMI, the FMI Stockholders and Envirogen to
consummate the Merger is subject to the satisfaction prior to the
Effective Time of certain conditions, including the following: (a) the
Merger Agreement and transactions contemplated thereby, the Securities
Purchase Agreement, the Charter Amendment and the Amended Option Plan
shall have been approved by the affirmative vote of Envirogen's
stockholders by the requisite vote in accordance with Envirogen's
Certificate of Incorporation and the DGCL; (b) the transactions
contemplated by the Securities Purchase Agreement shall have been
consummated; (c) all permits, approvals and consents of any governmental
body or agency necessary or appropriate for consummation of the Merger
shall have been obtained; (d) no preliminary or permanent
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injunction or other order of a court or governmental agency or authority
in the United States shall have been issued and be in effect, and no
federal or state statute, rule or regulation shall have been enacted or
promulgated after date of the Merger Agreement and be in effect, that
prohibits the consummation of the Merger or imposes material limitations
on the ability of Envirogen to exercise full rights of ownership of FMI's
assets or business; (e) there shall not have been any action or proceeding
commenced by or before any court or governmental agency or authority in
the United States that challenges the consummation of the Merger or seeks
to impose material limitations on the ability of Envirogen to exercise
full rights of ownership of FMI's assets or business; (f) Envirogen shall
have received an opinion dated as of the Effective Time from its financial
advisor, Allen & Company Incorporated, stating that in the opinion of
such financial advisor the terms of the Merger and the Securities Purchase
Agreement are fair to Envirogen's stockholders from a financial point of
view (see "Special Factors - Opinion of Financial Advisor"); (g) the
holders of no more than 10% of the shares of Common Stock outstanding and
entitled to vote shall have exercised dissenters' rights with respect to
the Merger in accordance with the provisions of the DGCL; (h) Envirogen
shall have received all federal, foreign, state, local and other
governmental consents, licenses, permits franchises, grants and
authorizations necessary for it to qualify and act as a "service provider"
under and in accordance with PECFA; (i) each FMI Stockholder shall have
entered into an employment agreement with Envirogen (see "Employment
Agreements"); and (j) Envirogen and FMI shall have received from each
lender of Company Debt a pay-off statement with respect to such Company
Debt and a representation that upon the payment to such lender of the
amount stated in the pay-off statement such lender will deliver to
Envirogen, FMI and each FMI Stockholder a satisfaction statement to the
effect that all such Company Debt has been satisfied in full and that
Envirogen, the Company and each FMI Stockholder has no further liability
of any kind to such lender.
The obligation of Envirogen to consummate the Merger is subject to
the satisfaction or waiver prior to the Effective Time of the following
additional conditions: (a) there shall not have occurred any material
adverse change in the business, financial condition, prospects, assets or
operations of FMI since September 30, 1996; (b) the representations and
warranties of FMI and the FMI Stockholders shall be true and correct in
all material respects at and as of the date of the Merger Agreement and as
of the Effective Time; (c) FMI and each FMI Stockholder shall have duly
performed and complied with all agreements, covenants and conditions
required by the Merger Agreement to be performed or complied with by it or
him prior to or at the Effective Time; (d) Envirogen shall have received a
certificate dated the Effective Time and signed on behalf of FMI by its
President and by each FMI Stockholder, which certificate shall evidence
that FMI's estimated Adjusted Net Worth as of the Effective Time is at
least One Million Dollars ($1,000,000); (e) Envirogen shall have received
from Quarles & Brady, counsel for FMI and the FMI Stockholders, an opinion
dated the Effective Time in form and substance satisfactory to Envirogen
and its counsel; (f) all approvals or consents of any third party required
for the execution, delivery or performance of the Merger Agreement by FMI
or the FMI Stockholders shall have been obtained and delivered to
Envirogen; (g) each FMI Stockholder shall have executed and delivered to
Envirogen a release; (h) each FMI Stockholder shall not have exercised
dissenters' rights under the Business Corporation Law of the State of
Wisconsin in connection with the Merger, and shall have executed and
delivered to Envirogen a waiver of such rights; (i) each FMI Stockholder
and the Escrow Agent shall have executed and delivered to Envirogen an
escrow agreement (the "Escrow Agreement"); (j) Envirogen shall have
received evidence satisfactory to Envirogen of the termination of certain
of FMI's contracts, plans and agreements; (k) Envirogen shall have
received the financial statements of FMI at and for the fiscal years ended
December 31, 1994, 1995 and 1996, as audited by Coopers & Lybrand L.L.P.
and accompanied by an "unqualified opinion" of Coopers & Lybrand L.L.P.
thereon; and (l) all federal, foreign, state, local and other governmental
consents, licenses, permits, franchises, grants and
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authorizations required for the operation of FMI's business as currently
conducted shall have been granted or renewed in accordance with applicable
law.
The obligation of FMI and the FMI Stockholders to consummate the
Merger is subject to the satisfaction or waiver prior to the Effective
Time of the following additional conditions: (a) the representations and
warranties of Envirogen contained in the Merger Agreement shall be true
and correct in all material respects at and as of the date of the Merger
Agreement and as of the Effective Time; (b) Envirogen shall have duly
performed and complied in all material respects with all agreements,
covenants and conditions required by the Merger Agreement to be performed
or complied with by it prior to or at the Effective Time; (c) FMI and the
FMI Stockholders shall have received from Drinker Biddle & Reath, counsel
for Envirogen, an opinion dated the Effective Time, in form and substance
satisfactory to FMI and the FMI Stockholders; (d) Envirogen shall have
executed and delivered to the FMI Stockholders a Registration Rights
Agreement, the form of which is attached as Appendix E to this Proxy
Statement; (e) there shall not have occurred any material adverse change
in the business, financial condition, prospects, assets or operations of
Envirogen since September 30, 1996; (f) all approvals or consents of any
third party required for the execution, delivery or performance of the
Merger Agreement by Envirogen shall have been obtained and delivered to
the FMI Stockholders; (g) there shall not have been completed any
Envirogen Acquisition Transaction (as defined below) nor shall there have
been any public announcement of a bona fide proposal or plan with respect
to an Envirogen Acquisition Transaction; (h) the Common Stock shall
continue to be quoted and traded in the Nasdaq SmallCap Market, and the
shares of Common Stock to the issued to the FMI Stockholders as part of
the Merger Consideration shall have been approved for quotation, upon
notice of issuance, in the Nasdaq SmallCap Market; (i) the average of the
daily closing prices of a share of Common Stock as reported on the Nasdaq
SmallCap Market during the period of ten trading days ending on the date
of the Special Meeting shall not be less than $1.90; and (j) Envirogen and
the Escrow Agent shall have executed and delivered to the FMI Stockholders
the Escrow Agreement.
The term "Envirogen Acquisition Transaction" as used in this Proxy
Statement is defined in Section 5.07(b) of the Merger Agreement as any
proposal Envirogen makes or receives that constitutes, or may reasonably
be expected to lead to, or in the event Envirogen retains an investment
banker or other financial adviser for the purpose of initiating,
soliciting or encouraging, any of the following transactions involving
Envirogen and/or its affiliates (other than the transactions contemplated
by the Merger Agreement and those contemplated by the Securities Purchase
Agreement): (a) any merger, consolidation, share exchange, business
combination or other similar transaction in which Envirogen is not the
surviving corporation; (b) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of all or substantially all of the assets of
Envirogen in a single transaction or series of transactions; (c) any
issuance and sale of 25% or more of shares of capital stock of Envirogen
(or securities convertible or exchangeable into or otherwise evidencing,
or any agreement or instrument evidencing, the right to acquire capital
stock of Envirogen); (d) any tender offer for 25% or more of outstanding
shares of capital stock or the filing of a registration statement under
the Securities Act of 1933, as amended, in connection therewith; or (e)
any person shall have acquired beneficial ownership or the right to
acquire beneficial ownership of, or any "group" (as such term is defined
under Section 13(d) of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder) shall have been
formed which beneficially owns or has the right to acquire beneficial
ownership of, 25% or more of the then-outstanding shares of capital stock
of Envirogen.
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Transaction Costs
Pursuant to Section 5.15 of the Merger Agreement, the FMI Stockholders
and Envirogen will each pay their own fees and expenses and those of their
respective agents and advisors incurred in connection with the transactions
contemplated by the Merger Agreement (including, without limitation, all legal
and accounting fees (collectively, "Transaction Costs"); provided, however, that
(a) if the Merger and the other transactions contemplated by the Merger
Agreement are consummated or (b) if the Merger Agreement is terminated by FMI on
or after May 31, 1997 on account of the completion of any Envirogen Acquisition
Transaction or any public announcement of a bona fide proposal or plan with
respect to an Envirogen Acquisition Transaction, then Envirogen will pay up to a
maximum of $350,000 in the aggregate of all reasonable Transaction Costs (other
than the fees and expenses of any brokers or finders) incurred by the FMI
Stockholders.
Voting Agreement
Contemporaneously with the execution and delivery of the Merger
Agreement, Allen & Company and Allen Capital entered into the Voting Agreement
with FMI. Pursuant to the Voting Agreement, Allen & Company and Allen Capital,
the record owners of an aggregate of __________ shares of Common Stock (or
approximately _____% of the outstanding shares of Common Stock) as of the Record
Date, have agreed to vote, in person or by proxy, all shares of Common Stock
that they shall be entitled to vote at the Special Meeting for the approval of
the Merger Agreement and the Merger, the Securities Purchase Agreement, the
Charter Amendment and the Amended Option Plan. The Voting Agreement will
terminate upon the earlier of the termination of the Merger Agreement or the
final adjournment of the Special Meeting.
Employment Agreements
Pursuant to the Merger Agreement, at the closing of the Merger each of
the FMI Stockholders will enter into an employment agreement with Envirogen
pursuant to which they will serve in the following positions: William C. Smith -
Chairman of the Board of Envirogen and President and Chief Executive Officer of
the FMI Division; Douglas W. Jacobson - Senior Vice President of Marketing of
Envirogen and Vice President of the FMI Division; Gary W. Hawk - Vice President
and General Manger of the FMI Division; and Richard W. Schowengerdt - Vice
President of Technical Development of the FMI Division. Mr. Smith will receive
an annual base salary of $180,000, and Messrs. Jacobson, Hawk and Schowengerdt
will each receive an annual base salary of $140,000. The FMI Stockholders will
also be entitled to certain fringe benefits as other employees of Envirogen
having similar salaries and responsibilities are entitled to receive from time
to time. The FMI Stockholders will also be eligible to receive annual incentive
bonuses based upon attainment of corporate and individual performance goals, and
grants of stock options under such stock option plans of Envirogen as are in
effect from time to time. The initial term of employment for each of the FMI
Stockholders expires December 31, 1998, subject to earlier termination by
Envirogen or the FMI Stockholder. If employment is terminated early due to
disability, or by Envirogen without cause, or by the FMI Stockholder with good
reason, or if Envirogen elects not to renew employment after the expiration
date, Envirogen is obligated to continue to pay the terminated FMI Stockholder
salary and provide fringe benefits for 12 months following termination, and all
options held by such FMI Stockholder which would vest in such 12-month period
will become exercisable on the date of termination. During the term of
employment and for two years after the termination of employment, each of the
FMI Stockholders may not, directly or indirectly, participate in the United
States, Canada or any other jurisdiction in which Envirogen has derived at least
$250,000 in
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revenues during the period the employment agreement was in effect, in any
business or enterprise competing with Envirogen of any affiliate of Envirogen,
nor may any FMI Stockholder induce any consultants, customers or employees of
Envirogen to take actions disadvantageous to Envirogen.
Registration Rights Agreement
Pursuant to the Merger Agreement, Envirogen has agreed to enter into a
registration rights agreement with the FMI Stockholders and Warburg, the form of
which is attached to this Proxy Statement as Appendix E (the "Registration
Rights Agreement"). Pursuant to the Registration Rights Agreement, Envirogen, as
soon as practicable after the Merger, will file with the Commission and cause to
be declared effective a registration statement pursuant to Rule 415 under the
Securities Act of 1933, as amended, relating to the offer and sale by the FMI
Stockholders of the 4,190,477 shares of Common Stock to be issued to the FMI
Stockholders pursuant to the Merger Agreement and the offer and sale by Warburg
of the 6,095,238 shares of Common Stock to be issued to Warburg pursuant to the
Securities Purchase Agreement. The FMI Stockholders and Warburg have agreed not
to sell such shares for a period of 12 months after the Effective Time without
the prior written consent of Envirogen. Envirogen has agreed to pay
substantially all expenses incident to the registration of such shares, other
than underwriting discounts and commissions.
Waiver and Amendment
At any time prior to the Effective Time, Envirogen on the one hand, and
FMI and the FMI Stockholders on the other, may to the extent legally allowed,
(a) extend the time for the performance of any of the obligations or other acts
of the other, (b) waive any inaccuracies in the representations and warranties
made to it contained in the Merger Agreement or in any document delivered
pursuant thereto and (c) waive compliance with any of the agreements or
conditions for the benefit of it contained therein. Any agreement on the part of
a party to the Merger Agreement to any such extension or waiver will be valid
only if set forth in an instrument in writing signed on behalf of such party.
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of Envirogen, FMI and the FMI Stockholders.
Termination
The Merger Agreement may be terminated at any time prior to the
Effective Time (a) by mutual agreement of Envirogen and FMI; (b) by Envirogen,
if events have occurred which have made it impossible to satisfy a condition
precedent to Envirogen's obligations to consummate the transactions described in
the Merger Agreement, unless Envirogen's breach of the Merger Agreement has
caused the condition to be unsatisfied; (c) by FMI and the FMI Stockholders, if
events have occurred which have made it impossible to satisfy a condition
precedent to FMI's and the FMI Stockholders' obligations to consummate the
transactions described in the Merger Agreement, unless FMI's or any FMI
Stockholder's breach of the Merger Agreement has caused the condition to be
unsatisfied; (d) by Envirogen or FMI, upon notice to the other, if the Merger
shall not have become effective on or before May 31, 1997 (unless such date is
extended in writing by Envirogen and FMI), except that the right to terminate
the Merger Agreement shall not be available to any party whose failure to
fulfill any obligation under the Merger Agreement has been the cause of, or
resulted in, the failure of the closing of the Merger to occur on or before such
date; or (e) by Envirogen or FMI, upon notice to the other, if the required
approval of Envirogen's stockholders of the Merger Agreement, the Securities
Purchase Agreement, the Charter
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Amendment and the Amended Option Plan shall not have been obtained by reason of
the failure to obtain the required vote at the Special Meeting or at any
adjournment or postponement thereof.
General Indemnification
The representations and warranties of Envirogen, FMI and the FMI
Stockholders set forth in the Merger Agreement will survive for a period
commencing on the date of the Merger Agreement and ending on the first
anniversary of the Effective Time (the "Claims Period"), except that the
representations and warranties of Envirogen, FMI and the FMI Stockholders
relating to income and other tax claims, ERISA claims and environmental claims
will survive until the expiration of the applicable statute of limitations with
respect to such claims.
The FMI Stockholders (and prior to the Closing Date, FMI) have agreed to
indemnify and hold harmless Envirogen and its respective directors, officers,
employers and agents against any and all losses, costs, expenses, claims,
damages or liabilities (collectively, a "Loss") which Envirogen has suffered,
incurred or become subject to, and to reimburse Envirogen for any reasonable
legal, audit or other expenses incurred by it in connection with investigating
any claims and defending any actions, in so far as any such Loss arises out of
or is based upon any false representation or the breach of any warranty made by
FMI or the FMI Stockholders in the Merger Agreement or any breach or default in
performance by FMI or the FMI Stockholders of any of their covenants or
agreements with Envirogen contained in the Merger Agreement, except that the FMI
Stockholders (and prior to the Closing Date, FMI) are not required to indemnify
Envirogen unless the aggregate of all amounts from which indemnity would
otherwise be due against them exceeds $50,000, and then only to the extent such
amounts exceed $50,000. In addition, Envirogen will not be entitled to recovery
for any Loss relating to a matter covered by a reserve established for such
matter on the latest financial statements of FMI delivered to Envirogen on or
before the Effective Time unless, and only to the extent that, the cumulative
Loss suffered by Envirogen exceeds the amount of such reserve. The FMI
Stockholders' obligation to indemnify Envirogen during the Claims Period will
also be limited to the Escrow Money and the Escrow Shares, and, after the
expiration of the Claims Period with respect to a misrepresentation or breach of
warranty relating to income or other tax claims, ERISA claims and environmental
claims, the indemnification obligations of the FMI Stockholders will be limited
to an amount equal to the Escrow Money and the value of the Escrow Shares as of
the expiration of the Claims Period, except that any Loss of Envirogen that
arises out of any act of fraud or intentional misrepresentation by the FMI
Stockholders will not be so limited to the Escrow Money and the Escrow Shares,
but the liability of each FMI Shareholder in such case will be several and not
joint with respect to such Loss.
Envirogen has agreed to indemnify and hold harmless the FMI Stockholders
(and prior to the Closing Date, FMI) and their respective agents against any and
all Losses which the FMI Stockholders and FMI have suffered, incurred or become
subject to, and to reimburse the FMI Stockholders and FMI for any reasonable
legal, audit or other expense incurred by them in connection with investigating
any claims and defending any actions, in so far as any such Loss arises out of
or is based upon any false representation or the breach of any warranty made by
Envirogen in the Merger Agreement or any breach or default in performance by
Envirogen of any of its covenants or agreements with the FMI Stockholders and
FMI contained in the Merger Agreement, except that Envirogen is not required to
indemnify the FMI Stockholders and FMI unless the aggregate of all amounts from
which indemnity would otherwise be due against it exceeds $50,000, and then only
to the extent such amounts exceed $50,000. In addition, FMI and the FMI
Stockholders will not be entitled to recovery for any Loss relating to a matter
covered by a reserve established for such matter on the latest financial
statements of Envirogen delivered to FMI and
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the FMI Stockholders on or before the Effective Time unless, and only to the
extent that, the cumulative Loss suffered by FMI and the FMI Stockholders
exceeds the amount of such reserve. Envirogen's obligation to indemnify the FMI
Stockholders and FMI will be also be limited in the aggregate to an amount equal
to the amount of the Escrow Money and the value of the Escrow Shares on the
Closing Date.
Escrow
At the closing of the Merger, Envirogen will deposit with the Escrow
Agent $1,100,000 of the cash portion of the Merger Consideration (the "Escrow
Money") and, immediately after the delivery to the FMI Stockholders of
certificates for the shares of Common Stock to be issued by Envirogen pursuant
to the Merger Agreement, the FMI Stockholders will deposit with the Escrow Agent
certificates representing in the aggregate 419,049 shares of Common Stock (the
"Escrow Shares"), in each case to be held in escrow by the Escrow Agent pursuant
to the Merger Agreement and the Escrow Agreement as security for any right to
indemnification Envirogen may have pursuant to the Merger Agreement and as
security for the FMI Stockholders' timely performance of their obligations in
the event of a post-closing adjustment of the Merger Consideration. All amounts
payable to Envirogen out of escrow in connection with a claim for
indemnification or in connection with an adjustment to the Merger Consideration
will be paid first in cash from the Escrow Money and then from the Escrow
Shares. The number of Escrow Shares to be so transferred to Envirogen will equal
the remaining amount of Loss so incurred (after any payments in cash in respect
thereof from the Escrow Money) divided by the average of the daily closing
prices of a share of Common Stock as reported by the Nasdaq SmallCap Market
during the period of ten trading days ending on the last trading day prior to
the date of receipt by the FMI Stockholders of notice of any such Loss (the
"Average Price"). To the extent that Envirogen has a right to receive any of the
Escrow Shares, it will give written notice to the FMI Stockholders, and the FMI
Stockholders may, within the ten-day period after such notice, pay to the Escrow
Agent cash in an amount equal to the amount of such Loss, and the Escrow Agent
shall in lieu of the transfer of Escrow Shares to Envirogen pay to Envirogen
cash in the amount of such Loss and release to the FMI Stockholders that number
of Escrow Shares calculated by dividing the amount of cash paid by the FMI
Stockholders to the Escrow Agent by the Average Price.
Each FMI Stockholder will retain the voting rights associated with his
proportionate share of the Escrow Shares and shall be entitled to all cash
dividends, if any, declared on such Escrow Shares unless and until the Escrow
Shares become the property of Envirogen. One year after the Effective Time, if
there are no outstanding claims for indemnification or with respect to an
adjustment to the Merger Consideration, all of the Escrow Money and Escrow
Shares then remaining in escrow will be released to the FMI Stockholders in
proportion to the number of shares of FMI common stock owned of record by each
FMI Stockholder at the Effective Time.
Indemnification of FMI Officers and Directors
Pursuant to Section 5.20 of the Merger Agreement, for a period of six
years after the Effective Time, Envirogen has agreed to indemnify the directors
and officers of FMI and its affiliates who serve as such immediately prior to
the Effective Time to the same extent as such persons presently are indemnified
by FMI pursuant to FMI's By-laws or the provisions of the Business Corporation
Law of the State of Wisconsin (the "WBCL"), as in effect at the Effective Time
and notwithstanding any subsequent changes thereto after the Effective Time,
with respect to matters which arose prior to the Effective Time.
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Article IX of FMI's By-laws provides that each director and officer of
FMI shall be entitled to be reimbursed by FMI for, and indemnified by FMI
against, all liability and expenses (including legal expenses) reasonably
incurred by such director or officer in connection with any claim, action, suit
or proceeding of whatever nature in which such director or officer may be
involved as a party or otherwise as a result of having served as a director or
officer of FMI or of any subsidiary of FMI, or by reason of any action alleged
to have been taken or omitted by such director or officer whether or not he or
she continues to be a director or officer; provided, however, that FMI shall not
be liable for any such reimbursement or indemnity relating to any liability or
expense incurred or settlement made in connection with any matter arising out of
the negligence or misconduct of any director or officer of FMI.
Notwithstanding the provisions of FMI's By-laws as described above,
Section 180.0851 of the WBCL requires FMI to (a) indemnify a director or officer
of FMI, to the extent such director or officer has been successful on the merits
or otherwise in defense of a proceeding, for all reasonable expenses incurred in
the proceeding if the director or officer was a party to the proceeding because
he or such was a director or officer of FMI and (b) indemnify a director or
officer of FMI, in cases not covered in subsection (a) above, against liability
incurred by such director or officer in a proceeding to which the director or
officer was a party because he was a director or officer of FMI, unless
liability was incurred because the director or officer breached or failed to
perform a duty that he owes to FMI and the breach or failure to perform
constitutes (i) a willful failure to deal fairly with FMI or its stockholders in
connection with a matter in which the director or officer has a material
conflict of interest; (ii) a violation of the criminal law, unless the director
or officer had reasonable cause to believe that his conduct was lawful or had no
reasonable cause to believe that his conduct was unlawful; (iii) a transaction
from which the director or officer derived an improper personal benefit; or (iv)
willful misconduct.
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BUSINESS OF ENVIROGEN
General
Envirogen 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
$2.5 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 n.v. VAM of the Netherlands to
supply advance 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 1995 revenues of
approximately $4.7 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
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. 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.
Consistent with this strategy, Envirogen has entered into the Merger
Agreement to acquire FMI, a full-service environmental consulting and
engineering firm with revenues of approximately $21.3 million and pre-tax net
income of approximately $4.6 million during 1995. See "Special Factors -Reasons
for the Merger; Recommendation of the Board of Directors" and "Business of FMI."
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
- --------------
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.
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Engineered Systems
- ------------------
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 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 waste water 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
- -------------------
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
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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.
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
- ----------------------
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
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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.
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 and two more are scheduled to start in early
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
- ------------------
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-
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<PAGE>
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.
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
- ---------------------
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.
35
<PAGE>
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, porus 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 $600,000. 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 $1,900,000 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
36
<PAGE>
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 for Envirogen. CVT
America realized initial revenues in 1995 on sales of its products and services
and substantially increased their revenues in 1996. CVT America signed an
agreement in 1996 with Davis Water, now a division of U.S. Filter, by which CVT
provides biofilters to Davis Water to cover specific market segments. The
agreement has already resulted in several systems sales, and CVT commenced
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
37
<PAGE>
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.
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
38
<PAGE>
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.
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.
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 products liability coverage, there
can be no assurance that
39
<PAGE>
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.
Legal Proceedings
Envirogen knows of no material litigation or other legal proceedings
pending or threatened to which it is, or may become, a party.
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.
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.
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<PAGE>
Compensation of Directors
Non-employee directors (the "Non-Employee Directors") receive a
$1,000 quarterly retainer and an additional $1,000 for each Board of Directors
meeting attended in person. Directors are also reimbursed for out-of-pocket
expenses for attendance at meetings. Non-Employee Directors are eligible to
receive stock option grants under the Envirogen, Inc. 1993 Directors' Non-
Qualified Stock Option Plan (the "1993 Plan").
Under the 1993 Plan, upon the initial election of each Non-Employee
Director, he or she will automatically be granted an option to purchase 15,000
shares of Common Stock, and an option to purchase an additional 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. The option to purchase 15,000 shares
vest over five years, and the option to purchase 5,000 shares vest at the end of
the first year of grant. Non-Employee Directors who are not initially elected at
an Annual Meeting of Stockholders will receive (i) an option to purchase 15,000
shares of Common Stock and (ii) an option to purchase 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.
Executive Compensation
The table on the following page sets forth certain information, for
Envirogen's last three fiscal years, concerning the annual and long-term
compensation paid to Envirogen's Chief Executive Officer and each of Envirogen's
other executive officers whose total annual salary and bonus during 1996
exceeded $100,000 (collectively, the "Named Officers"):
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<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation/(1)/ Compensation
------------------------------ ------------
Awards
------------
Securities
Underlying All Other
Name and Options Compensation
Principal Position/(2)/ Year Salary($) Bonuses (#)/(3)/ ($)/(4)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Harcharan S. Gill 1996 $190,000 $ 120,000 $ 4,135
President and Chief 1995 $175,000 $10,000 90,000 $51,140
Executive Officer 1994 $ 74,039 $10,000 130,000 $ 0
David N. Enegess 1996 $138,000 $ 35,000 $ 2,863
Vice President, 1995 $134,000 $ 0 31,800 $ 2,680
Marketing 1994 $130,000 $ 0 2,000 $ 2,540
and Commercial
Development
Ronald Unterman 1996 $138,000 $ 70,000 $ 2,863
Vice President and Chief 1995 $134,000 $ 0 41,800 $ 2,680
Scientific Officer 1994 $130,000 $ 0 2,000 $ 2,300
Peter E. Nangeroni 1996 $110,000 $ 70,000 $ 2,372
Vice President, 1995 $ 90,134 $ 5,000 15,900 $ 1,803
Operations 1994 $ 83,864 $ 0 4,000 $ 1,695
William J. Guarini 1996 $107,000 $ 35,000 $ 2,258
Vice President, Government 1995 $102,115 $ 2,000 16,350 $ 2,021
Business Development 1994 $ 98,350 $ 0 2,000 $ 1,885
</TABLE>
- -----------------------
(1) The costs of certain perquisites and other personal benefits are not
included because they did not exceed, in the case of each Named Officer,
the lesser of $50,000 or 10% of the total annual salary and bonus indicated
in the above table.
(2) Pursuant to the Merger Agreement, the annual base salary rates payable by
Envirogen to the FMI Stockholders commencing at the Effective Time will be
as follows: William C. Smith, $180,000; Douglas W. Jacobson, $140,000; Gary
W. Hawk, $140,000; and Richard W. Schowengerdt, $140,000. See "The Merger
Agreement - Employment Agreements."
(3) The options listed for Dr. Gill for 1994 consist of options granted in
connection with his acceptance of employment with Envirogen.
(4) This column consists of Envirogen's matching contributions to the
Envirogen, Inc. 401(k) Plan, except that the amount listed for Dr. Gill for
1995 also includes $49,659 as reimbursement of relocation expenses in
connection with Dr. Gill's employment with Envirogen.
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<PAGE>
The following tables set forth certain information concerning stock
options granted to the Named Officers during the fiscal year ended December 31,
1996 and unexercised options held by them at December 31, 1996:
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
% of Total
Options
Number of Granted to
Securities Employees
Underlying in Exercise
Options Fiscal Price Expiration
Name Granted/(1)/ Year/(2)/ Per Share Date
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harcharan S. Gill 40,000 16.4% $3.85 2/1/06
80,000 $2.80 11/19/06
David N. Enegess 15,000 4.8% $3.85 2/1/06
20,000 $2.80 11/19/06
Ronald Unterman 30,000 9.5% $3.85 2/1/06
40,000 $2.80 11/19/06
Peter E. Nangeroni 40,000 9.5% $3.85 2/1/06
30,000 $2.80 11/19/06
William J. Guarini 20,000 4.8% $3.85 2/1/06
15,000 $2.80 11/19/06
- -----------------------
</TABLE>
(1) All of the options were granted under the Option Plan at fair market value.
Such options are non-transferable and are exercisable in equal installments
over a five-year period commencing with the date of grant; provided,
however, that such options are immediately exercisable in the case of
certain business combinations involving Envirogen (other than the Merger).
(2) Envirogen granted options to employees to purchase a total of 733,000 shares
of Common Stock during 1996.
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<PAGE>
Aggregated Option Exercises In Last Fiscal Year And
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Shares Year-End at Fiscal Year-End/(2)/
Acquired on Value -------------------- ------------------------
Name Exercise Realized/(1)/ Exercis- Unexercis- Exercis- Unexer-
able able able cisable
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Harcharan S. Gill -- -- 70,000 270,000 $50,390 $166,310
David N. Enegess 2,800 $ 8,820 17,960 63,640 $18,516 $ 51,683
Ronald Unterman 1,400 $ 4,848 17,160 106,640 $13,376 $ 76,503
Peter E. Nangeroni 13,500 $39,488 8,780 86,120 $ 5,323 $ 43,542
William J. Guarini 3,200 $11,181 7,270 49,680 $ 9,877 $ 31,647
- -----------------------
</TABLE>
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date minus the exercise price.
(2) In-the-money options are those where the fair market value of the underlying
securities exceeds the exercise price of the option. The closing price of
Envirogen's Common Stock on December 31, 1996 was $3.375 per share.
Employment and Noncompetition Agreements
Dr. Gill's employment with Envirogen as President and Chief Executive
Officer began effective August 1, 1994 pursuant to an at-will employment
agreement. On June 6, 1996, Dr. Gill and Envirogen executed a new employment
agreement providing for Dr. Gill's employment as President and Chief Executive
Officer of Envirogen through May 31, 1999. Under this employment agreement, Dr.
Gill will receive an annual salary of $190,000. Dr. Gill will also be eligible
to receive annual incentive bonuses based upon corporate and individual
performance goals fixed by the Board of Directors and 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 Executive Compensation and Stock
Option Committee may determine. If Dr. Gill's employment is terminated early due
to his disability, or by Envirogen without cause, or by Dr. Gill with good
reason, or if Envirogen elects not to renew employment after the expiration
date, Envirogen is obligated to continue to pay salary and provide fringe
benefits for 12 months following termination, and all options held by Dr. Gill
which would vest in such 12-month period will become exercisable on the date of
termination. During the term of employment and for two years after the
termination of employment, Dr. Gill may not, directly or indirectly, participate
in the United States, Canada or any other jurisdiction in which Envirogen has
derived at least $250,000 in revenues during the period the employment agreement
was in effect, in any business or enterprise competing with Envirogen of any
affiliate of Envirogen, nor may Dr. Gill induce any consultants, customers or
employees of Envirogen to take actions disadvantageous to Envirogen.
Envirogen has noncompetition agreements with Messrs. Enegess and Unterman
which provide for one-year covenants not to compete following termination of
employment; provided, however, that if employment is terminated by Envirogen
without cause and Envirogen elects not to pay an amount equal to such person's
annual salary for such one-year period, then there is no such post-termination
covenant.
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Pursuant to the Merger Agreement, each of the FMI Stockholders will
enter into an employment agreement with Envirogen. For a description of the
material terms and conditions of such employment agreements, see "The Merger
Agreement - Employment Agreements."
Principal Stockholders of Envirogen
The following table sets forth certain information regarding the
beneficial ownership of Envirogen's Common Stock as of December 31, 1996, and as
adjusted to reflect the consummation of the transactions contemplated by the
Merger Agreement and the Securities Purchase Agreement, by (a) each stockholder
known to Envirogen to be the beneficial owner, as defined in Rule 13d-3 under
the Exchange Act, of more than five percent of the Common Stock, based upon
Company records or Securities and Exchange Commission filings, (b) each director
of Envirogen, (c) each of the Named Officers and (d) all executive officers and
directors of Envirogen as a group. Each of the stockholders named below has sole
voting power and sole investment power with respect to the shares indicated as
beneficially owned, unless otherwise indicated.
<TABLE>
<CAPTION>
As Adjusted
Shares Owned Shares Owned
------------------------ ------------------------
Name of Beneficial Owner Number Percent Number Percent
- ------------------------ ------ ------- ------ --------
<S> <C> <C> <C> <C>
Allen Holding Inc. 2,705,391/(1)/ 20.1% 2,705,391 11.4%
711 Fifth Avenue
New York, NY 10022
Allen & Company Incorporated 2,697,923/(2)/ 20.0 2,697,923 11.3
711 Fifth Avenue
New York, NY 10022
Warburg, Pincus Ventures, L.P. -- -- 6,095,238/(3)/ 26.3
466 Lexington Avenue
New York, NY 10017-3147
Robert S. Hillas, Director Appointee -- -- 6,095,238/(4)/ 26.3
466 Lexington Avenue
New York, NY 10017-3147
Robert F. Johnston, Director 385,000/(5)/ 3.0 385,000 1.7
Harcharan S. Gill, Director and Executive 190,000/(6)/ 1.5 190,000 *
Officer
Robert C. Miller, Director 160,610/(7)/ 1.2 160,610 *
Robert F. Hendrickson, Director 140,500/(8)/ 1.1 140,500 *
Seymour L. Meisel, Director 125,500/(9)/ 1.0 125,500/(9)/ *
Ronald Unterman, Executive Officer 108,260/(10)/ * 108,260 *
David N. Enegess, Executive Officer 89,560/(11)/ * 89,560 *
Peter E. Nangeroni, Named Officer 19,580/(12)/ * 19,580 *
William J. Guarini, Named Officer 10,670/(13)/ * 10,670 *
William C. Smith, Director Appointee 1,000 * 1,048,619/(14)/ 4.5
Peter J. Neff, Director -- -- -- --
All executive officers and directors as a group 1,199,430/(15)/ 9.2 8,217,787/(15)/ 35.2
(eight persons)/(15)/
</TABLE>
- ------------------------------------------
(Footnotes set forth on next page)
45
<PAGE>
- ---------------------------------------------
(Footnotes to table on previous page)
* Less than 1%.
(1) Includes 2,082,876 shares and 7,468 shares beneficially held by Allen &
Company and Allen Capital, respectively. Also includes 615,047 shares
issuable upon exercise of currently exercisable warrants to Allen &
Company. Does not include shares owned by officers and directors of Allen
& Company for which Allen & Company disclaims beneficial ownership,
including shares held by Robert C. Miller, a director of Envirogen. Allen
Capital has sole investment and voting power with respect to the
securities held by them. Allen Holding Inc. ("AHI") owns 100% of the
outstanding stock of Allen & Company and, through its subsidiaries, has a
controlling interest in the general partners of Allen Capital. As such,
AHI may be deemed to beneficially own the shares of Envirogen held by
Allen Capital; however, AHI disclaims beneficial ownership of all such
securities except to the extent represented by AHI's equity interest and
profit participation in such entities.
(2) Includes 615,047 issuable upon exercise of currently exercisable warrants.
(3) Represents the number of shares to be issued to Warburg in connection with
the Warburg Transaction. See "Proposal 2. The Securities Purchase
Agreement - The Warburg Transaction." The sole general partner of Warburg
is Warburg, Pincus & Co., a New York general partnership ("WP"). E.M.
Warburg, Pincus & Co., LLC, a New York limited liability company ("EMW
LLC"), manages Warburg. The members of EMW LLC are substantially the same
as the partners of WP. Lionel I. Pincus is the managing partner of WP and
the managing member of EMW LLC and may be deemed to control both WP and
EMW LLC. WP has a 15% interest in the profits of Warburg as the general
partner, and also owns approximately 1.5% of the limited partnership
interests in Warburg. Mr. Hillas, a director appointee of the Company, is
a Managing Director and member of EMW LLC and a general partner of WP. As
such, Mr. Hillas may be deemed to have an indirect pecuniary interest
(within the meaning of Rule 16a-1 under the Securities Exchange Act of
1934) in an indeterminate portion of the shares beneficially owned by
Warburg and WP. See Note 4 below.
(4) All of the shares indicated as owned by Mr. Hillas are owned directly by
Warburg and are included because of Mr. Hillas' affiliation with Warburg.
Mr. Hillas disclaims "beneficial ownership" of these shares within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934. See Note
3 above. Pursuant to the Merger Agreement, Mr. Hillas has been appointed
by the Board of Directors to serve as a director of Envirogen effective as
of the Effective Time.
(5) Includes 5,000 shares issuable upon exercise of currently excersisable
warrants.
(6) Includes 70,000 shares subject to options that are currently exercisable.
(7) Includes 55,400 shares issuable upon exercise of currently exercisable
warrants.
(8) Includes 22,000 shares subject to options that are currently exercisable.
(9) Includes 13,500 shares subject to options that are currently exercisable.
Dr. Meisel has tendered his resignation from the Board of Directors
effective as of the Effective Time.
(10) Includes 17,160 shares subject to options that are currently exercisable.
(11) Includes 17,960 shares subject to options that are currently exercisable.
(12) Includes 8,780 shares subject to options that are currently exercisable.
(13) Includes 7,270 shares subject to options that are currently exercisable.
(14) Includes 1,047,619 shares to be issued to Mr. Smith in connection with the
Merger. Pursuant to the Merger Agreement, Mr. Smith has been appointed by
the Board of Directors to serve as a director of Envirogen and has been
elected by the Board of Directors to serve as Chairman of the Board, in
each case effective as of the Effective Time. See "Special Factors -
Certain Effects of the Merger."
(15) See Notes 4 through 11 and 14 above. The number of shares set forth in the
"As Adjusted" column represents the number of shares beneficially owned by
all executive officers and directors as a group (nine persons), excluding
Dr. Meisel, who has tendered his resignation from the Board of Directors
effective as of the Effective Time, and including Messrs. Smith and
Hillas, who have been appointed to the Board of Directors effective as of
the Effective Time. See "Special Factors - Certain Effects of the Merger."
46
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF ENVIROGEN
The following selected consolidated financial data of Envirogen at
December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and
1993 is derived from Envirogen's audited Consolidated Financial Statements
included elsewhere herein. The financial data of Envirogen at September 30, 1996
and for each of the nine-month periods ended September 30, 1996 and 1995 is
derived from Envirogen's unaudited Consolidated Financial Statements also
included herein. In the opinion of management, the interim data reflects all
adjustments (consisting only of recurring accruals) which Envirogen considers
necessary for a fair presentation of the financial position and results of
operations of Envirogen for these periods. Interim operating results are not
necessarily indicative of the results to be expected for the entire year. The
selected consolidated financial data set forth below should be read in
conjunction with Envirogen's Consolidated Financial Statements and related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Envirogen" appearing elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
Statement of Operations Data:
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------------------------------------------- ---------------------------
1995 1994 1993 1992 1991 1996 1995
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 8,033,698 $ 6,134,577 $ 4,714,752 $ 3,386,459 $ 1,996,251 $ 8,908,837 $ 5,568,080
Costs and expenses 10,279,694 10,503,989 9,879,694 7,693,633 3,462,324 11,271,605 7,545,742
Interest, net 169,972 111,659 216,696 235,128 117,644 111,691 123,929
Equity in gain (loss)
of joint venture (93,437) - - - - 29,168 (49,210)
Other, net 16,961 - - - - - 13,961
------------ ------------ ------------ ------------ ------------ ----------- -----------
Net loss (2,152,500) (4,257,753) (4,948,246) (4,072,046) (1,348,429) (2,221,909) (1,888,982)
Preferred Stock
dividends (233,333) - - - - (36,458) (72,917)
------------ ------------ ------------ ------------ ------------ ----------- -----------
Net loss applicable
Common Stock ($ 2,385,833) ($ 4,257,753) ($ 4,948,246) ($ 4,072,046) ($ 1,348,429) ($2,258,367) ($1,961,899)
============ ============ ============ ============ ============ =========== ===========
Net loss per share
applicable to
Common Stock ($0.31) ($0.57) ($0.79) ($0.79) ($0.38) ($0.21) ($0.26)
============ ============ ============ ============ ============ =========== ===========
<CAPTION>
Balance Sheet Data:
December 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991 September 30, 1996
---- ---- ---- ---- ---- ------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 8,585,233 $ 6,704,806 $11,945,079 $10,505,940 $ 7,110,492 $13,058,613
Working capital 4,890,270 3,628,377 8,204,251 8,145,091 5,438,125 6,766,790
Long-term obligations 60,951 177,704 298,709 175,352 95,535 57,147
Redeemable convertible
Preferred Stock 1,728,621 - - - 9,663,031 -
Stockholders equity
(deficit) 4,863,357 5,400,207 9,694,715 9,523,971 (3,388,711) 10,480,504
</TABLE>
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ENVIROGEN
The following information should be read in conjunction with Envirogen's
consolidated financial statements and notes thereto included elsewhere in this
Proxy Statement.
General
The source of Envirogen's revenues to date includes (i) commercial sales
of Envirogen'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 Envirogen 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 Envirogen'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 Envirogen's systems.
The amount and timing of such expenditures can not be predicted.
Results of Operations
Nine Months Ended September 30, 1996 Compared to
Nine Months Ended September 30, 1995
For the nine months ended September 30, 1996, Envirogen reported
revenues of $8,908,837, an increase of 60% from the same period in 1995. The net
loss in the period increased 15% to $2,258,367 from $1,961,899 in the same
period in 1995, while the net loss per share was $0.21 compared to $0.26 in the
same period in 1995. The decrease in net loss per share is due to a greater
number of shares outstanding resulting from a private placement of Common Stock
in the second quarter of 1996.
Commercial revenues increased 80% to $7,621,681 from $4,237,170 in the
same period in 1995, while revenues from corporate and government research and
development contracts decreased 3% to $1,287,156 from $1,330,910 in the same
period in 1995. The increase in commercial revenues is due primarily to
increased systems sales by Envirogen's Commercial Air Group related to the ABTCo
biofilter project combined with revenues from Envirogen's MWR subsidiary that
was acquired in February 1996. Revenues from remediation activities accounted
for 74% of Envirogen's commercial revenues in the nine-month period ended
September 30, 1996.
Revenues from corporate and government research and development
contracts decreased slightly from 1995 as revenues from numerous new projects
partially offset the loss of revenues due to the conclusion in December 1995 of
PCB work Envirogen performed for the Texas Eastern Company. In late 1995,
Envirogen began work under a Phase II Department of Energy Small Business
Innovative Research Grant (SBIR), Phase II Department of Defense SBIR and Phase
II National Science Foundation SBIR, which contributed significantly to 1996
results. Envirogen also recorded initial revenues during
48
<PAGE>
the first nine months of 1996 under a new Phase I grant from the Department of
Energy and a new Phase I grant from the National Science Foundation.
Total costs and expenses increased 49% to $11,271,605 in the first nine
months of 1996 from $7,545,742 in the same period 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 87% to $6,967,717
due to higher revenue levels, a greater proportion of which were attributable to
lower margin systems sales. Research and development expenses decreased 4% to
$1,692,965. General and administrative expenses increased 15% to $1,380,361 due
largely to the increased amortization of intangible assets associated with the
acquisition of MWR in February 1996. The $550,000 provision for contract claim
is the estimated cost to repair and restart the previously disclosed Nylonge
biofilter system. Throughout 1996 Envirogen investigated the cause of the
failure, redesigned the internal grating and rebuilt and restarted the system.
While the ultimate responsibility for the costs incurred in connection therewith
has not yet been determined, Envirogen is actively pursuing reimbursement of
these expenses from third parties. However, there can be no assurance that any
such recoveries will be attained. Marketing expenses decreased 19% due primarily
to reduced personnel related costs combined with other cost reduction efforts.
Interest income decreased by 11% to $131,011 due to the decreased
average cash available for investment resulting from Envirogen's continuing loss
position combined with the cash required for Envirogen's acquisition of MWR,
Inc. Equity in gain of joint venture (in connection with Envirogen's
participation in the CVT America joint venture) increased to $29,168 for the
nine-month period ended September 30, 1996 from a loss of $49,210. Prior to its
conversion in May 1996, Envirogen paid dividends of $36,458 in 1996 on
Envirogen's outstanding convertible preferred stock.
1995 Compared to 1994
Envirogen 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, Envirogen 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 Envirogen'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 company in New Jersey caused Envirogen and the client
to jointly terminate, in the second quarter of 1995, a September 1994 contract
valued at approximately $1,000,000.
Envirogen received significant contract awards from its recently-
commercialized air systems business in 1995. In January, Envirogen was awarded a
contract to supply the Nylonge Corporation with a biofiltration system for the
removal of contaminant gases from the waste gas stream at its sponge
manufacturing facility in Ohio. Shortly after installation, however, the system
suffered a shutdown in January 1996, which Envirogen believes was primarily
caused by a failure of internal grating material
49
<PAGE>
supplied by third parties. Throughout 1996 Envirogen investigated the cause of
the failure, redesigned the internal grating and rebuilt and restarted the
system. While the ultimate responsibility for the costs incurred in connection
therewith has not yet been determined, Envirogen is actively pursuing
reimbursement of these expenses from third parties. However, there can be no
assurance that any such recoveries will be attained. In November, Envirogen was
awarded a contract to supply ABTco with a biofiltration system to reduce odor
emissions from its wood products mill in Michigan. The ABTco contract, valued at
approximately $1,900,000, is expected to provide Envirogen with approximately
$1,700,000 in revenues in 1996. Revenues from remediation services accounted for
81% of Envirogen's 1995 commercial revenues.
Revenues from corporate and government research and development
contracts remained relatively unchanged as Envirogen was able to replace several
completed large projects, which contributed significant revenues in 1994, with
several new multi-year grants and contracts. Envirogen 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 Envirogen'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 Envirogen'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 Envirogen'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 dividend paid in connection with the conversion of
50% of the Preferred Stock to Common Stock in December 1995
1994 Compared to 1993
Envirogen reported revenues in 1994 of $6,134,577, an increase of 30%
from 1993. The net loss in 1994 decreased by 14% to $4,257,753 from $4,948,246
in 1993, while the net loss per share was $0.57 in 1994 compared to $0.79 in
1993. In the third quarter of 1994, Envirogen underwent a strategic
restructuring of its operations to increase productivity and efficiency and
decrease costs. The restructuring, which was completed in 1994, resulted in a
one-time charge for severance related to staff reductions.
Commercial revenues increased by 47% to $4,061,432 from $2,760,557 in
1993, while revenues from corporate and government research and development
contracts increased by 6% to $2,073,145 from $1,954,195 in 1993. The increase in
commercial revenues reflects increased hydrocarbon remediation
50
<PAGE>
activity in Envirogen's Midatlantic Operations Group, which was newly
operational in 1993, and its Gulf Coast Operations Group, which realized its
first significant revenues in 1994.
Envirogen received substantial contract awards in several newly-
commercialized business areas in 1994. In September 1994, Envirogen was awarded
its first contract to build a full-scale commercial biofiltration system to
treat airborne odor-causing effluents. In December 1994, Envirogen was awarded a
contract to supply a fluidized bed biological reactor system for the treatment
of contaminated groundwater. This project, with expected billings of
approximately $1,060,000, was Envirogen's first permanent full-scale commercial
system for the treatment of contaminated water streams. Envirogen also received
initial commercial revenues for the remediation of nitroaromatics, a family of
chemicals that are used in explosives and pesticides that have become a serious
environmental problem at many military installations and in agricultural areas.
Revenues from remediation activities accounted for 94% of Envirogen's 1994
commercial services revenues.
Revenues from corporate and government research and development
contracts increased primarily due to Envirogen receiving and completing several
Department of Defense, Department of Energy and National Science Foundation
Phase I Small Business Innovative Research (SBIR) contracts.
Total costs and expenses increased by 6% to $10,503,989 in 1994 from
$9,879,694 in 1993. The cost of commercial operations increased by 27% to
$3,358,730 on higher revenue levels and other expenses associated with
commercializing new technologies. Research and development expenses decreased by
12% to $3,311,301 due primarily to lower equipment and supplies expenditures and
various cost reduction efforts. General and administrative expenses increased by
$75,560 (3%) due to compensation paid to former officers and executive
recruiting and relocation expenses, partially offset by reduced spending.
Marketing costs increased by 22% to $1,554,456 due primarily to additional
personnel and other costs associated with new business development activities.
Interest income, which results from Envirogen's investment in short-
term, high grade credit instruments, decreased by 35% to $164,886 due primarily
to a lower level of cash available for investment.
Liquidity and Capital Resources
Envirogen 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 September 30, 1996 Envirogen had cash and cash
equivalents of $4,722,318 and working capital of $6,766,790. Additionally,
Envirogen had restricted cash of $399,082 that was being used to collateralize
bonds for large commercial projects. Cash and cash equivalents increased by
$974,121 from December 31, 1995 to September 30, 1996 due to the net proceeds of
$4,620,186 from the May 1996 private placement of Common Stock which offset the
cash payment of $1,319,018 for the purchase of MWR, Inc. in February 1996, cash
used by operations of $1,922,857, capital expenditures of $168,798, an advance
to affiliate of $100,000, capital lease principal repayments of $98,426 and cash
dividends on preferred stock of $51,041. Envirogen 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 Envirogen's biodegradation systems
can be further commercialized and
51
<PAGE>
the availability of capital. Furthermore, future projects may require Envirogen
to set aside additional capital to collateralize performance bonds.
Revenue from certain of Envirogen'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 September 30, 1996, unbilled revenue was $403,949
greater than at December 31, 1995 due primarily to the acquisition of MWR.
Accounts receivable increased by $1,015,919 from December 31, 1995 to
September 30, 1996 due primarily to the acquisition of MWR and the timing of
billings for the ABTCo project. Accounts payable increased by $105,659 and
accrued expenses and other liabilities increased by $569,479 in the same period
due primarily to the acquisition of MWR.
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 the intermediate term; (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.
If the Merger and the Warburg Transaction are consummated, 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 Date, 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 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. See "Pro Forma
Condensed Consolidated Financial Information" appearing elsewhere in this Proxy
Statement. In addition, Envirogen intends to supplement its working capital with
a credit facility, either with Firstar Bank of Milwaukee, Wisconsin, or with
another financial institution. Firstar Bank is the lender under FMI's current
$1.2 million demand line of credit and $2.5 million term loan. There can be no
assurance that any such credit facility will be obtained or, if obtained, will
be on terms advantageous to Envirogen.
Other Matters
As of December 31, 1995, Envirogen had a net operating loss carry
forward of approximately $17,600,000 for federal income tax reporting purposes
available to offset future taxable income, if any, through 2010. The timing and
manner in which these losses may be utilized are limited under Section 382 of
the Internal Revenue Code of 1986, as amended, as a result of certain ownership
changes with
52
<PAGE>
respect to Envirogen to date, and will be further limited as a result of the
Merger and the Warburg Transaction and in the event of additional ownership
changes.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS 123"). In October 1995, SFAS 123 established financial and reporting
standards for stock based compensation plans. Envirogen adopted the disclosure
only provision of this standard during 1996.
MARKET PRICE OF AND DIVIDENDS ON ENVIROGEN COMMON STOCK
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. Stockholders are urged to obtain
current market quotations. 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 $4.625 $2.375
3rd Quarter $4.00 $2.125
4th Quarter $3.75 $2.375
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>
On January 14, 1997, the last full trading day prior to the public
announcement of the execution and delivery of the Merger Agreement, the high and
low closing prices for the Common Stock were a high of $3.563 and a low of
$3.313. The closing price for the Common Stock on February ___, 1997 was $_____.
The number of stockholders of record of the Common Stock on January 31,
1997 (the Record Date of the Special Meeting) was ____, which includes
stockholders whose shares were held in nominee name. The number of beneficial
stockholders of the Common Stock at that date was over ______.
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.
53
<PAGE>
BUSINESS OF FMI
General
Fluid Management, Inc. ("FMI") is a Wisconsin-based, full service
environmental consulting firm. FMI was founded in 1989 and, as of
December 31, 1996, had approximately 152 employees providing specialized
services in the areas of remedial investigation, design and construction;
solid waste and landfill management; air sciences and engineering; and
environmental engineering and compliance management.
FMI's business philosophy is to serve as a turnkey solution for its
clients' environmental problems and compliance issues. In this regard,
FMI provides or arranges for the provision of site investigation and
testing, analysis and identification of environmental problems and
compliance matters, development of remediation plans, obtaining approval
and/or certification of such remediation plans from relevant regulatory
agencies, construction, installation and implementation of remedial
systems, monitoring and analysis of efficacy of remedial systems, and
confirmation of successful results to relevant regulatory agencies. FMI
also assists its clients in obtaining financing for such environmental
projects and, where reimbursement of such costs is available from
regulatory agencies, FMI assists its clients in complying with eligibility
requirements for such reimbursement and in appropriately submitting
reimbursement claims. FMI prepares and processes all regulatory
applications, correspondence and other documentation and attends to all
other administrative matters necessary to complete the environmental
project. FMI's goal is to serve as a one-stop service for meeting its
clients' environmental needs.
FMI's ability to operate as a turnkey solution in this fashion is
attributable to its fully integrated remedial design and construction
management teams. FMI's management believes that having these activities
internalized provides FMI with a competitive advantage, especially when
competing for the business of smaller commercial concerns which often lack
the capabilities and resources required to manage a group of independent
consultants and construction contractors. FMI has developed a strong
network with laboratories and other diagnostic businesses and with
construction firms that it subcontracts to provide services to FMI's
clients.
FMI has a broad base of public and private sector clients including
bulk petroleum distributors, retail gasoline stations, paper mills,
railroads, foundries, municipalities and counties. Although the majority
of FMI's clients are smaller independent operators, it also has
relationships with major corporations. With over 400 clients, FMI has no
significant customer concentration, the largest representing less than 5%
of revenues during 1996.
FMI has focused primarily on the Wisconsin marketplace and to this
end has established offices in Pewaukee, LaCrosse, Ashwaubenon and
Mosinee, Wisconsin and Geneva, Illinois. Its headquarters are located at
the Pewaukee office (approximately ten miles west of Milwaukee,
Wisconsin), where over 100 of its employees are located.
FMI is owned equally by four stockholders: William C. Smith,
Chairman, Chief Executive Office and President; Gary W. Hawk, Vice
President; Douglas W. Jacobson, Vice President and Secretary; and Richard
W. Schowengerdt, Vice President (together, the "FMI Stockholders"). Each
of these individuals is actively involved in the daily operations of the
business and has significant client relationship responsibilities.
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<PAGE>
Remediation Services
General. FMI began operations in 1990 by providing industrial and
commercial clients with consulting services related to lubrication and
maintenance, management of industrial process fluids and environmental
issues. Because of the experience of several of the FMI Stockholders in
the petroleum distribution industry, FMI began providing comprehensive
consulting services associated with Wisconsin's Petroleum Environmental
Cleanup Fund Act ("PECFA") program. FMI has grown rapidly in this field,
focusing its efforts on providing solution-oriented remedial services by
utilizing a broad range of commercially-proven technologies. While these
technologies are not proprietary to FMI, FMI applies them in unique and
creative manners to address particular situations.
Remediation services remain FMI's core business, accounting for $16.4
million and $18.2 million of its total revenues during 1994 and 1995,
respectively, or approximately 87% and 85% of total revenues,
respectively, in each of those years. For the nine months ended September
30, 1996, remediation services generated approximately $12.9 million in
total revenues, or approximately 88% of FMI's total revenues over that
period.
FMI's remediation services are divided into two phases: the
investigation and design phase; and the construction and implementation
phase. Investigation and design services are provided by FMI's Remedial
Investigation and Design Group, which offers a full spectrum of
environmental characterization and remediation services. This Group
analyzes, creates and/or completes petroleum storage tank management
programs, environmental site characterization studies, soil and
groundwater remediation programs, regulatory documentation and
representation of clients before regulatory agencies.
Following the completion of the investigative and design stages, FMI
handles the process of implementation through its Construction Services
Group. This Group provides full construction management and engineering
support for projects ranging in complexity from over-excavation projects
and biopile treatment to sophisticated in situ remediation systems and
wastewater treatment systems. Services provided by the Construction
Services Group include development of plans and specifications, contract
bidding and project management, turnkey system construction, system
operations and maintenance. Services not provided directly by FMI are
contracted out to subcontractors hired through a formal bidding process.
FMI has developed strong relationships with a large network of
subcontractors.
PECFA Program. The Wisconsin PECFA program, established in 1987, is
a grant-based program that provides reimbursement for costs incurred to
remediate sites contaminated by petroleum storage tank systems. The
program is managed by the Wisconsin Department of Commerce ("DCOM") (prior
to July 1, 1996, the program was managed by the Wisconsin Department of
Industry, Labor and Human Relations). The PECFA program historically has
maintained a fully-funded status by means of a state-assessed inspection
fee on the sale of gasoline and diesel fuel. Maximum coverage is $1
million per site, with a $7,500 deductible for underground tanks and a
$31,000 deductible for aboveground tanks. An entity that owns more than
100 tanks cannot be reimbursed for more than $2 million a year. These
limits apply to all projects commenced prior to July 1, 1998. As of
September 30, 1996, FMI had more than 375 ongoing remediation projects.
The PECFA program is scheduled to reduce per site reimbursement coverage
for new sites to $190,000 after July 1, 1998. Legislation proposed in the
State of Wisconsin, if passed, would extend the current maximum coverage
amounts to December 31, 2001. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of FMI - General."
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<PAGE>
A unique factor to the PECFA program is the involvement of banks that
provide intermediary financing during the life of a project site clean-up.
A project site owner has the option to work with a commercial bank to
provide financing to cover the costs incurred during site investigation
and remediation, pending receipt of reimbursement payments under PECFA.
Banks are allowed to assess a 2% origination fee, a 1% renewal fee and an
interest rate of 2% over prime on monies expended. Banks seek repayment
of PECFA loans through reimbursements from DCOM. A bank's credit risk is
essentially reduced to three factors: (1) the annual PECFA funding limit
($84.5 million for 1996); (2) reimbursement from only eligible-costs as
approved by DCOM; and (3) fraudulent consultants. So far for the
Wisconsin biennium budget period ending July 1, 1997, PECFA has paid out
the full $169.0 million of its funding limit, and an additional $34
million of funding was added during 1996.
As a part of its objective to provide turnkey services to its
clients, FMI has established a practice of assisting clients in obtaining
financing of PECFA reimbursable remediation costs from financial
institutions. Over the years, FMI has worked with more than 50 banks in
and around Wisconsin. FMI assisted a publicly held, major regional bank
holding company headquartered in Wisconsin in establishing its PECFA
lending program, and has developed a strong PECFA lending relationship
with that institution. The bank holding company has over $18 billion in
total assets and operates approximately 125 office locations throughout
Wisconsin. Because of its strong relationship with this institution, FMI
receives payment promptly upon invoicing the bank, which reduces FMI's
risk of uncollectible receivables. FMI prepares and processes all of the
required paperwork for submission to DCOM which, in turn, makes
reimbursement payments jointly to the client and the bank.
FMI's invoices are paid either directly by the client or by the
lending financial institution on behalf of the client, although PECFA
reimbursement claims cannot be submitted to DCOM on behalf of the client
or the lender until achievement of certain project completion benchmarks.
FMI invoices its clients monthly for the services it provides on a time
and materials basis prior to project completion benchmarks, thereby
minimizing its operating capital needs.
Review of PECFA claims by DCOM and determination of which costs are
eligible for reimbursement generally are not completed until one to three
years after FMI has received payment from its client (or the client's
lending bank). This exposes the client to the risk that remediation
expenses it incurs and pays ultimately may be determined by DCOM not to be
reimbursable under PECFA. While FMI has no contractual liability for
PECFA ineligible reimbursements, it has established an unwritten policy of
repaying its clients or their lending banks for FMI expenses determined by
DCOM not to be reimbursable. FMI maintains a reserve against this
contingent liability in an amount that it believes to be adequate. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations of FMI - General."
As mentioned above, the maximum reimbursement limits under the PECFA
program presently are scheduled to decrease for all sites added to the
program after July 1, 1998. Proposed legislation would extend the current
maximum limits to December 31, 2001. However there can be no assurance
that any such legislation will be passed. As noted above, FMI has a
considerable ongoing backlog of PECFA site remediation projects. Based on
information published by DCOM, as of November 30, 1996, approximately
8,000 PECFA-eligible sites had been identified, and there are over 38,000
underground storage tank owners registered in the State of Wisconsin.
Information made available by the Petroleum Marketers Association of
Wisconsin indicates that only approximately 1,500 PECFA-eligible sites
have been remediated. Even if no legislation is passed to extend the $1
million cap on per site PECFA remediation, it is likely that a concerted
effort to identify potential PECFA sites will ensue prior to July
56
<PAGE>
1, 1998. On balance, FMI believes the current regulatory environment will
provide FMI with ample opportunities to continue its core PECFA
remediation business and to expand its other service areas.
Non-PECFA Service Areas
Solid Waste Services. The Engineering Solutions Group of FMI
provides solid waste services to public and private sector clients in over
50 counties in Wisconsin, Illinois, Michigan, Minnesota, Iowa and Indiana.
Projects undertaken by the Engineering Solutions Group include planning
services, permitting services, engineering services and construction
supervision. Technologies with which the Engineering Solutions Group has
experience include waste reduction, recycling, composting, transfer and
landfilling.
Planning services provided by the Engineering Solutions Group include
solid waste needs assessments, solid waste plans and audits, feasibility
studies and alternatives analyses, public education and procurement and
grant applications. Permitting services include site location studies and
local siting applications, state and federal permit applications,
compliance audits, air permits, groundwater monitoring plans, expert
witness testimony, construction quality assurance and geometric
evaluations. On the engineering side, the Engineering Solutions Group
assists in the design of solid waste transfer stations, material recovery
facilities, landfills and compost facilities, and also assists in
developing equipment specifications, facility operating and/or closure
plans, construction oversight, hydrogeologic investigation and remedial
investigations/designs.
Air Sciences and Engineering. The Air Sciences and Engineering
("ASE") Group of FMI offers a comprehensive line of air-related services,
including pollution control engineering, regulatory permitting and source
testing. Health and safety, exposure monitoring and asbestos abatement
design plans are also among the services that the ASE Group provides. The
major service areas offered by ASE include source testing and analysis,
engineering and regulatory compliance, and industrial health and safety.
Similar to other consulting services, the ASE Group's business is
largely driven by government regulatory policy. The ASE's Group's growth
has largely been the result of implementation of new federal regulations
related to the reduction of air pollution. For example, with the passage
of the 1990 Federal Clean Air Act Amendments, many manufacturing and other
commercial facilities were required to complete applications for new air
emissions operation permits. The ASE Group assisted such businesses with
gathering required information and preparing and submitting such
applications. Facilities classified as major emissions sources are
required to complete permit applications by specified dates ranging
through 1997. Other facilities must complete applications approximately
two years later.
The source testing and analysis group provides sampling and
quantification of virtually the entire spectrum of gaseous and particulate
air emissions. The ASE Group's staff assesses clients' sampling needs and
develops test programs tailored to meet existing compliance requirements.
The engineering and regulatory compliance group assists clients in
obtaining required air emissions permits and complying with limits
established in such permits. The ASE Group also offers a complete line of
industrial health and safety management services, including indoor air
quality assessments, air monitoring of OSHA regulated chemicals, asbestos
inspection and abatement, and respiratory protection/lead control/cadmium
control.
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<PAGE>
Environmental Engineering and Compliance Management. The
Environmental Engineering and Compliance Management Group provides
services relating to manufacturing process operations, waste-generating
practices, and hazardous material storage, handling and disposal. This
Group also provides wastewater and storm water management services
including influent and effluent characterization and analysis, as well as
design of pre-treatment systems and containment networks. The Group
provides technical and project management consulting services designed to
assist clients in complying with regulations governing industrial process
wastewater, lagoons, impoundments and storm water run-off.
Miller Environmental Technologies. Miller Environmental Technologies
("MET") is a limited liability company organized in September 1994 that is
jointly-owned by FMI and a subsidiary of a Milwaukee, Wisconsin based
scrap metal recycler, which is one of the largest scrap metal recyclers in
the United States. MET provides comprehensive environmental services to
the scrap metal recycling industry throughout the United States. The
service areas addressed by MET include soil and groundwater remediation,
compliance management, air sciences and engineering, storage tank services
and wastewater and storm water management. All of the consulting and
engineering services delivered by MET are conducted by FMI through
subcontracting arrangements. Such services are provided by FMI at its
market rates and its standard terms and conditions, including provisions
for reimbursement of out-of-pocket expenses. FMI also receives a monthly
fee in the amount of $1,000 from MET for FMI's provision of certain office
and record keeping services. From the commencement of MET's operations in
1994 through December 31, 1994, fees earned by FMI for providing services
to MET amounted to $85,000 (including the monthly office and record
keeping services fee). For the year ended December 31, 1995, those fees
totalled $118,000, and for the nine-month period ended September 30, 1996,
those fees amounted to $68,000.
Developing Service Areas. FMI also continues to develop new service
areas. These include: agricultural chemical compliance, management,
containment and remediation services; brownfield site redevelopment; dry
cleaning site remediation and compliance management services; and Phase I
environmental assessments.
Competition
The environmental consulting industry is fragmented and highly
competitive. Competitors of FMI include engineering firms and
environmental consulting firms, some of which are smaller than FMI and
have fewer resources and others of which are larger than FMI with
significantly greater resources. Some of FMI's competitors offer fewer
services than FMI, and others offer a wider array of services and have
expertise in other technologies. FMI, like most of its competitors, has
developed strong relationships with providers of subcontracted services,
such as laboratory analytical services, environmental drilling, excavating
and hauling. FMI's management believes that its policy of offering those
subcontracted services as part of "turnkey" solutions to environmental
problems has given FMI a competitive edge and allowed it to compete
successfully with some of its larger competitors. Additionally, FMI's
network of relationships with banks and other lenders and its resulting
ability to assist its clients in obtaining financing for costs associated
with environmental remediation projects are unique among many of its
competitors. FMI's pending consolidation with Envirogen will provide FMI
with access to Envirogen's technology in bioremediation and biodegradation
systems that will supplement and expand the services which FMI now offers
and enhance its competitive position.
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<PAGE>
Management
FMI was founded by the four FMI Stockholders, Messrs. Smith, Hawk,
Jacobson, and Schowengerdt, each of whom own 25% of the outstanding
capital stock of FMI. Biographical information regarding each of these
individuals is set forth below.
William C. Smith (age 65) is the President and Chief Executive
Officer of FMI. Mr. Smith has a degree in Chemical Engineering from the
University of Wisconsin and is a Wisconsin registered Professional
Engineer. Mr. Smith has over 40 years of technical and financial
management experience in the wood chemicals, plastics and petroleum
products industries. Prior to forming FMI, Mr. Smith served as a
consultant to paper mills on lignite utilization and recovery, designed
and patented charcoal bricketing and freeze concentration processes,
designed and built several manufacturing facilities and served as
president of a plastic molding company.
Gary W. Hawk (age 57) is a Vice President of FMI. Mr. Hawk has a
degree in Engineering Technology from the University of Toledo. Mr. Hawk
has over 30 years of technical and marketing experience in the corrugated
container, petroleum products, re-refining and hazardous waste
minimization/reclamation industries. Prior to forming FMI, Mr. Hawk
established waste minimization and waste oil/solvent reclamation programs
for numerous manufacturing facilities in the Midwest, and provided
operations and technical support and marketing services for facilities
engaged in waste oil recovering, re-refining and solvent recovery.
Douglas W. Jacobson (age 51) is a Vice President and Secretary of
FMI. Mr. Jacobson has a degree in Mechanical Engineering from the
University of Wisconsin and is a Wisconsin registered Professional
Engineer. Mr. Jacobson has over 25 years of technical and marketing
experience in the petroleum products, oil re-refining and solvent recovery
industries. Prior to forming FMI, Mr. Jacobson designed, built and
provided operational support for a high vacuum distillation oil refining
facility, established waste oil/solvent minimization and recovery programs
for numerous manufacturing facilities and served in a sales management
capacity for several manufacturing and service companies.
Richard W. Schowengerdt (age 42) is a Vice President of FMI. Mr.
Schowengerdt has a degree in Hydrology from Michigan Technical University.
Mr. Schowengerdt has over 15 years of technical experience in the
environmental consulting field. Mr. Schowengerdt has extensive
environmental project management experience including: Remedial
Investigation/Feasibility Study project manager for a wood treatment
Environmental Protection Agency Superfund Site, hydrogeologic
investigation, design and implementation of aquifer testing programs on
Superfund Sites, project management of several hydrogeologic projects for
coal gasification sites in Wyoming and Washington, CERCLA and HSWA site
investigation and closure activities for a major pump manufacturing
facility.
The Merger Agreement provides that, as a condition to the obligations
of the parties to consummate the Merger, each FMI Stockholder must enter
into an employment agreement with Envirogen. See "The Merger Agreement-
Employment Agreements."
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<PAGE>
Sales and Marketing
FMI's sales and marketing efforts are focused on industrial marketing
and PECFA marketing. Industrial marketing concentrates on expanding FMI's
client base with industrial manufacturing facilities. Clients include
foundries and other metal working companies, paper and pulp mills,
printing companies, food processing companies and others. Industrial
marketing is directed toward expanding FMI's non-PECFA site related
business. PECFA marketing concentrates on the continued expansion of
FMI's core PECFA-eligible remediation business. This effort involves
networking through FMI's extensive petroleum industry contacts, bankers
and attorneys throughout Wisconsin.
FMI competes with a large number of environmental firms, both on a
national and local level. DCOM has licensed over 200 firms as eligible
contractors to provide PECFA remediation services, although only a handful
of those firms account for a significant portion of that remediation
business. FMI, having completed remediation on more than 90 PECFA-
eligible remediation sites as of December 31, 1996, is one of the larger
participants in this market. FMI attributes its success to its early
entry into the market, its capability to provide unique and creative
solutions to address a client's specific needs, the strength of its
network of referral sources and subcontractors from which it can draw to
deliver services, and its full-service turnkey approach which includes
managing compliance with PECFA requirements to assure eligibility for
reimbursement of remediation costs, administration of reimbursement
claims, and assistance in obtaining financing from financial institutions
for remediation costs pending PECFA reimbursement. Management of FMI
believes these attributes position FMI well to expand its business in the
future.
Employee Bonus Plans
PAC Plan. As of December 31, 1996, FMI had approximately 152
employees. FMI maintains a Provisional Additional Compensation Plan (the
"PAC Plan") pursuant to which participants are eligible to receive annual
bonuses. All permanent, full-time employees of FMI are eligible to
participate in the PAC Plan following their probationary period, except
for the FMI Stockholders and certain persons covered under other plans or
arrangements (as discussed below).
Each calendar year, FMI contributes 10% of its net income (excluding
bonuses paid to employees who are not participants in the PAC Plan) to a
pool which is reserved for payment of bonuses to participants in the PAC
Plan. Bonuses are allocated to participants in the PAC Plan based on the
employee's years of service and his or her salary level, weighted 80% on
the salary level and 20% on the seniority level. The portion of the bonus
pool that a participant is entitled to receive for any calendar year is
determined based upon the ratio that such participant's weighted salary
and seniority levels bear to the aggregate salary and seniority levels of
all participants. No participant's bonus allocation for any calendar year
may exceed 35% of the participant's annual salary for that year.
The bonus earned by a participant for any calendar year is paid in
two equal installments. The first is paid within 75 days after the end of
the calendar year for which the bonus is earned, and the second is paid
within 75 days after the end of the next following calendar year.
Interest is paid on the second installment at the rate of 6.5% per year
until paid. If a participant's employment with FMI is terminated for any
reason prior to the payment of either or both installments, the
participant forfeits the right to receive the unpaid installment(s).
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Other Bonus Plans. Employees of the Engineering Solutions Group
participate in a bonus plan that is based upon the net, pre-tax profits
generated by the Engineering Solutions Group's operations. This plan
operates substantially similar to the PAC Plan. The amount of the bonus
pool from which bonuses are awarded to participant's is equal to 10% of
the Engineering Solutions Group's net profits for any year. An additional
annual bonus pool is available for discretionary awards made by FMI's
President and the Director of the Engineering Solutions Group. The amount
of this pool is equal to the sum of: (a) the lesser of (i) 5% of the gross
revenues attributable to the Engineering Solutions Group for the relevant
year, and (ii) the difference between 96.7% of pre-tax net income, minus
10% of the gross revenues attributable to the Engineering Solutions Group
for the relevant year; plus (b) one-half of the excess, if any, of (i) the
difference between the amount calculated in clause (a)(i) of the foregoing
minus the amount calculated in clause (a)(ii), over (ii) 5% of the gross
revenues attributable to the Engineering Solutions Group for the relevant
year. Participants in this supplemental bonus plan are those individuals
who the President of FMI and the Director of the Engineering Solutions
Group agree have been key contributors to the Group's performance for the
relevant year, and the amount of the bonus awarded to any individual
participant from the available pool is determined jointly in the
discretion of FMI's President and the Director of the Group.
The two directors of the Remediation Services Group each receive an
annual incentive bonus in an amount equal to 35% of their base pay. The
bonuses awarded to the Engineering Solutions Group and the Remediation
Services Group directors are paid on the same schedule (two annual
installments) and are subject to the same conditions as bonuses awarded
under the PAC Plan.
The Merger Agreement provides that through at least December 31,
1998, FMI's business must be operated as a separate division of Envirogen
with separate financial statements, and that the PAC Plan and other bonus
plans described above must be maintained for the benefit of the employees
assigned to that division during that period.
Governmental Regulation
Except for FMI's registration as an eligible "service provider" under
and in accordance with PECFA, FMI's business activities are not directly
regulated by governmental agencies because FMI's activities consist
primarily of consulting and engineering services. However, the federal
and state environmental laws regulating environmental aspects of FMI's
clients' businesses are complex, are subject to varying interpretations
and are continually evolving. FMI's consulting, engineering and
management services are directed, at least in part, to assisting its
clients in complying with such laws and regulations on both a current and
prospective basis. If advice given or recommendations made by FMI in the
course of providing such consulting and other professional services fail
effectively to achieve the desired compliance objectives, FMI could be
subjected to claims by the client for losses resulting from implementation
of FMI's advice and recommendations. FMI maintains errors and omissions
insurance to protect against such claims in amounts judged by management
to be prudent given the risk inherent in FMI's business. Nonetheless, it
is possible that such a claim could be brought which exceeds the maximum
insured limit, or which is excluded from coverage altogether. FMI has
experienced no such uninsured claims, and management has no knowledge of
any such claim being threatened. Additionally, in order to provide PECFA-
related remediation services, FMI and each of its employees must be
registered with DCOM as an eligible service provider. See "Business of
FMI - Remediation Services -PECFA Program."
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Property and Equipment
As a service business, FMI has only minimal capital assets and has
chosen to lease, rather than own, its five office sites. FMI's principal
executive offices are located in the western portion of the Milwaukee,
Wisconsin suburban area, which positions FMI in close proximity to a large
population of trained and qualified technical personnel, as well as
laboratory facilities and excavation firms which frequently are
subcontracted by FMI to assist it in providing services to its clients.
This location also affords FMI with ready access to the various locations
in Wisconsin and Northern Illinois where many of its clients are located,
and also provides ready access to offices of environmental regulatory
agencies headquartered in Madison, Wisconsin and/or Milwaukee, Wisconsin.
FMI's regional offices in Onalaska, Ashwaubenon and Mosinee, Wisconsin and
Geneva, Illinois have been strategically located to provide FMI with a
local presence and exposure in geographic territories that have generated
a high volume of business and/or that offer potential for significant
business in the future. FMI also leases various warehouse and storage
space.
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SELECTED HISTORICAL FINANCIAL DATA OF FMI
The following selected financial data of FMI at December 31, 1995 and
1994 and for the years ended December 31, 1995 and 1994 is derived from
FMI's audited financial statements included elsewhere herein. The
financial data of FMI at September 30, 1996 and for each of the nine-month
periods ended September 30, 1996 and 1995 is derived from FMI's unaudited
financial statements also included herein. In the opinion of management,
interim data reflects all adjustments (consisting only of recurring
accruals) which FMI considers necessary for a fair presentation of the
financial position and results of operations of FMI for these periods.
Interim operating results are not necessarily indicative of the results to
be expected for the entire year. The selected financial data set forth
below should be read in conjunction with FMI's financial statements and
related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of FMI" appearing elsewhere in this
Proxy Statement.
<TABLE>
<CAPTION>
Statement of Operations Data: Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------------------------------- ----------------------------
1995 1994 1993 1992 1991 1996 1995
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $20,245,027 $17,731,684 $11,373,493 $7,156,564 $3,855,506 $14,013,864 $14,317,937
Cost and expenses 15,484,808 14,072,096 8,855,859 5,247,096 2,873,307 10,825,971 10,662,096
Interest, net (135,113) (187,075) 1,233 2,593 (2,517) (128,150) (132,644)
Equity in earnings
of joint venture 17,060 34,146 -- -- -- 3,000 20,000
----------- ----------- ----------- ---------- ---------- ----------- -----------
Net income $ 4,642,166 $ 3,506,659 $ 2,518,867 $1,912,061 $ 979,682 $ 3,062,743 $ 3,543,197
=========== =========== =========== ========== ========== =========== ===========
Net income per
share $ 116 $ 88 $ 63 $ 48 $ 24 $ 77 $ 88
=========== =========== =========== ========== ========== =========== ===========
Cash dividends
declared per
share $ 147 $ 54 $ 116 $ 24 $ 16 $ 42 $ 52
=========== =========== =========== ========== ========== =========== ===========
<CAPTION>
Balance Sheet Data:
December 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991 September 30, 1996
---- ---- ---- ---- ---- --------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 9,108,061 $ 9,573,757 $ 6,147,263 $3,725,790 $1,663,634 $ 8,388,758
Working capital 674,105 1,602,173 1,150,157 1,308,579 420,146 774,585
Long-term debt 2,000,000 1,600,000 2,000,000 -- -- 833,000
Stockholders'
equity (deficit) (491,545) 732,489 (621,899) 1,488,234 528,173 872,221
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FMI
The following information should be read in conjunction with FMI's
financial statements and notes thereto included elsewhere in this Proxy
Statement.
General
FMI's revenues are derived almost exclusively from its sales of
consulting, engineering, construction and other services to its clients.
FMI recognizes revenues as work is performed. Remediation services remain
FMI's core business and generate the greatest portion of FMI's revenues.
FMI is generally paid monthly by its clients (or their lending banks) on a
time and materials basis. The vast majority of such work is eligible for
reimbursement to FMI's clients (or such clients' lending banks) under
PECFA, but such reimbursement is not made until certain project completion
milestones have been reached and all work and costs have been approved by
DCOM. As a result, FMI typically receives payment for its services
significantly in advance of the time when its client (or the client's
lending bank) receives reimbursement under PECFA.
Review of the PECFA claims by DCOM and determination of any
ineligible costs typically is not completed until one to three years after
the expense has been incurred and paid by FMI's client (or its lending
bank). This exposes the client to the risk that remediation expenses it
incurs and pays ultimately may be disallowed for PECFA reimbursement by
DCOM. While not contractually obligated to do so, FMI has established an
unwritten policy of repaying to its clients (or their lending banks)
remediation costs which ultimately are determined by DCOM to be ineligible
for reimbursement under PECFA. FMI maintains a reserve against such PECFA
ineligible costs in an amount that it believes to be adequate. Through
September 30, 1996, FMI had received approximately $46.8 million in PECFA
reimbursement claims on behalf of its clients which DCOM had not yet
reviewed. The reserve balance for PECFA ineligible reimbursements as of
September 30, 1996 was approximately $2.8 million.
FMI's revenues and expenses are tied directly to the pace at which it
adds technical and operational personnel to complete its work-in-process
backlog. FMI has added staff over the past three years in order to keep
pace with its growing backlog, which has had the effect of increasing
revenues. At the same time, FMI has maintained and expanded its marketing
activities in an effort to acquire new business and replenish its backlog.
The two major components of FMI's operating expenses are fees paid to
subcontractors and salaries and benefits paid to employees. Together
these two items have accounted for approximately 85% of FMI's total
expenses over the period from January 1, 1993 through September 30, 1996,
with approximately two-thirds of that amount consisting of fees paid to
subcontractors and one-third consisting of salaries and benefits paid to
employees. FMI's ability to invoice and to be paid monthly for its
services prior to receipt of PECFA reimbursement by its clients enhances
its cash flow and liquidity, and minimizes its need for other sources of
operating capital.
FMI has elected to be taxed, for federal income tax purposes,
pursuant to Subchapter S of the Internal Revenue Code of 1986, as amended.
As a result, FMI generally does not pay federal or state corporate income
taxes. Rather, any taxable income or loss of FMI is allocated pro rata to
the four FMI Stockholders, each of whom is required to include his
allocable share of such income or loss in his
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<PAGE>
individual income tax returns. As a result, FMI typically makes
distributions to the FMI Stockholders in amounts at least equivalent to
the income taxes payable by them on FMI's earnings allocated to them.
Results of Operations
Nine Months Ended September 30, 1996 Compared to
Nine Months Ended September 30, 1995
Total revenues for the nine-month period ended September 30, 1996
amounted to $14.7 million, as compared to $15.1 million for the same
period in 1995, representing a decline of approximately 2.6%. FMI made a
provision for PECFA claims adjustments and doubtful accounts in an amount
equal to $722,000 (as compared to $751,000 for the same period in 1995),
resulting in net revenues for the nine months ended September 30, 1996 of
approximately $14.0 million. Net revenues for the comparable period in
1995 were approximately $14.3 million, representing a decline during the
nine months ended September 30, 1996 of approximately 2.1%. However,
gross revenues less the provision for PECFA claims adjustments and
doubtful accounts, and less subcontractor and other direct selling costs,
increased approximately 7.7%, from $8.2 million for the first nine months
of 1995 to $8.8 million for the same period in 1996.
Operating expenses were substantially unchanged for the nine months
ended September 30, 1996 as compared to the same period for 1995,
totalling approximately $10.8 million and $10.7 million, respectively.
Subcontractor and other direct selling costs totalled approximately $5.2
million for the nine months ended September 30, 1996, and approximately
$6.1 million for the comparable period of 1995. These costs declined
because the nature of the work completed in the later period involved less
need for subcontractors and more direct labor by FMI employees.
The reduction in cost of sales was more than offset by
increases in salary and benefits and general and administrative expenses.
Salaries and benefits expense increased from $3.4 million to $4.2 million
(or approximately 23.5%), while general and administrative expenses
increased from $1.1 million to $1.4 million (or approximately 27.3%). The
increase in general and administrative expenses is primarily attributable
to costs in excess of $500,000 incurred in connection with the opening of
additional satellite offices in Ashwaubenon and Mosinee, Wisconsin and
Geneva, Illinois. The increase in salary and benefits expense was
attributable to three factors. First, because a greater portion of the
work completed during the first nine months of 1996 (as compared to the
first nine months of 1995) was completed by FMI employees as opposed to
subcontractors, FMI incurred higher salary and benefits expense and lower
subcontractor costs in 1996. The addition of the Engineering Solutions
Group in May 1996 also increased salary and benefits costs, but did not
immediately begin to contribute significantly to gross revenues.
Therefore, FMI's results of operations for the nine months ended September
30, 1996 did not reflect its historic correlation between increases in
technical staff and increases in gross revenues. Finally, modest increases
in base salaries and benefits also contributed to the overall increase in
salary and benefits expense.
The slight decline in gross revenues over the nine months ended
September 30, 1996 as compared to the same period of 1995, when coupled
with relatively unchanged operating expenses from period to period,
resulted in a decline in FMI's net income of approximately 11.4%, from
$3.5 million for the nine months ended September 30, 1995 to $3.1 million
for the nine months ended September 30, 1996. Net income as a percentage
of gross revenues was approximately 21.1% for the nine months ended
September 30, 1996, as compared to 23.2% for the same period in 1995.
65
<PAGE>
1995 Compared to 1994
FMI's total revenues for the year ended December 31, 1995 were
approximately $21.3 million, as compared to approximately $18.7 million
for the year ended December 31, 1994, an increase of almost 14%. The
increase was primarily attributable to FMI's hiring of additional
technical staff to accelerate progress on the PECFA-related projects,
going from 85 employees at December 31, 1994 to 100 employees at December
31, 1995. FMI's marketing efforts also successfully added new projects,
and despite the increase in operational and technical staff, the backlog
of PECFA-related projects increased during 1995. FMI's provision for
PECFA ineligible costs and doubtful accounts increased from $967,000 in
1994 to $1.1 million in 1995, resulting in 1995 net revenues increasing
slightly more than 14% over 1994 revenues, from approximately $17.7
million in 1994 to $20.2 million in 1995.
Operating expenses totalled approximately $15.5 million for 1995, as
compared to $14.1 million in 1994. Subcontractor expenses declined
slightly from $8.8 million in 1994 (or approximately 47.1% of gross
revenues) to $8.4 million in 1995 (or approximately 39% of gross
revenues). Salary and benefits expenses increased approximately 39.4%
from $3.3 million in 1994 to $4.6 million in 1995, and general and
administrative expenses increased approximately 36% from $1.1 million in
1994 to $1.5 million in 1995. The increase in salary and benefits
expenses primarily is attributable to the increase in the number of
employees. General and administrative expenses increased as a result of
the increased business activity associated with the expansion in FMI's
technical staff. The nature of the additional and expanded work
undertaken in 1995 did not require the involvement of subcontractors to
the same extent as FMI's work completed in 1994, resulting in
subcontractor expenses remaining relatively flat in 1995 as compared to
1994, and comprising a smaller percentage of gross revenues for 1995.
Net income increased $1.1 million (or 31.4%) to approximately $4.6
million for 1995, as compared to approximately $3.5 million for 1994. Net
income as a percentage of gross revenues in 1995 was approximately 21.6%,
as compared to 18.7% in 1994.
Liquidity and Capital Resources
As a service oriented business, FMI's fixed capital needs are not
significant. To minimize capital requirements, FMI leases, rather than
owns, its office facilities. FMI funds its operations primarily with cash
generated from its operating activities. Its net cash flow from operating
activities amounted to $3.3 million in 1994, $6.6 million in 1995 and $3.4
million for the nine months ended September 30, 1996. Operating capital
(total current assets less total current liabilities) amounted to $775,000
at September 30, 1996, as compared to $674,000 at December 31, 1995.
As a Subchapter S corporation, FMI makes distributions to the FMI
Stockholders at least equivalent to the income taxes payable by them on
their allocable share of FMI's taxable income. In addition to these
distributions, FMI's liquidity needs include funding of operating expenses
consisting principally of payments to subcontractors and other direct
costs of sales, and salary and benefits costs, including payments pursuant
to the PAC Plan and other employee bonus plans. See " Business of FMI -
Employee Bonus Plans." To assure adequate liquid resources, as of
September 30, 1996 FMI maintained a $500,000 demand line of credit with a
borrowing base limited to 80% of FMI's eligible accounts receivable.
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<PAGE>
At December 31, 1996, FMI had one term loan with an outstanding principal
balance of $2.5 million. The loan was originated in September 1996 with an
original principal amount of $3 million, and is for a term of three years
commencing September 30, 1996. The note is payable in 36 equal installments,
bears interest at the fixed rate of 8.5% per year and is secured by a general
business security interest in substantially all of FMI's assets. Prior to
December 31, 1996, FMI also had another term loan in the principal amount of $1
million, which was prepaid in full in December 1996. In January 1997, FMI
replaced its $500,000 demand line of credit with a $1.2 million demand line of
credit, which FMI intends to draw against (and increase, if necessary) to pay
certain bonuses and tax distributions contemplated under the Merger Agreement.
See "The Merger Agreement - The Merger; Merger Consideration." As a condition to
the closing under the Merger Agreement, all of FMI's indebtedness for borrowed
money outstanding on the Closing Date is to be repaid in full upon the closing
of the Merger.
COMPARATIVE PER SHARE DATA
The following table sets forth for the periods and dates indicated the net
income (loss) per common share, book value per common share and cash dividends
declared per common share of Envirogen and FMI on a historical and consolidated
pro forma basis, after giving pro forma effect to the Merger and the Warburg
Transaction. The pro forma data is based on numerous assumptions and includes
adjustments as explained in the unaudited pro forma balance sheets and pro forma
statements of operations appearing elsewhere in this Proxy Statement. See "Pro
Forma Condensed Consolidated Financial Information."
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1995 September 30, 1996
------------------ -------------------
<S> <C> <C>
ENVIROGEN, INC.
Net loss per common share........ $ (0.31) $ (0.21)
Book value per common share...... $ .54 $ .81
Cash dividends declared per
common share.................. -- --
Number of common shares
outstanding................... 9,049,460 12,869,640
FLUID MANAGEMENT, INC.
Net income per common share...... $ 116.05 $ 76.57
Equivalent pro forma net loss
per common share/(1)/......... $ 0 $ (2.10)
Book value (deficit) per common
share......................... $ (12.29) $ 21.81
Equivalent pro forma book value
per common share/(1)/......... $ 168.65
Cash dividends declared per
common share.................. $ 146.66 $ 42.47
Equivalent pro forma cash
dividends declared per common
share/(1)/.................... $ 26.54 $ 7.69
Number of common shares
outstanding................... 40,000 40,000
PRO FORMA CONSOLIDATED
Net loss per common share........ $ 0 $ (0.02)
Book value per common share...... $ 1.61
Cash dividends declared per
common share.................. $ .25 $ .07
Number of common shares
outstanding................... 23,155,355 23,155,355
- -------------------------------------------------------------------------------
</TABLE>
(1) After giving effect to the exchange of all of the outstanding common
stock of FMI into 4,190,477 shares of Envirogen Common Stock in the
Merger.
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<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain selected unaudited pro forma
consolidated financial data for Envirogen for the periods and dates
indicated, after giving pro forma effect to the Merger, the Warburg
Transaction and Envirogen's acquisition of MWR in February 1996. The
amounts presented are based upon the pro forma data and on numerous
assumptions and include adjustments as explained in the unaudited pro
forma balance sheets and pro forma statements of operations appearing
elsewhere in this Proxy Statement. See "Pro Forma Condensed Consolidated
Financial Information."
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1995 September 30, 1996
------------------ -------------------
(Pro Forma) (Pro Forma)
<S> <C> <C>
Statement of Operations Data:
Net revenues.............. $32,985,725 $23,201,468
Net loss.................. (115,183) (385,843)
Net loss per share........ 0 (0.02)
<CAPTION>
September 30, 1996
------------------
(Pro Forma)
<S> <C>
Balance Sheet Data:
Working capital........... $ 10,880,619
Intangible assets, net.... 23,147,661
Total assets.............. 46,125,152
Total liabilities......... 8,844,646
Stockholders' equity...... 37,280,506
</TABLE>
----------------------------
THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER, TAKING INTO
CONSIDERATION ALL RELEVANT MATERIAL FACTORS, IS FAIR TO AND IN THE BEST
INTERESTS OF ENVIROGEN'S STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER.
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<PAGE>
PROPOSAL 2. THE SECURITIES PURCHASE AGREEMENT
The terms and conditions of the proposed Warburg Transaction are
contained in the Securities Purchase Agreement, a copy of which is
attached as Appendix D to this Proxy Statement. Stockholders are urged to
read the Securities Purchase Agreement carefully. The descriptions of the
material terms and conditions of the Securities Purchase Agreement set
forth below are qualified in their entirety by reference to the complete
text of the Securities Purchase Agreement.
The Warburg Transaction
Stockholders of Envirogen are being asked to consider and vote upon a
proposal to approve and adopt the Securities Purchase Agreement pursuant
to which Envirogen will issue and sell to Warburg 6,095,238 shares of
Common Stock (the "Warburg Shares") for an aggregate cash purchase price
of $16,000,000. The purpose of the proposed Warburg Transaction is to
fund the cash portion of the Merger Consideration in connection with the
Merger and to provide additional working capital for Envirogen. The
closing of the Warburg Transaction is scheduled to take place
contemporaneously with the Merger. The adoption and approval of the
Securities Purchase Agreement requires the affirmative vote of holders of
a majority of the shares of Common Stock present, in person or by proxy,
at the Special Meeting and entitled to vote.
In order to effect the Warburg Transaction and the Merger and the
transactions contemplated thereby, at the Effective Time of Merger
Envirogen's Certificate of Incorporation, as in effect immediately prior
to the Merger, will need to be amended to increase the number of
authorized shares of Common Stock from 20,000,000 shares to 50,000,000
shares. See "Proposal 3. The Charter Amendment."
Required Regulatory Approvals
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the rules promulgated thereunder by the
Federal Trade Commission (the "FTC"), the Warburg Transaction may not be
consummated until notifications have been given and certain information
has been furnished to the FTC and the Antitrust Division of the Department
of Justice (the "Antitrust Division") and specified waiting period
requirements have been satisfied. Envirogen and Warburg filed
notification and report forms under the HSR Act with the FTC and the
Antitrust Division on January 17, 1997 and requested early termination of
the required waiting period under the HSR Act. The required waiting
period under the HSR Act is scheduled to expire on February 16, 1997.
Aside from the requirements of the HSR Act, Envirogen is aware of no
federal or state regulatory requirements that must be complied with or
other approvals that must be obtained prior to the consummation of the
Warburg Transaction, other than compliance with applicable federal and
state securities laws and applicable federal and state regulatory
requirements that must be complied with in connection with the Merger.
See "Proposal 1. The Merger - Special Factors - Required Regulatory
Approvals."
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<PAGE>
Representations and Warranties
In the Securities Purchase Agreement, Envirogen and Warburg have each
made certain representations and warranties with respect to, among other
matters, their organization and good standing and due authorization and
authority to enter into and perform their respective obligations under the
Securities Purchase Agreement. In addition, Envirogen has made certain
representations and warranties regarding its business and operations and
related matters customary for a transaction such as the Warburg
Transaction.
Conditions to the Warburg Transaction
The obligation of Warburg to consummate the Warburg Transaction is
subject to, among others, the following conditions: (a) the
representations and warranties of Envirogen shall be true on and as of the
Closing Date; (b) Envirogen shall have performed and complied with all
agreements, covenants and conditions required by the Securities Purchase
Agreement to be performed or complied with by Envirogen prior to or on the
Closing Date; (c) Warburg shall have received a certificate, dated the
Closing Date, signed on behalf of Envirogen by each of the President and
the Controller of Envirogen, certifying that the conditions specified in
(a) and (b) above have been fulfilled; (d) there shall be no effective
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the
transactions provided for in the Securities Purchase Agreement or any of
them not be consummated as provided therein; (e) Warburg shall have
received from Envirogen's counsel, Drinker Biddle & Reath, a satisfactory
opinion dated the Closing Date; (f) all conditions to the consummation of
the transactions contemplated by the Merger Agreement shall have been
satisfied or waived with the consent of Warburg in its sole and absolute
discretion; (g) all consents, approvals and actions shall have been
obtained or performed, and all applicable waiting periods (and any
extensions thereof) under the HSR Act shall have expired or otherwise been
terminated; (h) Robert S. Hillas and William C. Smith shall have been
elected to the Board of Directors of Envirogen, effective upon the Closing
Date; and (i) Envirogen, Warburg and the FMI Stockholders shall have
entered into the Registration Rights Agreement;
The obligation of Envirogen to consummate the Warburg Transaction is
subject to, among others, the following conditions: (a) the
representations and warranties of Warburg shall be true on and as of the
Closing Date; (b) Warburg shall have performed and complied with all
agreements, covenants and conditions required by the Securities Purchase
Agreement to be performed or complied with by it prior to or on the
Closing Date; (c) Envirogen shall have received a certificate from
Warburg, dated the Closing Date, signed by a duly authorized
representative of Warburg, certifying that the conditions specified in (a)
and (b) above have been fulfilled; (d) all consents, approvals and actions
shall have been obtained or performed, and all applicable waiting periods
(and any extensions thereof) under the HSR Act shall have expired or
otherwise been terminated; (e) there shall be no effective injunction,
writ, preliminary restraining order or any order of any nature issued by a
court of competent jurisdiction directing that the transactions provided
for in the Securities Purchase Agreement or any of them not be consummated
as provided therein; and (f) all conditions to the consummation of the
transactions contemplated by the Merger Agreement shall have been
satisfied or waived.
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<PAGE>
Certain Covenants of Envirogen and Warburg
The Securities Purchase Agreement provides that, during the period from
the date of the Securities Purchase Agreement to the Closing Date, except as
provided in the Securities Purchase Agreement, Envirogen will not, without
Warburg's prior consent, take any action which would result in any of the
representations or warranties of Envirogen contained in the Securities Purchase
Agreement not being true at and as of the time immediately after such action, or
in any of the covenants contained in the Securities Purchase Agreement becoming
incapable of performance.
Envirogen has agreed that for so long as Warburg owns beneficially
(within the meaning of Rule 13d-3 under the Exchange Act) at least 7.5% of the
issued and outstanding shares of Common Stock, Envirogen will nominate and use
its best efforts to elect and to cause to remain as a director on Envirogen's
Board of Directors one individual as Warburg may designate. Any vacancy created
by the death, disability, retirement or removal of any such individual may be
filled by Warburg. The initial nominee of Warburg will be Robert S. Hillas.
In the Securities Purchase Agreement, Warburg has agreed to not sell or
otherwise transfer any Warburg Shares until one year after the Closing Date
without the prior written consent of Envirogen.
Registration Rights Agreement
Envirogen has agreed, as a condition precedent to Warburg's obligations
under the Securities Purchase Agreement, to enter into the Registration Rights
Agreement with Warburg and the FMI Stockholders, the form of which is attached
as Appendix E to this Proxy Statement. Pursuant to the Registration Rights
Agreement, Envirogen, as soon as practicable after the Merger, will file with
the Commission and cause to be declared effective a registration statement
pursuant to Rule 415 under the Securities Act relating to the offer and sale by
Warburg of the 6,095,238 shares of Common Stock of Envirogen to be issued to
Warburg pursuant to the Securities Purchase Agreement and the offer and sale by
the FMI Stockholders of the 4,190,477 shares of Common Stock to be issued to the
FMI Stockholders pursuant to the Merger Agreement. Envirogen has agreed to pay
substantially all expenses incident to the registration of such shares, other
than underwriting discounts and commissions.
Waiver and Amendment
The Securities Purchase Agreement may be amended, and the observance of
any term thereof may be waived, with (and only with) the written consent of
Envirogen and Warburg.
Termination
The Securities Purchase Agreement and, except as therein provided, all
the rights of Envirogen and Warburg thereto, shall terminate on May 31, 1997
(unless such date is extended by mutual written consent). All warranties,
representations and covenants made by Warburg to Envirogen, or by Envirogen to
Warburg, in the Securities Purchase Agreement, or in any certificate or other
instrument delivered by Warburg or Envirogen under the Securities Purchase
Agreement will be considered to have been relied upon by Envirogen or Warburg,
as the case may be, and will survive all deliveries to Warburg of the Warburg
Shares, or payment to Envirogen for such Shares, until the 30th day following
the date on which Warburg receives Envirogen's audited financial statements for
the fiscal year ending December 31, 1997, except for the warranties and
representations relating to tax and environmental
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<PAGE>
matters, which shall survive until the expiration of any applicable statute of
limitations, regardless of any investigation made by Envirogen or Warburg, as
the case may be, or on Envirogen's or Warburg's behalf.
Costs and Expenses
Pursuant to the Securities Purchase Agreement, Envirogen has agreed to
pay up to $50,000 of Warburg's reasonable legal fees and expenses incurred in
connection with the negotiation, preparation, execution and delivery of the
Securities Purchase Agreement and the other instruments and agreements related
thereto. However, in the event the Warburg Transaction is not consummated as a
result of FMI's failure to satisfy certain conditions precedent to the closing
of the Merger on or prior to the Closing Date, Envirogen will only be obligated
to pay one-half of Warburg's reasonable legal fees and expenses, up to a maximum
of $25,000, and in the event the Warburg Transaction is not consummated as a
result of Warburg's failure to satisfy certain conditions precedent to the
Warburg Transaction on or prior to the Closing Date, Envirogen will not be
obligated to pay Warburg's legal fees and expenses.
____________________________
THE BOARD OF DIRECTORS BELIEVES THAT THE WARBURG TRANSACTION, TAKING
INTO CONSIDERATION ALL RELEVANT MATERIAL FACTORS, IS FAIR TO AND IN THE BEST
INTERESTS OF ENVIROGEN'S STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION OF THE SECURITIES PURCHASE
AGREEMENT.
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<PAGE>
PROPOSAL 3. THE CHARTER AMENDMENT
Stockholders are being asked to consider and vote upon a proposal to
amend the Amended and Restated Certificate of Incorporation of Envirogen, as
amended (the "Charter Amendment"), to increase the number of authorized shares
of Common Stock from 20,000,000 shares to 50,000,000 shares to (a) provide for
the issuance of the 4,190,477 shares of Common Stock to the FMI Stockholders
pursuant to the Merger Agreement; (b) provide for the issuance of the 6,095,238
shares of Common Stock to Warburg pursuant to the Securities Purchase Agreement;
(c) reserve additional shares of Common Stock for issuance upon the exercise of
stock options granted under the Amended Option Plan; and (d) provide Envirogen
with flexibility to issue additional shares of Common Stock in the future for
appropriate corporate purposes without the need to amend again its Amended and
Restated Certificate of Incorporation. Of the 20,000,000 shares of Common Stock
currently authorized, as of December 31, 1996, 12,872,440 shares were issued and
outstanding and 3,139,359 shares were reserved for issuance upon the exercise of
outstanding options and warrants.
If the stockholders approve the Charter Amendment, at the Effective Time
of the Merger, Article Fourth of the Certificate of Incorporation, as in effect
immediately prior to the Effective Time, will be amended and restated to read 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 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."
Approval of the Charter Amendment is dependent upon the approval of the
proposals to approve the Merger Agreement and the Merger, the Securities
Purchase Agreement and the Amended Option Plan. The rights of Envirogen's
stockholders will not be affected by the increase in the number of shares of
authorized Common Stock, except to the extent of their ownership dilution of
Envirogen upon issuance of any such shares. Approval of the holders of a
majority of the Envirogen Common Stock outstanding and entitled to vote is
required for the approval and adoption of the Charter Amendment.
------------------------------------
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS THAT THE
STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE CHARTER AMENDMENT.
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<PAGE>
PROPOSAL 4. AMENDED OPTION PLAN
Envirogen's Board of Directors and stockholders approved the Envirogen,
Inc. 1990 Incentive Stock Option and Non-Qualified Stock Option Plan in April
1990, which was subsequently amended in June 1994, November 1995 and February
1996 (as amended, the "Option Plan"). In connection with the Merger, Envirogen
has agreed that it will make available to certain employees of FMI that remain
with Envirogen after the Merger options to purchase an aggregate of 600,000
shares of Common Stock under the Option Plan. Accordingly, in January 1997, the
Board of Directors amended and restated the Option Plan (the "Amended Option
Plan"), subject to stockholder approval, to increase the aggregate maximum
number of shares that may be issued under the Option Plan from 2,000,000 shares
to 3,000,000 shares. The Board also amended and restated the Option Plan to
comply with recent changes to Section 16 of the Securities Exchange Act of 1934,
as amended, and the rules promulgated thereunder. Approval of the Amended Option
Plan requires the affirmative vote of the holders of a majority of the shares
present, in person or by proxy, at the Special Meeting and entitled to vote.
The Amended Option Plan is intended to attract and retain officers and
key employees (collectively, "Key Employees") and directors, scientific advisory
board members and consultants (together with the Key Employees, the "Optionees")
and to motivate them to exercise their best efforts on behalf of Envirogen and
any subsidiary or parent of Envirogen (a "Related Corporation").
Options granted under the Amended Option Plan may be designated as
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or may be designated as
options not intended to be ISOs ("Non-Qualified Stock Options").
The text of the Amended Option Plan is attached as Appendix F to this
Proxy Statement. The following description of the Amended Option Plan is
intended merely as a summary of its principal features and is qualified in its
entirety by reference to the provisions of the Amended Option Plan itself:
1. Number of Shares. The aggregate maximum number of shares for which
options may be granted under the Amended Option Plan will be 3,000,000 shares if
the Amended Option Plan is approved by the stockholders. The shares issued under
the Amended Option Plan may be authorized but unissued shares or reacquired
shares, and Envirogen may purchase shares required for this purpose, from time
to time, if it deems such purchase to be advisable.
2. Administration. The Amended Option Plan is administered by the
Executive Compensation and Stock Option Committee (the "Committee"), whose
members are designated by Envirogen's Board of Directors. The Committee will
consist of at least three directors who are "non-employee" directors within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), if the Amended Option Plan is approved by the stockholders. In
addition, each member of the Committee must also be an "outside director" within
the meaning of Treasury Regulation (S)1.162-27(e)(3) or any successor provision.
The Committee currently consists of Peter J. Neff, Robert F. Johnston and
Seymour L. Meisel. Dr. Meisel has tendered his resignation from the Board of
Directors effective as of the Effective Time. Accordingly, Dr. Meisel's position
on the Committee will be replaced with another qualified Board member after the
Effective Time. The Committee has the authority to (i) select the Key Employees
and other Optionees to be granted ISOs and Non-Qualified Stock Options under the
Amended Option Plan, (ii) grant options on behalf of Envirogen, and (iii) set
the date of grant and other terms of the options, including the times at which
and the price at which options shall be granted, except that (unless approved by
the Committee) no option will become exercisable at a rate in excess of 20% per
annum from the date of grant unless otherwise permitted under the terms of the
Amended Option Plan.
74
<PAGE>
3. Eligibility. Only Key Employees of Envirogen and/or a Related
Corporation are eligible to receive ISOs under the Amended Option Plan. Non-
Qualified Stock Options may be granted to all Optionees. As of December 31,
1996, there were approximately 108 Key Employees of Envirogen eligible to
receive ISOs and approximately 122 Optionees (including Key Employees) eligible
to receive non-qualified stock options.
4. Term of Stock Option Plan. No option may be granted under the
Amended Option Plan after March 31, 2000, although options outstanding on March
31, 2000 may extend beyond that date.
5. Term of Option. All options terminate on the earliest of (a) the
expiration of the term specified in the option document, which, in the case of
an ISO, may not exceed ten years from the date of grant or five years after the
date of grant if the Optionee on the date of grant owns, directly or by
attribution, shares possessing more than 10% of the total combined voting power
of all classes of stock of Envirogen or (b) the date, if any, set by the Board
of Directors as an accelerated expiration date.
6. Option Price. The option price for Non-Qualified Stock Options may
not be less than the greater of seventy-five percent (75%) of the fair market
value of the shares subject to the option on the date that the option is granted
or the par value thereof, and for ISOs not less than 100% of the fair market
value of the shares subject to the option on the date that the option is
granted. If an ISO is granted to an employee who then owns, directly or by
attribution under the Code, shares of Common Stock possessing more than 10% of
the total combined voting power of all classes of shares of Envirogen, the
option price must be at least 110% of the fair market value of the shares on the
date that the option is granted.
7. Payment. An Optionee may, in the discretion of the Committee, pay
for shares of Common Stock covered by his or her option (i) in cash or its
equivalent, (ii) in shares of Common Stock previously acquired by the Optionee
(subject to certain holding period requirements), (iii) through a combination of
(i) and (ii) above, or (iv) by delivering a properly executed notice of exercise
of the option to Envirogen and a broker, with irrevocable instructions to the
broker promptly to deliver to Envirogen the amount of sale or loan proceeds
necessary to pay the exercise price of the option.
8. Option Document; Restriction on Transferability. All options will be
evidenced by a written option document containing provisions consistent with the
Amended Option Plan and such other provisions as the Committee deems
appropriate. No option granted under the Amended Option Plan may be transferred,
except by will or the laws of descent and distribution. If the Optionee is
married at the time of exercise and if the Optionee requests at the time of
exercise, the certificate will be registered in the name of the Optionee and his
or her spouse, jointly, with right of survivorship.
9. Change of Control Provisions. Notwithstanding any other provision of
the Amended Option Plan, all outstanding options will become immediately
exercisable in the case of a merger, consolidation, or other business
combination involving the sale or transfer of all (or substantially all) of the
assets of Envirogen, or other business combination involving the sale or
transfer of all (or substantially all) of the capital stock of Envirogen in
which Envirogen 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 Envirogen.
10. Amendments to Options and the Amended Option Plan; Discontinuance
of the Amended Option Plan. Subject to the provisions of the Amended Option
Plan, the Committee may not amend an option document without an Optionee's
consent if the amendment is unfavorable to the Optionee. If the amendments to
the Amended Option Plan are approved by the stockholders, the Board of Directors
may
75
<PAGE>
suspend or discontinue the Amended Option Plan or amend it in any respect
whatsoever, except that, without the approval of the holders of a majority of
the shares of Envirogen present, in person or by proxy, and entitled to vote at
a duly called meeting, no such action may be taken to, with respect to ISOs,
change the class of employees eligible to participate in the Amended Option
Plan, increase the maximum number of shares of Common Stock with respect to
which ISOs may be granted under the Amended Option Plan (except as permitted
under the Amended Option Plan with respect to capital adjustments), or extend
the duration of the Amended Option Plan.
11. Tax Aspects of the Amended Option Plan. Based on the advice of
counsel, Envirogen believes that, under present Federal tax laws and
regulations, the Federal income tax consequences to Envirogen and to the
Optionees receiving ISOs and non-qualified stock options pursuant to the Amended
Option Plan will be as follows:
If an option is treated as an ISO, the Optionee will recognize no income
upon grant or exercise of the option unless the alternative minimum tax rules
apply. Upon an Optionee's sale of his or her shares of Common Stock (assuming
that the sale occurs no sooner than two years after grant of the option and one
year after exercise of the option), any gain will be taxed to the Optionee as
long-term capital gain. If the Optionee disposes of his or her shares of Common
Stock prior to the expiration of the above holding period, the Optionee
generally will recognize ordinary income in an amount measured as the difference
between the exercise price and the lower of the fair market value of the Common
Stock at the exercise date or the sale price of the Common Stock. Any gain or
loss recognized on such a disposition of the Common Stock in excess of the
amount treated as ordinary income will be characterized as capital gain or loss.
Envirogen will be allowed a business expense deduction to the extent the
Optionee recognizes ordinary income.
An Optionee will not recognize any taxable income at the time the
Optionee is granted a Non-Qualified Stock Option. However, upon exercise of the
option, the Optionee will recognize ordinary income for Federal income tax
purposes in an amount generally measured as the excess of the then fair market
value of the shares of Common Stock over the exercise price and Envirogen will
be entitled to a deduction in the same amount at the time of exercise. Upon an
Optionee's sale of such shares, any difference between the sale price and fair
market value of such shares on the date of exercise will be treated as capital
gain or loss and will qualify for long-term capital gain or loss treatment if
the shares of Common Stock have been held for more than one year.
Different rules for measuring ordinary income may apply if the Optionee
is subject to Section 16 of the Exchange Act.
Section 162(m) of the Code limits the extent to which the remuneration
paid to the Chief Executive Officer and the four highest compensated executives
(other than the Chief Executive Officer) (collectively, the "Covered Employees")
is deductible by a corporation when the annual remuneration for any of these
officers exceeds $1,000,000 in a calendar year. Remuneration for purposes of
Section 162(m) includes cash compensation and noncash benefits paid for services
(including with respect to non-qualified stock options, the difference between
the exercise price and the market value of the stock at the time of exercise),
subject to certain exclusions. At the 1994 Annual Meeting of Stockholders,
certain amendments to the Amended Option Plan were approved by Envirogen's
stockholders in order that the spread upon exercise of Non-Qualified Stock
Options would not be treated as remuneration for purposes of Section 162(m) and
in order that if any remuneration paid to any of the Covered Employees exceeds
$1,000,000 in the future, any compensation recognized upon the exercise of
certain non-qualified stock options granted under the Amended Option Plan would
be deductible by Envirogen. One of the amendments included a limitation on the
maximum number of shares of Company Stock with respect to
76
<PAGE>
which options may be granted to a Key Employee to 200,000. This limitation was
subsequently increased to 500,000 at the 1995 Annual Meeting of Stockholders.
The foregoing does not purport to be a complete summary of the effect of
federal income taxation upon holders of options or upon Envirogen. It also does
not reflect provisions of the income tax laws of any municipality, state or
foreign country in which an Optionee may reside.
12. Registration Statement on Form S-8. If the proposal to approve the
amendments to the Amended Option Plan is approved, Envirogen intends to file
with the Securities and Exchange Commission an amendment to Envirogen's
Registration Statement on Form S-8 relating to the Amended Option Plan to
register the additional shares of Common Stock that may be issued pursuant to
the Amended Option Plan.
----------------------------
As of December 31, 1996, options for 197,300 shares of Common Stock were
exercised and options to purchase an aggregate of 1,480,670 shares of Common
Stock were outstanding under the Option Plan, leaving approximately 322,030
shares available for issuance under the Option Plan. Envirogen has grown
significantly in recent years and the number of Optionees has also increased.
Envirogen's management and the Board of Directors believes that the ability to
grant options under the Option Plan for the purchase of Common Stock of
Envirogen has substantially contributed to the performance of Envirogen since
the adoption of the Option Plan. The proposed Amended Option Plan would
authorize a new reserve of shares of Common Stock available for the issuance of
stock options so that Envirogen's policy of providing equity incentives can
continue for the remaining years of the Option Plan. Other than the options to
purchase an aggregate of 600,000 shares of Common Stock to be granted in
connection with the Merger, it is not presently determinable who will receive
future options under the Amended Option Plan since stock option awards are
granted by the Committee in its discretion from time to time. It is anticipated
that most or all of the authorized options will be granted prior to the
expiration of the Amended Option Plan in March 2000.
----------------------------
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS THAT THE
STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE AMENDED OPTION PLAN.
77
<PAGE>
OTHER MATTERS
The Board of Directors knows of no matters to be presented for action at
the Special Meeting other than those set forth in the attached Notice of Special
Meeting of Stockholders and customary procedural matters. However, if any other
matters should properly come before the Special Meeting or any adjournments or
postponements thereof, the proxies solicited hereby will be voted on such
matters, to the extent permitted by the rules of the Commission, in accordance
with the judgment of the persons voting such proxies.
In order to be eligible for inclusion in Envirogen's proxy materials for
the 1998 Annual Meeting of Stockholders, stockholders' proposals to take action
at such meeting must comply with applicable Securities and Exchange Commission
rules and regulations, must be directed to the Secretary of Envirogen at its
offices set forth on page one of this Proxy Statement and must be received by
Envirogen not later than December 9, 1997.
By order of the Board of Directors,
Lawrenceville, New Jersey Morgan R. Jones
, 1997 Secretary
- ----------
78
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
-----
ENVIROGEN, INC. AND SUBSIDIARY
Report of Independent Accountants........................................ FS-3
Consolidated Balance Sheets as of December 31, 1995 and 1994............. FS-4
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993..................................................... FS-5
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993.................................. FS-6
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993..................................................... FS-7
Notes to Consolidated Financial Statements............................... FS-8
Consolidated Balance Sheet as of September 30, 1996 (Unaudited)......... FS-20
Consolidated Statements of Operations for the nine months
ended September 30, 1996 and 1995 (Unaudited)........................... FS-21
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 (Unaudited)........................... FS-22
Notes to Consolidated Financial Statements (Unaudited)................... FS-23
FLUID MANAGEMENT, INC.
Report of Independent Accountants........................................ FS-25
Balance Sheets as of December 31, 1995 and 1994 and September 30, 1996
(Unaudited)............................................................. FS-26
Statements of Operations and Retained Earnings (Deficit) for the years
ended December 31, 1995 and 1994 and the nine months ended September 30,
1996 and 1995 (Unaudited)............................................... FS-27
Statements of Cash Flows for the years ended December 31, 1995 and 1994
and the nine months ended September 30, 1996 and 1995 (Unaudited)....... FS-28
Notes to Financial Statements............................................ FS-29
FS-1
<PAGE>
Page
----
MWR, INC.
Report of Independent Public Accountants................................. FS-37
Balance Sheets as of December 30, 1995 and December 31, 1994............. FS-38
Statements of Operations for the years ended December 30, 1995
and December 31, 1994................................................... FS-39
Statements of Shareholder's Deficit for the years ended December 30, 1995
and December 31, 1994................................................... FS-40
Statements of Cash Flows for the years ended December 30, 1995
and December 31, 1994................................................... FS-41
Notes to Financial Statements............................................ FS-42
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Pro Forma Condensed Consolidated Financial Information................... FS-47
Pro Forma Condensed Consolidated Statements of Operations for the year
ended December 31, 1995 (Unaudited) and the nine months ended
September 30, 1996 (Unaudited).......................................... FS-48
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1996
(Unaudited)............................................................. FS-50
Notes to Pro Forma Condensed Consolidated Pro Forma Financial
Information (Unaudited)................................................. FS-51
FS-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Envirogen, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Envirogen,
Inc. and Subsidiary as of December 31, 1995 and 1994 and the related
consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit incudes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Envirogen, Inc. and Subsidiary as of December 31, 1995 and 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Princeton, New Jersey
February 16, 1996, except for
the third paragraph of Note 1,
as to which the date is
March 26, 1996
FS-3
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,748,197 $ 2,465,387
Accounts receivable, net of allowance for doubtful
accounts of $131,381 in 1995 and $107,932 in 1994 1,575,664 1,622,905
Unbilled revenue 1,338,232 544,822
Prepaid expenses and other current assets 160,481 122,158
------------ ------------
Total current assets 6,822,574 4,755,272
Property and equipment, net 1,119,090 1,503,345
Restricted cash 309,300 309,300
Investment in joint venture 181,563
Intangible assets, net 26,099 30,692
Other, principally deposits 126,607 106,197
------------ ------------
Total assets $ 8,585,233 $ 6,704,806
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 772,089 $ 422,212
Accrued expenses and other liabilities 613,691 511,644
Deferred revenue 424,588 76,610
Current portion of note payable 4,333 4,001
Current portion of capital lease obligations 103,020 112,428
Preferred Stock dividends payable 14,583
------------ ------------
Total current liabilities 1,932,304 1,126,895
Deferred rent 48,890 85,557
Note payable, net of current portion 4,287 8,621
Capital lease obligations, net of current portion 7,774 83,526
------------ ------------
Total liabilities 1,993,255 1,304,599
------------ ------------
Redeemable Cumulative Convertible
Preferred Stock 1,728,621
STOCKHOLDERS' EQUITY
Common stock 90,495 75,447
Additional paid-in capital 24,100,394 22,266,459
Accumulated deficit (19,321,582) (16,935,749)
Less: Treasury stock (5,950) (5,950)
------------ ------------
Total stockholders' equity 4,863,357 5,400,207
------------ ------------
Total liabilities and stockholders' equity $ 8,585,233 $ 6,704,806
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FS-4
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Commercial operations $ 5,971,278 $ 4,061,432 $ 2,760,557
Research and development services 2,062,420 2,073,145 1,954,195
-------------- ------------ ------------
Total revenues 8,033,698 6,134,577 4,714,752
-------------- ------------ ------------
Cost of commercial operations 5,126,901 3,358,730 2,634,821
Research and development costs 2,459,580 3,311,301 3,769,612
General and administrative expenses 1,583,383 2,279,502 2,203,942
Marketing expenses 1,109,830 1,554,456 1,271,319
-------------- ------------ ------------
Total costs and expenses 10,279,694 10,503,989 9,879,694
-------------- ------------ ------------
Other income (expense):
Interest income 201,130 164,886 252,098
Interest expense (31,158) (53,227) (35,402)
Equity in loss of joint venture (93,437)
Other, net 16,961
-------------- ------------ ------------
Other income, net 93,496 111,659 216,696
-------------- ------------ ------------
Net loss (2,152,500) (4,257,753) (4,948,246)
Preferred stock dividends (233,333)
-------------- ------------ ------------
Net loss applicable to Common Stock ($2,385,833) ($4,257,753) ($4,948,246)
============== ============ ============
Net loss per share applicable to Common Stock ($0.31) ($0.57) ($0.79)
============== ============ ============
Weighted average number of shares of
Common Stock outstanding 7,669,639 7,461,821 6,276,090
============== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FS-5
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
-------------------- Paid-in Accumulated --------------------
Shares Amount Capital Deficit Shares Amount
----------- -------- ------------ ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 5,926,400 $59,264 $17,199,957 ($7,729,750) (55,000) ($5,500)
Net loss (4,948,246)
Issuance of Common Stock for cash 1,500,000 15,000 5,057,902
Exercise of stock options/ other 72,850 728 45,360
----------- -------- ------------ ------------- --------- ----------
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)
=========== ======== ============ ============= ========== ==========
</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 1993.
Common Stock: Authorized 20,000,000 shares, par value $.01 per share.
The accompaning notes are an integral part of these consolidated financial
statement
FS-6
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,152,500) ($4,257,753) ($4,948,246)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation and amortization 574,183 542,984 449,562
Equity in loss of joint venture 93,437
Provision for doubtful accounts 60,000 17,700 110,366
Amortization of premium of marketable securities 29,526
Other (1,941) 6,632
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (12,759) 58,881 (973,748)
(Increase) decrease in unbilled revenue (793,410) (352,017) 4,706
(Increase) decrease in prepaid expenses
and other assets (63,031) (6,044) 137,042
(Increase) in restricted cash (309,300)
Increase (decrease ) in accounts payable 349,877 (643,770) 793,565
Increase (decrease) in accrued expenses and
other liabilities 65,380 (71,476) 142,765
Increase (decrease ) in deferred revenue 347,978 (91,297) 132,379
-------------- ------------- -------------
Net cash used by operating activities (1,532,786) (5,112,092) (4,115,451)
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (139,172) (392,180) (396,862)
Investment in joint venture (150,000)
Purchase of marketable securities (1,958,720)
Proceeds from sales of marketable securities 1,958,720 2,000,000
Proceeds from sale of property and equipment 3,000
-------------- ------------- -------------
Net cash provided by (used in) investing activities (286,172) (392,180) 1,603,138
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repayment (4,002) (3,397) (3,435)
Capital lease principal repayments (128,084) (135,825) (100,932)
Net proceeds from private placement of Redeemable
Cumulative Convertible Preferred Stock 3,457,242
Expenses of converting 50% of the Redeemable
Cumulative Convertible Preferred Stock (17,500)
Net proceeds (expenses) from issuance of
Common Stock and warrants (58,541) 5,072,902
Net proceeds from exercise of stock options 12,862 21,786 39,456
Cash dividends paid on Redeemable Cumulative
Convertible Preferred Stock (218,750)
-------------- ------------- -------------
Net cash provided by (used in) financing activities 3,101,768 (175,977) 5,007,991
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 1,282,810 (5,680,249) 2,495,678
Cash and cash equivalents at beginning of year 2,465,387 8,145,636 5,649,958
-------------- ------------- -------------
Cash and cash equivalents at end of year $ 3,748,197 $2,465,387 $8,145,636
============== ============= =============
Supplemental disclosures of cash flow information:
- --------------------------------------------------
Cash paid for interest $31,061 $43,538 $30,519
============== ============= =============
Cash paid for income taxes $200 $0 $0
============== ============= =============
</TABLE>
Supplemental Disclosures of non-cash investing and financing activities:
- -----------------------------------------------------------------------
- -The Company entered into capital lease obligations amounting to $42,924 and
$304,053 for the years ended December 31, 1995 and 1993, respectively.
- -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.
- -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.
The accompanying notes are an integral part of these consolidated financial
statements.
FS-7
<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. Through a wholly-owned subsidiary
that was merged into Envirogen effective December 31, 1994, Vapex
Environmental Technologies, Inc. ("Vapex"), the Company has been engaged in
commercial remediation activities utilizing vapor extraction techniques to
remove subsurface contaminants. The Company also entered into a joint
venture during 1995 (see Note 18).
While the activities of Vapex 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, dependence on key
personnel, competition, risk of technological obsolescence, governmental
regulations and approvals and limited manufacturing and marketing
capabilities.
In March 1996, Allen & Company Incorporated ("Allen & Company"), a
principal stockholder of the Company, was engaged to act as the Company's
agent in connection with a proposed private placement of the Company's
common stock. Allen & Company has agreed that, if less than $750,000 of
common stock is purchased by investors by May 31, 1996 Allen & Company will
purchase from the Company on May 31, 1996, an amount of common stock equal
to $750,000 less the amount of common stock purchased on or before such
date by investors. An officer of Allen & Company is also a director of the
Company.
The Company 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. While future
losses are anticipated, they are expected to occur at a reduced level due
to the continued development of the remediation business and cost reduction
programs which have been implemented. Although it is unable to predict with
certainty, the Company believes that it can meet its operating requirements
at least through the intermediate term. If the Company 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 additional funding from other sources. There
can be no assurance that the Company 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 the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vapex, the
Company's wholly-owned subsidiary which was merged into Envirogen effective
December 31, 1994. All material intercompany balances and transactions are
eliminated in consolidation.
FS-8
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
______________________________
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.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
MARKETABLE SECURITIES
During 1994, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). In 1994, the Company held as
investments certain marketable debt securities which were classified as
"held to maturity" and were carried at amortized cost. During 1994, the
Company purchased and received proceeds at maturity of $2,000,000 relating
to such securities. Income earned on these investments during 1994 totaled
$41,280 and is included in interest income. The adoption of SFAS 115 did
not have an impact on the financial position or the results of operations
of the Company. The Company held no investments in debt or equity
securities in 1995.
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.
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 $48,890 and $85,557 at December 31,
1995 and 1994, respectively.
FS-9
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
______________________________
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, 1995 of $78,767 is
expected to be collected within the next 12 months.
There are no unbilled revenues for which realization is uncertain. An
allowance for doubtful accounts has been established based on management's
assessment of the collectibility of all amounts billed (including amounts
subject to retainage) as of December 31, 1995.
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.
FS-10
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
______________________________
3. PROPERTY AND EQUIPMENT
----------------------
Property and equipment, net at December 31, 1995 and 1994 consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Computer Equipment $ 238,368 $ 214,775
Acquired computer software 210,000 210,000
Laboratory and field equipment 1,113,095 1,066,235
Equipment and vehicles under
capital leases 565,597 537,179
Furniture and office equipment 278,038 272,044
Leasehold improvements 537,837 537,837
Construction in Progress 65,232 -
---------- ----------
3,008,167 2,838,070
Less: Accumulated depreciation
and amortization 1,889,077 1,334,725
---------- ----------
$1,119,090 $1,503,345
========== ==========
</TABLE>
Accumulated amortization on equipment under capital leases amounted to
$345,867 and $248,499 at December 31, 1995 and 1994, respectively.
Depreciation and amortization expense amounted to $569,590, $537,808 and
$443,842 for the years ended December 31, 1995, 1994 and 1993,
respectively.
4. INTANGIBLE ASSETS
-----------------
Intangible assets, net at December 31, 1995 and 1994 consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Goodwill $44,746 $44,746
Organizational costs 5,428 5,428
Licensing agreement 3,500 3,500
-------- -------
53,674 53,674
Less: Accumulated amortization 27,575 22,982
-------- -------
$26,099 $30,692
======== =======
</TABLE>
Amortization expense amounted to $4,593, $5,176 and $5,720 for the years
ended December 31, 1995, 1994 and 1993, respectively.
FS-11
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
___________________________
5. ACCRUED EXPENSES AND OTHER LIABILITIES
--------------------------------------
Accrued expenses and other liabilities at December 31, 1995 and 1994
consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Salaries, benefits and payroll taxes $164,953 $156,581
Taxes 319,641 216,000
Professional fees 69,000 56,513
Contracts accrual 50,000 50,000
Other 10,097 32,550
-------- --------
$613,691 $511,644
======== ========
</TABLE>
6. 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 following is a schedule of
future maturities:
1996 $4,333
1997 $4,287
7. 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, 1995, was an increase of $874,447.
FS-12
<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, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
Deferred Tax Deferred Tax
Assets (Liabilities) Assets (Liabilities)
-------------------- --------------------
<S> <C> <C>
Accrued liabilities $ 157,383 $ 134,837
Contract reserve 17,000 17,000
Deferred rent 16,623 29,089
Depreciation 165,390 855
Bad debts 44,670 36,697
Net operating loss - federal 5,984,000 5,270,000
State taxes 1,347,254 1,437,988
Tax credits 297,187 228,594
----------- -----------
Total 8,029,507 7,155,060
Valuation allowance - U.S. (6,682,253) (5,717,072)
Valuation allowance - state (1,347,254) (1,437,988)
----------- -----------
Total deferred taxes $ 0 $ 0
=========== ===========
</TABLE>
As of December 31, 1995, the Company had a net operating loss carryforward
of approximately $17,600,000 for Federal income tax purposes which is
available to offset future taxable income, if any, between the years 1996
and 2010. The timing and manner in which these losses may be utilized are
limited by Internal Revenue Code Section 382.
8. COMMON AND PREFERRED STOCK
--------------------------
COMMON STOCK
On October 20, 1993 the Company completed a public offering of 1,500,000
units at $4.00 per unit resulting in net proceeds (after offering expenses
and underwriting discounts and commissions) of approximately $5,000,000.
Each unit consists of one share of Common Stock and a warrant to purchase
one-half of one share of Common Stock. Each warrant is exercisable until
October 13, 1998 at an exercise price of $5.20 per full share subject to
adjustment.
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
Incorporated ("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 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
FS-13
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
______________________________
(8,000), Robert F. Johnston (16,000), Seymour L. Meisel (10,000) and Robert
C. Miller (10,000). The shares of Preferred Stock are convertible at the
option of each holder at a conversion rate of ten shares of Common Stock
for each share of Preferred Stock and are subject to mandatory conversion
in April 1997 upon the fulfillment of certain conditions. Quarterly
dividends on the Preferred Stock are payable at a rate of $.625 per share
per annum. No cash dividend can be paid or distribution made on the shares
of Common Stock as long as any shares of the Preferred Stock are
outstanding without the prior consent of the holders of the Preferred
Stock. The Company is also subject to certain financial and other
covenants in connection with the Preferred Stock. In the event of the
breach of any of these covenants, the holders have the right after the
first anniversary of the issuance of the Preferred Stock to redeem for cash
their shares of Preferred Stock and any cumulative unpaid dividends
thereon. Holders also have certain registration rights with respect to the
underlying shares of Common Stock. On December 28, 1995, Preferred
Stockholders voluntarily converted 50% of their shares of Preferred Stock
into 1,400,000 shares of Common Stock. A dividend of $116,667 was paid on
the preferred shares in connection with this conversion. Regular Preferred
Stock dividends of $116,666 were also recognized in 1995.
9. 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 1,400,000 shares of Common Stock. 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 terms
of the 1993 Plan, an option to purchase 15,000 shares of Common Stock shall
be automatically granted to each new Independent Director (as defined in
the 1993 Plan) on the day the Independent Director is first elected as a
member of the Board of Directors. Thereafter, an option to purchase 500
shares of Common Stock shall be granted on June 1 of each year to each
Independent Director who is elected at subsequent annual meetings of
stockholders.
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.
FS-14
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
______________________________
Following is a summary of the stock option transactions for the years 1993,
1994 and 1995:
<TABLE>
<CAPTION>
Number Option
of Shares Price Range
--------- -----------
<S> <C> <C>
Options outstanding at December 31, 1992 519,250 $0.20 - $ 7.50
Granted 151,700 $3.31 - $ 7.38
Forfeited ( 70,600) $0.20 - $ 7.25
Exercised ( 72,850) $0.20 - $ 3.50
---------
Options outstanding at December 31, 1993 527,500 $0.20 - $ 7.50
---------
Granted 238,750 $2.31 - $ 3.81
Forfeited (150,980) $0.20 - $ 7.25
Exercised ( 45,500) $0.20 - $ 0.70
---------
Options outstanding at December 31, 1994 569,770 $0.20 - $ 7.50
---------
Granted 391,750 $1.71 - $ 3.29
Forfeited (106,000) $0.35 - $ 7.50
Exercised ( 46,570) $0.20 - $ 0.70
---------
Options outstanding at December 31, 1995 808,950 $0.20 - $ 7.25
=========
Exercisable at December 31, 1995 207,360 $0.20 - $ 7.25
</TABLE>
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS 123"). In October 1995, SFAS 123 established financial and reporting
standards for stock based compensation plans. The Company anticipates
adopting the disclosure only provision of this standard during 1996.
In September 1991, the Company issued warrants to purchase 181,500 shares
of Common Stock at an exercise price of $3.50 per share as partial
consideration to the placement agent in connection with the Company's
issuance of Series B Preferred Stock. The warrants expire five years from
the date of issuance.
In October 1991, the Company issued warrants to purchase 30,000 shares of
Common Stock at an exercise price of $7.00 per share in connection with the
Vapex acquisition. The warrants expire five years from the date of
issuance.
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. See Notes 8 and 12 for
additional information regarding the Company's other warrants.
FS-15
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
______________________________
10. 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 1998. 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 equipment.
Future minimum payments under capital and noncancelable operating leases
consisted of the following at December 31, 1995:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
<S> <C> <C>
1996 $ 110,992 $ 586,303
1997 6,403 230,591
1998 2,280 -
Thereafter - -
--------- ---------
Total minimum lease payments 119,675 $ 816,894
=========
Less amount representing interest 8,881)
---------
Present value of net minimum capital
lease payments $ 110,794
=========
</TABLE>
Rent expense for operating leases was $557,361, $577,471 and $530,384 for
the years ended December 31, 1995, 1994 and 1993, respectively.
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.
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.
FS-16
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
______________________________
11. 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.
Research and development work being conducted for one major customer
relates to the remediation of PCB wastes. This project involves work
relating to PCB wastes released on the ground at compressor stations along
a natural gas pipeline located in several states. Pursuant to the
Technology Agreement between the Company and the major customer each have
undivided ownership interests in any technology developed. Also, the
Company has granted the major customer a non-exclusive, non-transferable
license to use all presently existing and any future technology
that the Company may own relating to PCB remediation and that is
not otherwise subject to restrictions. With certain limited exceptions,
the Company is required to pay the major customer a royalty based on gross
revenues received from the utilization of any jointly-owned technology or a
Company-owned PCB-related remediation technology. The maximum aggregate
royalty payable to the major customer by the Company under the Technology
Agreement may not exceed the development funding received from the major
customer. At December 31, 1995, the Company had no obligations under the
royalty agreement. Research and development revenues from this customer for
the years ended December 31, 1995, 1994 and 1993 amounted to approximately
$749,000, $623,000 and $913,000, respectively.
12. 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.
In October 1993, an affiliate of a former principal stockholder of the
Company acted as the underwriter for the Company's public offering for the
sale of 1,500,000 units. The underwriter received gross fees and
commissions of $505,000 and a nonaccountable expense allowance of $175,000
and was reimbursed for certain legal fees and other expenses in connection
with the offering.
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 8
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.
FS-17
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
______________________________
13. 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 $53,992, $54,516 and $41,130
for the years ended December 31, 1995, 1994 and 1993, respectively. There
was no contribution expense related to the profit sharing plan. The
Company does not maintain other pension or postretirement benefit plans.
The Company also maintains an Executive Bonus Plan. The plan is
administered by the compensation committee, which sets the performance
targets for each year and authorizes bonuses to the extent to which those
targets are met. The Company incurred no expenses relating to this plan
during the past three years.
14. 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.
The Company maintains demand deposits with one major bank and money market
accounts with two financial institutions. At December 31, 1995 and 1994,
approximately 100% and 71%, respectively, of the Company's cash and cash
equivalents were held in money market accounts.
The Company performs contracts for various federal government agencies.
Revenue recognized under these contracts for the years ended December 31,
1995, 1994 and 1993 was $834,818, $869,254 and $417,734, respectively.
These revenues are primarily from research and development contracts.
15. RESTRICTED CASH
---------------
At December 31, 1995 and 1994, 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.
16. INDUSTRY SEGMENT AND MAJOR CUSTOMER DATA
----------------------------------------
The Company's operations are conducted within one business segment. There
are no revenues attributable to foreign customers. Customers comprising
10% or greater of the Company's revenues are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Customer A 21% 13% 11%
Customer B 10 19 20
</TABLE>
FS-18
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
______________________________
17. SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
-------------------------------------------------
Maintenance and repairs expense for the years ended December 31, 1995, 1994
and 1993 was $44,356, $82,588 and $85,847, respectively.
18. FORMATION OF 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. 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, 1995 amounted to $19,486. CVT
America's place of business is located at the Company's headquarters in
Lawrenceville, New Jersey.
19. SUBSEQUENT EVENTS
-----------------
On February 9, 1996, the Company acquired MWR, Inc. ("MWR") of Lansing,
Michigan for approximately $1,200,000 in cash and 466,667 shares of common
stock valued at $1,400,000. In connection with the acquisition, the Company
paid approximately $332,000 of MWR's outstanding payables. A portion of the
purchase price is being held in escrow to satisfy the seller's
indemnification obligations under the purchase agreement and to cover a
possible downward adjustment of the purchase price upon determination of
MWR's balance sheet as of the closing date. MWR, with 1995 revenues of
approximately $5 million, is a leading provider of in situ remediation
services with particular expertise in soil vapor extraction. MWR will
operate as a wholly-owned subsidiary of the Company and the acquisition
will be accounted for under the purchase method.
FS-19
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,722,318
Accounts receivable-trade, net 2,591,583
Unbilled revenue 1,742,181
Inventory 55,972
Prepaid expenses and other current assets 175,698
------------
Total current assets 9,287,752
Property and equipment, net 1,243,785
Restricted cash 399,082
Investment in and advances to joint venture 310,731
Intangible assets, net 1,392,124
Long term accounts receivable 306,768
Other, principally deposits 118,371
------------
Total assets $13,058,613
============
LIABILITIES
Current liabilities:
Accounts payable $877,748
Accrued expenses and other liabilities 1,183,170
Deferred revenue 416,363
Current portion of note payable 4,600
Current portion of capital lease obligations 39,081
Preferred Stock dividends payable
------------
Total current liabilities 2,520,962
Deferred rent 21,389
Note payable, net of current portion 803
Capital lease obligations, net of current portion 34,955
------------
Total liabilities 2,578,109
------------
STOCKHOLDERS' EQUITY
Common stock 129,291
Additional paid-in capital 31,937,112
Accumulated deficit (21,579,949)
Less: Treasury stock (5,950)
------------
Total stockholders' equity 10,480,504
------------
Total liabilities, redeemable cumulative convertible
preferred stock and stockholders' equity $13,058,613
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Commercial operations $ 7,621,681 $ 4,237,170
Research and development services 1,287,156 1,330,910
------------ ------------
Total revenues 8,908,837 5,568,080
------------ ------------
Cost of commercial operations 6,967,717 3,726,982
Provision for contract claim 550,000
Research and development costs 1,692,965 1,772,393
General and administrative expenses 1,380,361 1,204,983
Marketing expenses 680,562 841,384
------------ ------------
Total costs and expenses 11,271,605 7,545,742
------------ ------------
Other income (expense):
Interest income 131,011 147,737
Interest expense (19,320) (23,808)
Equity in gain (loss) of joint venture 29,168 (49,210)
Other, net 13,961
------------ ------------
Other income, net 140,859 88,680
------------ ------------
Net loss (2,221,909) (1,888,982)
Preferred stock dividends (36,458) (72,917)
------------ ------------
Net loss applicable to Common Stock ($2,258,367) ($1,961,899)
============ ============
Net loss per share applicable to Common ($0.21) ($0.26)
Stock
============ ============
Weighted average number of shares of
Common Stock outstanding 10,926,226 7,541,266
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FS-21
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,221,909) ($1,888,982)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation and amortization 724,552 428,247
Provision for doubtful accounts 63,100 45,000
Equity in (earnings) loss of joint venture (29,168) 49,210
Other 549
Changes in assets and liabilities:
(Increase) in accounts receivable (319,982) (259,121)
(Increase) decrease in unbilled revenue 141,036 (744,464)
(Increase) decrease in prepaid expenses and other assets 33,709 (59,919)
Decrease in inventory 3,231
(Increase) in restricted cash (89,782)
Increase (decrease) in accounts payable (275,264) 179,306
Increase in accrued expenses and other liabilities 55,296 126,230
Increase (decrease) in deferred revenue (8,225) 84,025
-------------- -------------
Net cash used by operating activities (1,922,857) (2,040,468)
-------------- -------------
Cash flows from investing activities:
Capital expenditures (168,798) (68,327)
Investment in and advances to joint venture (100,000) (76,750)
Purchase of MWR, Inc. (1,319,018)
Proceeds from sale of property and equipment 1,600
-------------- -------------
Net cash used in investing activities (1,586,216) (145,077)
-------------- -------------
Cash flows from financing activities:
Debt repayment (3,217) (2,971)
Capital lease principal repayments (98,426) (98,114)
Net proceeds from issuance of Common Stock 4,620,186
Net proceeds from issuance of Redeemable
Cumulative Convertible Preferred Stock 3,457,242
Net proceeds from exercise of stock options 15,692 11,792
Cash dividends paid on Redeemable Cumulative
Convertible Preferred Stock (51,041) (43,750)
-------------- -------------
Net cash used in financing activities 4,483,194 3,324,199
-------------- -------------
Net increase in cash and cash equivalents 974,121 1,138,654
Cash and cash equivalents at beginning of period 3,748,197 2,465,387
-------------- -------------
Cash and cash equivalents at end of period $4,722,318 $3,604,041
============== =============
Supplemental disclosures of cash flow information:
- --------------------------------------------------
Cash paid for interest $19,014 $23,759
============== =============
Cash paid for income taxes $1,250 $0
============== =============
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
- ------------------------------------------------------------------------
- -The Company entered into capital lease obligations amounting to $49,116 and
$42,924 for the nine months ended September 30, 1996 and 1995, respectively.
- -In February 1996, the Company purchased MWR, Inc. for $1,319,018 in cash and
456,500 shares of Common Stock valued at $1,511,015.
The accompanying notes are an integral part of these consolidated financial
statements.
FS-22
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
The financial information presented reflects all adjustments which are, in
the opinion of management, necessary for a fair statement of the results for the
interim periods. The results for the interim periods are not necessarily
indicative of the results to be expected for the entire year.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of the Company for the
fiscal year ended December 31, 1995.
2. ACQUISITION OF MWR, INC.
------------------------
On February 9, 1996, the Company purchased all of the outstanding capital stock
of MWR, Inc. for approximately $2,830,000. 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 of approximately $1,283,000 resulted in goodwill of
$1,051,000 and a covenant not to compete of $232,000. These 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>
Nine Months
Year Ended Ended
December 31, 1995 September 30, 1996
----------------- ------------------
<S> <C> <C>
Net revenues $12,740,698 $ 9,187,604
Net loss ($ 2,745,200) ($ 2,255,684)
Net loss per share applicable to
Common Stock ($ 0.34) ($ 0.21)
</TABLE>
FS-23
<PAGE>
3. PRIVATE PLACEMENT OF 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 $4,620,186. Allen
& Company Incorporated ("Allen & Company"), a principal stockholder of the
Company, acted as the placement agent. Allen & Company received a placement fee
of $300,000 and was reimbursed for certain legal fees and other expenses. In
connection therewith, the Company issued seven-year warrants to purchase 200,000
shares of the Company's Common Stock at $2.50 per share. An officer of Allen &
Company is a director of the Company.
FS-24
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
Fluid Management, Inc.
We have audited the accompanying balance sheets of Fluid Management, Inc.
(the "Company") as of December 31, 1995 and 1994 and the related statements of
operations and retained earnings (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fluid Management, Inc. as of
December 31, 1995 and 1994 and the results of its operations and cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Milwaukee, Wisconsin
December 6, 1996
FS-25
<PAGE>
FLUID MANAGEMENT, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------- -------------
1995 1994 1996
------------- ------------- -------------
ASSETS (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,799,829 $ 709,249 $ 827,756
Accounts receivable and unbilled
revenues, less reserve for doubtful
accounts of $120,000, $65,000
and $120,000 at December 31, 1995 and 1994 and
September 30, 1996, respectively 6,333,482 8,032,844 6,168,941
Prepaid expenses 140,400 101,348 461,425
------------- ------------- -------------
Total current assets 8,273,711 8,843,441 7,458,122
Property and equipment, net 770,644 683,670 863,930
Investment in joint venture 63,706 46,646 66,706
------------- ------------- -------------
Total assets $ 9,108,061 $ 9,573,757 8,388,758
============= ============= =============
LIABILITIES
Current liabilities:
Current portion of notes payable $ 1,000,000 $ 600,000 417,000
Accounts payable 2,773,465 3,687,591 2,589,506
Accrued expenses 739,397 533,107 701,898
Reserve for PECFA claim adjustments 2,270,744 1,576,300 2,804,156
Dividends payable 816,000 844,270 170,977
------------- ------------- -------------
Total current liabilities 7,599,606 7,241,268 6,683,537
Notes payable, less current portion 2,000,000 1,600,000 833,000
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY (DEFICIT)
Stockholders' equity (deficit):
Common stock, $.10 par value,
560,000 shares authorized,
40,000 shares outstanding 4,000 4,000 4,000
Additional paid- in capital 36,000 36,000 36,000
Retained earnings (deficit) (531,545) 692,489 832,221
------------- ------------- -------------
Total stockholders' equity (deficit) (491,545) 732,489 872,221
------------- ------------- -------------
Total liabilities and
stockholders' equity (deficit) $ 9,108,061 $ 9,573,757 $ 8,388,758
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
FS-26
<PAGE>
FLUID MANAGEMENT, INC.
Statements of Operations and Retained Earnings (Deficit)
<TABLE>
<CAPTION>
For the nine months ended
For the years ended December 31, September 30,
-------------------------------- --------------------------------
1995 1994 1996 1995
-------------- -------------- --------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 21,306,444 $ 18,698,662 $ 14,735,901 $ 15,069,157
Provisions for PECFA claims adjustments
and doubtful accounts 1,061,417 966,978 722,037 751,220
-------------- -------------- -------------- --------------
Net revenues 20,245,027 17,731,684 14,013,864 14,317,937
Expenses:
Cost of commercial service 13,973,144 12,958,206 9,393,719 9,572,176
General and administrative 1,511,664 1,113,890 1,432,252 1,089,920
-------------- -------------- -------------- --------------
Total costs and expenses 15,484,808 14,072,096 10,825,971 10,662,096
-------------- -------------- -------------- --------------
Other income (expense):
Interest income 24,520 8,467 17,143 11,595
Interest expense (159,633) (195,542) (145,293) (144,239)
Equity in earnings of joint venture 17,060 34,146 3,000 20,000
-------------- -------------- -------------- --------------
Other expense, net (118,053) (152,929) (125,150) (112,644)
-------------- -------------- -------------- --------------
Net income 4,642,166 3,506,659 3,062,743 3,543,197
Retained earnings (deficit):
Beginning of year 692,489 (661,900) (531,545) 692,489
Dividends declared 5,866,200 2,152,270 1,698,977 2,076,566
-------------- -------------- -------------- --------------
End of year $ (531,545) $ 692,489 $ 832,221 $ 2,159,120
============== ============== ============== ==============
Net income per share $ 116 $ 88 $ 77 $ 88
============== ============== ============== ==============
Weighted average number of
shares outstanding 40,000 40,000 40,000 40,000
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
FS-27
<PAGE>
FLUID MANAGEMENT, INC.
Statements of Cash flows
<TABLE>
<CAPTION>
For the nine months ended
For the year ended December 31, September 30,
------------------------------- -------------------------------
1995 1994 1996 1995
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,642,166 $ 3,506,659 $ 3,062,743 $ 3,543,197
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for PECFA claim adjustments
and doubtful accounts 1,061,417 966,978 722,037 751,220
Depreciation 193,284 115,785 179,185 142,236
Gain (loss) on sale of property and
equipment 6,889 (1,855) (1,451)
Equity in earnings of joint venture (17,060) (34,146) (3,000) (20,000)
-------------- -------------- -------------- --------------
5,886,696 4,553,421 3,960,965 4,415,202
Changes in assets and liabilities:
Accounts receivable and unbilled revenues 1,644,362 (2,668,731) 164,541 1,236,577
Prepaid expenses (39,052) (20,553) (321,025) (95,416)
Accounts payable (818,388) 1,507,748 (183,959) (1,294,396)
Accrued liabilities 206,290 117,761 (37,499) 71,930
Reserve for PECFA claim adjustments (311,973) (212,388) (188,625) (239,805)
-------------- -------------- -------------- --------------
Net cash provided by operating activities 6,567,935 3,277,258 3,394,398 4,094,092
Cash flows from investing activities:
Purchase of property and equipment (399,985) (480,733) (272,471) (331,296)
Proceeds from sale of property and equipment 17,100 6,814 13,600
Investment in joint venture (12,500)
-------------- -------------- -------------- --------------
Net cash used in investing activities (382,885) (486,419) (272,471) (317,696)
Cash flows from financing activities:
Dividends paid (5,894,470) (1,691,000) (2,344,000) (2,572,470)
Payments on notes payable (2,200,000) (800,000) (1,750,000) (900,000)
Proceeds on notes payable 3,000,000
-------------- -------------- -------------- --------------
Net cash used in financing activities (5,094,470) (2,491,000) (4,094,000) (3,472,470)
-------------- -------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents 1,090,580 299,839 (972,073) 303,926
Cash and cash equivalents:
Beginning of year 709,249 409,410 1,799,829 709,249
-------------- -------------- -------------- --------------
End of year $ 1,799,829 $ 709,249 $ 827,756 $ 1,013,175
============== ============== ============== ==============
Supplemental cash flow information:
Interest paid $ 156,091 $ 196,209 $ 148,835 $ 144,239
============== ============== ============== ==============
Dividends declared but not paid $ 745,000 $ 702,270 $ 170,977 $ 277,366
============== ============== ============== ==============
Property and equipment purchased
but not paid for $ $ 95,736 $ $
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
FS-28
<PAGE>
FLUID MANAGEMENT, INC.
(Information Relating to the Nine Months Ended
September 30, 1996 and 1995 is Unaudited)
Notes to Financial Statements
1. Summary of Significant Accounting Policies:
Nature of Business
Fluid Management, Inc. (the Company) is a consulting engineering firm
providing comprehensive environmental science services to customers located
primarily in Wisconsin. Such services include: soil and groundwater
remediation, compliance management, air sciences and engineering, wastewater
and stormwater management and storage tank management.
Storage tank removal and remediation totaled approximately 85% and 87% of
the Company's revenues for the years ended December 31, 1995 and 1994,
respectively, and 88% and 83% for the nine month periods ended September 30,
1996 and 1995, respectively. The majority of such work is eligible to be
reimbursed to the Company's customers under the State of Wisconsin Petroleum
Environmental Cleanup Fund Act (PECFA). Such reimbursement is not made until
certain remediation milestones have been reached and all work costs have
been approved by the State of Wisconsin Department of Commerce (DCOM), the
state's administrator of the PECFA program.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures of
contingent assets and liabilities at the dates of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The Company's most significant estimates relate to accounts receivable
valuation reserves and PECFA reserves.
Revenue Recognition
The Company recognizes revenues as work is performed.
Reserves for PECFA Claim Adjustments
The Company provides for an estimate of potential amounts it will repay to
customers related to remediation costs which are determined by DCOM to be
ineligible for reimbursement by PECFA.
FS-29
<PAGE>
FLUID MANAGEMENT, INC.
(Information Relating to the Nine Months Ended
September 30, 1996 and 1995 is Unaudited)
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued):
Claims for customer reimbursement are submitted to PECFA upon completion of
certain remediation milestones. Final review of the PECFA claims by DCOM and
determination of any ineligible costs is typically not completed until one
to three years after the related revenues have been recognized and collected
by the Company. Total revenues recognized in 1995 and prior years for which
claims are yet to be approved by DCOM were approximately $40,600,000 at
December 31, 1995. Claims not yet approved by DCOM at September 30, 1996
were approximately $46,800,000.
Cash and Cash Equivalents
The Company considers checking accounts and money market accounts to be cash
and cash equivalents. Substantially all the Company's cash and cash
equivalents are maintained at three banks in southwestern Wisconsin and
balances will normally exceed federally insured limits.
Property and Equipment
Property and equipment is recorded at cost and consists primarily of
vehicles, office and field 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 seven years. Gains and
losses on disposals are recognized in the year of disposal. Repair and
maintenance expenditures are expenses as incurred; significant renewals and
betterments are capitalized.
Investment in Joint Venture
The Company has a 50% ownership in Miller Environmental Technologies LLC.
(MET). Such ownership investment is accounted for under the equity method.
Summarized unaudited financial information for MET as of and for the years
ended December 31, 1995 and 1994 is set forth below.
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Current assets $ 181,000 $ 186,000
Current liabilities 54,000 93,000
Members capital 127,000 93,000
Revenues 194,000 218,000
Net income 34,000 68,000
</TABLE>
FS-30
<PAGE>
FLUID MANAGEMENT, INC.
(Information Relating to the Nine Months Ended
September 30, 1996 and 1995 is Unaudited)
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued):
The Company provides consulting and engineering services to MET under a
subcontracting arrangement. Billings for such services amounted to $106,000,
$82,000, $59,000 and $93,000 for the years ended December 31, 1995 and 1994,
and the nine months ended September 30, 1996 and 1995, respectively. The
Company is paid a monthly fee of $1,000 by MET to provide office and
recordkeeping functions. Such fees totaled $12,000, $3,000, $9,000 and
$9,000 for the years ended December 31, 1995 and 1994 and the nine months
ended September 30, 1996 and 1995, respectively. The Company is also
reimbursed for any expenses incurred related to MET matters. The Company had
accounts receivable from MET of $33,000, $90,000 and $36,000 at December 31,
1995 and 1994 and September 30, 1996, respectively.
Income Taxes
By unanimous consent of its shareholders, the Company elected S Corporation
status under the provisions of the Internal Revenue Code. Under those
provisions and most state laws, the Company generally does not pay federal
or state income taxes on its taxable income. An S Corporation, any taxable
income or loss of the Company is includable in the individual income tax
returns of the shareholders.
It is the intent of the shareholders to withdraw amounts as distributions at
least equivalent to the income taxes that will be payable by them on S
Corporation earnings. As of December 31, 1995 and September 30, 1996, the
amount of accumulated earnings taxed to the shareholders but not distributed
was approximately $2,900,000 and $4,100,000, respectively (before payment of
any dividends payable).
Interim Financial Statements (Unaudited)
The interim unaudited financial statements at September 30, 1996 and for the
nine months ended September 30, 1996 and 1995 reflect adjustments,
consisting only of normal recurring accruals, which are, in the opinion of
the Company's management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Operating
results for any interim period are not necessarily indicative of the results
for a full year.
Earnings Per Share
Earnings per share calculations are based on the weighted average shares
outstanding during the period.
FS-31
<PAGE>
FLUID MANAGEMENT, INC.
(Information Relating to the Nine Months Ended
September 30, 1996 and 1995 is Unaudited)
Notes to Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued):
Reclassifications
Certain reclassifications have been made to the December 31, 1995 and 1994
amounts to conform them to the September 30, 1996 presentation.
2. Property and Equipment:
Property and equipment, net consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------- ------------
1995 1994 1996
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Vehicles $ 135,883 $ 71,088 $ 135,883
Field equipment 329,535 289,194 357,478
Furniture and office equipment 634,152 477,518 875,380
Leasehold improvements 47,131 41,711 50,431
------------ ------------ ------------
1,146,701 879,511 1,419,172
Less: accumulated depreciation 376,057 195,841 555,242
------------ ------------ ------------
Property and equipment, net $ 770,644 $ 683,670 $ 863,930
============ ============ ============
</TABLE>
3. Accrued Expenses:
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------- ------------
1995 1994 1996
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Bonuses $ 695,547 $ 475,316 $ 638,790
Commissions 13,607 24,048 8,720
Insurance premiums 7,714 27,167
Other 22,529 6,576 54,388
------------ ------------ ------------
$ 739,397 $ 533,107 $ 701,898
============ ============ ============
</TABLE>
FS-32
<PAGE>
FLUID MANAGEMENT, INC.
(Information Relating to the Nine Months Ended
September 30, 1996 and 1995 is Unaudited)
Notes to Financial Statements (Continued)
4. Line of Credit:
The Company has a demand line of credit which allows borrowings up to the
lesser of $500,000 or a defined borrowing base. Borrowings bear interest at
prime and are secured by substantially all of the assets of the Company.
There was no balance outstanding at December 31, 1995 or 1994 or September
30, 1996.
5. Notes Payable:
The Company had a $3,000,000 bank note payable at December 31, 1995. The
note was due in monthly principal installments of $83,333 plus interest at
8.5% and was collateralized by substantially all assets of the Company. The
related loan agreement contains certain covenant restrictions. The fair
value of the note payable approximated carrying value.
Scheduled principal payment as of December 31, 1995 are set forth below.
<TABLE>
<CAPTION>
<S> <C>
1996 $ 1,000,000
1997 1,000,000
1998 1,000,000
</TABLE>
This Note was refinanced in October 1996 (see Note 11).
At December 31, 1994, the Company had a $2,200,000 bank note payable which
was refinanced in 1995.
FS-33
<PAGE>
FLUID MANAGEMENT, INC.
(Information Relating to the Nine Months Ended
September 30, 1996 and 1995 is Unaudited)
Notes to Financial Statements (Continued)
6. Commitments and Contingencies:
Operating Leases
The Company leases office and warehouse facilities under operating leases.
Rent expense was $255,000, $205,000, $355,000 and $87,000 for the years
ended December 31, 1995 and 1994 and for the nine month periods ended
September 31, 1996 and 1995, respectively. Under the terms of the leases,
the lessee is responsible for substantially all operating expenses. Minimum
future rental payments are set forth below.
<TABLE>
<CAPTION>
For the year ended
December 31,
------------------
<S> <C>
1996 $ 420,000
1997 398,000
1998 229,000
1999 223,000
2000 222,000
</TABLE>
Employment Agreements
The Company has employment agreements with the four shareholders of the
Company. These agreements terminate in June 1998 and provide for annual
salaries of $80,000 per shareholder. The agreements also provide for
increased salaries upon change in control by the Company.
The Company has an employment contract with an employee which provides for
an annual salary of $125,000 per year and a bonus based on certain pre-tax
profits. This agreement can be canceled upon written notice by the Company.
Bonus Plan
The Company has a bonus plan for substantially all employees which provides
for 10% of Company pre-tax profits to be distributed to employees.
Property and Equipment
At September 30, 1996, the Company had commitments totaling $242,000 for
computer software, hardware and related training.
FS-34
<PAGE>
FLUID MANAGEMENT, INC.
(Information Relating to the Nine Months Ended
September 30, 1996 and 1995 is Unaudited)
Notes to Financial Statements (Continued)
7. Self-Insured Health Benefits:
The Company self-insures health benefits for its employees and has obtained
an insurance policy that limits its exposure to the first $10,000 per
employee/family per year with an aggregate monthly limit. Health insurance
costs, including claims, stop-loss premiums and administration fees, were
$187,000, $120,000, $141,000 and $129,000 for the years ended December 31,
1995 and 1994 and for the nine month periods ended September 30, 1996 and
1995, respectively.
8. Salary Deferral Plan:
The Company has a 401(k) plan which provides for employee salary deferral
contributions as allowed by the Internal Revenue Code. Substantially all
employees are eligible to participate in this Plan. No Company contributions
have been made to this plan.
9. Stock Purchase Agreement:s:
The Company is a party to stock purchase agreements with each shareholder,
whereby, upon the death of a shareholder or at the option of a totally
disabled shareholder, the Company is required to purchase the shares of
common stock owned by the shareholder at fair market value, as determined by
the agreement. The Company owns term life insurance on each of the
shareholders to partially fund potential obligations related to a
shareholder's death.
10. Other Related Party Transactions:
The Company provides technical and administrative services to a Company with
common ownership. Amounts billed by the Company for such services amounted
to $26,600, $16,600, $36,100 and $15,000 for the years ended December 31,
1995 and 1994 and the nine month periods ended September 30, 1996 and 1995.
Accounts receivable amounted to $3,900 and $7,900 at December 31, 1995 and
September 30, 1996 relates to these services.
FS-35
<PAGE>
FLUID MANAGEMENT, INC.
(Information Relating to the Nine Months Ended
September 30, 1996 and 1995 is Unaudited)
Notes to Financial Statements (Continued)
11. Subsequent Events:
On October 1, 1996, the Company entered into two bank note payable
agreements for $3,000,000 and $1,000,000, respectively. The proceeds from
these bank notes were used to pay off the remaining balance of the
$3,000,000 note payable as of December 31, 1995 and distribute $2,800,000 to
the Shareholders. Such distribution was made in October 1996.
The $3,000,000 note payable is due in monthly principal installments of
$83,333 plus interest at 8.5%. The $1,000,000 note payable is due in one
lump sum payment on September 30, 1997, plus interest at 8.5%, and is
collateralized by $1,000,000 in certificates of deposit held by the Bank.
Both loan agreements contain certain covenant restrictions. The fair value
of the notes approximate their carrying values.
In January 1997, the Company entered into a Merger Agreement to merge with
and into Envirogen, Inc. The merger is subject to Envirogen, Inc. obtaining
satisfactory capital to finance the merger and the approval of the merger by
the shareholders of Envirogen.
FS-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ETG Environmental, Inc.:
We have audited the accompanying balance sheets of MWR, Inc. (a Michigan
corporation and a wholly owned subsidiary of ETG Environmental, Inc.) as of
December 30, 1995 and December 31, 1994, and the related statements of
operations, shareholder's deficit and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MWR, Inc. as of December 30,
1995 and December 31, 1994, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has incurred significant losses over the past several years and will require
additional funding if such losses continue. Such factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Philadelphia, Pa., Arthur Andersen LLP
April 20, 1996
FS-37
<PAGE>
MWR, INC.
---------
BALANCE SHEETS
--------------
(In thousands, except share data)
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Accounts receivable, net of reserve for
doubtful accounts of $46 in 1995 and
$148 in 1994 $ 1,511 $ 2,690
Prepaid expenses and other 66 87
----------- -----------
Total current assets 1,577 2,777
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and office equipment 274 273
Equipment 2,251 2,242
Leasehold improvements 11 10
----------- -----------
2,536 2,525
Less- Accumulated depreciation (2,008) (1,627)
----------- -----------
Net property and equipment 528 898
----------- -----------
INTANGIBLE ASSETS, net 250 316
----------- -----------
LONG-TERM RECEIVABLES 322 111
----------- -----------
$ 2,677 $ 4,102
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
LIABILITIES AND
SHAREHOLDER'S DEFICIT
---------------------
CURRENT LIABILITIES:
Current portion of capital lease obligation $ 14 $ 13
Bank overdraft 11 5
Accounts payable 520 576
Billings in excess of costs and
estimated earnings on uncompleted contracts 491 631
Other accrued expenses 81 288
----------- -----------
Total current liabilities 1,117 1,513
----------- -----------
CAPITAL LEASE OBLIGATION -- 14
----------- -----------
DUE TO ETG ENVIRONMENTAL, INC. AND
SUBSIDIARIES 3,958 4,357
----------- -----------
COMMITMENTS AND
CONTINGENCIES (Note 8)
SHAREHOLDER'S DEFICIT:
Preferred Stock--Series A, $100 par value,
200 shares authorized, 103 shares issued
and outstanding in 1995 and 1994 10 10
Common Stock, $1 par value, 50,000
shares authorized, 300 shares issued
and outstanding in 1995 and 1994 1 1
Additional paid-in capital 628 628
Accumulated deficit (3,037) (2,421)
----------- -----------
Total shareholder's deficit (2,398) (1,782)
----------- -----------
$ 2,677 $ 4,102
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
FS-38
<PAGE>
MWR, INC.
---------
STATEMENTS OF OPERATIONS
------------------------
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended
----------------------------
December 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
REVENUES $ 4,707 $ 6,759
COST OF REVENUES 3,885 5,450
------------ -----------
Gross profit 822 1,309
OPERATING EXPENSES:
Selling, general and administrative expenses 727 1,327
Corporate overhead expenses 416 431
Litigation expenses (150) 150
------------ -----------
Total operating expenses 993 1,908
------------ -----------
Operating loss (171) (599)
RELATED-PARTY INTEREST EXPENSE 409 428
INTEREST EXPENSE 6 6
------------ -----------
Loss before income taxes (586) (1,033)
INCOME TAX EXPENSE 30 13
------------ -----------
NET LOSS $ (616) $ (1,046)
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-39
<PAGE>
MWR, INC.
---------
STATEMENTS OF SHAREHOLDER'S DEFICIT
-----------------------------------
(In thousands)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Accumulated
Stock Stock Capital Deficit Total
--------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 25, 1993 $ 10 $ 1 $ 628 $ (1,375) $ (736)
Net loss -- -- -- (1,046) (1,046)
--------- ------ --------- --------- -------
BALANCE, DECEMBER 31, 1994 10 1 628 (2,421) (1,782)
Net loss -- -- -- (616) (616)
--------- ------ --------- --------- -------
BALANCE, DECEMBER 30, 1995 $ 10 $ 1 $ 628 $ (3,037) $(2,398)
========= ====== ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-40
<PAGE>
MWR, INC.
---------
STATEMENTS OF CASH FLOWS
------------------------
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended
---------------------------
December 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (616) $ (1,046)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Provision for doubtful accounts -- 48
Depreciation and amortization 490 494
Gain on sale of equipment (9) --
(Increase) decrease in assets-
Accounts receivable 1,179 21
Prepaid expenses and other assets 21 (14)
Long-term receivables (211) (111)
Increase (decrease) in liabilities-
Accounts payable (56) 75
Billings in excess of costs and estimated
earnings on uncompleted contracts (140) 139
Accrued expenses (207) 98
---------- ----------
Net cash provided by (used in)
operating activities 451 (296)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (61) (204)
Increase in patents (2) (9)
Proceeds from sale of equipment 18 --
---------- ----------
Net cash used in investing activities (45) (213)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (repayments) under due to ETG (399) 559
Group
Repayments of capital lease obligations (13) (12)
Increase (decrease) in bank overdraft 6 (38)
---------- ----------
Net cash (used in) provided by
financing activities (406) 509
---------- ----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS, -- --
BEGINNING OF YEAR
---------- ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ -- $ --
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-41
<PAGE>
MWR, INC.
---------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. BACKGROUND:
-----------
MWR, INC. ("MWR" or the "Company") specializes in integrated soil and
groundwater remediation services throughout the United States. The Company is a
wholly owned subsidiary of ETG Environmental, Inc. ("ETG" or the "Parent"). The
Company has numerous intercompany transactions with its Parent.
On February 9, 1996, all outstanding shares of the Company were sold to
Envirogen, Inc. (Envirogen) for $1,200,000 and 466,667 shares of Envirogen
common stock, subject to adjustment. Immediately prior to the acquisition by
Envirogen, the Parent contributed the intercompany payable from the Company to
the shareholder's equity of the Company.
These financial statements have been prepared by the Company at the request of
Envirogen (a publicly held NASDAQ company) for Form 8-K Securities and Exchange
Commission filing requirements.
The Company has incurred significant losses ($1,046,000 in 1994 and $616,000 in
1995) over the past several years and has a significant accumulated deficit as
of December 30, 1995. The Company will be required to obtain additional
financing to fund the Company's operations and to support future growth. To
date, the financing has been funded by ETG.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Fiscal Year
- -----------
The Company has a 52- or 53-week period ending on the last Saturday of the
calendar year. Fiscal year 1995 included 52 weeks and fiscal year 1994 included
53 weeks.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles 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 date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
FS-42
<PAGE>
Statement of Cash Flows
- -----------------------
For the purposes of determining cash flows, the Company considers all
investments purchased with original maturities of less than three months to be
cash equivalents. Cash paid for interest was $6,000 in both 1995 and 1994.
Cash paid for income taxes was $0 and $52,000 in 1995 and 1994, respectively.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Major additions or improvements are
capitalized while repairs and maintenance are charged to expense. Depreciation
is computed on a straight-line basis over three to ten years.
Intangible Assets
- -----------------
<TABLE>
<CAPTION>
As of
--------------------------------------
December 30, 1995 December 31, 1994
----------------- -----------------
Patents Goodwill Patents Goodwill
------- -------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
Original cost $ 646 $ 45 $ 644 $ 45
Accumulated amortization (416) (25) (352) (21)
----- ---- ----- ----
$ 230 $ 20 $ 292 $ 24
===== ==== ===== ====
</TABLE>
The cost of patents acquired is being amortized on a straight-line basis over 10
years. Amortization expense was $64,000 and $64,000 in 1995 and 1994,
respectively. Goodwill represents the excess of the purchase cost of net assets
acquired over their fair market value and is being amortized on a straight-line
basis over 10 years. Amortization expense was $4,000 in both 1995 and 1994.
Accrued Expenses
- ----------------
<TABLE>
<CAPTION>
As of
-------------------------
December 30, December 31,
1995 1994
------------ ------------
(in thousands)
<S> <C> <C>
Accrued payroll related $ 50 $ 95
Accrued litigation -- 150
Accrued other 31 43
----- -----
$ 81 $ 288
===== =====
</TABLE>
FS-43
<PAGE>
Revenue Recognition
- -------------------
Vapor extraction remediation contracts specifically identify two separate phases
for installation and extraction, and revenue is recognized separately for each
phase. During the installation phase, revenue is recognized by the percentage-
of-completion method, measured by the percentage of costs incurred to date to
estimated total costs for that phase of the contract. During the extraction
phase, revenue is recognized based on the fixed monthly fee established in the
contract.
Costs of revenues includes all direct material and labor costs and certain
indirect costs, such as indirect labor, supplies, tools, repairs and
depreciation costs. 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. Changes in job
performance, job conditions and estimated profitability, including those arising
from contract penalty provisions and final contract settlements, may result in
revisions to costs and revenues and are recognized in the period in which the
revisions are determined.
Concentration of Credit Risk
- ----------------------------
Financial instruments of the Company which are potentially subject to
concentration of credit risk are accounts receivable. The Company's customer
base is principally comprised of industrial-based companies within the United
States with requirements for soil and groundwater remediation services. The
Company does not require collateral from its customers.
3. ACCOUNTS RECEIVABLE:
--------------------
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
------------ ------------
(In thousands)
<S> <C> <C>
Billed, excluding retainage $1,116 $1,885
Retainage, due upon completion of
contracts 329 463
Unbilled 112 490
Less- Reserve for doubtful accounts (46) (148)
------ ------
$1,511 $2,690
====== ======
</TABLE>
The unbilled receivables primarily comprise revenues recognized on the
percentage-of-completion method for which billings have not been rendered. In
accordance with the contract terms, the retainage amounts at December 30, 1995,
are expected to be billed in 1996.
Included in long-term receivables as of December 30, 1995 is $231,000 of billed
receivables that are not expected to be collected until after December 31, 1996.
In addition, long term receivables as of December 30, 1995 includes $91,000 of
retainage that is not expected to be billed until after December 31, 1996.
FS-44
<PAGE>
4. CAPITAL LEASE OBLIGATION:
-------------------------
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
------------ ------------
(In thousands)
<S> <C> <C>
Capital lease obligation $ 14 $ 27
Less- Current portion (14) (13)
--------- ---------
$ -- $ 14
========= =========
</TABLE>
In June 1991, the Company entered into a capital lease for office equipment.
The lease term is five years and its implicit rate is approximately 11.4%. At
December 30, 1995 and December 31, 1994, the net book value of the equipment
under capital lease was $0 and $14,000, respectively. At December 30, 1995, the
aggregate remaining minimum lease payments were approximately $15,000 including
interest of $1,000.
5. RELATED-PARTY TRANSACTIONS:
---------------------------
The Company receives certain support services from the Parent including billing,
computer service, accounting, tax, legal, and other management services.
Charges for such services of $416,000 and $431,000 for 1995 and 1994,
respectively, are reflected in the statements of operations.
The Parent and its subsidiaries provide advances to the Company as needed to
fund working capital and other capital needs. The amounts advanced as of
December 30, 1995 and December 31, 1994 are $3,958,000 and $4,357,000,
respectively. Such advances have no stated contractual repayment terms. Based
upon the contribution by the Parent of the advance amount to shareholder's
deficit immediately prior to the sale, these advances have been classified as
long-term in the accompanying balance sheets. Interest is charged on the
advances at the rate of 10%. Interest expense on the advances was $409,000 and
$428,000 for 1995 and 1994, respectively.
Substantially all of the Company's assets have been pledged as collateral under
a bank line of credit and a bank equipment loan facility which the Parent has
used for financing. The outstanding balances under these financing arrangements
as of December 30, 1995, were $400,000 and $717,000, respectively.
6. INCOME TAXES:
-------------
The Company and its Parent have entered into an intercompany income tax sharing
arrangement whereby the Company is included in the consolidated federal and
state income tax returns filed by the Parent. The Company is required to file
separate tax returns in certain states. The income tax expense recorded in 1995
and 1994 represents the state income taxes which were payable to the states in
which the Company files separate tax returns. In accordance with the tax
sharing arrangement, the Company recorded no tax benefit associated with its
1995 or 1994 losses.
FS-45
<PAGE>
As of December 31, 1995, the Company had certain state net operating loss
carryforwards. Since realization of the tax benefits associated with the net
operating loss carryforwards is not assured, a valuation allowance of 100% of
the potential tax benefit is recorded as of December 30, 1995 and December 31,
1994.
7. LICENSING AGREEMENT:
--------------------
In November 1994, the Company entered into a licensing agreement which granted
an exclusive right to utilize the Company's licensed trademarks and technologies
in Japan. The Company received an initial fee of $100,000 and will receive an
annual fee equal to the greater of $60,000 or 3% of revenues derived from use of
the Company's technology through the year 2001. The fee will be reduced to the
greater of $50,000 or 2% of revenues derived from the Company's technology from
2002 through 2008.
8. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company has operating leases primarily for its office facilities. Rent
expense was $180,000 and $193,000 in 1995 and 1994, respectively. The future
minimum payments for all operating leases at December 30, 1995, are as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
1996 $168
1997 168
1998 126
</TABLE>
The Parent maintains a profit sharing plan which covers substantially all
employees of the Company. There were no profit sharing contributions made by
ETG or the Company in 1995 or 1994.
The Company and ETG are parties to a legal claim made by a former employee
against one of the Company's customers. Based on management's assessment of the
claim in 1994, a reserve of $150,000 was recorded in the Company's 1994
financial statements for this matter. During 1995, management has determined,
after consultation with legal counsel, that no reserve is necessary for this
claim. As a result, the $150,000 reserve was reversed in 1995. In the opinion
of management, the outcome of this claim will not have a material adverse effect
on the Company's financial position.
The Company is party to certain claims and litigation arising in the ordinary
course of business. In the opinion of management, the outcome of such claims
will not have a material adverse effect on the Company's financial position.
The Company has employment agreements with three individuals which require the
Company to pay contingent bonus amounts on an annual basis based on a total of
6% of the Company's gross profit, as defined, through the year 1998. These
amounts are paid semi-annually. Included in selling, general and administrative
expenses for 1995 and 1994 is $52,000 and $76,000, respectively, of contingent
bonus expense.
FS-46
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
------------------------------------------------------
(Unaudited)
----------
The following unaudited Pro Forma Condensed Consolidated Balance Sheet as
of September 30, 1996 and the unaudited Pro Forma Condensed Consolidated
Statements of Operations for the year ended December 31, 1995 and the nine
months ended September 30, 1996 are based on the historical financial statements
of Envirogen, Inc. ("Envirogen") and Fluid Management, Inc. ("FMI"), as adjusted
to give effect to the proposed merger (the "Merger") of FMI into Envirogen and
the proposed issuance and sale by Envirogen to Warburg, Pincus Ventures, L.P.
("Warburg") of 6,095,238 shares of Envirogen Common Stock (the "Warburg
Transaction"). See "Proposal 1. The Merger - The Merger Agreement" and
"Proposal 2. The Securities Purchase Agreement - The Warburg Transaction." The
Pro Forma Condensed Consolidated Statements of Operations have also been
adjusted for the acquisition of MWR, Inc. ("MWR") by Envirogen that closed on
February 9, 1996.
The Pro Forma Condensed Consolidated Balance Sheet has been prepared
assuming that the Merger and the Warburg Transaction occurred on September 30,
1996, and the Pro Forma Condensed Consolidated Statements of Operations , have
been prepared assuming the Merger, the Warburg Transaction and the acquisition
of MWR occurred on January 1, 1995. The related adjustments are described in
the notes thereto.
The Pro Forma Condensed Consolidated Financial Statements should be read in
conjunction with the historical financial statements of Envirogen, MWR and FMI
and the related notes thereto included in this Proxy Statement. The Pro Forma
Condensed Consolidated Financial Statements are based on certain assumptions and
preliminary estimates which are subject to change. The Pro Forma Condensed
Consolidated Financial Statements are not necessarily indicative of operating
results or financial position that would have been achieved had the Merger, the
Warburg Transaction and the acquisition of MWR been consummated on the
respective dates indicated and should not be construed as representative of
future operating results or financial position. In addition, the Pro Forma
Condensed Consolidated Financial Statements do not give effect to any matters
other than as described in the notes thereto.
FS-47
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Historical
------------------------------------------ Pro Forma Pro Forma
Envirogen MWR FMI Adjustments As Adjusted
----------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Commercial operations $5,971,278 $4,707,000 $21,306,444 $31,984,722
Research and development services 2,062,420 2,062,420
Provision for PECFA claims adjustments
and doubtful accounts (1,061,417) (1,061,417)
------------ ------------ ------------- -------------
Total revenues 8,033,698 4,707,000 20,245,027 32,985,725
------------ ------------ ------------- -------------
Cost of commercial operations 5,126,901 3,885,000 13,973,144 22,985,045
Research and development costs 2,459,580 2,459,580
Selling, general and administrative expenses 2,693,213 993,000 1,511,664 $280,000 (3) 6,718,454
1,087,777 (4)
152,800 (6)
------------ ------------ ------------- ------------- -------------
Total costs and expenses 10,279,694 4,878,000 15,484,808 1,520,577 32,163,079
------------ ------------ ------------- ------------- -------------
Other income (expense):
Interest income 201,130 24,520 225,650
Interest expense (31,158) (415,000) (159,633) 409,000 (7) (196,791)
Equity in earnings (loss) of joint ventures (93,437) 17,060 (76,377)
Other, net 16,961 16,961
------------ ------------ ------------- ------------- -------------
Other income (expense), net 93,496 (415,000) (118,053) 409,000 (30,557)
------------ ------------ ------------- ------------- -------------
Net income (loss) before income taxes (2,152,500) (586,000) 4,642,166 (1,111,577) 792,089
Income tax provision 30,000 643,939 (5) 673,939
------------ ------------ ------------- ------------- -------------
Net income (loss) (2,152,500) (616,000) 4,642,166 (1,755,516) 118,150
Preferred stock dividends (233,333) (233,333)
------------ ------------ ------------- ------------- -------------
Net income (loss) applicable to Common Stock ($2,385,833) ($616,000) $4,642,166 ($1,755,516) ($115,183)
============ ============ ============= ============= =============
Net income (loss) per share applicable to
Common Stock ($0.31) $116.05 ($0.00)
============ ============= =============
Weighted average number of shares of
Common Stock outstanding 7,669,639 40,000 15,445,716 (1,2) 23,155,355
============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these unaudited Pro Forma
Condensed Consolidated Financial Statements.
FS-48
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical
-------------------------------------- Pro Forma Pro Forma
Envirogen MWR (9) FMI Adjustments As Adjusted
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Commercial operations $7,621,681 $278,767 $14,735,901 $22,636,349
Research and development services 1,287,156 1,287,156
Provision for PECFA claim adjustments
and doubtful accounts (722,037) (722,037)
------------ ------------ ------------ -------------
Total revenues 8,908,837 278,767 14,013,864 23,201,468
------------ ------------ ------------ -------------
Cost of commercial operations 6,967,717 82,230 9,393,719 16,443,666
Provision for contract claim 550,000 550,000
Research and development costs 1,692,965 1,692,965
Selling, general and administrative expenses 2,060,923 174,585 1,432,252 $195,000 (3) 4,697,693
815,833 (4)
19,100 (6)
------------ ------------ ------------ ------------- -------------
Total costs and expenses 11,271,605 256,815 10,825,971 1,029,933 23,384,324
------------ ------------ ------------ ------------- -------------
Other income (expense):
Interest income 131,011 17,143 148,154
Interest expense (19,320) (606) (145,293) (165,219)
Equity in gain (loss) of joint venture 29,168 3,000 32,168
------------ ------------ ------------ ------------- -------------
Other income (expense), net 140,859 (606) (125,150) 0 15,103
------------ ------------ ------------ ------------- -------------
Net income (loss) before income taxes (2,221,909) 21,346 3,062,743 (1,029,933) (167,753)
Income tax provision 181,633 (5) 181,633
------------ ------------ ------------ ------------- -------------
Net income (loss) (2,221,909) 21,346 3,062,743 (1,211,565) (349,385)
Preferred stock dividends (36,458) (36,458)
------------ ------------ ------------ ------------- -------------
Net loss applicable to Common Stock ($2,258,367) $21,346 $3,062,743 ($1,211,565) ($385,843)
============ ============ ============ ============= =============
Net income (loss) per share applicable
to Common Stock ($0.21) $76.57 ($0.02)
============ ============ =============
Weighted average number of shares of
Common Stock outstanding 10,926,226 40,000 12,189,129 (1,2) 23,155,355
============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these unaudited Pro Forma
Condensed Consolidated Financial Statements.
FS-49
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical
------------- ----------- Pro Forma Pro Forma
Envirogen FMI Adjustments As Adjusted
------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,722,318 $827,756 $15,800,000 (1) $8,472,318
(11,627,756)(2)
(1,250,000)(8)
Accounts receivable, net 2,591,583 6,168,941 8,760,524
Unbilled revenue 1,742,181 1,742,181
Inventory 55,972 55,972
Prepaid expenses and other current assets 175,698 461,425 637,123
------------- ----------- -------------- ---------------
Total current assets 9,287,752 7,458,122 2,922,244 19,668,118
Property and equipment, net 1,243,785 863,930 2,107,715
Restricted cash 399,082 399,082
Long-term receivables 306,768 306,768
Investment in and advances to joint venture 310,731 66,706 377,437
Intangible assets, net 1,392,124 21,755,537 (2) 23,147,661
Other 118,371 118,371
------------- ----------- -------------- ---------------
Total assets $13,058,613 $8,388,758 $24,677,781 $46,125,152
============= =========== ============== ===============
LIABILITIES
Current liabilities:
Accounts payable $877,748 $2,589,506 3,467,254
Accrued expenses and other liabilities 1,183,170 701,898 1,885,068
Deferred revenue 416,363 416,363
Current portion of note payable 4,600 417,000 (417,000)(8) 4,600
Current portion of capital lease obligations 39,081 39,081
Reseve for PECFA claim adjustments 2,804,156 2,804,156
Dividends payable 170,977 170,977
------------- ----------- -------------- ---------------
Total current liabilities 2,520,962 6,683,537 (417,000) 8,787,499
Deferred rent 21,389 21,389
Note payable, net of current portion 803 833,000 (833,000)(8) 803
Capital lease obligations, net of current portion 34,955 34,955
------------- ----------- -------------- ---------------
Total liabilities 2,578,109 7,516,537 (1,250,000) 8,844,646
------------- ----------- -------------- ---------------
STOCKHOLDERS' EQUITY
Common stock 129,291 4,000 $60,952 (1) 232,148
41,905 (2)
(4,000)(2)
Additional paid-in capital 31,937,112 36,000 15,739,048 (1) 58,634,257
10,958,097 (2)
(36,000)(2)
Retained earning (deficit) (21,579,949) 832,221 (832,221)(2) (21,579,949)
Less: Treasury stock (5,950) (5,950)
------------- ----------- -------------- ---------------
Total stockholders' equity 10,480,504 872,221 25,927,781 37,280,506
------------- ----------- -------------- ---------------
Total liabilities and stockholders' equity $13,058,613 $8,388,758 $24,677,781 $46,125,152
============= =========== ============== ===============
</TABLE>
The accompanying notes are an integral part of these unaudited Pro Forma
Condensed Consolidated Financial Statements.
FS-50
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
---------------------------------------------------
FINANCIAL INFORMATION
---------------------
The unaudited Pro Forma Condensed Consolidated Financial Statements reflect
the Merger, the Warburg Transaction and the acquisition of MWR. The unaudited
Pro Forma Condensed Consolidated Financial Statements have been prepared using
the purchase method of accounting for both the FMI Merger and the acquisition of
MWR.
Note 1. Represents the issuance and sale to Warburg of 6,095,238 shares of
Envirogen Common Stock at $2.625 per share for net cash proceeds of
$15.8 million, after expenses estimated at $200,000.
Note 2. Represents the Merger of FMI into Envirogen, including the issuance by
Envirogen of 4,190,477 shares of Envirogen Common Stock valued at
approximately $11 million and the payment by Envirogen of
approximately $10.5 million of cash and estimated transaction expenses
of $1.1 million in connection therewith. The shares of Envirogen Common
Stock issuable in the Merger have been valued at $2.625 per share,
which represents the value of such Common Stock during a reasonable
period of time before and after the terms of the transaction were
agreed and announced, discounted to reflect the difference between the
shares traded in the public market and the shares issuable in the
Merger.The Merger will be accounted for under the purchase method of
accounting, and it has been assumed that the fair market value of the
assets and liabilities acquired are equal to their book value. The
Merger will result in goodwill of approximately $21.8 million which
will be amortized over 20 years.
Note 3. Represents increased compensation for current FMI executives upon
consummation of the Merger.
Note 4. Represents the amortization over 20 years of costs in excess of net
assets acquired as a result of the Merger.
Note 5. Represents the tax impact of the conversion of FMI to a C Corporation
from a S Corporation and the merger of FMI into Envirogen. The pro
forma tax calculation assumes no reduction in Envirogen's valuation
allowance as a result of the Merger. This tax calculation includes the
impact of the utilization of Envirogen's net operating loss
carryforward to offset a portion (due to IRS section 382 limitations)
of the Pro Forma tax liability and the tax impact of Pro Forma
adjustments on the tax rate for non-deductible items.
Note 6. Represents the amortization of intangible assets as a result of the
acquisition of MWR.
Note 7. Represents the elimination of historical intercompany interest charges
MWR incurred while a subsidiary of ETG Environmental, Inc.
Note 8. Represents the repayment in full of all indebtedness of FMI outstanding
at September 30, 1996. Pursuant to the Merger Agreement, all
outstanding indebtedness of FMI that is outstanding on the Closing Date
will be repaid in full. The amount of indebtedness of FMI expected to
be outstanding on the Closing Date is approximately $5 million.
Note 9. Represents the results of operations of MWR from January 1, 1996
through February 9, 1996.
FS-51
<PAGE>
Appendix A
AGREEMENT AND PLAN OF MERGER
among
ENVIROGEN, INC.,
FLUID MANAGEMENT, INC.
and
WILLIAM C. SMITH,
DOUGLAS W. JACOBSON,
GARY W. HAWK
and
RICHARD W. SCHOWENGERDT
Dated January 14, 1997
<PAGE>
INDEX
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<TABLE>
<CAPTION>
Page
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<S> <C>
SECTION 1. THE MERGER................................................................. 1
1.01 Merger; Surviving Corporation.............................................. 1
1.02 Certificate of Incorporation............................................... 1
1.03 By-Laws.................................................................... 2
1.04 Directors and Officers..................................................... 2
1.05 Effective Time............................................................. 2
1.06 Conversion of Company Shares............................................... 3
1.07 Exchange of Certificates................................................... 3
SECTION 2. THE MERGER CONSIDERATION................................................... 3
2.01 Merger Consideration....................................................... 3
2.02 Manner of Payment.......................................................... 4
2.03 Closing Certificate........................................................ 5
2.04 Closing Statement.......................................................... 5
2.05 Post-Closing Adjustment.................................................... 7
2.06 Anti-Dilution Provision.................................................... 7
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
STOCKHOLDERS...................................................................... 8
3.01 Organization and Good Standing............................................. 8
3.02 Power and Authorization.................................................... 8
3.03 No Conflicts............................................................... 9
3.04 Capitalization............................................................. 10
3.05 Company Investments and Subsidiaries....................................... 10
3.06 Compliance with Laws....................................................... 10
3.07 Litigation................................................................. 11
3.08 Financial Statements....................................................... 11
3.09 Accounts Receivable........................................................ 12
3.10 Product Design; Warranties................................................. 12
3.11 Real Property.............................................................. 12
3.12 Personal Property.......................................................... 13
3.13 List of Properties, Contracts, etc......................................... 13
3.14 Contracts.................................................................. 15
3.15 Insurance.................................................................. 15
3.16 Intellectual Property...................................................... 16
3.17 Customers and Suppliers.................................................... 17
3.18 Taxes...................................................................... 17
3.19 Employee Benefit Plans..................................................... 19
3.20 Labor Matters.............................................................. 21
3.21 Directors, Officers and Employees.......................................... 22
3.22 Affiliate Agreements....................................................... 22
3.23 Environmental Matters...................................................... 23
3.24 Absence of Certain Changes and Events...................................... 25
3.25 Books and Records.......................................................... 27
</TABLE>
i
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<TABLE>
<CAPTION>
Page
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<S> <C>
3.26 Brokers.................................................................... 27
3.27 Full Disclosure............................................................ 27
SECTION 4. REPRESENTATIONS AND WARRANTIES OF ENVIROGEN................................. 28
4.01 Organization and Good Standing............................................. 28
4.02 Power and Authorization.................................................... 28
4.03 No Conflicts............................................................... 28
4.04 Brokers.................................................................... 29
4.05 Capital Stock.............................................................. 29
4.06 Envirogen Reports.......................................................... 29
4.07 Information Included in Proxy Statement.................................... 30
4.08 Opinion of Financial Advisor............................................... 30
4.09 Vote Required.............................................................. 30
4.10 Securities Purchase Agreement.............................................. 30
SECTION 5. AGREEMENTS AND COVENANTS................................................... 31
5.01 Special Stockholders Meeting............................................... 31
5.02 Proxy Statement............................................................ 31
5.03 Further Action; Reasonable Best Efforts.................................... 32
5.04 Access to Information; Confidentiality..................................... 32
5.05 Public Announcements....................................................... 32
5.06 No Solicitation............................................................ 32
5.07 Notification of Certain Matters............................................ 33
5.08 Conduct of the Company's Business.......................................... 35
5.09 Conduct of Envirogen's Business............................................ 36
5.10 Sale of Shares of the Company.............................................. 37
5.11 Retirement of Certain Loans................................................ 37
5.12 Financial Information...................................................... 38
5.13 Adoption by Stockholders................................................... 38
5.14 Stock Options.............................................................. 38
5.15 Costs and Expenses......................................................... 38
5.16 Covenant Not-to-Compete.................................................... 39
5.17 Voting Agreement of Allen & Company Incorporated........................... 40
5.18 Repayment of Company Debt.................................................. 40
5.19 Envirogen Board Nominee.................................................... 40
5.20 Indemnification of the Company's Directors and Officers.................... 40
5.21 Post-Closing Operation of the Company...................................... 41
5.22 Continuation of PAC Plans.................................................. 41
5.23 Insurance Matters.......................................................... 41
SECTION 6. CONDITIONS................................................................. 41
6.01 Conditions Precedent to the Obligations of All Parties..................... 41
6.02 Additional Conditions Precedent to the Obligations of Envirogen............ 43
6.03 Additional Conditions Precedent to the Obligations of the Company
and Stockholders........................................................... 44
</TABLE>
ii
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<TABLE>
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<S> <C>
6.04 Waiver..................................................................... 45
SECTION 7. SECURITIES MATTERS......................................................... 45
7.01 Investment Representations and Covenants of Stockholders................... 45
7.02 Registration Rights Agreement.............................................. 47
SECTION 8. INDEMNIFICATION; ESCROW.................................................... 47
8.01 Indemnification............................................................ 47
8.02 Escrow..................................................................... 49
SECTION 9. TERMINATION................................................................ 51
9.01 Termination................................................................ 51
9.02 Effect of Termination...................................................... 51
SECTION 10. GENERAL PROVISIONS......................................................... 52
10.01 Amendment.................................................................. 52
10.02 Extension; Waiver.......................................................... 52
10.03 Notices.................................................................... 52
10.04 Assignment and Benefit..................................................... 54
10.05 Severability............................................................... 54
10.06 Other Remedies............................................................. 54
10.07 Further Assurances......................................................... 54
10.08 Governing Law.............................................................. 54
10.09 Section Headings and Defined Terms......................................... 54
10.10 Counterparts............................................................... 55
10.11 Entire Agreement........................................................... 55
10.12 Income Tax Position........................................................ 55
10.13 Enforcement Expenses....................................................... 55
10.14 Access to Records.......................................................... 55
</TABLE>
EXHIBITS
- --------
Exhibit 1.05(i) Form of Delaware Certificate of Merger
Exhibit 1.05(ii) Form of Wisconsin Articles of Merger
Exhibit 2.02(b) Form of Escrow Agreement
Exhibit 2.03 Form of Closing Certificate
Exhibit 5.17 Voting Agreement of Allen & Company Incorporated
Exhibit 6.01(i) Form of Employment Agreement between Envirogen and each
Stockholder
Exhibit 6.02(d) Matters to be opined upon by counsel to the Company and
the Stockholders
Exhibit 6.02(f) Form of Stockholder Release
Exhibit 6.02(i) Contracts, Plans and Agreements to be Terminated At or
Before Closing
Exhibit 6.03(b) Matters to be opined upon by counsel to Envirogen
Exhibit 6.03(c) Form of Registration Rights Agreement
SCHEDULES
- ---------
Disclosure Schedule of the Company and Stockholders
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement") made and entered into on
this 14th day of January, 1997 by and among Envirogen, Inc., a Delaware
corporation ("Envirogen"), Fluid Management, Inc., a Wisconsin corporation (the
"Company"), and William C. Smith, Douglas W. Jacobson, Gary W. Hawk and Richard
W. Schowengerdt, being all of the stockholders of the Company (individually, a
"Stockholder" and, collectively, the "Stockholders").
BACKGROUND
The parties desire that the Company merge with and into Envirogen upon the
terms and conditions set forth herein and in accordance with the laws of the
State of Delaware and the State of Wisconsin.
It is intended that the merger of the Company with and into Envirogen will
be a tax-free reorganization under Section 368(a)(1)(A) of the Internal Revenue
Code of 1986, as amended (the "Code").
NOW THEREFORE, in consideration of the mutual terms and conditions herein
contained, and intending to be legally bound, it is agreed between the parties
hereto as follows:
SECTION 1. THE MERGER
1.01 Merger; Surviving Corporation. In accordance with the provisions of
-----------------------------
this Agreement, the General Corporation Law of the State of Delaware ("DGCL")
and the Business Corporation Law of the State of Wisconsin ("WBCL"), at the
Effective Time (as such term is defined in Section 1.05 hereof), the Company
shall be merged with and into Envirogen (the "Merger"), and Envirogen shall be
the surviving corporation in the Merger (hereinafter sometimes called the
"Surviving Corporation") and shall continue its corporate existence under the
laws of the State of Delaware. At the Effective Time, the separate existence of
the Company shall cease. All properties, franchises and rights belonging to the
Company and Envirogen, by virtue of the Merger and without further act or deed,
shall be deemed to be vested in the Surviving Corporation, which shall
thenceforth be responsible for all the liabilities and obligations of each of
Envirogen and the Company.
1.02 Certificate of Incorporation. At the Effective Time, Article Fourth
----------------------------
of the Certificate of Incorporation of Envirogen, as in effect immediately prior
to the Effective Time, shall be amended and restated to read 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.
A-1
<PAGE>
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 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."
Except as provided herein, Envirogen's Certificate of Incorporation, as amended,
as in effect immediately prior to the Effective Time 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.
1.03 By-Laws. Envirogen's By-Laws, as amended, in effect immediately
-------
prior to the Effective Time shall be the By-Laws of the Surviving Corporation
until altered, amended or repealed as provided therein or by law.
1.04 Directors and Officers. The directors of Envirogen immediately prior
----------------------
to the Effective Time shall serve as directors of the Surviving Corporation
following the Effective Time in accordance with the Certificate of Incorporation
and By-laws of the Surviving Corporation and the DGCL, except that (i) Seymour
L. Meisel shall tender his resignation as a director, (ii) William C. Smith, the
designee of the Stockholders, shall be appointed by the Board of Directors of
Envirogen to fill the vacancy created thereby and (iii) Robert S. Hillas, the
designee of Warburg, Pincus Ventures, L.P., shall be appointed by the Board of
Directors of Envirogen to fill a previously existing vacancy, in each case
effective as of the Effective Time. The officers of Envirogen immediately prior
to the Effective Time shall serve in such capacities at the pleasure of the
Board of Directors of the Surviving Corporation following the Effective Time in
accordance with the Certificate of Incorporation and By-Laws of the Surviving
Corporation and the DGCL, except that William C. Smith shall be appointed by the
Board of Directors of Envirogen to serve as the Chairman of the Board, effective
as of the Effective Time.
1.05 Effective Time. The Merger shall become effective at the time and
--------------
date that the last of the following two events has occurred: (i) the acceptance
for filing of a certificate of merger (the "DGCL Certificate of Merger"), in
substantially the form attached hereto as Exhibit 1.05(i), by the Secretary of
State of the State of Delaware in accordance with the provisions of Section 252
of the DGCL; and (ii) the acceptance for filing of articles of merger (the "WBCL
Articles of Merger"), in substantially the form attached hereto as Exhibit
1.05(ii), by the Department of Financial Institutions of the State of Wisconsin
in accordance with Section 180.1107 of the WBCL. The DGCL Certificate of Merger
and the WBCL Articles of Merger shall be executed by Envirogen and the Company
and delivered to the Secretary of State of the State of Delaware and the
Department of Financial Institutions of the State of Wisconsin,
A-2
<PAGE>
respectively, for filing, as stated above, on the Closing Date provided for in
Section 1.07(b). The date and time when the Merger shall become effective are
referred to herein as the "Effective Time."
1.06 Conversion of Company Shares. All shares of common stock, $.10 par
----------------------------
value per share, of the Company ("Company Common Stock") issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holders thereof, be converted at the
Effective Time into the Merger Consideration (as defined in Section 2.01
hereof).
1.07 Exchange of Certificates; Closing. (a) At the Closing provided for
---------------------------------
in paragraph (b) below, immediately after the Effective Time of the Merger, the
Stockholders shall surrender to the Surviving Corporation all of the outstanding
certificates theretofore representing shares of Company Common Stock in exchange
for the Merger Consideration payable to the Stockholders at Closing as provided
for in Section 2. Until such certificates are surrendered, outstanding
certificates formerly representing shares of Company Common Stock shall be
deemed for all purposes as evidencing the right to receive the Merger
Consideration into which such shares have been converted as though said
surrender and exchange had taken place. In no event will a holder of shares of
Company Common Stock be entitled to interest on the Merger Consideration
issuable in respect of such shares.
(b) The closing of the transactions contemplated by this Agreement
(the "Closing") shall take place on the later of (a) the second business day
after the date on which Envirogen stockholder approval is obtained, as
contemplated by Section 5.01 hereof, or (b) the first business day after
satisfaction or waiver of the latest to occur of the conditions set forth in
Section 6 hereof (the "Closing Date"), at the offices of Drinker Biddle & Reath,
47 Hulfish Street, Princeton, New Jersey, or such other date and place as the
parties shall agree.
SECTION 2. THE MERGER CONSIDERATION
2.01 Merger Consideration. Subject to adjustment as herein provided, all
--------------------
of the issued and outstanding shares of Company Common Stock shall be converted
at the Effective Time of the Merger into (a) 4,190,477 shares of common stock,
par value $.01 per share, of Envirogen ("Envirogen Common Stock") and (b) cash
in an amount equal to (i) Eleven Million Dollars ($11,000,000), plus (ii) the
amount of all cash and cash equivalents of the Company on the Closing Date that
exceeds Fifty Thousand Dollars ($50,000), minus (iii) the amount by which all
cash and cash equivalents of the Company on the Closing Date is less than Fifty
Thousand Dollars ($50,000), minus (iv) the amount of all Company Debt (as
defined below) that is outstanding on the Closing Date; provided, however, that
-------- -------
in the event the Company's Estimated Adjusted Net Worth (as defined in Section
2.03(b) hereof) is less than Two Million Dollars ($2,000,000) (and, if less than
One Million Dollars ($1,000,000) and Envirogen in its sole and absolute
discretion waives the closing condition set forth in Section 6.02(c) hereof),
the amount of cash payable under this clause (b) shall be further reduced by the
amount by which the Company's Estimated Adjusted Net Worth is less than
$2,000,000 (the consideration referred to in clauses (a) and (b) above being
together referred to herein as the "Merger Consideration"). For purposes of
this Section 2, the term "Company Debt" shall mean the principal amount of all
A-3
<PAGE>
outstanding indebtedness of the Company for borrowed money on the Closing Date,
provided that such term shall exclude any outstanding indebtedness of the
Company for borrowed money on the Closing Date to the extent such money has been
used to distribute to the Stockholders Permitted Tax Dividends (as defined
below) or has been used by the Company to pay on or about March 15, 1997 amounts
of the Permitted Accrual (as defined in Section 2.03(c) hereof) which become
payable within 75 days of December 31, 1996 in accordance with the existing
terms and conditions of the Company's PAC Plans (as defined in Section 5.22
hereof) (such excluded debt being referred to herein as the "Permitted Debt").
For purposes of this Agreement, "Permitted Tax Dividends" shall mean
distributions of cash to the Stockholders in an amount equal to the
Stockholders' federal, state and local income taxes attributable to the
Company's Taxable Income (as defined below) for the year ended December 31,
1996, less amounts previously paid to the Stockholders in respect of such income
taxes. The parties hereto agree that Permitted Tax Dividends will equal in the
aggregate 46.875% of the Company's Taxable Income and that $2,188,000 of
Permitted Tax Dividends has already been distributed by the Company to the
Stockholders during the period commencing January 1, 1996 and ending on the date
of this Agreement and that $660,000 of Permitted Debt was incurred by the
Company in connection with the payment of such Permitted Tax Dividends. As used
in this Agreement, the term "Taxable Income" shall mean the Company's net income
plus the provision for unrealized sales, in each case as reflected on the
Company's audited statement of income for the year ended December 31, 1996, to
be delivered to Envirogen at Closing pursuant to Section 6.02(j) hereof.
2.02 Manner of Payment.
-----------------
(a) Upon presentation of the certificates representing the shares of
Company Common Stock owned by the Stockholders, Envirogen shall, subject to the
escrow provisions of paragraphs (b) and (c) below, make payment of the Merger
Consideration payable to the Stockholders. The Merger Consideration shall be
allocated among the Stockholders in proportion to the number of shares of
Company Common Stock owned by each Stockholder at the Effective Time of the
Merger. Subject to the escrow provisions of paragraphs (b) and (c) below, the
cash portion of the Merger Consideration payable to each Stockholder shall be
paid in immediately available U.S. dollars by wire transfer of funds to a bank
account designated by such Stockholder.
(b) At the Closing, Envirogen shall pay to the Escrow Agent (as
defined in Section 8.02 hereof) an aggregate amount of One Million One Hundred
Thousand Dollars ($1,100,000) of the cash portion of the Merger Consideration
(the "Escrow Money") to be held in an escrow account (the "Escrow Account")
pursuant to the provisions of Section 8.02 hereof and the Escrow Agreement
substantially in the form attached hereto as Exhibit 2.02(b) (the "Escrow
Agreement").
(c) At the Closing, immediately after the delivery to the
Stockholders of certificates for the shares of Envirogen Common Stock to be
issued in the Merger, the Stockholders shall deliver to the Escrow Agent a
certificate or certificates representing in the aggregate a total of 419,048 of
such shares (the "Escrow Shares"), duly endorsed in blank for transfer by the
Stockholders, to be held in escrow by the Escrow Agent pursuant to the
provisions of Section 8.02 hereof and the Escrow Agreement.
A-4
<PAGE>
2.03 Closing Certificate. On the Closing Date, the Company and the
-------------------
Stockholders shall deliver to Envirogen a certificate, in substantially the form
attached hereto as Exhibit 2.03, dated the Closing Date and signed by the
Stockholders and by the Company's President on behalf of the Company, as to the
matters set forth below, along with such records, documents and supporting
information that Envirogen may request with respect thereto:
(a) the amount of the Company's cash and cash equivalents on the
Closing Date;
(b) a good faith estimate of the amount of the Company's Adjusted
Net Worth (as defined in Section 2.04(b) hereof) ("Estimated Adjusted Net
Worth"), Company Debt (the "Estimated Company Debt"), Permitted Debt ("Estimated
Permitted Debt") and Permitted Reserve (as defined in Section 2.04(b) hereof)
("Estimated Permitted Reserve"), in each case on the Closing Date, and the
calculation thereof; and
(c) a good faith estimate of the accrual at December 31, 1996 for
unpaid bonuses for the years ended December 31, 1995 and 1996 under the
Company's PAC Plans (as defined in Section 5.22 hereof) ("Permitted Accrual")
and the outstanding balance, if any, of such Permitted Accrual on the Closing
Date, and the calculation thereof.
2.04 Closing Statement.
-----------------
(a) The Closing Statement. For purposes of determining actual
---------------------
Adjusted Net Worth, actual Company Debt, actual Permitted Debt and actual
Permitted Reserve, in each case on the Closing Date, and actual Permitted
Accrual on December 31, 1996, the Surviving Corporation shall prepare or cause
to be prepared promptly following the Closing, a balance sheet of the Company as
of the Closing Date and income statements of the Company for the year ended
December 31, 1996 and for the period commencing January 1, 1997 and ending on
the Closing Date. Such balance sheet and income statements shall be prepared in
accordance with GAAP. Such balance sheet and income statements prepared and
finally determined as provided in this Section 2.04 is referred to herein as the
"Closing Statement." Within 45 days following the Closing, the Surviving
Corporation shall deliver to the Stockholders a final draft of the Closing
Statement. All determinations of the Stockholders with respect to all matters
referred to in this Section 2.04 shall require the approval of all of the
Stockholders.
(b) Adjusted Net Worth. As used in this Agreement, "Adjusted Net
------------------
Worth" shall be that amount equal to the excess of all assets of the Company on
the Closing Date over all liabilities of the Company on the Closing Date, in
each case determined in accordance with United States generally accepted
accounting principles applied on a basis consistent with the accounting
principles used in preparing the Company's Audited Financial Statements
described in Section 3.08(a) hereof (such accounting principles are herein
referred to as "GAAP"), except that in the determination of Adjusted Net Worth
no effect will be given to (i) the Company Debt on the Closing Date, (ii) the
Permitted Debt on the Closing Date, (iii) the Permitted Accrual to the extent
outstanding on the Closing Date, (iv) the Permitted Reserve on the Closing Date
or (v) any accounting or other effect of the transactions described in this
Agreement, and except further that for purposes of calculating Adjusted Net
Worth only, the Company's cash and cash equivalents
A-5
<PAGE>
as of the Closing Date shall be deemed to equal $50,000. For purposes of this
Agreement, "Permitted Reserve" shall mean the Company's accrual for unrealized
sales on the Closing Date less 1.86% of all PECFA (as defined in Section 6.01(h)
hereof) draw requests subject to adjustment as of the Closing Date.
(c) Discussions. The Stockholders and Envirogen shall, throughout
-----------
the entire period from the date of this Agreement to the date of the deliveries
required by Sections 2.03 and 2.04(a) of this Agreement, meet and discuss any
and all financial and business matters relating to such process and the
preparation of the Closing Certificate and the Closing Statement. If the
Stockholders and Envirogen cannot resolve any disagreement between themselves
with respect to the Closing Statement, then the procedures described in Sections
2.04(d) and 2.04(e) of this Agreement shall be used. The Stockholders and their
auditors may observe the taking of the inventory in connection with the Closing
Statement and may review the work papers of Envirogen's auditors in connection
with the preparation of the Closing Statement.
(d) Objections.
----------
(i) If the Stockholders object to any matter on the Closing
Statement the Stockholders shall, within thirty (30) calendar days after the
date of the Closing Statement, notify Envirogen of such objection and specify
the grounds for such objection.
(ii) If Envirogen does not agree with the objection of the
Stockholders, Envirogen shall, within thirty (30) calendar days after receipt of
such objection, notify the Stockholders of such fact.
(e) Independent Accountants. Any disagreement between the
-----------------------
Stockholders and Envirogen with respect to any matter on the Closing Statement
shall be submitted by either the Stockholders or Envirogen for resolution to
Price Waterhouse LLP (the "Independent Accountants"). Each of the parties shall
furnish, at its own expense, the Independent Accountants and the other parties
hereto with such documents and other written information as the Independent
Accountants may request. Each party may also furnish to the Independent
Accountants such other written information and documents as it deems relevant,
with appropriate copies or notification being given to the other parties hereto.
The Independent Accountants may, at their discretion, conduct a conference
concerning the disagreement between the Stockholders and Envirogen, at which
conference each party shall have the right to present such additional documents,
materials and other information and to have present such advisors, counsel and
accountants as each party shall choose in its sole discretion. In connection
with such process, there shall be no hearings, oral examinations, testimony,
depositions, discovery or other similar proceedings conducted by any party or by
the Independent Accountants. The determination of the Independent Accountants
shall be final and binding. The Independent Accountants shall determine the
proportion of their fees and expenses to be paid by the Stockholders and by
Envirogen, the greater the degree to which the Independent Accountants have
accepted the position of a party, the smaller the proportion of fees and
expenses assessed against that party.
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<PAGE>
2.05 Post-Closing Adjustment.
-----------------------
(a) Post-Closing adjustments to the Merger Consideration shall be
made in the following manner:
(i) In the event Estimated Adjusted Net Worth equals or
exceeds $2,000,000 and the actual Adjusted Net Worth of the Company is less than
$2,000,000, then the Stockholders shall pay to the Surviving Corporation an
amount equal to the difference between $2,000,000 and the amount of the actual
Adjusted Net Worth of the Company;
(ii) In the event Estimated Adjusted Net Worth is less than
$2,000,000 (and the appropriate adjustment to the Merger Consideration is
accordingly made pursuant to Section 2.01 hereof) and the actual Adjusted Net
Worth of the Company is less than such Estimated Adjusted Net Worth, then the
Stockholders shall pay to the Surviving Corporation an amount equal to such
deficiency;
(iii) In the event Estimated Adjusted Net Worth is less than
$2,000,000 (and the appropriate adjustment to the Merger Consideration is
accordingly made pursuant to Section 2.01 hereof) and the actual Adjusted Net
Worth of the Company is greater than such Estimated Adjusted Net Worth, then the
Surviving Corporation shall pay to the Stockholders an amount equal to the
difference between (A) the lesser of $2,000,000 and the actual Adjusted Net
Worth of the Company as reflected on the Closing Statement and (B) the Estimated
Adjusted Net Worth of the Company;
(iv) In the event Estimated Company Debt is less than actual
Company Debt, then the Stockholders shall pay to the Surviving Corporation an
amount equal to any such deficiency; and
(v) In the event Estimated Company Debt is greater than
actual Company Debt, then the Surviving Corporation shall pay to the
Stockholders an amount equal to any such excess.
(b) Any amounts payable by the Stockholders to the Surviving
Corporation pursuant to this Section 2.05 shall be made first from the Escrow
Account in accordance with the terms set forth in Section 8.02 hereof and then,
if necessary, by the Stockholders by certified check or wire transfer of
immediately available funds to an account designated by the Surviving
Corporation. Any amounts payable by the Surviving Corporation to the
Stockholders shall be made by certified check or wire transfer of immediately
available funds to an account or accounts designated by the Stockholders.
2.06 Anti-Dilution Provision. In the event that, between the date of this
-----------------------
Agreement and the Effective Time, the issued and outstanding shares of Envirogen
Common Stock shall have been changed into a different number of shares as the
result of a stock split, reverse stock split, stock dividend, recapitalization,
reclassification or other similar transaction, then the number of shares of
Envirogen Common Stock set forth in Section 2.01(a) and the number of Escrow
Shares set forth in Section 2.02(c) shall be adjusted appropriately.
A-7
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND STOCKHOLDERS
Certain information relating to the representations and warranties of the
Company and the Stockholders is set forth in a Disclosure Schedule hereto (the
"Disclosure Schedule") prepared by the Company and the Stockholders and
delivered to Envirogen pursuant to this Agreement as of the date hereof. The
disclosures in the Disclosure Schedule shall relate only to the representations
and warranties to which they expressly refer and shall be deemed to be
representations and warranties as if made hereunder. In the event of any
inconsistency between the statements made in the body of this Agreement and
those contained in the Disclosure Schedule (other than a disclosure in the
Disclosure Schedule which expressly relates to a specifically identified
representation and warranty), those in this Agreement shall control. All
capitalized terms used in the Disclosure Schedule have the definitions specified
in this Agreement. Disclosure of a matter or document in the Disclosure
Schedule shall not be deemed to be an acknowledgement that such matter is
material or outside the ordinary course of business of the Company. The Company
and the Stockholders may supplement the Disclosure Schedule from time to time
subject to and in accordance with Section 5.07(c) of this Agreement, and from
and after any such supplement the term "Disclosure Schedule" as used in this
Agreement shall mean the Disclosure Schedule as so supplemented.
The Company and each Stockholder (provided that in the case of a reference
in this Section 3 to the business, affairs or status of a Stockholder, such
Stockholder shall be deemed to make such representation solely with respect to
himself) represent and warrant to Envirogen as follows:
3.01 Organization and Good Standing. The Company is a corporation duly
------------------------------
organized, validly existing and in active status (meaning it has filed the
required Domestic Corporation Annual Reports with the Wisconsin Department of
Financial Institutions and has not filed Articles of Dissolution) under the laws
of the State of Wisconsin and has all necessary corporate power and authority to
carry on its business, to own and lease the assets that it owns and leases and
to perform all its obligations. The Company is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each
jurisdiction identified in the Disclosure Schedule, which includes each
jurisdiction in which its ownership or leasing of assets or properties or the
nature of its activities requires such qualification.
3.02 Power and Authorization. The Company has full legal right, power and
-----------------------
authority to enter into and perform its obligations under this Agreement and
under the other agreements and documents (the "Company Transaction Documents")
required to be delivered by it prior to or at the Closing. The execution,
delivery and performance by the Company of this Agreement and the Company
Transaction Documents have been duly authorized by the Board of Directors of the
Company and approved by the Stockholders, and no other corporate proceedings on
the part of the Company are necessary to authorize this Agreement or the Company
Transaction Documents. Each Stockholder has full power, authority and capacity
to execute, deliver and perform this Agreement and the other agreements and
documents (the "Stockholder Transaction Documents") required to be delivered by
such Stockholder prior to or at the Closing. This Agreement has been duly and
validly executed and delivered by the Company and each Stockholder and
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constitutes the Company's and each Stockholder's legal, valid and binding
obligation, enforceable against the Company and each Stockholder in accordance
with its terms, and when executed and delivered as contemplated herein, each of
the Company Transaction Documents and the Stockholder Transaction Documents
shall constitute the legal, valid and binding obligation of the Company and each
Stockholder, respectively, enforceable against the Company and each Stockholder
in accordance with its terms, except as such enforceability of this Agreement or
any Company Transaction Document or any Stockholder Transaction Document may be
limited by bankruptcy, insolvency, moratorium, reorganization or other similar
laws relating to or affecting the enforcement of creditors' rights generally,
and except that the availability of specific performance, injunctive relief or
other equitable remedies is subject to the discretion of the court before which
any such proceeding therefor may be brought.
3.03 No Conflicts.
------------
(a) Except as described in the Disclosure Schedule, the execution,
delivery and performance of this Agreement, the Company Transaction Documents
and the Stockholder Transaction Documents do not and will not (with or without
the passage of time or the giving of notice):
(i) violate or conflict with any provision of the certificate
or articles of incorporation or bylaws of the Company or of any law, statute,
regulation, Permit (as defined in Section 3.06(b) hereof), license, certificate,
judgment, order, award or other decision or requirement of any arbitrator,
court, government or governmental agency or instrumentality (each, a "Law" and
collectively, "Laws") binding upon the Company or any Stockholder;
(ii) violate or conflict with, result in a breach of, or
constitute a default or otherwise cause any loss of benefit under any agreement
or other obligation to which the Company or any Stockholder is a party or by
which the Company or its assets are bound, or give to others any rights
(including rights of termination, foreclosure, cancellation or acceleration) in
or with respect to the Company or any Stockholder or any of the assets of
either; or
(iii) result in, require or permit the creation or imposition
of any restriction, mortgage, deed of trust, pledge, lien, security interest or
other charge, claim or encumbrance of any nature upon or with respect to the
Company Common Stock, the Company or any of its assets.
(b) There are no judicial, administrative or other governmental
actions, proceedings or investigations pending or, to the knowledge of the
Company or any Stockholder, threatened, that question any of the transactions
contemplated by this Agreement or the validity of this Agreement or any of the
other agreements or instruments contemplated hereby or which, if adversely
determined, would have an adverse effect upon the Company's or any Stockholder's
ability to enter into or perform its obligations under this Agreement or any of
the other agreements or instruments contemplated hereby. Neither the Company
nor any Stockholder has received any request from any governmental agency or
instrumentality for information with respect to the transactions contemplated
hereby.
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3.04 Capitalization. The Company's authorized, issued and outstanding
--------------
capital stock and its other securities are fully and accurately described in the
Disclosure Schedule. The Stockholders own all of the issued and outstanding
shares of Company Common Stock, beneficially and of record, and no other person
has any rights, title or interest, whether legal or equitable, in said shares.
No person has any preemptive or other rights with respect to any such capital
stock or securities and there are no offers, options, warrants, rights,
agreements or commitments of any kind (contingent or otherwise) relating to the
issuance, conversion, registration, sale or transfer of any equity interests or
other securities of the Company or obligating the Company or any other person to
purchase or redeem any such equity interests or other securities. All of the
issued and outstanding shares of Company Common Stock have been duly authorized
and are validly issued and outstanding, fully paid and (except as otherwise
provided by Section 180.622(2)(b) of the WBCL, including judicial
interpretations of such Section and of its predecessor statute, Section
180.40(6) of the WBCL) nonassessable, and have been issued in compliance with
applicable securities and other Laws.
3.05 Company Investments and Subsidiaries. Except as disclosed on the
------------------------------------
Disclosure Schedule, the Company does not own, control or have any investment or
other interest in any corporation, partnership, joint venture, business trust or
other entity, and the Company has not agreed, contingently or otherwise, to
share any profits, losses, costs or liabilities, or to indemnify any person or
entity or to guaranty the obligations of any person or entity.
3.06 Compliance with Laws.
--------------------
(a) Except as described in the Disclosure Schedule, the Company is,
and at all times has been, in compliance with all applicable Laws, except where
noncompliance would not have a material adverse effect on the business,
properties, profits, prospects or condition (financial or otherwise) of the
Company (a "Material Adverse Effect"), and the Company does not have any basis
to expect, and has not received any notice, order or other communication from
any governmental agency or instrumentality of, any alleged, actual, or potential
violation or failure to comply with any Law. There are no unsatisfied
judgments, penalties or awards against or affecting the Company or any of its
businesses, properties or assets.
(b) All federal, foreign, state, local and other governmental
consents, licenses, permits, franchises, grants and authorizations required to
be obtained and held by the Company for the operation of its business as
currently conducted and as conducted since December 31, 1993 (collectively,
"Permits") are, except as otherwise described in the Disclosure Schedule, in
full force and effect without any default or violation thereunder by the Company
or, to the knowledge of the Company, by any other party thereto (except where
the failure to have such a Permit in full force and effect or where any default
or violation thereunder would not have a Material Adverse Effect), and the
Company has not received any notice of any claim or charge that the Company is
or had been in violation of or in default under any such Permit. Except as
described in the Disclosure Schedule: (i) no proceeding is pending or, to the
knowledge of the Company, threatened by any person to revoke or deny the renewal
of any Permit of the Company; and (ii) the Company has not been notified that
any such Permit may not in the ordinary course be renewed upon its expiration or
that by virtue of the transactions contemplated hereby any such Permit may not
be granted or renewed.
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3.07 Litigation. Except as described in the Disclosure Schedule or the
----------
Financial Statements (as defined in Section 3.08 hereof), there are no, and
since the date of the Interim Balance Sheet (as defined in Section 3.08 hereof)
there have not been any, claims, actions, suits, proceedings (arbitration or
otherwise) or investigations involving or affecting the Company, its businesses
or assets, or its directors, officers or shareholders in their capacities as
such, before or by any court or governmental agency or instrumentality, or
before an arbitrator of any kind. Any description set forth on the Disclosure
Schedule pursuant to this Section 3.07 with respect to any such claims, actions,
suits, proceedings or investigations shall include, to the extent applicable,
the name of the court or agency in which the proceedings are pending, the date
instituted, the principal parties thereto, a description of the factual basis
alleged to underlie the proceeding and the relief sought. To the knowledge of
the Stockholders and the Company, (a) no such claims, actions, suits,
proceedings or investigations are presently threatened or contemplated and (b)
there are no facts that could reasonably serve as a basis for any such claim,
action, suit, proceeding or investigation.
3.08 Financial Statements.
--------------------
(a) The Disclosure Schedule contains: (i) the balance sheet of the
Company as at December 31, 1995 (including the notes thereto, the "Balance
Sheet"), and the related statements of income, changes in stockholders' equity
and cash flow for the fiscal year then ended, together with the report thereon
of Vrakas, Blum & Co., S.C., independent certified public accountants (the
"Audited Financial Statements"); (ii) the unaudited balance sheets of the
Company as of December 31, 1993 and 1994, and the related unaudited statements
of income, changes in stockholders' equity and cash flow for each of the fiscal
years then ended; and (iii) an unaudited balance sheet of the Company as at
September 30, 1996 (including the notes thereto, the "Interim Balance Sheet")
and the related unaudited statements of income, changes in stockholders' equity
and cash flow for the nine months then ended, together with the corresponding
unaudited financial statements as of and for the corresponding period of the
preceding fiscal year, including in each case all notes thereto (the financial
statements referred to in this clause (iii) being referred to collectively as
the "Interim Financial Statements" and the financial statements referred to in
clauses (i), (ii) and (iii) above being referred to collectively as the
"Financial Statements"). The Financial Statements and notes accurately and
fairly reflect the books and records of the Company and fairly present the
financial condition, cash flow and results of operations of the Company as at
the respective dates thereof and for the periods therein referred to, all in
accordance with generally accepted United States accounting principles,
consistently applied ("GAAP"), subject, in the case of the Interim Financial
Statements, to normal recurring year-end adjustments (the effect of which will
not, individually or in the aggregate, be material) and the absence of notes
(which, if presented, would not differ materially from those included in the
Audited Financial Statements).
(b) The Balance Sheet and the Interim Balance Sheet reflect all
liabilities of the Company, whether absolute, accrued or contingent, as of the
respective dates thereof of the type required to be reflected or disclosed in a
balance sheet (or the notes thereto) prepared in accordance with GAAP. The
Company does not have any liabilities of any nature that are not reflected on
the Interim Balance Sheet except for liabilities disclosed on the Disclosure
Schedule and for current liabilities (within the meaning of GAAP) that have been
incurred since the date
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thereof in the ordinary course of business consistent in nature and amount with
past practice and that are not inconsistent with any of the representations and
warranties contained herein, and, to the knowledge of the Company and the
Stockholders, there is no basis for the assertion against the Company of any
liability (other than current liabilities referred to above) not fully reflected
or reserved against in the Interim Balance Sheet.
(c) The Balance Sheet and the Interim Balance Sheet reflect reserves
or other appropriate provisions at least equal to reasonably anticipated
liabilities, losses and expenses of the Company as of the respective dates
thereof, including those with respect to income and other taxes (including
alternative minimum tax), warranty claims, bad debts, unsalable inventories,
vacation pay, and plans and programs for the benefit of present and former
employees (including, without limitation, plans and programs relating to medical
coverage for employees).
3.09 Accounts Receivable. All accounts and notes receivable of the
-------------------
Company represent valid obligations from sales made or services rendered in the
ordinary course of business and in the aggregate have been or will be collected
in full in the ordinary course of business, without any set-off or discount,
except to the extent of any reserves for possible losses set forth on the
Interim Balance Sheet and any adjustments made to such reserve by the Company
after the date of the Interim Balance Sheet in accordance with the Company's
policies and in a manner consistent with past practices. The Disclosure
Schedule includes a correct and complete accounts and notes receivable aging of
the Company as of the date of the Interim Balance Sheet, reflecting the
designated and undesignated reserves for possible losses as of such date and the
aggregate dollar amount of all accounts and notes receivable due the Company
that have been outstanding for: 60 days or less; more than 60 but less than 90
days; more than 90 but less than 120 days; more than 120 but less than 150 days;
and more than 150 days.
3.10 Product Design; Warranties. Except as described in the Disclosure
--------------------------
Schedule: (a) the Company has not expressly agreed to become responsible for
consequential damages or made any express warranties to third parties with
respect to any products created, manufactured, sold, distributed or licensed, or
any services rendered, by the Company; (b) to the knowledge of the Company and
the Stockholders, there are no implied warranties outstanding with respect to
any such products or services other than any such implied pursuant to Sections
2-312 and 2-314 of the Uniform Commercial Code; and (c) there are no design,
manufacturing or other defects, latent or otherwise, with respect to any such
products.
3.11 Real Property. The Disclosure Schedule identifies each interest in
-------------
real property leased by the Company, including a listing of all leases and other
agreements under which any such property is held. The Company does not own or
have any other interest in real property other than pursuant to the leases
referred to above. The Company owns all right, title and interest in all
leasehold estates and other rights purported to be granted to them by the leases
and other agreements listed in the Disclosure Schedule, in each case free and
clear of any restriction, mortgage, deed of trust, pledge, lien, security
interest or other charge, claim or encumbrance of any nature except for liens
and restrictions described in said Schedule. All of the buildings and
structures constituting the premises leased by the Company are structurally
sound with no known defects, are in good operating condition and repair
(ordinary wear and tear excepted) and are suitable for the purposes for which
they are being used. No such building or structure, or any
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<PAGE>
appurtenance thereto or equipment therein, or the operation or maintenance
thereof by the Company, violates any restrictive covenant or any provision of
any Law (including without limitation any such relating to health and safety or
zoning), which violation interferes with the use of such building, structure or
appurtenance, or encroaches on any property owned by others. No condemnation
proceeding is pending or, to the knowledge of the Company or the Stockholders,
threatened with respect to any real property identified in the Disclosure
Schedule.
3.12 Personal Property. Except as described in the Disclosure Schedule:
-----------------
(a) the Company has good and marketable title to all of its properties and
assets (other than real property) free and clear of any restriction, mortgage,
deed of trust, pledge, lien, security interest or other charge, claim or
encumbrance of any nature; and (b) all properties and assets owned or leased by
the Company are in the possession or under the control of the Company and are in
good condition and repair, ordinary wear and tear excepted, are suitable for the
purposes for which they are being used, and are of a condition, nature and
quantity sufficient for the conduct of the Company's business as it is presently
conducted.
3.13 List of Properties, Contracts, etc. The Disclosure Schedule contains,
----------------------------------
lists or adequately describes the following:
(a) each vehicle, item of machinery, equipment and other tangible
asset (other than real property) carried as an asset on the records of the
Company with a fair market or book value in excess of $5,000 in respect of any
item, and the location thereof;
(b) each vehicle, item of machinery, equipment and other tangible
asset (other than real property) leased to or by the Company under agreement
providing for annualized payments of more than $5,000, together with the
location of such asset, the identities of the lessor and lessee, the annual
rental and unexpired term of the lease;
(c) each Permit;
(d) each (i) fictitious business name, tradename, registered and
unregistered trademark, service mark and related application (together with the
name Fluid Management, Inc., "Marks"), (ii) patent, patent right and patent
application (collectively, "Patents"), (iii) copyright in published and material
unpublished works ("Copyrights"), computer program and software ("Software"),
(iv) proprietary formula, trade secret, formulation and unpatented invention
("Trade Secrets") and (v) licenses and permits issued or granted by any person
relating to any of the foregoing (the items referred to in clauses (i)-(iv)
above are collectively referred to herein as ("Intellectual Property"); in each
case owned, leased, used or held by, granted to or licensed by the Company as
licensor or licensee (excluding non-critical, off-the-shelf application software
licensed by the Company and software imbedded in machinery or equipment, which
software is owned or used by the Company and is licensed for use by the Company
in conjunction with its ownership or use of said equipment or machinery),
together with all other interests therein granted by the Company to any other
person and all agreements with respect to any of the foregoing to which the
Company is a party (including secrecy and non-disclosure agreements with current
or former employees, consultants or contractors);
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(e) each agreement or commitment that restricts or purports to
restrict the Company's business activities or the freedom of the Company to
engage in any business or to compete with any person;
(f) each outstanding loan or advance (excluding advances for
ordinary and necessary business expenses, receivables generated in connection
with the Company's bona fide sales of products and services, and prepaids, in
each case made or generated by the Company in the ordinary course of business
consistent with past practices) by the Company to any person (including any
Stockholder and any director, officer, or employee of the Company);
(g) each contract, agreement, purchase order or other commitment
(whether or not in writing) involving the performance of services or delivery of
goods or materials by or to the Company (i) outside of the continental United
States of America, (ii) of an aggregate amount or value in excess of $50,000 in
any 12-month period or (iii) which is not terminable by the Company without
payment of penalty or premium on 30 days notice or less;
(h) each capital project currently undertaken or which has been
approved by the Company;
(i) each evidence of indebtedness, note, advance, guaranty or letter
of credit entered into, issued or to be issued, contingently or otherwise, by,
to or from the Company, and all loan and other agreements relating thereto;
(j) each restriction, deed of trust, pledge, lien, security interest
or other charge, claim and encumbrance of any nature relating to or affecting
any of the assets or properties of the Company;
(k) each contract, agreement or commitment to which the Company is a
party or is otherwise bound providing for payments to or by any person or entity
based on sales, purchases or profits, other than direct payments for goods, and
each other agreement to which the Company is a party or is otherwise bound that
is material to its business, operation, financial condition or prospects;
(l) each policy and binder of insurance (including without
limitation, property, casualty, liability, life, health, accident, workers'
compensation and disability insurance and bonding arrangements) owned by, or
maintained for the benefit of, or the premiums for which are paid directly or
indirectly in whole or in part by, the Company;
(m) each form of contract, agreement or commitment used by the
Company as a standard form in the ordinary course of business;
(n) each outstanding power-of-attorney or similar power granted by
the Company for any purpose whatsoever; and
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<PAGE>
(o) each bank or other financial institution in which the Company
has a deposit account, line of credit or safe deposit box, the relevant account
or other identifying number, and the names of all persons authorized to act or
deal in connection therewith.
The Company has furnished and will furnish or make available to Envirogen
true and complete copies of each agreement, plan and other document required to
be disclosed on the Disclosure Schedule.
3.14 Contracts. Each of the contracts, agreements and commitments to
---------
which the Company is a party or by which it or its assets are bound was made in
the ordinary course of business and is in full force and effect and is valid,
binding and enforceable in accordance with its terms against the Company and, to
the knowledge of the Company and the Stockholders, the other parties thereto.
Except as described in the Disclosure Schedule, the Company has performed all
obligations required to be performed by it under each such contract, agreement
and commitment through the date hereof, and no condition exists or event has
occurred that with notice or lapse of time would constitute a material default
or a basis for delay or nonperformance by the Company or by any other party to
any such contract, agreement or commitment, except where such failure in
performance or condition would not have a Material Adverse Effect. The Company
is not a party to any contract or commitment upon which, upon completion, it is
likely to recognize a material loss on its books and records. Except as
described in the Disclosure Schedule, each other party to each such contract,
commitment and agreement has consented or been given sufficient notice (when
such consent or notice is necessary) that the same shall remain in full force
and effect following the Closing.
3.15 Insurance.
---------
(a) The summary of the policies and binders of insurance contained
in the Disclosure Schedule identifies, among other things: (i) the respective
issuers and expiration dates thereof; (ii) deductible amounts and amounts of
coverage available and outstanding thereunder; (iii) whether such policies and
binders are "claims made" or "occurrences" policies; and (iv) any retrospective
premium adjustments. Such policies and binders are sufficient for compliance
with all requirements of Laws and all agreements to which the Company is a party
or by which it or its assets are bound, are valid and enforceable policies and
will not be affected by, terminate or lapse prior to the Closing by reason of
the transactions contemplated by this Agreement.
(b) The Company has not received (i) any notice of cancellation of
any policy or binder of insurance required to be identified in the Disclosure
Schedule or refusal of coverage thereunder; (ii) any notice that any issuer of
such policy or binder has filed for protection under applicable bankruptcy or
insolvency laws or is otherwise in the process of liquidating or has been
liquidated; or (iii) any other indication that any such policy or binder may no
longer be in full force or effect or that the issuer of any such policy or
binder may no longer be willing or able to perform its obligations thereunder.
The Company has never been refused any insurance nor has its coverage been
limited.
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3.16 Intellectual Property.
---------------------
(a) Except as otherwise described in the Disclosure Schedule: (i)
the Company is the sole owner or has the right to use all Intellectual Property
in the manner presently used by the Company, free and clear of any lien,
security interest, restriction, encumbrance or other adverse claim; (ii) the
Intellectual Property is sufficient for the conduct of the businesses of the
Company as such has been conducted since its inception and as it is presently
conducted; and (iii) the rights of the Company in and to all of the Intellectual
Property will not be limited or otherwise affected by virtue of the transactions
contemplated hereby.
(b) The Disclosure Schedule identifies, with respect to any
Intellectual Property not owned exclusively by the Company and the
unavailability to the Company of which would have a Material Adverse Effect, the
owner thereof or of any interest therein, principal terms of the license or
other agreement relating to such Intellectual Property, including the unexpired
term of such agreement, the consideration therefor, if any, and any limitations
upon the Company's use thereof.
(c) Except as described in the Disclosure Schedule, the Company is
not obligated, contingently or otherwise, to: (i) develop, update, distribute or
service any Software or other Intellectual Property; or (ii) pay royalties or
license or similar fees in excess of $25,000 per year, individually or in the
aggregate, to any person with respect to any Software or other Intellectual
Property now used by the Company or which is proposed to be used by the Company.
(d) All employees of the Company involved with the development,
implementation or marketing of any Intellectual Property have entered into
written agreements assigning to the Company all rights to inventions,
improvements, discoveries or information relating thereto.
(e) All of the Marks, Copyrights and Patents owned by the Company
have been duly registered. All of the Marks, Copyrights and Patents owned by
the Company are in compliance with all applicable legal requirements (including
payment of filing, examination and maintenance fees and proofs of working or
use), to the knowledge of the Company and the Stockholders are valid and
enforceable and are not subject to any maintenance fees or taxes or actions due
within 90 days after the Closing Date. No Mark, Copyright or Patent owned by
the Company has been or is involved in any interference, reissue, reexamination,
opposition, invalidation or cancellation proceeding and, to the knowledge of the
Company and each Stockholder, no such proceeding is threatened. To the
knowledge of the Company and each Stockholder, there is no patent or patent
application or trademark or trademark application pending that interferes or
potentially interferes with any Patent, Copyright or Mark owned by the Company
or any rights of the Company therein. No Mark, Copyright or Patent owned by the
Company has been infringed or, to the best knowledge of the Company and each
Stockholder, challenged or threatened in any way. None of the Marks, Patents,
Copyrights or Software, owned by the Company, nor any products manufactured or
sold by the Company, nor any processes or other Intellectual Property owned by
the Company infringe or are alleged to infringe any trademark, copyright, patent
or other proprietary right of any person. The Company has
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taken commercially reasonable precautions to preserve and document its Software
and Trade Secrets and to protect the secrecy, confidentiality and value of its
Software and Trade Secrets. All documentation relating to Trade Secrets and
Software of the Company has been maintained only at the Company's principal
office. The only Marks, Copyrights, Patents, Software or other Intellectual
Property owned by third parties which are used by the Company in the conduct of
its business as presently conducted either are available commercially to the
Company without any separately executed licenses or other written agreements on
the same terms they generally are available to the public, or their
unavailability to the Company would not have a Material Adverse Effect.
3.17 Customers and Suppliers. The Disclosure Schedule lists the names of
-----------------------
the ten (10) customers of the Company that generated the most revenue during
1995 and 1996 and the aggregate revenues attributable to each in each such
period, and of the ten (10) suppliers and vendors from whom the Company made the
most purchases during such periods and the aggregate expenditures attributable
to each in each such period. No customer that accounted for more than of 5% of
the revenues of the Company during 1995 or 1996 has terminated or materially
reduced, or has given notice that it intends to terminate or materially reduce,
the amount of business done with the Company; provided that Envirogen
understands that a significant portion of the Company's business is episodic and
not of a recurring nature with most customers, and that the representation made
in this sentence shall not be deemed breached by virtue of lack of a continuing
relationship between any customer and the Company by virtue of the fact that the
Company has completed or completes a contracted project for such customer. No
supplier or vendor that accounted for more than $10,000 of the purchases of the
Company during 1995 or 1996 has terminated or materially reduced, or has given
notice that it intends to terminate or materially reduce, the amount of business
done with the Company. The Company is not aware of any such intention on the
part of any such customer, supplier or vendor. Except as disclosed on the
Disclosure Schedule, there are no, and since December 31, 1993 there have not
been any, disputes or controversies involving, in the aggregate, more than
$5,000 between the Company and any customer, supplier or other person regarding
the quality, merchantability or safety of, or involving a claim of breach of
warranty that has not been fully resolved with respect to, or defect in, any
service or product purchased or sold by the Company. The Company is satisfied
with its working relationships under all arrangements and agreements with
customers and suppliers necessary to the normal operation of its businesses.
Alternative sources of supply, on substantially similar terms and conditions,
exist for all material goods or services purchased by or supplied to the
Company.
3.18 Taxes.
-----
(a) All federal, state, local and foreign returns and reports
relating to Taxes (as defined herein), or extensions relating thereto, required
to be filed by or with respect to the Company (including, without limitation,
all federal and state consolidated and combined tax returns and reports for any
consolidated group of which the Company has been a member during the last five
years (the "Consolidated Group")) have been timely and properly filed, and all
such returns and reports are correct and complete.
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(b) All federal, state, local, and foreign income, profits,
franchise, sales, use, payroll, premium, occupancy, property, severance, excise,
withholding, customs, unemployment, transfer and other taxes, including
interest, additions to tax and penalties (collectively "Taxes") due or properly
shown to be due on any return referred to in Subsection (a) above by the Company
with respect to taxable periods ending on or prior to, and the portion of any
interim period up to, the date hereof have been fully and timely paid or, in the
case of Taxes not yet due, fully provided for on the Interim Balance Sheet or,
in the case of Taxes accruing after the date of such financial statement, on the
books of account of the Company; and there are no levies, liens, or other
encumbrances relating to Taxes existing, threatened or pending with respect to
any asset of the Company, other than statutory liens for taxes not yet due and
payable.
(c) Except as described in the Disclosure Schedule, no issues have
been raised with any representative or employee of the Company (and are
currently pending) by the Internal Revenue Service ("IRS") or any other taxing
authority in connection with any of the returns and reports referred to in
subsection (a) above and no waivers of statutes of limitations have been given
or requested with respect to any such returns and reports or with respect to any
Taxes.
(d) To the knowledge of the Company and each Stockholder, no
federal, state, local or foreign income, franchise or sales and use tax returns
of or with respect to the Company have been examined since 1993, or are
currently under examination, by the IRS or by other taxing authorities, or with
respect to which the applicable statue of limitations (including all extensions
and tolling periods) has not yet run. There are no unpaid deficiencies asserted
or assessments made by any taxing authority against the Company.
(e) The Disclosure Schedule lists all elections by or with respect
to the Company for federal or state income or franchise tax purposes that are
currently applicable. The Company has been an S corporation for federal and
state tax purposes since inception and will maintain such S status until the
Merger. The Company uses the accrual method of accounting for federal income tax
purposes. The Company has not: filed any consent under section 341(f)(1) of the
Code, or agreed to have the provisions of Code section 341(f)(2) apply to any
dispositions of "subsection (f) assets" as such term is defined in Code section
341(f)(4); agreed to or is required to make any adjustments under Code section
481(a) by reason of a change in accounting method or otherwise; or made a
transfer of intangible property on which Code section 367(d) or 482 will require
the recognition of additional income for any period after the date hereof. The
Company does not own stock in a "passive foreign investment company" within the
meaning of Code section 1296(a). The books and records of the Company are
sufficient to prove the correctness of all tax returns for open tax years and to
determine and to prove the adjusted tax basis for federal income tax purposes of
each asset of the Company.
(f) The Company is not obligated to make any payments that would
constitute an "excess parachute payment" as defined in Code section 280G. The
Company is not a party to any tax sharing agreement or tax indemnification
agreement.
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<PAGE>
3.19 Employee Benefit Plans.
----------------------
(a) The Disclosure Schedule contains a complete and correct list of
all employee benefit plans, arrangements, commitments and payroll practices
(whether or not employee benefit plans ("Employee Benefit Plans") as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), including, without limitation, sick leave, vacation pay, severance
pay, salary continuation for disability, consulting or other compensation
arrangements, retirement, deferred compensation, bonus, incentive compensation,
stock purchase, stock option, health including hospitalization, medical and
dental, life insurance and scholarship programs maintained for the benefit of
any employees of the Company or any ERISA Affiliate (as defined below) or to
which the Company or any ERISA Affiliate has contributed or is or was within the
last six years obligated to make payments. The Company has delivered to
Envirogen, with respect to all benefit plans, arrangements, commitments or
payroll practices required to be listed on the Disclosure Schedule, true,
complete and correct copies of the following: all plan documents, handbooks,
manuals, collective bargaining agreements and similar documents governing
employment policies, practices and procedures; all the most recent summary plan
descriptions and any subsequent summaries of material modifications and all
other material employee communications discussing any employee benefit; Forms
series 5500 as filed with the IRS for the most recent three plan years; the most
recent report of the enrolled actuary for all defined benefit plans, funded
welfare plans or other plans requiring actuarial valuation; all trust agreements
with respect to employee benefit plans; plan contracts with service providers
and plan contracts with insurers providing benefits for participants or
liability insurance for fiduciaries and other parties in interest or bonding;
most recent annual audit and accounting of plan assets for all funded plans; and
most recent IRS determination letter for all plans qualified under Code section
401(a). As used herein, "ERISA Affiliate" shall refer to any trade or business,
whether or not incorporated, under common control with the Company within the
meaning of Section 414(b), (c), (m) or (o) of the Code.
(b) With respect to each Employee Benefit Plan required to be listed
on the Disclosure Schedule: (i) each Employee Benefit Plan has been
administered in compliance with its terms and is in compliance in all material
respects with the applicable provisions of ERISA, the Code and all other
federal, foreign, state and other applicable laws, rules and regulations, as
they relate to such plan (including, without limitation, funding, filing,
termination, reporting and disclosure and continuation coverage obligations
pursuant to Section 601 et seq. of ERISA); (ii) the Company and each ERISA
------
Affiliate has made all contributions to all Employee Benefit Plans as required
under the terms of such Plans; (iii) no "Employee Pension Benefit Plan" (as
defined in Section 3(2) of ERISA) has been the subject of a "reportable event"
(as defined in Section 4043 of ERISA) and there have been no "prohibited
transactions" (as described in Section 4975 of the Code or in Part 4 of Subtitle
B of Title I of ERISA) with respect to any Employee Benefit Plan; (iv) there are
and during the past three years there have been no inquiries, proceedings,
claims or suits pending or, to the knowledge of the Company and the
Stockholders, threatened by any governmental agency or authority or by any
participant or beneficiary against any of the Employee Benefit Plans, the assets
of any of the trusts under such Plans or the Plan sponsor or the Plan
administrator, or against any fiduciary of any of such Employee Benefit Plans
with respect to the design or operation of the Employee Benefit Plans; (v) the
actuarial present value of accumulated benefits (both vested and unvested) of
each of the Employee Pension Benefit
A-19
<PAGE>
Plans, which are defined benefit plans, are fully funded in accordance with the
actuarial assumptions used by the Pension Benefit Guaranty Corporation ("PBGC")
to determine the level of funding required in the event of the termination of
such Plan; (vi) each Employee Pension Benefit Plan that is intended to be
"qualified" within the meaning of Section 401(a) of the Code is, and has from
its inception been so qualified, both in form and in operation, and any trust
created pursuant to any such Employee Pension Benefit Plan is exempt from
federal income tax under Section 501(a) of the Code and the IRS has issued each
such Plan a favorable determination letter which is currently applicable; and
(vii) neither the Stockholders and the Company nor, to the knowledge of the
Company and the Stockholders, any ERISA Affiliate is aware of any circumstance
or event which would jeopardize the tax-qualified status of any such Employee
Pension Benefit Plan or the tax-exempt status of any related trust, or would
cause the imposition of any liability, penalty or tax under ERISA or the Code
with respect to any Employee Benefit Plan.
(c) Neither the Company nor any ERISA Affiliate maintains or has
ever maintained or been obligated to contribute to a "Multiemployer Plan" (as
such term is defined by Section 4001(a)(3) of ERISA).
(d) With respect to each Employee Benefit Plan maintained by the
Company or any ERISA Affiliate: (i) no unsatisfied liabilities to participants,
the IRS, the United States Department of Labor ("DOL"), the PBGC or to any other
person or entity have been incurred as a result of the termination of any
Employee Benefit Plan; (ii) no Employee Pension Benefit Plan, which is subject
to the minimum funding requirements of Part 3 of subtitle B of Title I of ERISA
or subject to Section 412 of the Code, has incurred any "accumulated funding
deficiency" within the meaning of Section 302 of ERISA or Section 412 of the
Code and there has been no waived funding deficiency within the meaning of
Section 303 of ERISA or Section 412 of the Code; (iii) there has been no event
with respect to an Employee Pension Benefit Plan that would require disclosure
under Sections 4062(c), 4063(a) or 4041(e) of ERISA.
(e) All reports and information required to be filed with the DOL,
IRS and PBGC and with plan participants and their beneficiaries with respect to
each Employee Benefit Plan required to be listed on the Disclosure Schedule have
been filed and all annual reports (Form 5500 series) of such Plans were
certified without qualification by each Plan's accountants and actuaries. Any
annual reports that are not yet due but are required to be filed with respect to
a plan year that ended on or prior to the Closing Date shall be filed by the
Company before the Closing Date.
(f) Except as set forth on the Disclosure Schedule, all Employee
Benefit Plans, arrangements, commitments, and payroll practices required to be
listed on the Disclosure Schedule have been administered in compliance with
federal, state, and local law, including, but not limited to, the Americans with
Disabilities Act, the Age Discrimination in Employment Act, and the Family and
Medical Leave Act, except where noncompliance would not have a Material Adverse
Effect.
(g) Except as set forth on the Disclosure Schedule, all Employee
Benefit Plans, arrangements, commitments, and payroll practices required to be
listed on the Disclosure
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<PAGE>
Schedule and all other Employee Benefit Plans currently maintained by the
Company or an ERISA Affiliate may, without liability, be amended, terminated or
otherwise discontinued.
(h) Any bonding required under ERISA with respect to any Employee
Benefit Plan required to be listed on the Disclosure Schedule and any other
Employee Benefit Plan currently maintained by the Company or an ERISA Affiliate
has been obtained and is in full force and effect and no funds held by or under
the control of the Company are plan assets.
(i) Except as set forth on the Disclosure Schedule, neither the
Company nor any ERISA Affiliate maintains any retiree life and/or retiree health
insurance plans that provide for continuing benefits or coverage for any
employee or any beneficiary of an employee after such employee's termination of
employment, other than as required by Section 601 et seq. of ERISA.
------
(j) Except as set forth on the Disclosure Schedule, the consummation
of the transactions contemplated by this Agreement will not, alone or together
with any other event, (i) entitle any person to severance pay, an excess
parachute payment within the meaning of Section 280G of the Code, unemployment
compensation or any other payment, (ii) accelerate the time of payment or
vesting, or increase the amount of compensation due to any such employee or
(iii) result in any liability under Title IV of ERISA or otherwise.
3.20 Labor Matters.
-------------
(a) No application for certification of a collective bargaining
agent is pending and none of the employees of the Company are, or have ever
been, represented by any union or other bargaining representative; there has not
been, and there is not currently pending, any labor arbitration or proceeding in
respect of the grievance of any employee, any application or complaint filed by
any employee or union with the National Labor Relations Board or any comparable
state or local agency, any strike, slowdown, picketing or work stoppage by any
employees at any facility of the Company, any lockout of any such employees or
any labor trouble or other labor-related controversy, occurrence or condition of
a similar character; no agreement restricts the Company from relocating, closing
or terminating any of its operations or facilities; and to the best knowledge of
each Stockholder and the Company, no such agreement, action, proceeding or
occurrence is threatened or contemplated by any person.
(b) Except as described in the Disclosure Schedule, the Company has
not been cited for violations of the Occupational Safety and Health Act of 1970,
29 U.S.C. sec. 651 et seq. ("OSHA"), any regulation promulgated pursuant to
OSHA, or any other statute, ordinance, rule, or regulation establishing
standards of workplace safety or paid any fines or penalties with respect to any
such citation. Except as described in the Disclosure Schedule: (i) since
January 1, 1994, there have been no inspections of any of the facilities of the
Company by representatives of the Occupational Safety and Health Administration
or any other government agency vested with authority to enforce any statute,
ordinance, rule or regulation establishing standards of workplace safety; (ii)
to the knowledge of the Company and the Stockholders, no representative of the
Occupational Safety and Health Administration or any other such government
agency has attempted to conduct any such inspection or sought entry to any of
such facilities for that
A-21
<PAGE>
purpose; (iii) the Company has not been notified of any complaint or charge
filed by any employee or any labor union or other employee representative with
the Occupational Safety and Health Administration or any other such government
agency that alleges that the Company has violated OSHA or any other statute,
ordinance, rule or regulation establishing standards of workplace safety; (iv)
the Company has not been notified that any employee, labor union or other
employee representative has requested that the Occupational Safety and Health
Administration or any other such government agency conduct an inspection of any
facilities of the Company to determine whether violations of OSHA or any other
such statute, ordinance, rule or regulation exists; and (v) the Company does not
maintain any condition, process, practice or procedure at any of its facilities
that violate OSHA or any other statute, ordinance, regulation or rule
establishing standards or workplace safety where any such violation has or
reasonably can be expected in the future to have a Material Adverse Effect.
3.21 Directors, Officers and Employees. The Disclosure Schedule sets
---------------------------------
forth the following information for each officer and employee of the Company and
for each consultant and independent contractor regularly retained, whose
aggregate compensation for the year ended December 31, 1995 exceeded $50,000 or
whose current aggregate annual rate of compensation exceeds such amount
(including each such person on leave or layoff status): employee name and job
title; current annual rate of compensation (identifying bonuses separately) and
any change in compensation since the date of the Balance Sheet; vacation accrued
and service credited for purposes of vesting and eligibility to participate in
applicable Employee Benefit plans and programs; and any automobile leased or
owned by the Company primarily for use by any of the foregoing persons. Since
the date of the Interim Balance Sheet, no employees of the Company have been
reassigned or transferred to, or hired or employed by, any Stockholder or any
affiliate of a Stockholder other than the Company. Except as described in the
Disclosure Schedule, to the knowledge of each Stockholder and the Company, none
of the employees or officers of the Company is a party to, or is otherwise bound
by, any agreement or arrangement with any person or entity other than the
Company (including, without limitation, any confidentiality, non-competition or
proprietary rights agreement) that in any way limits or adversely affects the
performance of his or her duties, the ability of the Company to conduct its
businesses, or his or her freedom to engage in any of the businesses conducted
by the Company. The Disclosure Schedule lists each written, and lists and
describes the principal terms of each oral, employment, severance, change of
control, consulting, commission, agency and representative agreement to which
the Company is a party or is otherwise bound, including, without limitation, all
agreements and commitments relating to wages, hours or other terms or conditions
of employment (other than unwritten employment arrangements terminable at will
without payment of any contractual severance or other amount).
3.22 Affiliate Agreements. Except as described in the Disclosure
--------------------
Schedule, there are no, and during the last three years there have not been any,
agreements, arrangements or understandings between the Company, on the one hand,
and any Stockholder or any member of the immediate family of such Stockholder,
on the other. Except as described in the Disclosure Schedule, neither the
Stockholders nor any present or former director, shareholder or officer of the
Company nor any member of the immediate family of or any person or entity
controlling or controlled by any of such persons has, or during the last three
years has had: any interest in any material property (real or personal, tangible
or intangible) sold to, purchased by or otherwise
A-22
<PAGE>
used in or pertaining to the business of the Company; or any direct or indirect
interest in any person or entity that has had business dealings or a financial
interest in any transaction with the Company or that is in competition with any
business of the Company. Except as described in the Disclosure Schedule, all
agreements between the Company and any person or entity described in the
preceding sentence are terminable by the Company, upon less than ten days
notice, without payment of penalty or premium of any kind. No Stockholder has
any claim or right against the Company except as described in the Disclosure
Schedule.
3.23 Environmental Matters.
---------------------
(a) Except as described in the Disclosure Schedule:
(i) The Company, including all of its businesses and
operations, are and always have been operated in compliance with all
Environmental Laws (as defined below), except where noncompliance would not have
a Material Adverse Effect of $100,000 or more;
(ii) During the Company's period of ownership or tenancy of
any real property that is now owned or leased to or by the Company ("Current
Real Property") and, to the knowledge of the Company and the Stockholders
without investigation or inquiry, prior to the Company's period of ownership or
tenancy of any Current Real Property, there are no conditions on, about, beneath
or arising from any Current Real Property that might, under any Environmental
Law, (A) give rise to liability or the imposition of a statutory lien, or (B)
that would or may require any "Response," "Removal" or "Remedial Action" (as
those terms are defined below) or any other action, including without limitation
reporting, monitoring, cleanup or contribution;
(iii) During the Company's period of ownership or tenancy of
any real property that was, but is no longer, owned or leased to or by the
Company ("Former Real Property") and, to the knowledge of the Company and the
Stockholders without investigation or inquiry, prior to and after the Company's
period of ownership or tenancy of any Former Real Property, there were no
conditions on, about, beneath or arising from any Former Real Property, during
the period of such ownership, use or lease, that might, under any Environmental
Law, (A) give rise to liability or the imposition of a statutory lien, or (B)
that would or may require any "Response," "Removal" or "Remedial Action" or any
other action, including without limitation reporting, monitoring, cleanup or
contribution;
(iv) The Company has not received any notification of a
release or threat of a release of a "Hazardous Substance" (as defined below)
with respect to any Current Real Property or Former Real Property;
(v) During the Company's period of ownership or tenancy of
any Current Real Property and, to the knowledge of the Company and the
Stockholders without investigation or inquiry, prior to the Company's period of
ownership or tenancy of any Current Real Property, no Hazardous Substances have
been used, handled, generated, processed, treated, stored, transported to or
from, released, discharged or disposed of by the Company or, to the
A-23
<PAGE>
knowledge of the Company and each Stockholder, any third party, on, about or
beneath any Current Real Property in violation of any applicable Environmental
Law;
(vi) During the Company's period of ownership or tenancy of
any Former Real Property and, to the knowledge of the Company and the
Stockholders without investigation or inquiry, prior to and after the Company's
period of ownership or tenancy of any Former Real Property, no Hazardous
Substances were used, handled, generated, processed, treated, stored,
transported to or from, released, discharged or disposed of by the Company or
any third party, on, about or beneath the Former Real Property in violation of
any applicable Environmental Law;
(vii) There are no above or underground storage tanks, asbestos
containing materials, or transformers containing or contaminated with
polychlorinated biphenyls on, about or beneath the Current Real Property.
During the Company's period of ownership or tenancy of any Former Real Property
and, to the knowledge of the Company and the Stockholders without investigation
or inquiry, prior to and after the Company's period of ownership or tenancy of
any Former Real Property, there were no above or underground storage tanks,
asbestos containing materials, or transformers containing or contaminated with
polychlorinated biphenyls on, about or beneath the Former Real Property;
(viii) The Company has not received notice and does not have
actual or constructive knowledge of:
(A) any claim, demand, investigation, enforcement
action, Response, Removal, Remedial Action, statutory lien or other governmental
or regulatory action instituted or threatened against the Company, the Current
Real Property or Former Real Property pursuant to any of the Environmental Laws;
(B) any claim, demand notice, suit or action, made or
threatened by any person against the Company, the Current Real Property or the
Former Real Property relating to (i) any form of damage, loss or injury
resulting from, or claimed to result from, any Hazardous Substance on, about,
beneath or arising from the Current Real Property or Former Real Property or
(ii) any alleged violation of the Environmental Laws by the Company; or
(C) any communication to or from any governmental or
regulatory agency arising out of or in connection with Hazardous Substances on,
about, beneath, arising from or generated at the Current Real Property or Former
Real Property, including without limitation, any notice of violation, citation,
complaint, order, directive, request for information or response thereto, notice
letter, demand letter or compliance schedule;
(ix) No wastes generated by the Company have ever been
directly or indirectly sent, transferred, transported to, treated, stored, or
disposed of at any site listed or formally proposed for listing on the National
Priority List promulgated pursuant to "CERCLA" (as defined below) or to any site
listed on any state list of sites required or recommended for investigation or
clean-up. None of the Current Real Property or Former Real Property is listed
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<PAGE>
on the National Priorities List or any state list of sites requiring or
recommended for investigation or clean up; and
(x) To the knowledge of the Company and the Stockholders
there is no proposed change in any Environmental Law that could have a Material
Adverse Effect.
(b) As used in this Agreement:
(i) the term "Environmental Laws" means all Laws presently or
heretofore in effect concerning or relating to industrial hygiene or protection
of human health or the environment;
(ii) the terms "Response," "Removal" and "Remedial Action"
shall have the meanings ascribed to them in Sections 101(23)-101(25) of the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
as amended by the Superfund Amendments and Reauthorization Act ("SARA"), 42
U.S.C. (S)(S) 9601(23)-9601(25) and other comparable Laws as presently or
heretofore in effect; and
(iii) The term "Hazardous Substances" or "Hazardous Substance"
shall mean any substance presently or heretofore regulated under any of the
Environmental Laws including, without limitation, any substance that is (A)
petroleum, asbestos or asbestos-containing material, or polychlorinated
biphenyls; (B) defined, designated or listed as a "Hazardous Substance" pursuant
to Sections 307 and 311 of the Clean Water Act, 33 U.S.C. (S)(S)1317, 1321,
Section 101(14) of CERCLA, 42 U.S.C. (S)9601; (C) listed in the United States
Department of Transportation Hazardous Material Tables, 49 C.F.R. (S)172.101; or
(D) defined, designated or listed as a "Hazardous Waste" under Section 1004(5)
of the Resource and Conservation and Recover Act, 42 U.S.C. 6903(5).
3.24 Absence of Certain Changes and Events.
-------------------------------------
(a) Except as described in the Disclosure Schedule, since the date
of the Interim Balance Sheet, the Company has conducted its business only in the
usual and ordinary course consistent with past practice and there has not been
any:
(i) declaration or payment of any dividend or other
distribution or payment in respect of the shares of capital stock of the
Company, or any repurchase or redemption of any such shares of capital stock;
(ii) payment by the Company of any bonus, or increase of any
salary or other compensation payable to any director or officer, payment by the
Company of any bonus or increase of any salary or other compensation payable to
any non-officer employee other than ordinary merit bonuses and merit salary
increases consistent with past practices, nor has the Company entered into any
employment, severance or similar agreement with any director, officer or
employee other than employment at will arrangements;
A-25
<PAGE>
(iii) adoption of or change in any plan or policy that is
required to be disclosed pursuant to Section 3.20;
(iv) damage, destruction or loss to any material asset or
property of the Company, whether or not covered by insurance (including, without
limitation, any extraordinary loss as defined in Opinion Number 30 of the
Accounting Principles Board of The American Institute of Certified Public
Accountants);
(v) entry into, amendment, termination or receipt of notice
of termination of any agreement that is required to be disclosed in the
Disclosure Schedule hereto, other than in the ordinary course of business
consistent with past practices;
(vi) sale, assignment, conveyance, lease, or other disposition
of any material asset or property of the Company or mortgage, pledge, or
imposition of any lien or other encumbrance on any material asset or material
property of the Company;
(vii) incurrence or repayment of any liability or obligation
(whether absolute or contingent) to any affiliated person, or incurrence or
repayment of any liability or obligation to any other person other than current
liabilities incurred and obligations under agreements entered into in the
ordinary course of business consistent with past practice, or any discharge or
satisfaction of any lien, claim or encumbrance other than in the ordinary course
of business consistent with past practice;
(viii) write-down or write-off of the value of any asset, except
for write-downs and write-offs of accounts receivable in the ordinary course of
business consistent with past practice or any cancellation or waiver of any
other material claims or rights;
(ix) change in the business or operations of the Company or in
the manner of conducting the same or entry by the Company into any transaction,
other than in the ordinary course of business consistent with past practice;
(x) change in the accounting methods, principles or practices
followed by the Company, except as required by GAAP, or any change in any of
assumptions underlying, or methods of calculating, any bad debt, contingency or
other reserve; or
(xi) agreement, whether or not in writing, to do any of the
foregoing by the Company.
(b) Since the date of the Interim Balance Sheet, there has not been
any material adverse change in the business, operations, properties, assets,
prospects, working capital, or condition (financial or otherwise) of the Company
or, to the knowledge of the Company and each Stockholder, any event, condition
or contingency that is likely to result in such a material adverse change.
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<PAGE>
3.25 Books and Records.
-----------------
(a) The copies of the articles of incorporation of the Company, as
certified by the Wisconsin Department of Financial Institutions, and of its
bylaws, as certified by the secretary or assistant secretary of the Company,
which have been delivered to Envirogen, are true, complete and correct and are
in full force and effect as of the date hereof.
(b) The stock records of the Company fairly and accurately reflect
the record ownership of all of its outstanding shares of capital stock. The
minute books of the Company contain complete and accurate records of all
meetings held of, and corporate action taken by, the shareholders, the board of
directors and each committee of the board of directors of the Company and no
meetings of such shareholders or of such board of directors or committee have
been held for which minutes have not been prepared and are not contained in such
minute books. The other books and records of the Company, including financial
records and books of account, are complete and accurate in all material respects
and have been maintained in accordance with sound business practices. Complete
and accurate copies, as of the date hereof, of all such minute books and stock
records have been made available to Envirogen.
3.26 Brokers. Except as disclosed on the Disclosure Schedule, no person
-------
acting on behalf of any Stockholder or the Company or under the authority of
either of the foregoing is or will be entitled to any brokers' or finders' fee
or any other commission or similar fee, directly or indirectly, from any of such
parties in connection with any of the transactions contemplated by this
Agreement.
3.27 Full Disclosure.
---------------
(a) All documents and other papers delivered by or on behalf of the
Company in connection with the transactions contemplated by this Agreement are
accurate and complete and are authentic. No representation or warranty of the
Company or any Stockholder contained in this Agreement or any Schedule hereto
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading.
(b) Except as described in this Agreement or the Schedules hereto,
there is no fact known to any Stockholder or the Company (other than general
economic or industry conditions) that materially adversely affects or, so far as
the Company and each Stockholder can reasonably foresee, materially threatens,
the assets, business, prospects, financial condition or results of operations of
the Company or the ability of the Stockholders or the Company to perform this
Agreement.
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<PAGE>
SECTION 4. REPRESENTATIONS AND WARRANTIES OF ENVIROGEN
Envirogen hereby represents and warrants to the Stockholders and the
Company as follows:
4.01 Organization and Good Standing. Envirogen is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all necessary corporate power and authority to carry on its
business as presently conducted, to own and lease the assets that it owns and
leases and to perform all of its obligations under each agreement and instrument
by which it is bound. Envirogen is duly qualified to do business as a foreign
corporation and is good standing under the laws of each jurisdiction in which
its ownership or leasing of assets or properties or the nature of its activities
requires such qualification.
4.02 Power and Authorization. Envirogen has full legal right, power and
-----------------------
authority to enter into and perform its obligations under this Agreement and
under the other agreements and documents (the "Envirogen Transaction Documents")
required to be delivered by it prior to or at the Closing. The execution,
delivery and performance by Envirogen of this Agreement and the Envirogen
Transaction Documents have been duly authorized by the Board of Directors of
Envirogen. This Agreement has been duly and validly executed and delivered by
Envirogen. This Agreement is, and when executed and delivered by Envirogen at
the Closing each of the Envirogen Transaction Documents to which Envirogen is a
party shall constitute, the legal, valid and binding obligation of Envirogen,
enforceable against it in accordance with its terms, except as such may be
limited by bankruptcy, insolvency, moratorium, reorganization or other similar
laws relating to or affecting the enforcement of creditors' rights generally,
and except that the availability of specific performance, injunctive relief or
other equitable remedies is subject to the discretion of the court before which
any such proceeding therefor may be brought.
4.03 No Conflicts.
------------
(a) The execution, delivery and performance of this Agreement and
the Envirogen Transaction Documents do not and will not (with or without the
passage of time or the giving of notice):
(i) violate or conflict with any provision of the certificate
of incorporation or bylaws, each as amended, of Envirogen or of any Law binding
upon Envirogen;
(ii) violate or conflict with, result in a breach of, or
constitute a default or otherwise cause any loss of benefit under any material
agreement or other material obligation to which Envirogen is a party; or
(iii) require any consent, approval, authorization or permit
of, or filing with or notification to, any governmental or regulatory authority,
except as set forth on Schedule 2.5 to the Securities Purchase Agreement (as
defined in Section 5.01 hereof).
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<PAGE>
(b) There are no judicial, administrative or other governmental
actions, proceedings or investigations pending or, to the knowledge of
Envirogen, threatened, that question any of the transactions contemplated by
this Agreement or the validity of this Agreement or any of the other agreements
or instruments contemplated hereby or which, if adversely determined, would have
an adverse effect upon the ability of Envirogen to enter into or perform its
obligations under this Agreement or any of the other agreements or instruments
contemplated hereby. Envirogen has not received any request from any
governmental agency or instrumentality for information with respect to the
transactions contemplated hereby.
4.04 Brokers. No person acting on behalf of Envirogen or any of its
-------
affiliates or under the authority of any of the foregoing is or will be entitled
to any brokers' or finders' fee or any other commission or similar fee, directly
or indirectly, from any of such parties in connection with any of the
transactions contemplated by this Agreement, other than Allen & Company
Incorporated, whose fees and expenses shall be the sole responsibility of
Envirogen.
4.05 Capital Stock.
-------------
(a) On the date hereof, the authorized capital stock of Envirogen
consists of 22,000,000 shares, including 20,000,000 shares of Envirogen Common
Stock, and 2,000,000 shares of preferred stock, par value $.01 per share, of
which 12,872,440 shares of Envirogen Common Stock and no shares of Envirogen's
preferred stock are issued and outstanding, 1,531,335 shares of Envirogen Common
Stock are reserved for issuance pursuant to outstanding stock options, and
1,608,024 shares of Envirogen Common Stock are reserved for issuance pursuant to
outstanding warrants. Except for the foregoing, as of the date of this
Agreement there are no options, warrants or other rights, agreements,
arrangements or commitments of any character (including without limitation
voting agreements or arrangements known to Envirogen) relating to the issued or
unissued capital stock of Envirogen or obligating Envirogen to issue or sell any
shares of capital stock of, or other equity interests in, Envirogen.
(b) All shares of Envirogen Common Stock to be issued and delivered
in the Merger will be, at the time of issuance and delivery in accordance with
the terms of this Agreement, duly authorized, validly issued, fully paid and
nonassessable by Envirogen and will not be issued in violation of the preemptive
rights of any Envirogen stockholder.
4.06 Envirogen Reports. Envirogen has delivered to the Stockholders and
-----------------
the Company copies of Envirogen's (a) Proxy Statement dated April 10, 1996, (b)
Annual Report on Form 10-K for 1995 containing audited financial statements for
1995, as amended by its Form 10-K/A dated April 17, 1996, (c) Quarterly Reports
on Form 10-Q for the quarters ended March 31, June 30, and September 30, 1996,
(d) Form 10-C dated May 31, 1996, (e) Registration Statement on Form S-3
(Registration No. 333-12883) effective October 3, 1996 and (f) Current Reports
on Form 8-K dated January 5, 1996, February 23, 1996 (as amended by its Form 8-
K/A dated April 22, 1996) and June 27, 1996, all of which have been filed by
Envirogen with the Securities and Exchange Commission (the "Envirogen Reports").
The audited consolidated financial statements and unaudited interim financial
statements of Envirogen included in such reports have been prepared in
accordance with GAAP consistently applied (except as may be indicated in the
notes thereto) and fairly present the financial position of Envirogen and its
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consolidated subsidiary as at the dates thereof and for the periods then ended,
subject, in the case of the unaudited interim financial statements, to normal
year-end adjustments and any other adjustments described therein. The Envirogen
Reports do not contain any untrue statements of a material fact or omit to state
a material fact necessary to make the statements contained therein, in light of
the circumstances under which they were made, not misleading.
4.07 Information Included in Proxy Statement. The information to be
---------------------------------------
included or incorporated in the Proxy Statement (as defined in Section 5.02
hereof), other than information provided by the Company or the Stockholders for
the express purpose of including the same in the Proxy Statement, shall not, at
the date the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to stockholders of Envirogen, or at any time thereafter up to and
including the time of the Envirogen Stockholder Meeting, be false or misleading
with respect to any material fact required to be stated therein, or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they are made, not misleading; or omit
to state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Envirogen
Stockholder Meeting which has become false or misleading. The Proxy Statement
shall comply in all material respects as to form and substance with the
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder. Notwithstanding the foregoing, Envirogen makes no
representation or warranty with respect to any information about, or supplied or
omitted by, the Company or any Stockholder which is contained in the Proxy
Statement.
4.08 Opinion of Financial Advisor. Envirogen has received the written
----------------------------
opinion of its financial advisor, Allen & Company Incorporated, stating that the
terms of the Merger and the Securities Purchase Agreement are fair to the
stockholders of Envirogen from a financial point of view.
4.09 Vote Required. The affirmative vote of the holders of a majority of
-------------
the outstanding shares of Envirogen Common Stock and entitled to vote at the
Envirogen Stockholder Meeting in which a quorum is present is necessary to
approve this Agreement and the transactions contemplated hereby and the
amendment to Envirogen's Certificate of Incorporation to increase the number of
authorized shares of Envirogen Common Stock from 20,000,000 to 50,000,000, and
the affirmative vote of the holders of a majority of the outstanding shares of
Envirogen Common Stock present, in person or by proxy, and entitled to vote at
the Envirogen Stockholder Meeting in which a quorum is present is necessary to
approve the Securities Purchase Agreement and the transactions contemplated
thereby and the amendment to Envirogen's Option Plan (as defined in Section 5.14
hereof) to, among other things, increase the number of shares of Envirogen
Common Stock reserved for issuance upon the exercise of options granted under
such plan from 2,000,000 to 3,000,000.
4.10 Securities Purchase Agreement. All representations and warranties of
-----------------------------
Envirogen contained in the Securities Purchase Agreement (as defined in Section
5.01 below) and the Schedules thereto are true and correct in all material
respects. The Securities Purchase Agreement and the agreements attached as
Exhibits thereto constitute the entire understanding and agreement of Envirogen
and Warburg, Pincus Ventures, L.P. with respect to the subject matter thereof,
and there are no side letters or other agreements, whether written or oral, that
modify or supplement the provisions of the Securities Purchase Agreement, or
that relate in any way to the subject matter of the Securities Purchase
Agreement.
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<PAGE>
SECTION 5. AGREEMENTS AND COVENANTS
5.01 Special Stockholders Meeting. Envirogen shall duly call, give notice
----------------------------
of, convene and hold a special stockholders meeting (the "Envirogen Stockholder
Meeting") to approve, among other things, (i) this Agreement and the
transactions contemplated hereby, (ii) the Securities Purchase Agreement dated
the date hereof between Envirogen and Warburg, Pincus Ventures, L.P. (the
"Securities Purchase Agreement") and the transactions contemplated thereby,
(iii) the amendment to Envirogen's Certificate of Incorporation to increase the
number of authorized shares of Envirogen Common Stock from 20,000,000 to
50,000,000 and (iv) an amendment to Envirogen's Option Plan (as defined in
Section 5.14 hereof) to, among other things, increase the number of shares of
Envirogen Common Stock reserved for issuance upon the exercise of options
granted under such plan from 2,000,000 to 3,000,000. The Board of Directors of
Envirogen will recommend to its stockholders approval of such matters, and
Envirogen shall take all such actions to obtain such approvals as promptly as
practicable, including without limitation the solicitation of proxies.
5.02 Proxy Statement. Envirogen shall prepare as promptly as practicable,
---------------
with the cooperation of the Company and the Stockholders, a proxy statement (the
"Proxy Statement") in compliance with the provisions of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), for purposes of soliciting the
approval of the stockholders of Envirogen of, among other things, (i) this
Agreement and the transactions contemplated hereby, (ii) the Securities Purchase
Agreement and the transactions contemplated thereby (iii) the amendment to
Envirogen's Certificate of Incorporation to increase the number of authorized
shares of Envirogen Common Stock from 20,000,000 to 50,000,000, and (iv) an
amendment to Envirogen's Option Plan (as defined in Section 5.14 hereof) to,
among other things, increase the number of shares of Envirogen Common Stock
reserved for issuance upon the exercise of options granted under such plan from
2,000,000 to 3,000,000. The Company and each Stockholder agree to provide
promptly to Envirogen for inclusion in the Proxy Statement, or any amendments or
supplements thereto, such information concerning its business and financial
statements and affairs as, in the reasonable judgment of Envirogen or its
counsel, may be required by applicable law or the rules and regulations of the
Securities and Exchange Commission (including without limitation audited
financial statements of the Company) and unaudited interim financial statements
of the Company and to cause its counsel and auditors to cooperate with
Envirogen's counsel and auditors in the preparation of the Proxy Statement. The
Company and the Stockholders agree that the information to be included in the
Proxy Statement with respect to the Company and its business and the
Stockholders shall not, at the date the Proxy Statement (or any amendment
thereof or supplement thereto) is first mailed to stockholders of Envirogen, or
at any time thereafter up to and including the time of the Envirogen Stockholder
Meeting, be false or misleading with respect to any material fact required to be
stated therein, or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they are
made, not misleading; or omit to state any material fact necessary to correct
any statement in any earlier communication with respect to the solicitation of
proxies for the Envirogen Stockholder Meeting which has become false or
misleading. The Company and the Stockholders will promptly advise Envirogen in
writing if at any time prior to the Effective Time of the Merger the Company or
any Stockholder shall obtain knowledge of any facts that might make it necessary
or
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<PAGE>
appropriate to amend or supplement the Proxy Statement in order to make the
statements contained or incorporated by reference therein not misleading or to
comply with applicable law.
5.03 Further Action; Reasonable Best Efforts. Upon the terms and subject
---------------------------------------
to the conditions hereof, each of the parties hereto shall use its reasonable
best efforts to take, or cause to be taken, all appropriate action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including without limitation (i) cooperation in
the preparation and filing of the Proxy Statement and (ii) using its reasonable
best efforts to make all required regulatory filings and applications and to
obtain all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental authorities and parties to contracts
with the Company as are necessary for the consummation of the transactions
contemplated by this Agreement and to fulfill the conditions to the Merger. In
case any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, each of the parties
hereto shall use their reasonable best efforts to take all such necessary
action.
5.04 Access to Information; Confidentiality. From the date of this
--------------------------------------
Agreement to the Closing Date, each party will give to the other party (and to
Warburg, Pincus Ventures, L.P.) and its officers, employees, counsel,
accountants and other representatives free and full access to and the right to
inspect, during normal business hours, all of the assets, records, contracts and
other documents relating to its business as the other party may reasonably
request. Neither party will use such information for purposes other than in
connection with the Merger and each party will otherwise hold such information
in confidence until such time as such information otherwise becomes publicly
available, and in the event of termination of this Agreement for any reason will
promptly return, destroy or cause to be returned or destroyed, to the other
party all nonpublic documents obtained from the other party, and any copies made
of such documents.
5.05 Public Announcements. Except as and to the extent required by law in
--------------------
the opinion of their respective counsel, as the case may be, without the prior
written consent of the other party, neither the Company, any Stockholder nor
Envirogen will, and each will direct its representatives not to, directly or
indirectly, make any public comment, statement or communication with respect to,
or otherwise disclose or permit the disclosure of any of the terms, conditions
or other aspects of, the transactions contemplated hereby. In the event any
party determines that it is required by law to make any such public comment,
statement or communication, such party shall advise the other parties of that
fact as soon as reasonably practicable so that, to the extent feasible and
desired by the other parties, such public comment, statement or other
communication can be made jointly by the parties.
5.06 No Solicitation. The Company and each Stockholder shall not, and
---------------
the Company shall cause its officers, employees, representatives and agents not
to, directly or indirectly, continue, encourage, solicit, initiate or
participate in discussions or negotiations with, or provide any nonpublic
information to, any person (other than Envirogen, Warburg, Pincus Ventures, L.P.
and their respective representatives in connection with the transactions
contemplated by this Agreement) concerning any sale of assets (other than in the
ordinary course of its business consistent with past practice) or shares of
capital stock of the Company or any merger,
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<PAGE>
consolidation, recapitalization, liquidation or similar transaction involving
the Company (collectively, a "Company Acquisition Transaction"). The Company
and each Stockholder agrees that it or he will promptly communicate to Envirogen
the terms of any inquiry or proposal that it or he may receive in respect of a
Company Acquisition Transaction, to the extent he or it can do so without
breaching any confidentiality provision contained in such proposal. Subject to
any such confidentiality provision, any notification under this Section 5.06
shall include the identity of the person making such proposal, the terms of such
proposal and any other information with respect thereto as Envirogen may
reasonably request.
5.07 Notification of Certain Matters.
-------------------------------
(a) Certain Events. The Company and the Stockholders shall give
--------------
prompt notice to Envirogen, and Envirogen shall give prompt notice to the
Company and the Stockholders, of (i) the occurrence, or failure to occur, of any
event that such party believes would likely cause any of its representations or
warranties contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date of this Agreement to the Effective
Time, (ii) any material failure of the Company, any Stockholder or Envirogen, as
the case may be, or any officer, director, employee or agent thereof, to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder, (iii) any notice or other communication from any
governmental or regulatory agency or authority in connection with the
transactions contemplated by this Agreement, and (iv) any actions, suits,
claims, investigations or proceedings commenced or, to the best of its
knowledge, threatened against, relating to or involving or otherwise affecting
the Company, any Stockholder or Envirogen, as the case may be, or any of the
transactions contemplated by this Agreement.
(b) Other Acquisitions. Envirogen promptly shall notify the Company
------------------
and the Stockholders of any proposal it makes or receives that constitutes, or
may reasonably be expected to lead to, any Envirogen Acquisition Transaction (as
such term is defined below), or in the event Envirogen retains an investment
banker or other financial adviser for the purpose of initiating, soliciting or
encouraging an Envirogen Acquisition Transaction. Any such notice shall provide
relevant details relating to such proposal. For purposes of this Agreement,
"Envirogen Acquisition Transaction" shall mean any of the following involving
Envirogen and/or its affiliates, other than the transactions contemplated by
this Agreement and those contemplated by the Securities Purchase Agreement: (i)
any merger, consolidation, share exchange, business combination or other similar
transaction in which Envirogen is not the surviving corporation; (ii) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of all or
substantially all of the assets of Envirogen in a single transaction or series
of transactions; (iii) any issuance and sale of 25% or more of shares of capital
stock of Envirogen (or securities convertible or exchangeable into or otherwise
evidencing, or any agreement or instrument evidencing, the right to acquire
capital stock of Envirogen); (iv) any tender offer or exchange offer for 25% or
more of outstanding shares of capital stock or the filing of a registration
statement under the Securities Act in connection therewith; or (v) any person
shall have acquired beneficial ownership or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under Section 13(d) of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder) shall have been formed which beneficially owns or has
the right to
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<PAGE>
acquire beneficial ownership of, 25% or more of the then-outstanding shares of
capital stock of Envirogen.
(c) Update of Disclosure Schedule. In the event the Company or any
-----------------------------
Stockholder discovers any matter which would cause any of the representations
and warranties made herein by the Company or any Stockholder to become
inaccurate or untrue, or in the event any developments should occur between the
date of this Agreement and the Closing Date which cause any representation or
warranty made by the Company or any Stockholder herein to become inaccurate or
untrue, then the Company and the Stockholders shall supplement the Disclosure
Schedule to disclose such discovery or development, and shall notify Envirogen
of the proposed change to the Disclosure Schedule in accordance with the notice
provisions of Section 10.03 of this Agreement. If requested by Envirogen in
writing within ten days of notice of the proposed change to the Disclosure
Schedule, the Company and the Stockholders shall meet and discuss any such
proposed change to the Disclosure Schedule with representatives of Envirogen.
If the parties cannot resolve any differences regarding the proposed change to
the Disclosure Schedule within a reasonable period of time (not to exceed 15
days), and the discovery or development described in the Company's and the
Stockholders' notice would, or could reasonably be expected to, result in a
Material Adverse Effect, individually or together with any other such
discoveries and developments brought to the attention of Envirogen pursuant to
this subsection (c) after the date of this Agreement, then Envirogen shall have
the right, upon notice to the Company and the Stockholders, to terminate this
Agreement pursuant to Section 9.01(b) hereof. If Envirogen does not make a
request to meet with the Company and the Stockholders within ten days of
Envirogen's receipt of their notice of a proposed change to the Disclosure
Schedule, then the discovery or development described in such notice shall be
deemed to be incorporated into and to become a part of the Disclosure Schedule
as of the date hereof and this Agreement shall continue in full force and
effect.
(d) Update of Envirogen Representations. In the event Envirogen
-----------------------------------
discovers any matter which would cause any of the representations and warranties
made herein by Envirogen to become inaccurate or untrue, or in the event any
developments should occur between the date of this Agreement and the Closing
Date which cause any representation or warranty made by Envirogen herein to
become inaccurate or untrue, then Envirogen shall notify the Company and the
Stockholders of such discovery or development, and the corresponding proposed
amendment or supplement to the Envirogen representation and warranty, in
accordance with the notice provisions of Section 10.03 of this Agreement. If
requested by the Company and the Stockholders in writing within ten days of
notice of the proposed change to the Envirogen representation and warranty,
Envirogen shall meet and discuss any such proposed change to the Envirogen
representation and warranty with representatives of the Company and the
Stockholders. If the parties cannot resolve any differences regarding the
proposed change to the Envirogen representation and warranty within a reasonable
period of time (not to exceed 15 days), and the discovery or development
described in Envirogen's notice would, or could reasonably be expected to,
result in a Material Adverse Effect, individually or together with any other
such discoveries and developments brought to the attention of the Company and
the Stockholders pursuant to this subsection (d) after the date of this
Agreement, then the Company shall have the right, upon notice to Envirogen, to
terminate this Agreement pursuant to Section 9.01(c) hereof. If the Company and
the Stockholders do not make a request to meet with
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<PAGE>
Envirogen within ten days of their receipt of Envirogen's notice of a proposed
change to the Envirogen representation and warranty, then the discovery or
development described in such notice shall be deemed to be incorporated into and
to become a part of the Envirogen representation and warranty as of the date
hereof and this Agreement shall continue in full force and effect.
5.08 Conduct of the Company's Business. From the date hereof to the
---------------------------------
Effective Time, except with the prior written consent of Envirogen, the Company
will (and the Stockholders will use their best efforts to cause the Company to):
(a) carry on its business in, and only in, the usual, regular and
ordinary course, consistent with past practice and in substantially the same
manner as heretofore conducted and, to the extent consistent with such business,
use its best efforts to preserve intact its present business organization, keep
available the services of its present officers and employees, and preserve its
relationships with customers, contractors, and others having business dealings
with it to the end that its goodwill and going business shall be unimpaired at
the Effective Time;
(b) to pay and discharge all of its debts, liabilities and
obligations as they become due;
(c) keep in full force and effect insurance comparable in amount and
scope of coverage to insurance now carried by it;
(d) perform all of its obligations under agreements, contracts and
instruments relating to or affecting its properties, assets and business;
(e) maintain its facilities and assets in the same state of repair,
order and condition as they were on the date hereof, reasonable wear and tear
excepted;
(f) maintain its books of account and records in the usual, regular
and ordinary manner and to use best efforts to maintain in full force and effect
all Permits;
(g) comply with all statutes, laws, ordinances, rules and
regulations applicable to it and to the conduct of its business;
(h) promptly advise Envirogen in writing of any material adverse
change in its financial condition, operations, assets, prospects or business;
(i) maintain the Company's S corporation status for federal and
state income tax purposes;
(j) not enter into, assume or amend in any material respect any
agreement, contract, purchase order or commitment of the character described in
Section 3.13, except in the ordinary course of business consistent with past
practice;
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<PAGE>
(k) not take, or permit to be taken, any action that is represented
and warranted in Section 3.24 not to have been taken since the date of the
Interim Balance Sheet (with the exception of (A) that described in Subsection
3.24(a)(iv) and (B) the payment and distributions to the Stockholders and (C)
the incurrence of Company Debt or Permitted Debt, or both, as described in
Section 5.08(m) below);
(l) not increase salaries or other compensation of its officers or
directors or any other employee other than normal year-end merit increases for
non-officer employees made in the ordinary course of the Company's business
consistent with past practice;
(m) not create, incur, assume, guarantee or otherwise become
directly or indirectly liable with respect to any indebtedness for borrowed
money other than (i) Company Debt, (ii) indebtedness for borrowed money in the
ordinary course of business under agreements existing on the date hereof and
identified on the Disclosure Schedule pursuant to Section 3.13 and (iii)
Permitted Debt to the extent the terms thereof are not inconsistent with the
terms of the Company's indebtedness for borrowed money outstanding on the date
hereof and do not provide for any premium or other penalty upon payment prior to
maturity thereof;
(n) not make any change in the Company's authorized or issued
capital stock; grant any stock option or other right to purchase shares of the
Company's capital stock or other securities; issue or make any commitment to
issue any security by the Company, including any security convertible into
capital stock; grant any registration rights; or purchase, redeem, retire or
make any other acquisition of any shares of its capital stock or other
securities;
(o) not amend the certificate or articles of incorporation or bylaws
(or equivalent governing documents) of the Company;
(p) not enter any contract with any Stockholder or any affiliate of
any Stockholder; and
(q) not enter into any agreement or understanding to do or engage in
any of the foregoing actions described in paragraphs (j) through (p).
5.09 Conduct of Envirogen's Business. From the date hereof to the
-------------------------------
Effective Time, except with the prior written consent of all of the
Stockholders, Envirogen will, and will cause its affiliates to:
(a) carry on their businesses in, and only in, the usual, regular
and ordinary course, consistent with past practice and in substantially the same
manner as heretofore conducted and, to the extent consistent with such
businesses, use their best efforts to preserve intact their present business
organizations, keep available the services of their present officers and
employees, and preserve their relationships with customers, contractors, and
others having business dealings with them to the end that their goodwill and
going business shall be materially unimpaired at the Effective Time;
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<PAGE>
(b) pay and discharge all of their debts, liabilities and
obligations as they become due;
(c) keep in full force and effect insurance comparable in amount and
scope of coverage to insurance now carried by them;
(d) perform all of their obligations under agreements, contracts and
instruments relating to or affecting their properties, assets and business;
(e) maintain their facilities and assets in the same state of
repair, order and condition as they were on the date hereof, reasonable wear and
tear accepted;
(f) maintain their books of account and records in the usual,
regular and ordinary manner and to use their best efforts to maintain in full
force and effect all licenses, permits and other authorizations issued to them
with respect to their assets or businesses by any government or regulatory or
administrative agency;
(g) comply with all statues, laws, ordinances, rules and regulations
applicable to them and to the conduct of their businesses;
(h) promptly advise the Stockholders in writing of any material
adverse change in the financial condition, operations, assets, prospects or
business of Envirogen and its affiliates, taken as a whole;
(i) except as expressly provided in Section 1.02, not make any
change in Envirogen's authorized capital stock or purchase, redeem retire or
make any other acquisition of any shares of Envirogen's capital stock or other
securities;
(j) except as expressly provided in Section 1.02, not take any
action to amend Envirogen's Certificate of Incorporation or Bylaws;
(k) not take any action to amend or otherwise modify the Securities
Purchase Agreement; or
(l) not enter into any agreement or understanding to do or engage in
any of the foregoing actions described in paragraphs (i) through (k).
5.10 Sale of Shares of the Company. From the date hereto to the
-----------------------------
Effective Time, except with the prior written consent of Envirogen, each
Stockholder will not sell, assign, transfer, or otherwise encumber any of his
shares of Company Common Stock, or any rights of such Stockholder in such
shares.
5.11 Retirement of Certain Loans. Prior to the Merger, all loans by the
---------------------------
Company to any Stockholder or any other company or other person controlled by or
affiliated with such Stockholder shall be paid in full, and all loans to the
Company from any Stockholder or any other company or other person controlled by
or affiliated with such Stockholder shall be repaid.
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<PAGE>
5.12 Financial Information.
---------------------
(a) Until the Closing, the Company shall provide Envirogen, as soon
as practicable and in any event no later than the 30th day after the end of each
month, with an unaudited balance sheet and income statement of the Company as of
and for the month then ended, prepared on the same basis as the interim
financial statements referred to in Section 3.08, and certified as such by the
President of the Company.
(b) The Company shall provide Envirogen as soon as practicable and
in any event not later than February 15, 1997, the balance sheet of the Company
as at December 31, 1996 (including the notes thereto), and the related
statements of income, changes in stockholders' equity and cash flow for the
fiscal year then ended, together with an "unqualified opinion" thereon of
Vrakas, Blum & Co., S.C., independent public accountants.
(c) Until the Closing, Envirogen shall provide to the Company, at
the same time and to the same extent such information is provided to Envirogen's
executive officers, an unaudited consolidated balance sheet and income statement
of Envirogen as of and for the month ended, prepared on the same basis as the
interim financial statements included in the Envirogen Reports described in
Section 4.06 of this Agreement, certified as such by the Controller of
Envirogen.
5.13 Adoption by Stockholders. The Stockholders, constituting the
------------------------
holders of all of the issued and outstanding capital stock of the Company, by
executing this Agreement, consent to the adoption of this Agreement by the
Company and agree that such consent shall be treated for all purposes as a vote
duly adopted at a meeting of the shareholders of the Company held for this
purpose. Each Stockholder acknowledges receipt of a notice of his rights to
dissent from the Merger under the WBCL and to demand an appraisal of his shares
and shall provide Envirogen with a copy of such notice prior to the Closing
Date. The Company and each Stockholder waives any rights it or he may have under
the Stock Purchase Agreement dated June 6, 1990 among the Stockholders and the
Company with respect to this Agreement and the transactions contemplated hereby,
and agrees that as of the Closing Date such Stock Purchase Agreement shall be
terminated and be of no further force or effect.
5.14 Stock Options. Following the Effective Time, Envirogen shall make
-------------
available to certain employees of the Company that remain with the Surviving
Corporation after the Merger options to purchase an aggregate of 600,000 shares
of Envirogen Common Stock under the Envirogen, Inc. 1990 Incentive Stock Option
and Non-Qualified Stock Option Plan (the "Option Plan") at an exercise price per
share equal to the closing price of Envirogen's Common Stock on the Closing
Date. The identity of such employees, the number of shares subject to such
options, the exercise price, whether such options will be incentive or non-
qualified options, the vesting schedule for such options (which will not be
longer than 20% per year over a five-year vesting period) and the other terms
and conditions thereof shall be mutually agreed to by the Company and Envirogen
prior to Closing.
5.15 Costs and Expenses. Except as otherwise provided herein, the
------------------
Stockholders and Envirogen shall each pay their own fees and expenses and those
of their respective agents and
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<PAGE>
advisors incurred in connection with the transactions contemplated by this
Agreement (including, without limitation, all legal and accounting fees
(collectively, "Transaction Costs")), it being agreed that the proposed
acquisition of the Company contemplated by this Agreement is not in the ordinary
course of the Company's business and that none of the Transaction Costs incurred
in connection with the transactions contemplated hereby shall be borne by the
Company. Notwithstanding the foregoing, (a) if the transactions contemplated by
this Agreement are consummated, Envirogen shall pay up to a maximum of $350,000
in the aggregate of the reasonable Transaction Costs (other than the fees and
expenses of any brokers or finders required to be set forth on the Disclosure
Schedule pursuant to Section 3.26 hereof) incurred by the Stockholders, upon
submission to Envirogen of reasonably detailed invoices and such other
information related thereto as Envirogen may reasonably request, and (b) if this
Agreement is terminated by the Company pursuant to Section 9.01(d) hereof on
account of the failure to fulfill the condition set forth in Section 6.03(f)
herein, then Envirogen (or any successor to Envirogen) shall pay up to a maximum
of $350,000 in the aggregate of all reasonable Transaction Costs incurred by the
Stockholders upon submission to Envirogen (or such successor) of reasonably
detailed invoices and such other information related thereto as Envirogen (or
its successor) may reasonably request. It is agreed and acknowledged that all
fees and expenses of Coopers & Lybrand LLP incurred in connection with the
transactions described in this Agreement (including the audit of any financial
statements of the Company) are fees and expenses incurred by Envirogen and are
not Transaction Costs of the Stockholders.
5.16 Covenant Not-to-Compete.
-----------------------
(a) Except as otherwise permitted in this Section 5.16(a), for a
period of five (5) years from and after the Closing Date, no Stockholder shall,
directly or indirectly, operate, manage, own, control, provide consulting
services to, or in any way be connected with or be concerned with or be
interested in any person, entity or business (other than Envirogen or its
affiliates) that (i) does research with respect to, designs, develops, produces
or manufactures any products which are the same as or substantially similar to
or are intended for uses similar to those with respect to which Envirogen or any
affiliate designs, develops, produces or manufactures; or (ii) furnishes
services similar to those furnished by Envirogen or any affiliate. The
provisions of this paragraph, however, shall not prohibit any Stockholder from
investing in the securities of any such business or enterprise which are traded
publicly and constitute less than one percent (1%) of the particular class of
such business's or enterprises's securities outstanding from time to time.
(b) From and after the Closing Date, no Stockholder shall disclose
directly or indirectly to any person outside of the employ of the Surviving
Corporation, without the express authorization of the Surviving Corporation, any
customer lists, pricing strategies, customer and employee files and records, any
proprietary data or trade secrets of the Surviving Corporation, or any financial
or other information about the Surviving Corporation not in the public domain.
(c) For a period of five (5) years from and after the Closing Date,
no Stockholder shall engage or participate in any effort or act to induce any of
the customers, suppliers, associates, employees or independent contractors of
the Surviving Corporation to take any action or to refrain from taking any such
action or inaction which might be disadvantageous
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to the Surviving Corporation, including, but not limited to, the solicitation of
the Surviving Corporation's customers, suppliers, associates, employees or
independent contractors to cease doing business, or their association or
employment, with the Surviving Corporation.
(d) Each Stockholder expressly acknowledges that damages alone will
be an inadequate remedy for any breach or violation of any of the provisions of
this Section 5.16, and that the Surviving Corporation, in addition to all other
remedies under this Agreement, shall be entitled as a matter of right to
injunctive relief, including specific performance, with respect to any such
breach or violation, in any court of competent jurisdiction.
(e) The invalidity or unenforceability of any provision or
provisions of this Section 5.16 shall not affect the validity or enforceability
of any other provision of this Section 5.16, which shall remain in full force
and effect, and in the event that any provision of this Section 5.16 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.
5.17 Voting Agreement of Allen & Company Incorporated. Contemporaneously
------------------------------------------------
with the execution and delivery of this Agreement, Allen & Company Incorporated
shall deliver to the Company a duly executed voting agreement in the form
attached hereto as Exhibit 5.17.
5.18 Repayment of Company Debt. Contemporaneously with the Closing, the
-------------------------
Company shall repay in full all of the then outstanding Company Debt, without
the payment of any prepayment premium or other similar penalty, and each
Stockholder shall receive at the Closing, in form and substance reasonably
satisfactory to such Stockholder, a copy of a satisfaction statement from each
lender of the Company Debt and a release from each lender of any and all
personal guarantees from the Stockholders held with respect to any Company Debt
and any Permitted Debt.
5.19 Envirogen Board Nominee. For so long as the Stockholders
-----------------------
beneficially own (within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934, as amended), in the aggregate, at least 7.5% of the issued and
outstanding shares of the Envirogen Common Stock, Envirogen will nominate and
use its best efforts to elect and cause to remain as a director on Envirogen's
Board of Directors one individual as such Stockholders as a group may designate
(provided that no Stockholder shall have a vote on such matter if such
Stockholder does not then own shares of Envirogen Common Stock). Such designee
shall be William C. Smith, provided that Mr. Smith is willing and able to serve
in such position. Any vacancy created by Mr. Smith's unwillingness or inability
to act or by his death, disability, retirement, resignation or removal shall be
filled by the majority vote of the number of shares of Envirogen Common Stock
owned by the Stockholders on the date of such vote.
5.20 Indemnification of the Company's Directors and Officers. For a
-------------------------------------------------------
period of at least six (6) years after the Effective Time, Envirogen will
indemnify the directors and officers of the Company and its affiliates who serve
as such immediately prior to the Effective Time to the same extent as such
persons presently are indemnified by the Company pursuant to the Company's
Articles of Incorporation or Bylaws or the provisions of the WBCL (as in effect
at the Effective
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Time and notwithstanding any subsequent change to the WBCL) with respect to
matters which arose prior to the Effective Time.
5.21 Post-Closing Operation of the Company. Envirogen agrees that, at
-------------------------------------
least through December 31, 1998, it will maintain and operate the assets,
operations and business of the Company as a separate operating division of
Envirogen (the "Division"). In this regard, separate books and records,
including budgets, expenses, revenues, operating profits and the like, will be
maintained with respect to the Division's operations; provided, that there shall
be no corporate charges by Envirogen to the Division except for actual service
provided by Envirogen to the Division and then only at the actual cost of such
services.
5.22 Continuation of PAC Plans. Envirogen agrees that, at least through
-------------------------
December 31, 1998, it will retain the Company's PAC Plans (as defined below) and
will award bonuses to employees of the Division during that period and will pay
out all such bonuses awarded at the times and otherwise in accordance with the
provisions of the PAC Plans based on the financial results of the Division. For
purposes of this Agreement, the term "PAC Plans" shall mean (a) the Company's
Provisional Additional Compensation Plan for Employees, (b) the Company's bonus
plan for the employees of its Engineering Solutions division, (c) the Company's
bonus agreement with the Director of its Air Sciences and Engineering Group and
(d) the Company's bonus agreements with the two directors of its Remediation
Services Group, in each case as in effect on the date hereof.
5.23 Insurance Matters. Prior to the Closing, Envirogen shall make
-----------------
arrangements with insurers so that, as of the Effective Time, the assets,
business, operations and personnel of the Company will be covered under a
Commercial General Liability Insurance Policy and a Combined Professional and
Contractors Pollution Liability Policy for the period after the Effective Time.
Such coverage shall insure the assets, business, operations and personnel of the
Company against losses associated with any claims made after the Effective Time,
whether relating to the conduct of the Company's business prior to the Effective
Time or after the Effective Time, and shall be subject to such terms and
conditions as may be mutually agreed to by the Company and Envirogen prior to
the Closing. Prior to the Closing, the Company shall file with its insurer all
necessary incident reports, if any, and will deliver copies of such reports to
Envirogen. At or prior to the Closing, Envirogen shall deliver to the
Stockholders certificates of such insurance, endorsements or other evidence of
such insurance coverage.
SECTION 6. CONDITIONS
6.01 Conditions Precedent to the Obligations of All Parties.
------------------------------------------------------
Notwithstanding any other provision of this Agreement, the obligations of
Envirogen, the Company and the Stockholders to effect the Merger shall be
subject to the fulfillment, at or prior to the Effective Time, of each of the
following conditions:
(a) this Agreement and the transactions contemplated hereby
(including without limitation the amendment to Envirogen's Certificate of
Incorporation to increase the number of authorized shares of Envirogen Common
Stock from 20,000,000 to 50,000,000 and the amendment to Envirogen's Option Plan
to, among other things, increase the number of shares
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<PAGE>
of Envirogen Common Stock reserved for issuance upon exercise of options granted
under such plan from 2,000,000 to 3,000,000) shall have been approved by the
affirmative vote of the stockholders of Envirogen by the requisite vote in
accordance with Envirogen's certificate of incorporation, as amended, and the
DGCL;
(b) the Securities Purchase Agreement shall have been approved by
the affirmative vote of the stockholders of Envirogen by the requisite vote in
accordance with Envirogen's certificate of incorporation, as amended, and the
DGCL, and the transactions contemplated thereby shall have been consummated;
(c) all permits, approvals and consents of any governmental body or
agency necessary or appropriate for consummation of the Merger shall have been
obtained;
(d) no preliminary or permanent injunction or other order of a court
or governmental agency or authority in the United States shall have been issued
and be in effect, and no federal or state statute, rule or regulation shall have
been enacted or promulgated after the date hereof and be in effect that
prohibits the consummation of the Merger or imposes material limitations on the
ability of the Surviving Corporation to exercise full rights of ownership of the
Company's assets or business;
(e) there shall not be any action or proceeding commenced by or
before any court or governmental agency or authority in the United States that
challenges the consummation of the Merger or seeks to impose material
limitations on the ability of the Surviving Corporation to exercise full rights
of ownership of the assets or business of the Company;
(f) Envirogen shall have received an opinion from its financial
advisor, Allen & Company Incorporated, dated the Closing Date, stating that in
the opinion of such financial advisor the terms of the Merger and the Securities
Purchase Agreement are fair to the stockholders of Envirogen from a financial
point of view;
(g) the holders of no more than 10% of the shares of Envirogen's
Common Stock outstanding and entitled to vote on the matters described in
Section 5.01 of this Agreement shall have exercised dissenters' rights with
respect to any or all of such matters in accordance with the provisions of the
DGCL;
(h) Envirogen shall have received all Permits necessary for it to
qualify and act as a "service provider" under and in accordance with the
Petroleum Environmental Clean Up Fund Act of Wisconsin ("PECFA");
(i) Envirogen and each Stockholder shall have executed and delivered
an Employment Agreement in the form attached hereto as Exhibit 6.01(i)
containing the appropriate information for each Stockholder as listed on
Schedule A to Exhibit 6.01(i) attached hereto; and
(j) Envirogen and the Company shall have received from each lender
of Company Debt a pay-off statement with respect to such Company Debt and a
representation that upon the payment to such lender of the amount stated in the
pay-off statement such lender will
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<PAGE>
deliver to Envirogen, the Company and each Stockholder a satisfaction statement
to the effect that all such Company Debt has been satisfied in full and that
Envirogen, the Company and each Stockholder have no further liability of any
kind to such lender.
6.02 Additional Conditions Precedent to the Obligations of Envirogen. In
---------------------------------------------------------------
addition to the conditions contained in Section 6.01, the obligations of
Envirogen to effect the Merger shall also be subject to the fulfillment at the
Effective Time of each of the following conditions:
(a) there shall not have occurred any material adverse change in the
business, financial condition, prospects, assets or operations of the Company
since the date of the Interim Balance Sheet;
(b) the representations and warranties of the Company and the
Stockholders contained in Section 3 and Section 7.01 shall be true and correct
in all material respects at and as of the date hereof and as of the Effective
Time as if made at and as of such time; the Company and each Stockholder shall
have duly performed and complied with all agreements, covenants and conditions
required by this Agreement to be performed or complied with by it or him prior
to or at the Effective Time; and the Company and each Stockholder shall have
delivered to Envirogen a certificate dated the Effective Time and signed on
behalf of the Company by its President and by each Stockholder to the effect set
forth in this paragraph (b);
(c) Envirogen shall have received a certificate pursuant to Section
2.03(a) dated the Effective Time signed on behalf of the Company by its
President and by each Stockholder, which certificate shall evidence that the
Company's Estimated Adjusted Net Worth as of the Closing Date is at least One
Million Dollars ($1,000,000);
(d) Envirogen shall have received from Quarles & Brady, counsel for
the Company and the Stockholders, an opinion dated the Effective Time in form
and substance satisfactory to Envirogen and its counsel, with respect to the
matters set forth on Exhibit 6.02(d) hereto;
(e) all approvals or consents of any third party required for the
execution, delivery or performance of this Agreement by the Company or the
Stockholders, as required to be disclosed on the Disclosure Schedule pursuant to
Sections 3.03(a) and 3.14(a), shall have been obtained and delivered to
Envirogen;
(f) each Stockholder shall have executed and delivered to Envirogen
a Release in the form attached hereto as Exhibit 6.02(f);
(g) each Stockholder shall not have exercised dissenters' rights
under the WBCL in connection with the Merger, and shall have executed and
delivered a waiver of such rights, in form and substance acceptable to
Envirogen;
(h) each Stockholder and the Escrow Agent shall have executed and
delivered to Envirogen the Escrow Agreement;
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<PAGE>
(i) evidence satisfactory to Envirogen of termination of the
Company's contracts, plans and agreements listed on Exhibit 6.02(i) without any
liability to the Company, Envirogen or the Surviving Corporation other than the
repayment of the Company Debt and the Permitted Debt;
(j) Envirogen shall have received the financial statements of the
Company at and for the fiscal years ended December 31, 1994, 1995 and 1996, as
audited by Coopers & Lybrand L.L.P. and accompanied by an "unqualified opinion"
of Coopers & Lybrand L.L.P. thereon; and
(k) all Permits required to be disclosed on the Disclosure Schedule
pursuant to Section 3.06(b)(ii) hereof shall have been granted or renewed in
accordance with applicable law.
6.03 Additional Conditions Precedent to the Obligations of the
---------------------------------------------------------
Company and Stockholders. In addition to the conditions contained in Section
- ------------------------
6.01, the obligations of the Company and the Stockholders to effect the Merger
shall also be subject to the fulfillment at the Effective Time of each of the
following conditions:
(a) the representations and warranties of Envirogen contained in
Section 4 shall be true and correct in all material respects at and as of the
date hereof and as of the Effective Time as if made at and as of the Effective
Time; Envirogen shall have duly performed and complied with all agreements,
covenants and conditions required by this Agreement to be performed or complied
with by it prior to or at the Effective Time; and Envirogen shall have delivered
to the Stockholders a certificate dated the Effective Time and signed on its
behalf by its President to the effect set forth in this paragraph (a);
(b) the Stockholders shall have received from Drinker Biddle &
Reath, counsel for Envirogen, an opinion dated the Effective Time, in form and
substance satisfactory to the Company, the Stockholders and counsel thereto,
with respect to the matters set forth on Exhibit 6.03(b) hereto;
(c) Envirogen and Warburg shall have executed and delivered to the
Stockholders a Registration Rights Agreement in the form attached hereto as
Exhibit 6.03(c) (the "Registration Rights Agreement");
(d) there shall not have occurred any material adverse change in the
business, financial condition, prospects, assets or operations of Envirogen
since September 30, 1996;
(e) all approvals or consents of any third party required for the
execution, delivery, or performance of this Agreement by Envirogen shall have
been obtained and delivered to the Stockholders;
(f) there shall not have been completed any Envirogen Acquisition
Transaction, nor shall there have been any public announcement of a bona fide
proposal or plan with respect to an Envirogen Acquisition Transaction;
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<PAGE>
(g) the Envirogen Common Stock shall continue to be quoted and
traded in the Nasdaq SmallCap Market, and the Envirogen Shares shall have been
approved for quotation, upon notice of issuance, in the Nasdaq SmallCap Market;
(h) the average of the daily closing prices of a share of Envirogen
Common Stock as reported on the Nasdaq SmallCap Market during the period of ten
trading days ending on the last trading day prior to the Envirogen Stockholder
Meeting shall not be less than $1.90; and
(i) Envirogen and the Escrow Agent shall have executed and delivered
to the Stockholders the Escrow Agreement.
6.04 Waiver. Any time prior to the Effective Time, any party hereto may
------
(i) in the case of Envirogen, extend the time for the performance of any of the
obligations or other acts of the Company or any Stockholder or waive compliance
with any of the agreements of the Company or any Stockholder or with any
conditions to its own obligations or (ii) in the case of the Company and the
Stockholders, extend the time for the performance of any of the obligations or
other acts of Envirogen or waive compliance with any of the agreements of
Envirogen or with any conditions to its own obligations. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid if set
forth in an instrument in writing signed on behalf of such party by a duly
authorized officer.
SECTION 7. SECURITIES MATTERS
7.01 Investment Representations and Covenants of Stockholders.
--------------------------------------------------------
(a) Each Stockholder understands (subject to the express obligation
of Envirogen to register the shares of Envirogen Common Stock to be issued to
the Stockholders in the Merger (the "Envirogen Shares") as provided in Section
7.02 hereof) that the issuance of the Envirogen Shares will not be registered
under the Securities Act of 1933, as amended (the "1933 Act"), on the grounds
that the issuance of the Envirogen Shares is exempt from registration pursuant
to Section 4(2) of the 1933 Act and/or Regulation D promulgated under the 1933
Act ("Regulation D"), and that the reliance of Envirogen on such exemptions is
predicated in part on such Stockholder's representations, warranties, covenants
and acknowledgements set forth in this Section.
(b) Each Stockholder hereby represents and warrants to Envirogen
that he is an Accredited Investor, as that term is defined in Regulation D, and
that the Envirogen Shares will be acquired by him for his own account, not as a
nominee or agent, for investment and without a view to resale or other
distribution within the meaning of the 1933 Act, and the rules and regulations
thereunder, and such Stockholder will not distribute or transfer any of the
Envirogen Shares in violation of the 1933 Act. Each Stockholder is a resident of
Wisconsin for purposes of state securities laws.
(c) Each Stockholder: (i) acknowledges that the Envirogen Shares are
not registered under the 1933 Act and may not be sold by such Stockholder unless
the Envirogen
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<PAGE>
Shares are first registered under the 1933 Act (in accordance with Section 7.02
hereof or otherwise) or an exemption from registration is available with respect
to such sale transaction, (ii) is aware that any sales of the Envirogen Shares
made under Rule 144 of the Securities and Exchange Commission under the 1933 Act
may be made only in limited amounts and in accordance with the terms and
conditions of that Rule and that in such cases where the Rule is not applicable,
registration or compliance with some other registration exemption will be
required, (iii) is aware that Rule 144 is not presently, and for a period of at
least two years following the Closing Date hereof may not be, available for use
by such Stockholder for resale of the Envirogen Shares, and (iv) is aware that
Envirogen is not obligated to register any sale, transfer or other disposition
of the Envirogen Shares except in accordance with the provisions of Section 7.02
hereof.
(d) Each Stockholder represents and warrants to Envirogen that such
Stockholder has such knowledge and experience in financial and business matters
that he is fully capable of evaluating the risks and merits of such
Stockholder's investment in the Envirogen Shares.
(e) Each Stockholder acknowledges receipt of the Envirogen Reports,
the Securities Purchase Agreement and the exhibits and schedules thereto and
such other documents, agreements and information as each Stockholder has
required and confirms and acknowledges that: (i) Envirogen has afforded such
Stockholder the opportunity to ask questions of and receive answers from
Envirogen's officers and various directors concerning the terms and conditions
of this Agreement and such Stockholder's investment in the Envirogen Shares and
to obtain such additional information as such Stockholder has requested, and
(ii) such Stockholder has availed himself of such opportunity to the extent he
deems necessary and has received the information requested.
(f) In order to ensure compliance with the provisions of subsection
(b) hereof, each Stockholder covenants and agrees that, after the Closing, he
will not sell, transfer or otherwise dispose of any of the Envirogen Shares or
any interest therein (unless such sale, transfer or disposition has been
registered under the 1933 Act in accordance with the provisions of Section 7.02
hereof or otherwise) or otherwise without there first having been compliance
with either of the following conditions:
(i) Envirogen shall have received a written opinion of
counsel in form and substance reasonably satisfactory to Envirogen, or
a copy of a "no-action" or interpretive letter of the SEC, specifying
the nature and circumstances of the proposed transfer and indicating
that the proposed transfer will not be in violation of any of the
provisions of the 1933 Act and the rules and regulations promulgated
thereunder; or
(ii) Envirogen shall have received an opinion from its own
counsel to the effect that the proposed transfer will not be in
violation of any of the provisions of the 1933 Act and the rules and
regulations promulgated thereunder.
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(g) Each Stockholder agrees that he will not sell, transfer or
otherwise dispose of Envirogen Shares for a period of twelve (12) months after
the Effective Time without the prior written consent of Envirogen.
(h) Each Stockholder also acknowledges and agrees that the
certificates representing the Envirogen Shares issuable to him will contain a
restrictive legend noting the restrictions on transfer described in this Section
7.01 and under federal and applicable state securities laws, and that
appropriate "stop-transfer" instructions will be given to Envirogen's stock
transfer agent.
7.02 Registration Rights Agreement. Envirogen shall register the shares
-----------------------------
of Envirogen Common Stock as described in, and subject to the terms and
conditions provided under, the Registration Rights Agreement.
SECTION 8. INDEMNIFICATION; ESCROW
8.01 Indemnification.
---------------
(a) Indemnities. Each Stockholder (and, prior to the Closing Date,
-----------
the Company) agrees to indemnify and hold harmless each of Envirogen and the
Surviving Corporation and their respective directors, officers, employees and
agents, and Envirogen agrees to indemnify and hold harmless each Stockholder
(and, prior to the Closing Date, the Company) and their respective agents (the
party referred to as indemnifying another party being hereinafter referred to as
the "indemnifying party") against any and all losses, costs, expenses, claims,
damages or liabilities, including the amount of any settlement approved by such
indemnifying party and expenses of enforcing this Agreement (collectively,
"Loss"), which the party entitled to such indemnification (the "indemnified
party") has suffered, incurred or become subject to, and to reimburse the
indemnified party for any reasonable legal, audit or other expenses incurred by
it in connection with investigating any claims and defending any actions,
insofar as any such Loss arises out of or is based upon: (i) any false
representation or the breach of any warranty made by the indemnifying party
herein or in any schedule, document, list, certificate or other instrument
delivered to the indemnified party pursuant to this Agreement; or (ii) any
breach or default in performance by the indemnifying party of any of its
covenants or agreements with the indemnified party contained herein.
(b) Notices. A party seeking indemnification hereunder shall
-------
promptly notify the party from whom it is seeking indemnification of the
assertion of any claim or the discovery of any fact upon which the party seeking
indemnification intends to base a claim for indemnification hereunder. With
respect to any claim made by a third party against which a party hereto is
seeking indemnification hereunder (other than a claim made by a taxing authority
with respect to any consolidated, combined or unitary return filed by Envirogen
or an affiliate thereof), the party from whom indemnification is sought shall
have the right, at its own expense, to participate in or assume control of the
defense of such claim, and the party seeking indemnification shall fully
cooperate with the party from whom indemnification is sought subject to
reimbursement for actual out-of-pocket expenses incurred as the result of such
request by the party from whom indemnification is sought. If the party from whom
indemnification is sought
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either does not elect to assume control or otherwise participate in the defense
of any third-party claim, that party shall be bound by the results obtained by
the other with respect to such claim.
(c) Survival of Representations, Warranties and Covenants. The
-----------------------------------------------------
representations and warranties of each party hereto shall survive for a period
commencing on the date hereof and ending on the first anniversary of the
Effective Time (the "Claims Period"). If no claim for indemnification relating
to any misrepresentation or breach of warranty has been initiated within the
Claims Period, then no claim for indemnification hereunder or any other claim
may be asserted under law or under this Agreement for any misrepresentation or
breach of warranty hereunder; provided, however, that in the case of (i) the
-------- -------
representations and warranties of the Company and the Stockholders contained in
Sections 3.18, 3.19 and 3.23 of this Agreement and (ii) the representations and
warranties of Envirogen in Sections 2.14, 2.15 and 2.24 of the Securities
Purchase Agreement, relating to income and other tax claims, ERISA claims and
environmental claims, claims may be made within the period of the applicable
statute of limitations provided that neither party takes, nor permits to be
taken, any action to extend such period of limitations without the other's
written consent in advance; and provided further, that notwithstanding anything
----------------
contained herein to the contrary, this paragraph shall not impose any time
limitation on the assertion of claims for breach of any covenant or agreement
made by any party hereunder.
(d) Investigations. Any indemnity agreements contained in this
--------------
Section 8.01 shall remain operative and in full force and effect regardless of
any investigation made or omitted by or on behalf of any indemnified party.
(e) Exclusivity. The rights of indemnity provided by this Section
-----------
8.01 shall, after the Effective Time, be exclusive of all other rights of
indemnity or contribution, whether created by law or otherwise, relating in any
way to the subject matter of this Agreement except as provided in Section
5.16(d) hereof; provided that notwithstanding the provisions of this Section
--------
8.01 or any other provision of this Agreement, nothing contained in this
Agreement shall limit any liability of any party hereto arising out of any act
of fraud or intentional misrepresentation by such party occurring in connection
with this Agreement, and the rights of indemnity of the parties hereto from any
Loss incurred in connection therewith shall be in addition to any other rights
to indemnification that the parties hereto may have pursuant to law or
otherwise.
(f) Limitations.
-----------
(i) An indemnified party shall not be entitled to recovery
for any Loss relating to a matter covered by a reserve established for such
matter on the latest financial statements of the indemnifying party delivered to
the indemnified party on or before the Effective Time unless, and only to the
extent that, the cumulative Loss suffered by such indemnified party exceeds the
amount of such reserve. For these purposes only, the reserves of the Company on
the Closing Statement shall be deemed to be a reserve of the Stockholders.
(ii) An indemnified party shall not be entitled to more than
one recovery for any single Loss even though such Loss may have resulted from
the breach or
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inaccuracy of more than one of the representations, warranties, covenants and
agreements made by an indemnifying party in or pursuant to this Agreement.
(iii) With respect to claims for breaches by an indemnifying
party of its representations and warranties, the indemnified party shall not be
entitled to indemnification hereunder unless and until the aggregate of all
valid claims of the indemnified party relating to breaches of representations or
warranties exceeds the sum of $50,000 (the "Threshold"), and then only to the
extent of the amount in excess of the Threshold.
(iv) The liability of each Stockholder under this Section 8.01
shall be limited to the Escrow Money and the Escrow Shares (and, after the
expiration of the Claims Period with respect to a misrepresentation or breach of
warranty with respect to the representations and warranties of the Company and
the Stockholders contained in Sections 3.18, 3.19 and 2.23 of this Agreement,
the liability of the Stockholders shall be limited to an aggregate amount equal
to the Escrow Money and the value of the Escrow Shares as of the expiration of
the Claims Period, but the liability of each Stockholder in such case shall be
several and not joint); provided, however, that any Loss of the Surviving
Corporation that arises out of any act of fraud or intentional misrepresentation
by the Stockholders shall not be so limited to the Escrow Money and the Escrow
Shares (or the value thereof as of the expiration of the Claims Period), but the
liability of each Stockholder in such case shall be several and not joint with
respect to such Loss.
(v) The cumulative liability of Envirogen and the Surviving
Corporation under this Section 8.01 shall be limited in the aggregate to an
amount equal to the amount of the Escrow Money and the value of the Escrow
Shares on the Closing Date.
(vi) The amounts for which an indemnifying party shall be
liable under this Section 8.01 of this Agreement shall be: (A) net of any tax
benefit realized or to be realized by the indemnified party by reason of the
facts and circumstances giving rise to the indemnifying party's liability; and
(B) net of any insurance proceeds received by the indemnified party in
connection with the facts giving rise to the right of indemnification.
8.02 Escrow.
------
(a) At the Closing, immediately after the delivery to the
Stockholders of certificates for the shares of Envirogen Common Stock to be
issued in the Merger, (i) the Stockholders shall deliver to Summit Bank as
escrow agent (the "Escrow Agent"), certificates representing the Escrow Shares
duly endorsed in blank for transfer by the Stockholders and (ii) Envirogen will
deliver to the Escrow Agent the Escrow Money. The Escrow Shares and the Escrow
Money shall be held by the Escrow Agent in escrow pursuant to the terms of this
Section 8.02 and the terms of the Escrow Agreement, and the Escrow Agent and the
Surviving Corporation are hereby granted a security interest in the Escrow
Shares and the Escrow Money, as security for any right to indemnification the
Surviving Corporation may have under Section 8.01 hereof and as security for the
Stockholders' timely performance of the their obligations under Section 2.05
hereof.
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(b) If the Surviving Corporation determines that it is entitled to
be indemnified pursuant to Section 8.01 or that an amount is owed pursuant to
Section 2.05 hereof, it shall so notify the Stockholders of the nature of the
claim and the amount (estimated or actual) of the Loss. Subject to the rights of
the Stockholders pursuant to Section 8.02(c) hereof, all amounts payable to the
Surviving Corporation pursuant to Sections 8.01 and 2.05 shall be paid first in
cash from the Escrow Money and then from the Escrow Shares. The number of Escrow
Shares to be transferred to the Surviving Corporation pursuant to this Section
8.02(b) shall equal the remaining amount of the Loss so incurred (after any
payments in cash in respect thereof from the Escrow Money) divided by the
average of the daily closing prices of a share of Envirogen Common Stock as
reported by the Nasdaq SmallCap Market during the period of ten trading days
ending on the last trading day prior to the date of receipt by the Stockholders
of the notice described in this Section 8.02(b) (the "Average Price"). To the
extent that the Surviving Corporation has a right to receive any of the Escrow
Shares, it shall give a notice to the Stockholders and the Stockholders may,
within the ten (10) day period after such notice, pay to the Escrow Agent cash
in an amount equal to the amount of such Loss, and the Escrow Agent shall then
in lieu of the transfer of Escrow Shares to the Surviving Corporation pay to the
Surviving Corporation cash in the amount of such Loss and release to the
Stockholders that number of the Escrow Shares calculated by dividing the amount
of cash paid by the Stockholders to the Escrow Agent by the Average Price.
(c) If the Stockholders do not deliver to the Surviving Corporation
written objection to the notice described in Section 8.02(b) within twenty (20)
business days after the date of such notice, the amount of loss shall be deemed
accepted by the Stockholders and the appropriate number of Escrow Shares and
Escrow Money shall become the property of the Surviving Corporation in
accordance with Section 8.02(b). If the Stockholders deliver to the Surviving
Corporation written notice of objection within such twenty (20) business day
period, then the Stockholders and the Surviving Corporation shall, within twenty
(20) business days after receipt of such notice of objection, attempt to resolve
the dispute. If the Stockholders and the Surviving Corporation fail to do so
within said period of time, the matter shall be determined by a court of
competent jurisdiction.
(d) All Escrow Shares that have not theretofore been transferred to
the Surviving Corporation pursuant to this Section 8.02 shall be delivered by
the Escrow Agent to the Stockholders promptly after the expiration of the Claims
Period; provided that if, at the expiration of the Claims Period, the Surviving
Corporation shall have given written notice to the Stockholders of a Loss
(actual or potential) hereunder, the Escrow Agent shall continue to withhold a
number of Escrow Shares and Escrow Money in accordance with the terms of Section
8.02(b) above as is appropriate, in its reasonable judgment, to satisfy the
amount of the Loss. Such Escrow Shares and Escrow Money shall continue to be
withheld until there has been a final determination as to whether the Surviving
Corporation has suffered any such Loss.
(e) The Stockholders shall not transfer any of the Escrow Shares, or
any interest therein, or attempt to pledge any of the Escrow Shares, so long as
the Escrow Shares are held in escrow by the Escrow Agent hereunder.
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(f) Unless and until the Escrow Shares become the property of the
Surviving Corporation as above provided, each cash dividend declared and paid
with respect to such Escrow Shares shall be delivered, as paid, to the
Stockholders. In the case of any stock dividend, stock split, reverse stock
split or similar event, the additional shares shall be added to the Escrow
Shares. All other rights incident to the Escrow Shares, except as provided for
in, or limited by, this Section 8.02, shall be in the Stockholders. With respect
to the right to vote the Escrow Shares, each Stockholder shall have the right to
vote the Escrow Shares to the extent of his pro rata ownership interest in such
Escrow Shares.
SECTION 9. TERMINATION
9.01 Termination. This Agreement may be terminated at any time prior to
-----------
the Effective Time:
(a) by mutual agreement of the Company and Envirogen;
(b) by Envirogen, if events have occurred which have made it
impossible to satisfy a consition precedent to Envirogen's obligations to
consummate the transactions described in this Agreement, unless Envirogen's
breach of this Agreement has caused the condition to be unsatisfied;
(c) by the Company and the Stockholders, if events have occurred
which have made it impossible to satisfy a condition precedent to the Company's
and the Stockholders' obligations to consummate the transactions described in
this Agreement, unless the Company's or any Stockholder's breach of this
Agreement has caused the condition to be unsatisfied;
(d) by Envirogen or the Company, upon notice to the other, if the
Merger shall not have become effective on or before May 31, 1997 (unless such
date is extended in writing by the parties hereto), except that the right to
terminate this Agreement under this Section 9.01(d) shall not be available to
any party whose failure to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the Closing to occur on or before
such date; or
(e) by Envirogen or the Company, upon notice to the other, if the
required approval of the stockholders of Envirogen contemplated by this
Agreement shall not have been obtained by reason of the failure to obtain the
required vote at the Envirogen Stockholder Meeting or at any adjournment or
postponement thereof.
9.02 Effect of Termination. Except as provided in Section 5.04 hereof
---------------------
with respect to information obtained in connection with the transactions
contemplated hereby and as provided in Section 5.15 hereof with respect to the
payment of reasonable Transaction Costs under certain circumstances, in the
event of the termination of this Agreement pursuant to the provisions of Section
9.01, the provisions of this Agreement shall become void and have no effect,
with no liability on the part of any party hereto or its shareholders or
directors or officers in respect thereof, provided that nothing contained herein
shall be deemed to relieve any party of any liability it may have to any other
party with respect to a breach of its obligations, covenants, representations or
warranties contained in this Agreement.
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SECTION 10. GENERAL PROVISIONS
10.01 Amendment. This Agreement may be amended by the parties hereto at
---------
any time before or after approval of the Merger by the stockholders of
Envirogen; provided that following approval of the Merger by the stockholders of
Envirogen, no amendment shall be made which by law requires the further approval
of such stockholders without obtaining such further approval. This Agreement may
not be amended except by an instrument in writing signed on behalf of the
parties hereto.
10.02 Extension; Waiver. At any time prior to the Effective Time of the
-----------------
Merger, Envirogen, on the one hand, and the Company and the Stockholders, on the
other, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other, (ii) waive any
inaccuracies in the representations and warranties made to it contained herein
or in any document delivered pursuant hereto and (iii) waive compliance with any
of the agreements or conditions for the benefit of it contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
10.03 Notices. All notices or other communications permitted or required
-------
under this Agreement shall be in writing and shall be sufficiently given if and
when hand delivered to the persons set forth below or if sent by documented
overnight delivery service or registered or certified mail, postage prepaid,
return receipt requested, or by telegram, telex or telecopy, receipt
acknowledged, addressed as set forth below or to such other person or persons
and/or at such other address or addresses as shall be furnished in writing by
any party hereto to the others. Any such notice or communication shall be deemed
to have been given as of the date received, in the case of personal delivery, or
on the date shown on the receipt or confirmation therefor in all other cases.
(a) If to Envirogen, to:
Envirogen, Inc.
4100 Quakerbridge Road
Lawrenceville, New Jersey 08648
Telecopier No.: 609-936-9221
Attn: Harch S. Gill
with a copy to:
Drinker Biddle & Reath
47 Hulfish Street
Princeton, New Jersey 08542
Telecopier No.: 609-921-2265
Attn: John E. Stoddard III, Esq.
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<PAGE>
(b) If to the Company, to:
Fluid Management, Inc.
2831 No. Grandview Blvd.
P.O. Box 90
Pewaukee, Wisconsin 53072-0090
Telecopier No.: 414-549-6938
Attn: William C. Smith
with a copy to:
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-4497
Telecopier No.: 414-271-3552
Attn: Patrick M. Ryan, Esq.
(c) If to the Stockholders, to:
William C. Smith
S38 W33688 Highway D
Dousman, Wisconsin 53118
Douglas W. Jacobson
2518 N. 81st Street
Wauwatosa, Wisconsin 53213
Gary W. Hawk
W272 N1347 Spring Hill Drive
Pewaukee, Wisconsin 53072
Richard W. Schowengerdt
250 N. Summit Moors Drive
Oconomowoc, Wisconsin 53066
with a copy to:
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-4497
Telecopier No.: 414-271-3552
Attn: Patrick M. Ryan, Esq.
A-53
<PAGE>
10.04 Assignment and Benefit.
----------------------
(a) Prior to the Closing Date, this Agreement and the rights and
obligations set forth herein may not be transferred or assigned by operation of
law or otherwise without the consent of each party hereto. After the Closing
Date, any party may assign its rights (but not its obligations) under this
Agreement upon written notice to the other parties. This Agreement is binding
upon and will inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
(b) This Agreement shall not be construed as giving any person,
other than the parties hereto and their permitted successors, heirs and assigns,
any legal or equitable right, remedy or claim under or in respect of this
Agreement or any of the provisions herein contained, this Agreement and all
provisions and conditions hereof being intended to be, and being, for the sole
and exclusive benefit of such parties, and permitted successors, heirs and
assigns and for the benefit of no other person or entity.
10.05 Severability. If any provision of this Agreement, or the application
------------
thereof, will for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of the void unenforceable provision.
10.06 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law or equity on
such party, and the exercise of any one remedy will not preclude the exercise of
any other.
10.07 Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Agreement.
10.08 Governing Law. This Agreement is made pursuant to, and shall be
-------------
construed and enforced in accordance with, the laws of the State of Delaware,
without giving effect to otherwise applicable principles of conflicts of law,
except insofar as the corporation laws of Delaware and Wisconsin apply to the
Merger.
10.09 Section Headings and Defined Terms. The section headings contained
----------------------------------
herein are for reference purposes only and shall not in any way affect the
meaning and interpretation of this Agreement. The terms defined herein and in
any agreement executed in connection herewith include the plural as well as the
singular and the singular as well as the plural. Except as otherwise indicated,
all agreements defined herein refer to the same as from time to time
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<PAGE>
amended or supplemented or the terms thereof waived or modified in accordance
herewith and therewith.
10.10 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original; and any person may
become a party hereto by executing a counterpart hereof, but all of such
counterparts together shall be deemed to be one and the same instrument. It
shall not be necessary in making proof of this Agreement or any counterpart
hereof to produce or account for any of the other counterparts.
10.11 Entire Agreement. This Agreement, together with the Disclosure
----------------
Schedule and the agreements, exhibits, schedules and certificates referred to
herein or delivered pursuant hereto, constitute the entire agreement between the
parties hereto with respect to the subject matter hereof and supersede all prior
agreements and understandings.
10.12 Income Tax Position. None of Envirogen, the Company, or the
-------------------
Stockholders shall take a position for income tax purposes which is inconsistent
with this Agreement, including the position stated in the Recitals to this
Agreement to the effect that the Merger is intended to be a tax-free
reorganization under Section 368(a)(1)(A) of the Code.
10.13 Enforcement Expenses. In the event of any litigation, arbitration,
--------------------
or other legal proceeding to enforce, interpret or recover damages for breach of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and costs incurred in the proceeding in addition to any other
relief to which the prevailing party is entitled.
10.14 Access to Records. Envirogen agrees that the Stockholders and their
-----------------
attorneys, agents, accountants and designees may have such access to the books
and records of the Company and such right to make copies thereof, for the one-
year period from and after the Effective Time, as the Stockholders may
reasonably deem necessary or desirable. Any such examination shall be at the
expense of the Stockholders, shall be performed at the place where such books
and records are regularly maintained by Envirogen during Envirogen's normal
business hours and shall not interfere with Envirogen's normal business
activities. Such access to the Company's books and records shall extend only
insofar as such books and records relate to the Stockholders and/or matters or
events arising prior to the Closing Date relating to the Company or the
Stockholders.
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IN WITNESS WHEREOF, Envirogen and the Company have caused this Agreement to
be signed by their respective duly authorized officers, and the Stockholders
have signed this Agreement, on the date first above written.
ATTEST: ENVIROGEN, INC.
/s/ Gale Smith By:/s/ Harcharan S. Gill
- -------------------------------- ---------------------------------
Gale Smith Harcharan S. Gill
Assistant Secretary President
ATTEST: FLUID MANAGEMENT, INC.
/s/ Douglas W. Jacobson By:/s/ William C. Smith
- -------------------------------- ---------------------------------
Douglas W. Jacobson William C. Smith
Secretary President
WITNESS: STOCKHOLDERS:
/s/ Douglas W. Jacobson /s/ William C. Smith
- -------------------------------- ------------------------------------
William C. Smith
Social Security No: ###-##-####
/s/ William C. Smith /s/ Douglas W. Jacobson
- -------------------------------- ------------------------------------
Douglas W. Jacobson
Social Security No.: ###-##-####
/s/ Richard W. Schowengerdt /s/ Gary W. Hawk
- -------------------------------- ------------------------------------
Gary W. Hawk
Social Security No.: ###-##-####
/s/ Gary W. Hawk /s/ Richard W. Schowengerdt
- -------------------------------- ------------------------------------
Richard W. Schowengerdt
Social Security No.: ###-##-####
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<PAGE>
Appendix B
262 APPRAISAL RIGHTS.-(A) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with the respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to (S)228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S)251 (other than a merger effected pursuant to subsection
(g) of Section 251), 252, 254, 257, 258, 263, or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to (S)(S)251, 252,
254, 257, 258, 263, and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
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b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) and (c) hereof that appraisal rights are available for any or
all of the shares of the constituent corporations, and shall include in such
notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein provided.
Within 10 days after the effective date of such merger or consolidation, the
surviving or resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this
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subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within twenty days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such holer's shares.
If such notice did not notify stockholders of the effective date of the merger
or consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation notifying
each of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date of the
merger or consolidation or (ii) the surviving or resulting corporation shall
send such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more than
20 days following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this subsection.
An affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to
receive either notice, each constituent corporation may fix, in advance, a
record date that shall be not more than 10 days prior to the date the notice is
given; provided that, if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such effective date. If
no record date is fixed and the notice is given prior to the effective date, the
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record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in newspaper of general circulation
published in the City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by publication shall be
approved by the Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing of such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit
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their certificates of stock to the Register in Chancery for notation thereon of
the pendency of the appraisal proceedings; and if any stockholder fails to
comply with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted his certificates of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of
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<PAGE>
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal shall be
filed within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a written
withdrawal of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch
349, L '96, eff. 7-1-96.)
B-6
<PAGE>
Appendix C
[LETTERHEAD OF ALLEN & COMPANY INCORPORATED]
January 3, 1997
The Board of Directors
Envirogen, Inc.
Princeton Research Center
4100 Quakerbridge Road
Lawrenceville, New Jersey 08648
Members of the Board of Directors:
You have requested our opinion, as of this date, as to the fairness, from a
financial point of view, to the holders of the outstanding shares of Common
Stock, par value $.01 per share (the "Common Stock"), of Envirogen, Inc., a
Delaware corporation (the "Company"), of the terms of the Proposed Transactions
referred to hereinafter.
Pursuant to the proposed Agreement and Plan of Merger (the "Merger
Agreement"), to be entered into by and among the Company, Fluid Management,
Inc., a Wisconsin corporation ("FMI"), and the stockholders of FMI, the Company
will enter into a business combination transaction pursuant to which FMI will be
merged with and into the Company, with the Company surviving the merger (the
"Merger Transaction"). Pursuant to the Merger Transaction, each outstanding
share of common stock of FMI will be converted into a combination of shares of
Common Stock and cash in such amounts as are more fully set forth in the Merger
Agreement. As a condition to the Merger Transaction, a simultaneous private sale
of shares of Common Stock will be made by the Company to Warburg, Pincus
Ventures, L.P. ("Warburg") at a purchase price of $2.625 per share in order to
finance the Merger Transaction and supplement the working capital of the
combined entity (the "Stock Sale Transaction" and, collectively with the Merger
Transaction, the "Proposed Transactions") pursuant to a proposed Securities
Purchase Agreement (the "Securities Purchase Agreement") to be entered into by
and between the Company and Warburg. Unless otherwise specifically defined
herein, all capitalized terms used herein shall have the meanings ascribed to
such terms in the Merger Agreement and the Securities Purchase Agreement.
C-1
<PAGE>
The Board of Directors
Envirogen, Inc.
January 3, 1997
Page 2
We understand that all approvals required for the consummation of the
Proposed Transactions have been or, prior to consummation of the Proposed
Transactions, will be obtained. As you know, Allen & Company Incorporated
("Allen") has from time to time provided various investment banking and
financial advisory services to the Company and has acted as its financial
advisor in connection with the Proposed Transactions and will receive a fee for
its services to the Company pursuant to the letter agreement dated December 9,
1996. In addition, as you know, Allen together with certain of its affiliates
own an aggregate of 2,090,344 shares of the Company's Common Stock and warrants
to purchase an additional 615,047 shares of the Company's Common Stock, and Mr.
Robert C. Miller, a Vice President and Director of Allen, is also a director and
stockholder of the Company. From time to time in the ordinary course of its
business as a broker-dealer, Allen may hold positions and trade in securities of
the Company.
In arriving at our opinion, we have among other things:
(i) reviewed the terms and conditions of the Proposed
Transactions, including the draft Merger Agreement and the
draft agreements ancillary thereto, as well as the draft
Securities Purchase Agreement and the draft agreements
ancillary thereto (none of which prior to the delivery of
this opinion has been executed by the parties);
(ii) analyzed publicly available historical business and
financial information relating to the Company, as presented
in documents filed with the Securities and Exchange
Commission;
(iii) reviewed a draft of the Company's preliminary proxy
statement to be filed with the Securities and Exchange
Commission;
(iv) analyzed certain historical business and financial
information relating to FMI furnished by FMI;
(v) reviewed certain financial forecasts and other data provided
to us by the Company and FMI relating to their respective
businesses;
(vi) conducted discussions with certain members of the senior
management of the Company and FMI with respect to the
financial condition, business operations, strategic
objectives and
[LOGO OF ALLEN & COMPANY INCORPORATED]
C-2
<PAGE>
The Board of Directors
Envirogen, Inc.
January 3, 1997
Page 3
prospects of the Company and FMI, as well as trends
prevailing in the Company's and FMI's respective industries;
(vii) reviewed and analyzed public information, including certain
stock market data and financial information relating to
selected public companies in lines of business which we
believe to be comparable to the Company's and FMI's;
(viii) reviewed trends in the waste management and environmental
services industries;
(ix) reviewed the trading history of the Company's Common Stock,
including its performance in comparison to market indices
and to selected companies in comparable businesses and the
market reaction to selected public announcements regarding
the Company;
(x) reviewed public financial and transaction information
relating to merger and acquisition transactions we deemed to
be comparable to the Merger Transaction; and
(xi) conducted such other financial analyses and investigations
as we deemed necessary or appropriate for the purposes of
the opinion expressed herein.
In rendering our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information respecting the Company
and FMI and any other information provided to us, and we have not assumed any
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets of the Company or FMI.
With respect to the financial forecasts referred to above, we have assumed that
they have been reasonably prepared on a basis reflecting the best currently
available information and the good faith estimates and judgments of the
management of the Company and FMI as to the future financial performance of the
Company and FMI, respectively.
In addition to our review and analysis of the specific information set
forth above, our opinion herein reflects and gives effect to our assessment of
general economic, monetary and market conditions existing as of the date hereof
as they may affect the business and prospects of the Company and FMI.
[LOGO OF ALLEN & COMPANY INCORPORATED]
C-3
<PAGE>
The Board of Directors
Envirogen, Inc.
January 3, 1997
Page 4
Our engagement and the opinion expressed herein are solely for the
benefit of the Board of Directors of the Company in its evaluation of the
Proposed Transactions and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
and referred to in any filing made by the Company with the Securities and
Exchange Commission with respect to the Proposed Transactions. Furthermore, the
opinion rendered herein does not constitute a recommendation that the Company
pursue the Proposed Transactions over any other alternative transactions which
may be available to the Company or that any stockholder of the Company vote to
approve the Proposed Transactions.
Based on and subject to the foregoing, we are of the opinion that, as
of this date, the terms of the Proposed Transactions are fair, from a financial
point of view, to the holders of the Company's Common Stock.
Very truly yours,
ALLEN & COMPANY INCORPORATED
/s/ Robert C Miller
By:----------------------------------------------
VICE PRESIDENT & DIRECTOR
[LOGO OF ALLEN & COMPANY INCORPORATED]
C-4
<PAGE>
Appendix D
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT
between
WARBURG, PINCUS VENTURES, L.P.
and
ENVIROGEN, INC.
January 14, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1. PURCHASE AND SALE OF SECURITIES....................... 1
1.1. Issuance of Common Stock.............................. 1
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY......... 1
2.1. Corporate Organization................................ 1
2.2. Subsidiaries.......................................... 2
2.3. Capitalization........................................ 2
2.4. Corporate Proceedings, etc............................ 3
2.5. Consents and Approvals................................ 3
2.6. Absence of Defaults, Conflicts, etc................... 4
2.7. SEC Reports........................................... 4
2.8. Absence of Certain Developments....................... 5
2.9. Compliance with Law................................... 5
2.10. Litigation............................................ 6
2.11. Material Contracts.................................... 6
2.12. Absence of Undisclosed Liabilities.................... 6
2.13. Employees............................................. 7
2.14. Tax Matters........................................... 7
2.15. Employee Benefit Plans................................ 7
2.16. Patents, Licenses, etc................................ 8
2.17. Title to Tangible Assets.............................. 9
2.18. Condition of Properties............................... 9
2.19. Insurance............................................. 9
2.20. Transactions with Related Parties..................... 9
2.21. Interest in Competitors............................... 10
2.22. Registration Rights................................... 10
2.23. Private Offering...................................... 10
2.24. Environmental......................................... 11
2.25. Fluid Management Agreement Representations............ 12
2.26. Brokerage............................................. 12
2.27. Illegal or Unauthorized Payments; Political
Contributions......................................... 12
2.28. Takeover Statute...................................... 13
2.29. Material Facts........................................ 13
SECTION 3. REPRESENTATIONS AND WARRANTIES OF WARBURG............. 13
SECTION 4. ADDITIONAL COVENANTS OF THE PARTIES................... 15
4.1. Resale of Securities.................................. 15
4.2. Covenants Pending Closing............................. 16
4.3. Further Assurance..................................... 16
4.4. Board Nominee......................................... 16
4.5. Hart-Scott-Rodino..................................... 16
SECTION 5. WARBURG'S CLOSING CONDITIONS.......................... 17
5.1. Representations and Warranties........................ 17
5.2. Compliance with Agreement............................. 17
5.3. Officer's Certificate................................. 17
5.4. Injunction............................................ 17
5.5. Counsel's Opinion..................................... 17
</TABLE>
- i -
<PAGE>
<TABLE>
<S> <C>
5.6. Acquisition of Fluid Management....................... 18
5.7. Consents; Hart-Scott-Rodino........................... 19
5.8. Election of Directors................................. 18
5.9. Registration Rights Agreement......................... 18
5.10. Approval of Proceedings............................... 18
SECTION 6. COMPANY CLOSING CONDITIONS............................ 18
6.1. Representations and Warranties........................ 18
6.2. Compliance with Agreement............................. 19
6.3. Warburg's Certificate................................. 19
6.4. Consents; Hart-Scott-Rodino........................... 19
6.5. Injunction............................................ 19
6.6. Acquisition of Fluid Management....................... 19
SECTION 7. RESERVED.............................................. 19
SECTION 8. COVENANTS............................................. 19
8.1. Confidentiality....................................... 19
8.2. Lost, etc. Certificates Evidencing Shares of
Common Stock; Exchange................................ 20
SECTION 9. INTERPRETATION OF THIS AGREEMENT...................... 20
9.1. Terms Defined......................................... 20
9.2. Accounting Principles................................. 22
9.3. Directly or Indirectly................................ 22
9.4. Governing Law......................................... 22
9.5. Paragraph and Section Headings........................ 22
SECTION 10. MISCELLANEOUS......................................... 22
10.1. Notices............................................... 22
10.2. Expenses and Taxes.................................... 23
10.3. Reproduction of Documents............................. 23
10.4. Termination and Survival.............................. 24
10.5. Successors and Assigns................................ 24
10.6. Entire Agreement; Amendment and Waiver................ 24
10.7. Severability.......................................... 25
10.8. Limitation on Enforcement of Remedies................. 25
10.9. Counterparts.......................................... 25
</TABLE>
EXHIBIT A Certificate of Incorporation of the Company
EXHIBIT B Bylaws of the Company
EXHIBIT C Form of Opinion of Company Counsel
- ii -
<PAGE>
ENVIROGEN, INC.
SECURITIES PURCHASE AGREEMENT
Dated as of January 14, 1997
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017
Dear Sirs:
Envirogen, Inc., a Delaware corporation (the "Company"), hereby agrees
with Warburg, Pincus Ventures, L.P., a Delaware limited partnership ("Warburg"),
as follows :
SECTION 1. PURCHASE AND SALE OF SECURITIES
-------------------------------
1.1. Issuance of Common Stock
------------------------
(a) Subject to the terms and conditions set forth in this Agreement
and in reliance upon the Company's and Warburg's representations set forth
below, on the Closing Date (as defined below) the Company shall sell to Warburg,
and Warburg shall purchase from the Company, 6,095,238 shares (the "Shares") of
the Company's Common Stock, par value $.01 per share (the "Common Stock"), at
the aggregate cash purchase price of $15,999,999.75 (the "Purchase Price"). Such
sale and purchase shall be effected on the Closing Date by the Company executing
and delivering to Warburg, duly registered in its name, a duly executed stock
certificate evidencing the Shares being purchased by it, against delivery by
Warburg to the Company of the Purchase Price by wire transfer of immediately
available funds to such account as the Company shall designate.
(b) The closing of such sale and purchase (the "Closing") shall take
place contemporaneously with the merger of Fluid Management, Inc. with and into
the Company pursuant to the Fluid Management Agreement, or such other date as
Warburg and the Company agree in writing (the "Closing Date"), at the offices of
Willkie Farr & Gallagher, 153 East 53rd Street, New York, New York, or such
other location as Warburg and the Company shall mutually select.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company represents and warrants to Warburg that:
2.1. Corporate Organization
----------------------
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Attached hereto as
Exhibits A and B, respectively, are true and complete copies of the Certificate
of Incorporation
D-1
<PAGE>
and Bylaws of the Company, each as amended through the date hereof
(collectively, the "Organizational Documents").
(b) The Company has all requisite power and authority and has all
necessary approvals, licenses, permits and authorization to own its properties
and to carry on its business as now conducted. The Company has all requisite
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder.
(c) The Company has filed all necessary documents to qualify to do
business as a foreign corporation in, and the Company is in good standing under
the laws of, each jurisdiction in which the conduct of the Company's business or
the nature of the property owned requires such qualification, except where the
failure to so qualify would not have a material adverse affect on the business,
properties, prospects, profits or condition (financial or otherwise) of the
Company and its subsidiaries taken as a whole (a "Material Adverse Effect").
2.2. Subsidiaries
------------
Except as set forth on Schedule 2.2, the Company has no subsidiaries
------------
and no interests or investments in any partnership, trust or other entity or
organization. Each subsidiary of the Company listed on Schedule 2.2 has been
------------
duly incorporated, is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has the corporate power and
authority to own its properties and to conduct its business and is duly
registered, qualified and authorized to transact business and is in good
standing in each jurisdiction in which the conduct of its business or the nature
of its properties requires such registration, qualification or authorization,
except where the failure to so register, qualify or be authorized would not have
a Material Adverse Effect; all of the issued and outstanding capital stock of
each subsidiary has been duly authorized and validly issued, is fully paid and
non-assessable, and is owned by the Company free and clear of any mortgage,
pledge, lien, encumbrance, security interest, claim or equity.
2.3. Capitalization
--------------
(a) On the date hereof, the authorized capital stock of the Company
consists of 20,000,000 shares of its Common Stock and 2,000,000 shares of its
preferred stock, par value $.01 per share (the "Preferred Stock"). As of the
Closing Date, the authorized capital stock of the Company will consist of
50,000,000 shares of its Common Stock and 2,000,000 shares of its Preferred
Stock. The issued and outstanding shares of capital stock of the Company on the
date hereof consist of 12,872,440 shares of Common Stock.
(b) All the outstanding shares of capital stock of the Company have
been duly and validly issued and are fully paid and
D-2
<PAGE>
non-assessable, and were issued in accordance with the registration or
qualification requirements of the Securities Act and any relevant state
securities laws or pursuant to valid exemptions therefrom. Upon issuance, sale
and delivery as contemplated by this Agreement, the Shares will be duly
authorized, validly issued, fully paid and non-assessable shares of the Company,
free of all preemptive or similar rights, and entitled to the rights therein
described.
(c) Except for the conversion rights which attach to the warrants,
options and convertible securities which are listed on Schedule 2.3 hereto, on
------------
the Closing Date there will be no shares of Common Stock, Preferred Stock or any
other equity security of the Company issuable upon conversion or exchange of any
security of the Company nor will there be any rights, options or warrants
outstanding or other agreements to acquire shares of Common Stock or Preferred
Stock nor will the Company be contractually obligated to purchase, redeem or
otherwise acquire any of its outstanding shares. Schedule 2.3 sets forth the
------------
exercise price, vesting provisions, expiration date and other material terms of
all warrants, options and convertible securities listed therein. No stockholder
of the Company is entitled to any preemptive or similar rights to subscribe for
shares of capital stock of the Company.
2.4. Corporate Proceedings, etc.
--------------------------
The Board of Directors of the Company has authorized the execution,
delivery, and performance of this Agreement and each of the transactions and
agreements contemplated hereby. No other corporate action (other than
stockholder approval) is necessary to authorize such execution, delivery and
performance of this Agreement, and this Agreement constitutes the valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except that such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights and general principles of equity. The Board
of Directors of the Company has authorized the issuance and delivery of the
Shares in accordance with this Agreement.
2.5. Consents and Approvals
----------------------
The execution and delivery by the Company of this Agreement, the
performance by the Company of its obligations hereunder and the consummation by
the Company of the transactions contemplated hereby do not require the Company
or any of its subsidiaries to obtain any consent, approval or action of, or make
any filing with or give any notice to, any corporation, person or firm or any
public, governmental or judicial authority, except such approvals, consents, or
filings that have been made or obtained or as disclosed on Schedule 2.5.
------------
D-3
<PAGE>
2.6. Absence of Defaults, Conflicts, etc.
-----------------------------------
The execution and delivery of this Agreement do not, and the
fulfillment of the terms hereof by the Company, and the issuance of the Shares
will not, result in a breach of any of the terms, conditions or provisions of,
or constitute a default under, or permit the acceleration of rights under or
termination of, any material indenture, mortgage, deed of trust, credit
agreement, note or other evidence of indebtedness, or other material agreement
of the Company or any of its subsidiaries (collectively the "Key Agreements and
Instruments"), or the Organizational Documents, or any rule or regulation of any
court or federal, state or foreign regulatory board or body or administrative
agency having jurisdiction over the Company or any of its subsidiaries or over
their respective properties or businesses. No event has occurred and no
condition exists which, upon notice or the passage of time (or both), would
constitute a default under any such Key Agreements and Instruments or in any
license, permit or authorization to which the Company or any subsidiary is a
party or by which any of them may be bound.
2.7. SEC Reports
-----------
The Company has previously furnished Warburg with true and complete
copies of its (i) Annual Report on Form 10-K, as amended, for the fiscal year
ended December 31, 1995, as filed with the SEC, (ii) Quarterly Reports on Form
10-Q for the quarters ended March 31, 1996, June 30, 1996 and September 30,
1996, as filed with the SEC, (iii) proxy statements related to all meetings of
its stockholders (whether annual or special) since January 1, 1996 and (iv) all
other reports or registration statements filed by the Company with the SEC since
January 1, 1996, except registration statements on Form S-8 relating to employee
benefit plans, which are all the documents (other than preliminary material)
that the Company was required to file with the SEC since that date (the
documents described in clauses (i) through (iv) being referred to herein
collectively as the "SEC Reports"). As of their respective dates, the SEC
-----------
Reports complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such SEC Reports. As of their
respective dates, the SEC Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The audited consolidated financial
statements and unaudited interim financial statements of the Company included in
the SEC Reports comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto. The financial statements included in the SEC Reports: have
been prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis (except as may be indicated therein or in
the notes
D-4
<PAGE>
thereto); present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries as at the dates thereof and the
consolidated results of their operations and cash flow for the periods then
ended subject, in the case of the unaudited interim financial statements, to
normal year-end audit adjustments and any other adjustments described therein
and the fact that certain information and notes have been condensed or omitted
in accordance with the Exchange Act and the rules promulgated thereunder; and
are in all material respects, in accordance with the books of account and
records of the Company.
2.8. Absence of Certain Developments
-------------------------------
Except as disclosed in the SEC Reports or on Schedule 2.8, since
------------
December 31, 1995, there has been no (i) material adverse change in the
condition, financial or otherwise, of the Company and its subsidiaries taken as
a whole or in their assets, liabilities, properties, or business or prospects,
(ii) declaration, setting aside or payment of any dividend or other distribution
with respect to the capital stock of the Company, (iii) issuance of capital
stock (other than pursuant to the exercise of options, warrants, or convertible
securities outstanding at such date) or options, warrants or rights to acquire
capital stock (other than the rights granted to Warburg hereunder), (iv)
material loss, destruction or damage to any property of the Company or any
subsidiary, whether or not insured, (v) acceleration or prepayment of any
indebtedness for borrowed money or the refunding of any such indebtedness, (vi)
material labor trouble involving the Company or any subsidiary or any material
change in their personnel or the terms and conditions of employment, (vii)
waiver of any valuable right, (viii) loan or extension of credit to any officer
or employee of the Company or any subsidiary or (ix) acquisition or disposition
of any material assets (or any contract or arrangement therefor), or any other
material transaction by the Company or any subsidiary otherwise than for fair
value in the ordinary course of business.
2.9. Compliance with Law
-------------------
(a) Neither the Company nor any of its subsidiaries is in material
violation of any laws, ordinances, governmental rules or regulations to which it
is subject, including without limitation laws or regulations relating to the
environment or to occupational health and safety, and no material expenditures
are or will be required in order to cause its current operations or properties
to comply with any such laws, ordinances, governmental rules or regulations.
(b) The Company and its subsidiaries have all licenses, permits,
franchises or other governmental authorizations necessary to the ownership of
their property or to the conduct of their respective businesses, which if
violated or
D-5
<PAGE>
not obtained is reasonably likely to have a Material Adverse Effect. Neither the
Company nor any subsidiary has finally been denied any application for any such
licenses, permits, franchises or other governmental authorizations necessary to
its business.
2.10. Litigation
----------
Except as disclosed in the SEC Reports or on Schedule 2.10, there is
-------------
no legal action, suit, arbitration or other legal, administrative or other
governmental investigation, inquiry or proceeding, whether federal, state, local
or foreign (collectively "Legal Proceedings"), pending or, to the best of the
Company's knowledge, threatened against or affecting the Company or any
subsidiary or any of their respective properties, assets or businesses, nor is
there any Legal Proceeding pending or, to the knowledge of the Company,
threatened, relating to this Agreement or the transactions contemplated hereby.
After reasonable inquiry of its officers, the Company is not aware of any fact
which might result in or form the basis for any Legal Proceeding which could
have a Material Adverse Effect. Neither the Company nor any subsidiary is
subject to any order, writ, judgment, injunction, decree, determination or award
of any court or of any governmental agency or instrumentality (whether federal,
state, local or foreign).
2.11. Material Contracts
------------------
Except as disclosed in the SEC Reports or on Schedule 2.11, there are
-------------
no material contracts, agreements, instruments, commitments and other
arrangements to which the Company or any subsidiary is a party or otherwise
relating to or affecting any of their respective assets, including without
limitation, employment, severance or consulting agreements; loan, credit or
security agreements; joint venture agreements and distribution agreements (each,
a "Contract"). Each such Contract is valid, binding and enforceable against the
Company or such subsidiary and, to the Company's best knowledge, the other
parties thereto, in accordance with its terms, except that such enforcement may
be subject to bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights and
general principles of equity. Each such Contract is in full force and effect on
the date hereof.
2.12. Absence of Undisclosed Liabilities
----------------------------------
Except as disclosed in the SEC Reports or on Schedule 2.12, neither
-------------
the Company nor any of its subsidiaries has any debt, obligation or liability
(whether accrued, absolute, contingent, liquidated or otherwise, whether due or
to become due, whether or not known to the Company) arising out of any
transaction entered into at or prior to the Closing, or any act or omission at
or prior to the Closing, or any state of facts existing at or prior to the
Closing, including taxes with respect to or based upon the transactions or
events occurring at or prior
D-6
<PAGE>
to the Closing, and including, without limitation, unfunded past service
liabilities under any pension, profit sharing or similar plan, except current
liabilities incurred, and obligations under agreements entered into, in the
usual and ordinary course of business, none of which (individually or in the
aggregate) could have a Material Adverse Effect.
2.13. Employees
---------
(a) The Company and its subsidiaries are in compliance with all
applicable foreign, federal, state and local laws and regulations regarding
occupational safety and health standards except to the extent that noncompliance
will not have a Material Adverse Effect, and has received no complaints from any
foreign, federal, state or local agency or regulatory body alleging violations
of any such laws and regulations.
(b) The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any nature)
or other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of such employee's best
efforts to promote the interests of the Company or that would conflict with the
Company's business as proposed to be conducted.
(c) The Company is not aware that any officer or key employee, or
that any group of key employees, intends to terminate their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing.
2.14. Tax Matters
-----------
There are no federal, state, county or local taxes due and payable by
the Company or any of its subsidiaries which have not been paid. The provisions
for taxes on the audited and unaudited balance sheets contained in the SEC
Reports are sufficient for the payment of all accrued and unpaid federal, state,
county and local taxes of the Company whether or not assessed or disputed as of
the respective dates of such balance sheets. The Company and its subsidiaries
have duly filed all federal, state, county and local tax returns required to
have been filed by it and there are in effect no waivers of applicable statutes
of limitations with respect to taxes for any year. Neither the Company nor any
of its subsidiaries has been subject to a federal or state tax audit of any
kind.
2.15. Employee Benefit Plans
----------------------
Except as disclosed on Schedule 2.15, the Company and its subsidiaries
-------------
have no employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974) covering former and current employees of
the Company or any of its subsidiaries, or under which the Company or any of its
D-7
<PAGE>
subsidiaries has any obligation or liability. True and complete copies of all
material plans, contracts, bonuses, commissions, profit-sharing, savings, stock
options, insurance, deferred compensation, or other similar fringe or employee
benefits covering former or current employees of the Company or any of its
subsidiaries or under which the Company or any of its subsidiaries has any
obligation or liability (each, a "Benefit Arrangement") have been provided or
made available to Warburg prior to the date hereof. The Benefit Arrangements are
and have been administered in compliance in all material respects with their
terms and with the requirements of applicable law. Except as disclosed on
Schedule 2.15, all payments to current or former employees of the Company or any
of its subsidiaries pursuant to the Benefit Arrangements are and have been fully
deductible under the Code.
2.16. Patents, Licenses, etc.
----------------------
Except as provided on Schedule 2.16, the Company or one of its
-------------
subsidiaries owns, free and clear of all encumbrances, restrictions, liens,
security interests and charges, and has good and marketable title to, or holds
adequate licenses or otherwise possess all such rights as are necessary to use
all patents (and applications therefor), patent disclosures, trademarks, service
marks, trade names, copyrights (and applications therefor), inventions,
discoveries, processes, know-how, scientific, technical, engineering and
marketing data, formulae and techniques used or proposed to be used, in or
necessary for the conduct of its business as now conducted or as proposed to be
conducted (collectively, "Intellectual Property").
Except as provided on Schedule 2.16, neither the Company nor any of
-------------
its subsidiaries has received notice nor otherwise has reason to know of any
conflict or alleged conflict with the rights of others pertaining to the
Intellectual Property described in this Section 2.16. To the Company's best
knowledge, the Company's business, as presently conducted and as proposed to be
conducted, does not infringe upon or violate any patent rights or trade secrets
of others. To the Company's best knowledge, the Company and its subsidiaries
have the unrestricted right to use, free and clear of any rights or claims of
others, all trade secrets, processes, customer lists and other rights incident
to their respective businesses as now conducted or as proposed to be conducted.
Except as disclosed in the SEC Reports or on Schedule 2.16, neither
-------------
the Company nor any of its subsidiaries is currently obligated or under any
existing liability to make royalty or other payments to any owner of, licensor
of, or other claimant to, any patent, trademark, service names, trade names,
copyrights, or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business as now conducted or as proposed to
be conducted, or otherwise. To the Company's best knowledge, no employee of the
Company or any of
D-8
<PAGE>
its subsidiaries has violated any employment agreement or proprietary
information agreement which he had with a previous employer or any patent policy
of such employer, or is a party to or threatened by any litigation concerning
any patents, trademarks, trade secrets, service names, trade names, copyrights,
licenses and the like.
2.17. Title to Tangible Assets
------------------------
Except as disclosed in the SEC Reports, the Company and its
subsidiaries have good title to their properties and assets and good title to
all their leasehold estates, in each case subject to no mortgage, pledge, lien,
lease, encumbrance or charge, other than or resulting from taxes which have not
yet become delinquent and minor liens and encumbrances which do not in any case
materially detract from the value of the property subject thereto or materially
impair the operations of the Company and its subsidiaries and which have not
arisen otherwise than in the ordinary course of business.
2.18. Condition of Properties
-----------------------
All facilities, machinery, equipment, fixtures, vehicles and other
properties owned, leased or used by the Company and its subsidiaries are in good
operating condition and repair, are reasonably fit and usable for the purposes
for which they are being used, are adequate and sufficient for the Company's or
such subsidiary's business and comply in all material respects with all
applicable ordinances, regulations and laws.
2.19. Insurance
---------
The Company and its subsidiaries and their respective properties are
insured in such amounts, against such losses and with such insurers as are
prudent when considered in light of the nature of the properties and businesses
of the Company and its subsidiaries. Schedule 2.19 sets forth a true and
-------------
complete listing of the insurance policies of the Company and its subsidiaries
as in effect on the date hereof, including in each case the applicable coverage
limits, deductibles and the policy expiration dates. No notice of any
termination or threatened termination of any of such policies has been received
and such policies are in full force and effect.
2.20. Transactions with Related Parties
---------------------------------
Except as disclosed in the SEC Reports or on Schedule 2.20, neither
-------------
the Company nor any subsidiary is a party to any agreement with any of the
Company's directors, officers or stockholders or any Affiliate or family member
of any of the foregoing under which it: (i) leases any real or personal property
(either to or from such Person), (ii) licenses technology (either to or from
such Person), (iii) is obligated to
D-9
<PAGE>
purchase any tangible or intangible asset from or sell such asset to such
Person, (iv) purchases products or services from such Person or (v) has borrowed
money from or lent money to such Person. Except as set forth in Schedule 2.20,
-------------
neither the Company nor any subsidiary employs as an employee or engages as a
consultant any family member of any of the Company's directors, officers or
stockholders. To the best knowledge of the Company, there exist no agreements
among stockholders of the Company to act in concert with respect to their voting
or holding of Company securities.
2.21. Interest in Competitors
-----------------------
Neither the Company nor any of its officers or, to the best of its
knowledge, any of its directors, has any interest, either by way of contract or
by way of investment (other than as holder of not more than 2% of the
outstanding capital stock of a publicly traded Person) or otherwise, directly or
indirectly, in any Person other than the Company that (i) provides any services
or designs, produces or sells any product or product lines or engages in any
activity similar to or competitive with any activity currently proposed to be
conducted by the Company or any of its subsidiaries or (ii) has any direct or
indirect interest in any asset or property, real or personal, tangible or
intangible, of the Company.
2.22. Registration Rights
-------------------
Except as disclosed in the SEC Reports or on Schedule 2.22, or
-------------
pursuant to the Registration Rights Agreement, the Company will not, as of the
Closing Date, be under any obligation to register any of its securities under
the Securities Act of 1933, as amended (the "Securities Act").
2.23. Private Offering
----------------
Neither the Company nor anyone acting on its behalf has sold or has
offered any of the Shares for sale to, or solicited offers to buy from, or
otherwise approached or negotiated with respect thereto with, any prospective
purchaser, other than Warburg. Neither the Company nor anyone acting on its
behalf shall offer the Shares for issue or sale to, or solicit any offer to
acquire any of the same from, anyone so as to bring the issuance and sale of
such Shares within the provisions of Section 5 of the Securities Act. Based upon
the representations of Warburg set forth in Section 3, the offer, issuance and
sale of the Shares are exempt from the registration and prospectus delivery
requirements of the Securities Act, and have been registered or qualified (or
are exempt from registration and qualification) under the registration, permit
or qualification requirements of all applicable state securities laws.
D-10
<PAGE>
2.24. Environmental
-------------
Except as disclosed in the SEC Reports or on Schedule 2.24,
-------------
(a) except for such noncompliance which would not, individually or in
the aggregate, result in losses, costs, or liability in excess of $100,000, the
Company and its operations are in compliance with all applicable laws,
regulations and other requirements of governmental or regulatory authorities or
duties under the common law relating to toxic or hazardous substances, wastes,
pollution or to the protection of health, safety or the environment
(collectively, "Environmental Laws") and have obtained or filed timely
applications for and maintained in effect all licenses, permits and other
authorizations or registrations (collectively "Environmental Permits") required
under all Environmental Laws and are in compliance with all such Environmental
Permits.
(b) the Company has not performed or suffered any act which could
give rise to, or has otherwise incurred, liability to any person (governmental
or not) under the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. (S) 9601 et seq. ("CERCLA"), or any other Environmental
-- ---
Laws, nor has the Company received notice of any such liability or any claim
therefor or submitted notice pursuant to Section 103 of CERCLA to any
governmental agency with respect to any of its assets.
(c) during the period of the Company's ownership or lease, and to the
best of the Company's knowledge prior to that time, no hazardous substance,
hazardous waste, contaminant, pollutant or toxic substance (as such terms are
defined in any applicable Environmental Law and collectively referred to herein
as "Hazardous Materials") has been released, placed, dumped or otherwise come to
be located on, at, or beneath any of the assets or properties owned or leased by
the Company or any surface waters or groundwaters thereon or thereunder.
(d) the Company does not own or operate, and has never owned or
operated, aboveground or underground storage tanks or surface improvements
containing Hazardous Materials.
(e) with respect to any or all of the real properties leased by the
Company: (i) there are no asbestos-containing materials, urea formaldehyde
insulation, polychlorinated biphenyls or lead-based paints present at any such
properties; and (ii) there are no wetlands as defined under any Environmental
Law located on any such properties.
(f) during the period of the Company's ownership or lease, and to the
best of the Company's knowledge prior to that time, none of the real properties
leased by the Company: (i) has been used or is now used for the generation,
transportation,
D-11
<PAGE>
storage, handling, treatment or disposal of any Hazardous Materials except in
the ordinary course of the Company's business and in compliance with
Environmental Laws, except for noncompliance which would not, individually or in
the aggregate, result in losses, costs, or liability in excess of $100,000; or
(ii) is identified on a federal, state or local listing of sites which require
or might require environmental investigation, mitigation, remediation or
corrective action.
(g) no condition exists on any of the real properties leased by the
Company or, to the best of the Company's knowledge, existed prior to the
Company's lease of such property, that upon the failure to act, the passage of
time or the giving of notice would give rise to liability or the imposition of a
lien under any Environmental Law.
(h) there are no ongoing investigations or negotiations, pending or,
to the best of the Company's knowledge, threatened administrative, judicial or
regulatory proceedings, or consent decrees or other agreements in effect that
relate to environmental conditions or Hazardous Materials in, on, under, about
or related to the Company, its operations or the real properties leased by the
Company.
(i) neither the Company nor its operations is subject to reporting
requirements under the federal Emergency Planning and Community Right-to-Know
Act, 42 U.S.C. (S) 11001 et seq., or analogous state statutes and related
-- ---
regulations.
2.25. Fluid Management Agreement Representations
------------------------------------------
All representations and warranties of the Company and, to the best of
the Company's knowledge, all the representations and warranties of Fluid
Management, Inc. contained in the Fluid Management Agreement are true and
correct in all material respects.
2.26. Brokerage
---------
There are no claims for brokerage commissions or finder's fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement made by or on behalf of the Company (other
than Allen & Company Incorporated, whose fees and expenses shall be the sole
responsibility of the Company) and the Company agrees to indemnify and hold
Warburg harmless against any costs or damages incurred as a result of any such
claim.
2.27. Illegal or Unauthorized Payments; Political Contributions
---------------------------------------------------------
Neither the Company or any of its subsidiaries nor, to the best of the
Company's knowledge (after reasonable inquiry of its officers and directors),
any of the officers, directors,
D-12
<PAGE>
employees, agents or other representatives of the Company or any of its
subsidiaries or any other business entity or enterprise with which the Company
or any subsidiary is or has been affiliated or associated, has, directly or
indirectly, made or authorized any payment, contribution or gift of money,
property, or services, whether or not in contravention of applicable law, (a) as
a kickback or bribe to any Person or (b) to any political organization, or the
holder of or any aspirant to any elective or appointive public office except for
personal political contributions not involving the direct or indirect use of
funds of the Company or any of its subsidiaries.
2.28 Takeover Statute
----------------
Assuming Warburg and its "associates" and "affiliates" (as defined in
Section 203 of the Delaware Code) collectively beneficially own and have
beneficially owned at all times during the three year period prior to the date
hereof less than fifteen percent (15%) of the Common Stock outstanding, Section
203 of the Delaware Code is, and shall be, inapplicable to this Agreement and
the transactions contemplated hereby.
2.29 Material Facts
--------------
This Agreement, the schedules furnished contemporaneously herewith,
and the other agreements, documents, certificates or written statements
furnished or to be furnished to Warburg through the Closing Date by or on behalf
of the Company in connection with the transactions contemplated hereby taken as
a whole, do not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements contained therein or herein, in
light of the circumstances in which they were made, not misleading. There is no
fact which is known to the Company (other than general economic or industry
conditions) and which has not been disclosed herein or otherwise by the Company
to Warburg which may materially adversely affect the business, properties,
assets or condition, financial or otherwise, of the Company and its subsidiaries
taken as a whole.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF WARBURG
-----------------------------------------
Warburg represents and warrants to the Company as follows:
(a) It has full power and legal right to execute and deliver this
Agreement and to perform its obligations hereunder.
(b) It is a validly existing limited partnership, duly organized and
in good standing under the laws of Delaware.
(c) It has taken all action necessary for the authorization,
execution, delivery, and performance of this Agreement and its obligations
hereunder. This Agreement has been
D-13
<PAGE>
duly and validly executed and delivered by Warburg and constitutes the valid and
binding obligation of Warburg, enforceable against Warburg in accordance with
its terms, except that such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights and general principles of equity.
(d) There are no claims for brokerage commissions or finder's fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement made by or on behalf of Warburg (other than
Ivan Burns and Alan Craft, whose fees and expenses shall be the sole
responsibility of Warburg) and Warburg agrees to indemnify and hold the Company
harmless against any costs or damages incurred as a result of any such claim.
(e) The execution and delivery by Warburg of this Agreement, the
performance by Warburg of its obligations hereunder and the consummation by
Warburg of the transactions contemplated hereby do not require Warburg to obtain
any consent, approval or action of, or make any filing with or give any notice
to, any corporation, person or firm or any public, governmental or judicial
authority, other than consents, approvals, actions, filings or notices in
connection with the HSR Act.
(f) It understands (subject to the express obligations of the Company
to register the Shares as provided in the Registration Rights Agreement) that
the issuance of the Shares is exempt from registration pursuant to Section 4(2)
of the Securities Act and/or Regulation D promulgated under the Securities Act
("Regulation D"), and that the reliance of the Company on such exemptions is
predicated in part on its representations, warranties, covenants and
acknowledgments set forth in this Section.
(g) It is an Accredited Investor, as that term is defined in
Regulation D, and has such knowledge and experience in financial and business
matters that it is fully capable of evaluating the risks and merits of its
investment in the Shares. The Shares will be acquired by it for its own account,
not as a nominee or agent, for investment and without a view to resale, transfer
or other distribution within the meaning of the Securities Act and the rules and
regulations thereunder, and it will not distribute nor transfer any of the
Shares in violation of the Securities Act. It is a resident of the State of New
York for purposes of state securities laws.
(h) It: (i) acknowledges that the Shares are not registered under the
Securities Act and must be held indefinitely by it unless the Shares are
subsequently registered under the Securities Act (in accordance with the
Registration Rights Agreement or otherwise) or an exemption from registration is
available, (ii) is aware that any routine sales of the Shares
D-14
<PAGE>
made under Rule 144 of the Securities and Exchange Commission under the
Securities Act may be made only in limited amounts and in accordance with the
terms and conditions of that Rule and that in such cases where the Rule is not
applicable, registration or compliance with some other registration exemption
will be required, (iii) is aware that Rule 144 is not presently, and for a
period of at least two years following the Closing Date hereof probably will not
be, available for use by it for resale of the Shares, and (iv) is aware that the
Company is not obligated to register any sale, transfer or other disposition of
the Shares except in accordance with the provisions of the Registration Rights
Agreement.
(i) It acknowledges receipt of the SEC Reports and such other
documents, agreements and information as it has required and confirms and
acknowledges that: (i) the Company has afforded it the opportunity to ask
questions of and receive answers from the Company's officers and directors
concerning the terms and conditions of this Agreement and its investment in the
Shares and to obtain such additional information as it has requested, and (ii)
it has availed itself of such opportunity to the extent it deems necessary and
has received the information requested.
(j) It acknowledges and agrees that the certificates representing the
Shares issuable to it will contain a restrictive legend noting the restrictions
on transfer described in this Section 3 and Section 4.1(a) hereof and under
federal and applicable state securities laws, and that appropriate "stop-
transfer" instructions will be given to the Company's stock transfer agent.
SECTION 4. ADDITIONAL COVENANTS OF THE PARTIES
4.1 Resale of Securities
--------------------
(a) Subject to the provisions of Section 3 hereof, Warburg covenants
that it will not sell or otherwise transfer any Shares until one (1) year after
the Closing Date without the written consent of the Company.
(b) In order to ensure compliance with the provisions of Section 3
hereof, Warburg covenants and agrees that, after the Closing, it will not sell,
transfer or otherwise dispose of any of the Shares or any interest therein
(unless such sale, transfer or disposition has been registered under the
Securities Act in accordance with the provisions of Section 7 hereof or
otherwise) or otherwise without there first having been compliance with either
of the following conditions:
(i) the Company shall have received a written opinion of counsel
in form and substance reasonably satisfactory to the Company, which
counsel shall include Willkie Farr & Gallagher, or a copy of a "no-
D-15
<PAGE>
action" or interpretive letter of the SEC, specifying the nature and
circumstances of the proposed transfer and indicating that the
proposed transfer will not be in violation of any of the provisions of
the Securities Act and the rules and regulations promulgated
thereunder; or
(ii) the Company shall have received an opinion from its own
counsel to the effect that the proposed transfer will not be in
violation of any of the provisions of the Securities Act and the rules
and regulations promulgated thereunder.
4.2. Covenants Pending Closing
-------------------------
Pending the Closing the Company will not, without Warburg's prior
written consent, take any action which would result in any of the
representations or warranties contained in this Agreement not being true at and
as of the time immediately after such action, or in any of the covenants
contained in this Agreement becoming incapable of performance. The Company will
promptly advise Warburg of any action or event of which it becomes aware which
has the effect of making incorrect any of such representations or warranties or
which has the effect of rendering any of such covenants incapable of
performance.
4.3. Further Assurance
-----------------
Each of the parties shall execute such documents and other papers and
take such further actions as may be reasonably required or desirable to carry
out the provisions hereof and the transactions contemplated hereby. Each such
party shall use its reasonable efforts to fulfill or obtain the fulfillment of
the conditions to the Closing as promptly as practicable.
4.4. Board Nominee
-------------
For so long as Warburg owns beneficially (within the meaning of Rule
13d-3 under the Exchange Act) at least 7.5% of the issued and outstanding shares
of the Company's Common Stock, the Company will nominate and use its best
efforts to elect and to cause to remain as a director on the Company's Board of
Directors one individual as Warburg may designate. Any vacancy created by the
death, disability, retirement or removal of any such individual may be filled by
Warburg. The initial nominee of Warburg shall be Robert S. Hillas.
4.5. Hart-Scott-Rodino
-----------------
As promptly as practicable following the execution and delivery of
this Agreement by the parties, the Company and Warburg shall each prepare and
file, or shall cause its "ultimate parent" (as defined in the HSR Act) to
prepare and file, any required notification and report form under the HSR Act,
in
D-16
<PAGE>
connection with the transactions contemplated hereby, each party paying its
own filing fees; the Company and Warburg shall, or shall cause their ultimate
parents to, take or cause to be taken all actions and do or cause to be done all
things necessary, proper or advisable to obtain prompt termination of the
waiting period under the HSR Act.
SECTION 5. WARBURG'S CLOSING CONDITIONS
The obligation of Warburg to purchase and pay for the Shares on the
Closing Date, as provided in Section 1 hereof, shall be subject to the
performance by the Company of its agreements theretofore to be performed
hereunder and to the satisfaction, prior thereto or concurrently therewith, of
the following further conditions:
5.1. Representations and Warranties
------------------------------
The representations and warranties of the Company contained in this
Agreement shall be true on and as of the Closing Date as though such warranties
and representations were made at and as of such date, except as otherwise
affected by the transactions contemplated hereby.
5.2. Compliance with Agreement
-------------------------
The Company shall have performed and complied with all agreements,
covenants and conditions contained in this Agreement which are required to be
performed or complied with by the Company prior to or on the Closing Date.
5.3. Officer's Certificate
---------------------
Warburg shall have received a certificate, dated the Closing Date,
signed on behalf of the Company by each of the President and the Controller of
the Company, certifying that the conditions specified in the foregoing Sections
5.1 and 5.2 hereof have been fulfilled.
5.4. Injunction
----------
There shall be no effective injunction, writ, preliminary restraining
order or any order of any nature issued by a court of competent jurisdiction
directing that the transactions provided for herein or any of them not be
consummated as herein provided.
5.5. Counsel's Opinion
-----------------
Warburg shall have received from the Company's counsel, Drinker Biddle
& Reath, an opinion, dated the Closing Date, substantially in the form of
Exhibit C hereto.
D-17
<PAGE>
5.6. Acquisition of Fluid Management
-------------------------------
All conditions to the consummation of the transactions contemplated by
the Fluid Management Agreement shall have been satisfied or waived with the
consent of Warburg in its sole and absolute discretion.
5.7. Consents; Hart-Scott-Rodino
---------------------------
All consents, approvals and actions which are listed on Schedule 2.5
------------
hereto shall have been obtained or performed, and all applicable waiting periods
(and any extensions thereof) under the HSR Act shall have expired or otherwise
been terminated.
5.8 Election of Directors
---------------------
Robert S. Hillas (in accordance with Section 4.4 hereof) and William
C. Smith shall have been elected to the Board of Directors of the Company,
effective upon the Closing.
5.9. Registration Rights Agreement
-----------------------------
The Company, Warburg and the shareholders of Fluid Management, Inc.
shall have entered into the Registration Rights Agreement, the terms of which
shall be satisfactory to the Company and Warburg.
5.10. Approval of Proceedings
-----------------------
All proceedings to be taken in connection with the transactions
contemplated by this Agreement, and all documents incident thereto, shall be
satisfactory in form and substance to Warburg and its special counsel, Willkie
Farr & Gallagher; and Warburg shall have received copies of all documents or
other evidence which it and Willkie Farr & Gallagher may request in connection
with such transactions and of all records of corporate proceedings in connection
therewith in form and substance satisfactory to Warburg and Willkie Farr &
Gallagher.
SECTION 6. COMPANY CLOSING CONDITIONS
The obligation of the Company to issue and deliver the Shares on the
Closing Date, as provided in Section 1 hereof, shall be subject to the
performance by Warburg of its agreements theretofore to be performed hereunder
and to the satisfaction, prior thereto or concurrently therewith, of the
following further conditions:
6.1. Representations and Warranties
------------------------------
The representations and warranties of Warburg contained in this
Agreement shall be true on and as of the Closing Date as though such warranties
and representations were made at and as of
D-18
<PAGE>
such date, except as otherwise affected by the transactions contemplated hereby.
6.2. Compliance with Agreement
-------------------------
Warburg shall have performed and complied with all agreements,
covenants and conditions contained in this Agreement which are required to be
performed or complied with by it prior to or on the Closing Date.
6.3. Warburg's Certificate
---------------------
The Company shall have received a certificate from Warburg, dated the
Closing Date, signed by a duly authorized representative of Warburg, certifying
that the conditions specified in the foregoing Sections 6.1 and 6.2 hereof have
been fulfilled.
6.4. Consents; Hart-Scott-Rodino
---------------------------
All consents, approvals and actions which are listed on Schedule 2.5
hereto shall have been obtained or performed, and all applicable waiting periods
(and any extensions thereof) under the HSR Act shall have expired or otherwise
been terminated.
6.5. Injunction
----------
There shall be no effective injunction, writ, preliminary restraining
order or any order of any nature issued by a court of competent jurisdiction
directing that the transactions provided for herein or any of them not be
consummated as herein provided.
6.6. Acquisition of Fluid Management
-------------------------------
All conditions to the consummation of the transactions contemplated by
the Fluid Management Agreement shall have been satisfied or waived.
SECTION 7. RESERVED
--------
SECTION 8. COVENANTS
---------
8.1. Confidentiality
---------------
As to so much of the information and other material furnished under or
in connection with this Agreement (whether furnished before, on or after the
date hereof, including without limitation information furnished pursuant to
Section 8.1 hereof) as constitutes or contains confidential business, financial
or other information of the Company or any subsidiary, Warburg covenants for
itself and its directors, officers and partners that it will use due care to
prevent its officers, directors,
D-19
<PAGE>
partners, employees, counsel, accountants and other representatives from
disclosing such information to Persons other than their respective authorized
employees, counsel, accountants, partners and other authorized representatives;
provided, however, that Warburg may disclose or deliver any information or other
- -------- -------
material disclosed to or received by it should Warburg be advised by its counsel
that such disclosure or delivery is required by law, regulation or judicial or
administrative order. In the event of termination of this Agreement for any
reason, upon the written request of the Company, Warburg will promptly return or
cause to be returned to the Company, or promptly destroy or cause to be
destroyed, all such information and material obtained from the Company, and any
copies made of such information and materials. For purposes of this Section 8.1,
"due care" means at least the same level of care that Warburg would use to
protect the confidentiality of its own sensitive or proprietary information, and
this obligation shall survive termination of this Agreement.
8.2. Lost, etc. Certificates Evidencing Shares of Common Stock;
-----------------------------------------------------------------
Exchange
--------
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any certificate evidencing any
shares of Common Stock owned by Warburg, and (in the case of loss, theft or
destruction) of an unsecured indemnity satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of such certificate, if mutilated, the Company
will make and deliver in lieu of such certificate a new certificate of like
tenor and for the number of shares evidenced by such certificate which remain
outstanding. Warburg's agreement of indemnity shall constitute indemnity
satisfactory to the Company for purposes of this Section 8.2. Upon surrender of
any certificate representing any shares of Common Stock for exchange at the
office of the Company, the Company at its expense will cause to be issued in
exchange therefor new certificates in such denomination or denominations as may
be requested for the same aggregate number of shares of Common Stock, as the
case may be, represented by the certificate so surrendered and registered as
such holder may request. The Company will also pay the cost of all deliveries
of certificates for such shares to the office of Warburg (including the cost of
insurance against loss or theft in an amount satisfactory to the holders) upon
any exchange provided for in this Section 8.2.
SECTION 9. INTERPRETATION OF THIS AGREEMENT
--------------------------------
9.1. Terms Defined
-------------
As used in this Agreement, the following terms have the respective
meanings set forth below or set forth in the Section hereof following such term:
D-20
<PAGE>
Affiliate: means any Person or entity, directly or indirectly,
---------
controlling, controlled by or under common control with such Person or entity.
Business Day: shall mean a day other than a Saturday, Sunday or other
------------
day on which banks in the State of New York are required or authorized to close.
Closing: shall have the meaning set forth in Section 1.1(b).
-------
Closing Date: shall have the meaning set forth in Section 1.1(b).
------------
Code: shall mean the Internal Revenue Code of 1986, as amended.
----
Common Stock: shall have the meaning set forth in Section 1.1(a).
------------
Exchange Act: shall mean the Securities Exchange Act of 1934, as
------------
amended.
Fluid Management Agreement: shall mean the Agreement and Plan of
--------------------------
Merger among the Company, Fluid Management, Inc. and William C. Smith, Douglas
W. Jacobson, Gary W. Hawk and Richard W. Schowengerdt, dated January 14, 1997.
GAAP: shall have the meaning set forth in Section 2.7.
----
HSR Act: refers to the Hart-Scott-Rodino Antitrust Improvements Act of
-------
1976, as amended.
Intellectual Property: shall have the meaning set forth in Section
---------------------
2.16.
Material Adverse Effect: shall have the meaning set forth in Section
-----------------------
2.1(c).
Person: shall mean an individual, partnership, joint-stock company,
------
corporation, limited liability company, trust or unincorporated organization,
and a government or agency or political subdivision thereof.
Registration Rights Agreement: shall mean a registration rights
-----------------------------
agreement to entered into by the Company, Warburg and Fluid Management, Inc.
relating to the registration of the Shares and shares of Common Stock to be
acquired by the shareholders of Fluid Management, Inc., pursuant to the
preparation and filing of a registration statement in compliance with the
Securities Act.
SEC: shall mean the Securities and Exchange Commission.
---
D-21
<PAGE>
SEC Reports: shall have the meaning set forth in Section 2.7.
-----------
Securities Act: shall mean the Securities Act of 1933, as amended.
--------------
Subsidiary: shall mean a corporation of which a Person owns, directly
----------
or indirectly, more than 50% of the Voting Stock.
Voting Stock: shall mean securities of any class or classes of a
------------
corporation the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the corporate directors (or
Persons performing similar functions).
9.2. Accounting Principles
---------------------
Where the character or amount of any asset or amount of any asset or
liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement, this shall be done in accordance with GAAP at the
time in effect, to the extent applicable, except where such principles are
inconsistent with the requirements of this Agreement.
9.3. Directly or Indirectly
----------------------
Where any provision in this Agreement refers to action to be taken by
any Person, or which such Person is prohibited from taking, such provision shall
be applicable whether such action is taken directly or indirectly by such
Person.
9.4. Governing Law
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed entirely within such State.
9.5. Paragraph and Section Headings
------------------------------
The headings of the sections and subsections of this Agreement are
inserted for convenience only and shall not be deemed to constitute a part
thereof.
SECTION 10. MISCELLANEOUS
-------------
10.1. Notices
-------
(a) All communications under this Agreement shall be in writing and
shall be delivered by hand or mailed by overnight courier or by registered mail
or certified mail, postage prepaid:
(1) if to Warburg, at 466 Lexington Avenue, New York, New York 10017,
marked for attention of Robert S.
D-22
<PAGE>
Hillas, or at such other address as Warburg may have furnished the
Company in writing,
(2) if to the Company, at 4100 Quakerbridge Road, Lawrenceville, NJ
08648, marked for the attention of Harch S. Gill, or at such other
address as it may have furnished in writing to Warburg.
(b) Any notice so addressed shall be deemed to be given: if delivered
by hand, on the date of such delivery; if mailed by courier, on the first
business day following the date of such mailing; and if mailed by registered or
certified mail, on the third business day after the date of such mailing.
10.2. Expenses and Taxes
------------------
(a) The Company agrees to pay fifty percent (50%) of the fee required
to be paid under the HSR Act in connection with the transaction contemplated
hereby and the reasonable fees and disbursements of Willkie Farr & Gallagher,
special counsel for Warburg, incurred in connection with the negotiation,
preparation, execution and delivery of this Agreement and the other instruments
and agreements entered into pursuant to this Agreement, and any amendments to
the same, in an amount not to exceed $50,000.00, said payment to be made no
later than 30 days after a bill for such fees and/or disbursements has been sent
to the Company (provided, however, that in no event shall said payment be
required to be made by the Company prior to the Closing Date). Notwithstanding
the foregoing, (i) the Company shall be required to pay fifty percent (50%) of
such legal fees and expenses in an amount not to exceed $25,000 in the event
that the transactions contemplated by the Fluid Management Agreement are not
consummated as a result of the failure by Fluid Management, Inc. or its
stockholders to satisfy the conditions set forth in Section 6.02 of the Fluid
Management Agreement on or prior to the Closing Date and (ii) the Company shall
not be required to pay any such legal fees and expenses in the event that the
transactions contemplated hereby are not consummated as a result of the failure
by Warburg to satisfy the conditions set forth in Sections 6.1, 6.2, 6.3, 6.4,
or 6.5 hereto on or prior to the Closing Date.
(b) The Company will pay, and save and hold Warburg harmless from any
and all liabilities (including interest and penalties) with respect to, or
resulting from any delay or failure in paying, stamp and other taxes (other than
income taxes), if any, which may be payable or determined to be payable on the
acquisition by Warburg of the Shares.
10.3. Reproduction of Documents
-------------------------
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents
D-23
<PAGE>
received by Warburg on the Closing Date (except for certificates evidencing the
Shares themselves), and (c) financial statements, certificates and other
information previously or hereafter furnished to Warburg, may be reproduced by
Warburg by any photographic, photostatic, microfilm, micro-card, miniature
photographic or other similar process and Warburg may destroy any original
document so reproduced. All parties hereto agree and stipulate that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made by Warburg in the
regular course of business) and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
10.4. Termination and Survival
------------------------
Unless the Closing has occurred prior thereto, this Agreement and,
except as herein provided, all the rights of the parties hereto, shall terminate
on May 31, 1997 (unless such date is extended by mutual written consent).
Notwithstanding the termination of this Agreement, Section 8.1 hereof shall
survive the termination of this Agreement. All warranties, representations, and
covenants made by Warburg to the Company, or by the Company to Warburg, herein
or in any certificate or other instrument delivered by Warburg or the Company
under this Agreement shall be considered to have been relied upon by the Company
or Warburg, as the case may be, and shall survive all deliveries to Warburg of
the Shares, or payment to the Company for such Shares, until the thirtieth day
following the date on which Warburg receives the Company's audited financial
statements for the fiscal year ending December 31, 1997, except for the
warranties and representations set forth in Sections 2.14 and 2.24 herein, which
shall survive until expiration of any applicable statute of limitations,
regardless of any investigation made by the Company or Warburg, as the case may
be, or on the Company's or Warburg's behalf. All statements in any such
certificate or other instrument shall constitute warranties and representations
by the Company and Warburg, as the case may be, hereunder.
10.5. Successors and Assigns
----------------------
This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties.
10.6. Entire Agreement; Amendment and Waiver
--------------------------------------
This Agreement constitutes the entire understandings of the parties
hereto and supersede all prior agreements or understandings with respect to the
subject matter hereof among such parties. This Agreement may be amended, and
the observance of any term of this Agreement may be waived, with (and only with)
the written consent of the Company and Warburg.
D-24
<PAGE>
10.7. Severability
------------
In the event that any part or parts of this Agreement shall be held
illegal or unenforceable by any court or administrative body of competent
jurisdiction, such determination shall not effect the remaining provisions of
this Agreement which shall remain in full force and effect.
10.8. Limitation on Enforcement of Remedies
-------------------------------------
The Company hereby agrees that it will not assert against the limited
partners of Warburg any claim it may have under this Agreement by reason of any
failure or alleged failure by Warburg to meet its obligations hereunder.
10.9. Counterparts
------------
This Agreement may be executed in one or more counterparts, both of
which shall be deemed an original and all of which together shall be considered
one and the same agreement.
Very truly yours,
ENVIROGEN, INC.
By:/s/ Harcharan S. Gill
__________________________
Name: Harcharan S. Gill
Title: President and Chief
Executive Officer
WARBURG, PINCUS VENTURES, L.P.
By: WARBURG, PINCUS & CO.,
General Partner
By:/s/ Robert S. Hillas
____________________________
Name: Robert S. Hillas
Title: Partner
D-25
<PAGE>
Appendix E
ENVIROGEN, INC.
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of ________, 1997, among the
investors listed on Schedule I hereto (the "Investors") and Envirogen, Inc., a
Delaware corporation (the "Company").
R E C I T A L S
- - - - - - - -
WHEREAS, Warburg, Pincus Ventures, L.P., a Delaware limited
partnership ("Warburg"), has agreed, pursuant to the terms of the Securities
Purchase Agreement, dated as of January 14, 1997, by and between Warburg and the
Company (the "Purchase Agreement"), to purchase 6,095,238 shares of the common
stock, par value $0.01 per share, of the Company (the "Common Stock") at the
aggregate cash purchase price of $15,999,999.75; and
WHEREAS, the Company has agreed, as a condition precedent to the
Warburg's obligations under the Purchase Agreement, to grant Warburg certain
registration rights; and
WHEREAS, pursuant to the Agreement and Plan of Merger, dated January
14, 1997 (the "Merger Agreement"), by and among the Company, Fluid Management,
Inc., a Wisconsin corporation ("Fluid Management"), and William C. Smith,
Douglas W. Jacobson, Gary W. Hawk and Richard W. Schowengerdt (Messrs. Smith,
Jacobson, Hawk and Schowengerdt collectively, the "Other Investors"), the Other
Investors shall receive, collectively, up to 4,190,477 shares of Common Stock in
connection with the transactions contemplated by the Merger Agreement and
WHEREAS, the Company has agreed, as a condition precedent to Fluid
Management's and the Other Investor's obligations under the Merger Agreement, to
grant the Other Investors certain registration rights; and
WHEREAS, the Investors and the Company desire to define the
registration rights of the Investors on the terms and subject to the conditions
herein set forth.
NOW, THEREFORE, in consideration of the foregoing premises and for
other good and valuable consideration, the parties hereby agree as follows:
E-1
<PAGE>
1. DEFINITIONS
-----------
As used in this Agreement, the following terms have the respective
meaning set forth below:
Commission: shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act;
Exchange Act: shall mean the Securities Exchange Act of 1934, as
------------
amended;
Holder: shall mean any holder of Registrable Securities;
------
Person: shall mean an individual, partnership, joint-stock company,
------
corporation, trust or unincorporated organization, and a government or agency or
political subdivision thereof;
register, registered and registration: shall mean to a registration
-------- ---------- ------------
effected by preparing and filing a registration statement in compliance with the
Securities Act (and any post-effective amendments filed or required to be filed)
and the declaration or ordering of effectiveness of such registration statement;
Registrable Securities: shall mean (A) shares of Common Stock
----------------------
acquired by Warburg pursuant to the Purchase Agreement and shares of Common
Stock acquired by the Other Investors pursuant to the Merger Agreement, and (B)
any common stock of the Company issued as a dividend or other distribution with
respect to, or in exchange for or in replacement of, the shares of Common Stock
referred to in clause (A);
Registration Expenses: shall mean all expenses incurred by the
---------------------
Company in compliance with Section 2 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, fees and expenses of one counsel for all the Holders in
an amount not to exceed $15,000 in connection with an underwritten transaction
or $5,000 in connection with a non-underwritten transaction, blue sky fees and
expenses and the expense of any special audits incident to or required by any
such registration (but excluding the compensation of regular employees of the
Company, which shall be paid in any event by the Company);
Security, Securities: shall have the meaning set forth in Section
--------------------
2(1) of the Securities Act;
Securities Act: shall mean the Securities Act of 1933, as amended;
--------------
and
E-2
<PAGE>
Selling Expenses: shall mean all underwriting discounts and selling
----------------
commissions applicable to the sale of Registrable Securities and all fees and
disbursements of counsel for each of the Holders other than fees and expenses of
one counsel for all the Holders in an amount not to exceed $15,000 in connection
with an underwritten transaction or $5,000 in connection with a non-underwritten
transaction.
2. REGISTRATION RIGHTS
-------------------
(a) Shelf Registration.
------------------
(i) As soon as practicable after the Closing Date, but in any
event within nine (9) months after the Closing Date, the Company shall file
with the Commission and cause to be declared effective a registration
statement pursuant to Rule 415 under the Securities Act (a "Shelf
Registration Statement") relating to the offer and sale of Registrable
Securities by the Holders thereof from time to time in accordance with the
methods of distribution elected by such Holders and set forth in such Shelf
Registration Statement.
(ii) The Company shall supplement or amend, if necessary, the
Shelf Registration Statement as required by the applicable registration
form or by the Securities Act or the rules and regulations promulgated
thereunder or as reasonably requested by the Holders of a majority of the
Registrable Securities (the "Majority Holders"), and the Company shall
furnish to the holders of the Registrable Securities to which the Shelf
Registration Statement relates copies of any such supplement or amendment
prior to its being used and/or filed with the Commission.
(b) Expenses of Registration. All Registration Expenses
------------------------
incurred in connection with any registration, qualification or compliance
pursuant to this Section 2 shall be borne by the Company, and all Selling
Expenses shall be borne by the Holders of the securities so registered pro rata
on the basis of the number of their shares so registered.
(c) Registration Procedures. In connection with the Shelf
-----------------------
Registration Statement filed pursuant to this Section 2, the Company will keep
the Holders, as applicable, advised in writing as to the initiation of such
registration and as to the completion thereof. Subject to Section 2(g) hereof,
at its expense, the Company will, as expeditiously as possible:
(i) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Securities covered by
E-3
<PAGE>
such registration statement or as may be reasonably requested by the
Majority Holders, until such time (x) as all of such Registrable Securities
have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such registration
statement or (y) as set forth in Section 2(h) hereof;
(ii) use its best efforts (x) to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities or blue sky laws of such States of
the United States of America where an exemption is not available and as the
sellers of Registrable Securities covered by such registration statement
shall reasonably request, (y) to keep such registration or qualification in
effect for so long as such registration statement remains in effect, and
(z) to take any other action which may be reasonably necessary or advisable
to enable such sellers to consummate the disposition in such jurisdictions
of the securities to be sold by such sellers, except that the Company shall
not for any such purpose be required to qualify generally to do business as
a foreign corporation in any jurisdiction wherein it would not but for the
requirements of this subdivision (ii) be obligated to be so qualified,
subject itself to taxation in any such jurisdiction or to consent to
general service of process in any such jurisdiction;
(iii) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or approved by
such other federal or state governmental agencies or authorities as may be
necessary in the opinion of counsel to the Company and counsel to the
seller or sellers of Registrable Securities to enable the seller or sellers
thereof to consummate the disposition of such Registrable Securities;
(iv) promptly notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of which,
the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, in the light of the circumstances under
which they were made, and at the request of any such Holder promptly
prepare and furnish to it a reasonable number of copies of a supplement to
or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
E-4
<PAGE>
make the statements therein not misleading in the light of the
circumstances under which they were made;
(v) furnish, on the date that such Registrable Securities are
delivered to the underwriters for sale, if such securities are being sold
through underwriters, (1) an opinion, dated as of such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the
Holders participating in such registration, addressed to the underwriters
and to the Holders participating in such registration and (2) a letter,
dated as of such date, from the independent certified public accountants of
the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the
Holders participating in such registration, addressed to the underwriters,
and if permitted by applicable accounting standards, to the Holders
participating in such registration; and
(vi) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more than
eighteen months, beginning with the first full calendar month after the
effective date of such registration statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act and
Rule 158 promulgated thereunder, and promptly furnish to each Holder of
Registrable Securities a copy of any amendment or supplement to such
registration statement or prospectus.
Notwithstanding the foregoing, if any such registration or comparable
statement refers to any Holder by name or otherwise as the holder of any
securities of the Company and in its sole and exclusive judgment such Holder is
or might be deemed to be a controlling person of the Company, such Holder shall
have the right to require the insertion therein of language, in form and
substance reasonably satisfactory to such Holder and the Company, to the effect
that the holding by such Holder of such securities is not to be construed as a
recommendation by such Holder of the investment quality of the Company's
securities covered thereby and that such holding does not imply that such Holder
will assist in meeting any future financial requirements of the Company.
(d) Indemnification.
---------------
(i) The Company will indemnify each of the Holders, as
applicable, each of its officers, directors and partners, and each person
controlling each of the Holders,
E-5
<PAGE>
with respect to the registration which has been effected pursuant to this
Section 2, and each underwriter, if any, and each person who controls any
underwriter, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any
prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of the Securities Act or any rule or regulation
thereunder applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each of the Holders, each
of its officers, directors and partners, and each person controlling each
of the Holders, each such underwriter and each person who controls any such
underwriter, for any reasonable legal and any other expenses incurred in
connection with investigating and defending any such claim, loss, damage,
liability or action, provided that the Company will not be liable in any
--------
such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by the Holders or
underwriter and stated to be specifically for use therein.
(ii) Each of the Holders severally will, if Registrable
Securities held by it are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers and each underwriter, if any,
of the Company's securities covered by such registration statement, each
person who controls the Company or such underwriter and each of their
officers, directors, and partners against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained
in such registration statement, prospectus, offering circular or other
document made by such Holder, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements by such Holder therein not misleading, and will
reimburse the Company and such directors, officers, partners, persons,
underwriters or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
E-6
<PAGE>
statement, prospectus, offering circular or other document in reliance upon
and in conformity with written information furnished to the Company by such
Holder and stated to be specifically for use therein; provided, however,
-------- -------
that the obligations of each of the Holders hereunder shall be limited to
an amount equal to the net proceeds to such Holder of securities sold as
contemplated herein.
(iii) Each party entitled to indemnification under this Section
2(d) (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom; provided
--------
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld) and
the Indemnified Party may participate in such defense at such party's
expense (unless the Indemnified Party shall have reasonably concluded that
there may be a conflict of interest between the Indemnifying Party and the
Indemnified Party in such action, in which case the fees and expenses of
counsel shall be at the expense of the Indemnifying Party, provided that in
such event the Indemnifying Party shall not be responsible for the fees of
more than one counsel (plus one local counsel) to the Indemnified Parties),
and provided further that the failure of any Indemnified Party to give
-------- -------
notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 2 unless the Indemnifying Party is
materially prejudiced thereby. No Indemnifying Party, in the defense of
any such claim or litigation shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the
claim in question as an Indemnifying Party may reasonably request in
writing and as shall be reasonably required in connection with the defense
of such claim and litigation resulting therefrom.
(iv) If the indemnification provided for in this Section 2(d) is
held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any loss, liability, claim, damage or
expense referred to herein, then the Indemnifying Party, in lieu of
indemnifying such Indemnified Party hereunder, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such loss,
liability, claim, damage or expense in such proportion as is appropriate to
reflect the relative fault
E-7
<PAGE>
of the Indemnifying Party on the one hand and of the Indemnified Party on
the other in connection with the statements or omissions which resulted in
such loss, liability, claim, damage or expense, as well as any other
relevant equitable considerations. The relative fault of the Indemnifying
Party and of the Indemnified Party shall be determined by reference to,
among other things, whether the untrue (or alleged untrue) statement of a
material fact or the omission (or alleged omission) to state a material
fact relates to information supplied by the Indemnifying Party or by the
Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
(v) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the
underwriting agreement entered into in connection with any underwritten
public offering contemplated by this Agreement are in conflict with the
foregoing provisions, the provisions in such underwriting agreement shall
be controlling.
(vi) The foregoing indemnity agreement of the Company and the
Holders is subject to the condition that, insofar as they relate to any
loss, claim, liability or damage made in a preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the
Commission at the time the registration statement in question becomes
effective or the amended prospectus filed with the Commission pursuant to
Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not
inure to the benefit of (i) any underwriter if a copy of the Final
Prospectus was furnished to the underwriter and was not furnished to the
person asserting the loss, liability, claim or damage at or prior to the
time such action is required by the Securities Act and (ii) any Holder if
the loss, claim, liability or damage relates to a transaction pursuant to
which shares of Common Stock were not distributed pursuant to an
underwritten offering and if a copy of the Final Prospectus was furnished
to the Holder and was not furnished to the person asserting the loss,
liability, claim or damage at or prior to the time such action is required
by the Securities Act.
(e) Information by the Holders. Each of the Holders holding
--------------------------
securities included in any registration shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Section 2.
E-8
<PAGE>
(f) Rule 144 Reporting.
------------------
With a view to making available the benefits of certain rules and
regulations of the Commission which may permit the sale of restricted securities
to the public without registration, the Company agrees to:
(i) make and keep public information available as those terms
are understood and defined in Rule 144 under the Securities Act ("Rule
144");
(ii) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act; and
(iii) so long as the Holder owns any Registrable Securities,
furnish to the Holder upon request, a written statement by the Company as
to its compliance with the reporting requirements of Rule 144 and of the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so
filed as the Holder may reasonably request in availing itself of any rule
or regulation of the Commission allowing the Holder to sell any such
securities without registration.
(g) Holdback Periods. Notwithstanding anything in this
----------------
Agreement to the contrary if (i) the Company shall determine in good faith that
it would be significantly disadvantageous to the Company and its stockholders
for any such Shelf Registration Statement to be amended or supplemented, and
(ii) the need for such an amendment or supplement is not caused by a proposed
public offering of any securities of the Company by any of its securityholders
(other than an offering made pursuant to a registration on Form S-8), the
Company may defer such amending or supplementing of such Shelf Registration
Statement for not more than 60 days and in such event, upon appropriate notice
to the Holders, the Holders shall be required to discontinue disposition of any
Registrable Securities covered by such Shelf Registration Statement during such
period; provided, however, that this right may not be exercised by the Company
-------- -------
more than once in any twelve-month period.
(h) Termination. The registration rights set forth in this
-----------
Section 2 shall not be available to any Holder if, in the opinion of counsel to
the Company, all of the Registrable Securities then owned by such Holder could
be sold in any 90-day period pursuant to Rule 144 under the Securities Act
(without giving effect to the provisions of Rule 144(k)). Upon termination of
such registration rights in accordance with this Section 2(h), the obligations
of the Company to continue the effectiveness of the Shelf Registration Statement
shall terminate.
E-9
<PAGE>
3. MISCELLANEOUS
-------------
(a) Directly or Indirectly. Where any provision in this
----------------------
Agreement refers to action to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such Person.
(b) Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within such State.
(c) Section Headings. The headings of the sections and
----------------
subsections of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part thereof.
(d) Notices.
-------
(i) All communications under this Agreement shall be in writing
and shall be delivered by hand or mailed by overnight courier or by
registered or certified mail, postage prepaid:
(A) if to the Company, to 4100 Quakerbridge Road,
Lawrenceville, NJ 08648, Attention: Harch S. Gill, or at such other
address as it may have furnished in writing to the Investors;
(B) if to the Investors, at the addresses listed on
Schedule I hereto, or at such other addresses as may have been
furnished the Company in writing.
(iii) Any notice so addressed shall be deemed to be given: if
delivered by hand, on the date of such delivery; if mailed by courier, on
the first business day following the date of such mailing; and if mailed by
registered or certified mail, on the third business day after the date of
such mailing.
(e) Reproduction of Documents. This Agreement and all documents
-------------------------
relating thereto, including, without limitation, any consents, waivers and
modifications which may hereafter be executed may be reproduced by the Investor
by any photographic, photostatic, microfilm, microcard, miniature photographic
or other similar process and the Investors may destroy any original document so
reproduced. The parties hereto agree and stipulate that any such reproduction
shall be admissible in evidence as the original itself in any judicial or
administrative proceeding (whether or not the original is in existence and
whether or not such reproduction was made by the Investors in the regular course
of business) and that any
E-10
<PAGE>
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
(f) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of each of the
parties.
(g) Entire Agreement; Amendment and Waiver. This Agreement
--------------------------------------
constitutes the entire understanding of the parties hereto and supersedes all
prior understanding among such parties. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, with (and only with) the
written consent of the Company and the Investors holding a majority of the then
outstanding Registrable Securities.
(h) Severability. In the event that any part or parts of this
------------
Agreement shall be held illegal or unenforceable by any court or administrative
body of competent jurisdiction, such determination shall not effect the
remaining provisions of this Agreement which shall remain in full force and
effect.
(i) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
E-11
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as
of the date first set forth above.
ENVIROGEN, INC.
By:_______________________________
Harcharan S. Gill
President
INVESTORS:
WARBURG, PINCUS VENTURES, L.P.
By: Warburg, Pincus & Co.,
General Partner
By:_______________________________
Name:
Title:
__________________________________
WILLIAM C. SMITH
__________________________________
DOUGLAS W. JACOBSON
__________________________________
GARY W. HAWK
_________________________________
RICHARD W. SCHOWENGERDT
E-12
<PAGE>
SCHEDULE I
Name and Address
of Investor
- -----------
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, NY 10017
Attention: Robert S. Hillas
William C. Smith
S38 W33688 Highway D
Dousman, WI 53118
Douglas W. Jacobson
2518 N. 81st Street
Wauwatosa, WI 53213
Gary W. Hawk
W272 N1347 Spring Hill Drive
Pewaukee, WI 53072
Richard W. Schowengerdt
250 N. Summit Moors Drive
Oconomowoc, WI 53066
E-13
<PAGE>
Appendix F
ENVIROGEN, INC.
1990 INCENTIVE STOCK OPTION AND
NON-QUALIFIED STOCK OPTION PLAN
-------------------------------
(As Amended and Restated Effective January 3, 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
F-1
<PAGE>
upon the Company, its stockholders and all employees, and upon their 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 (3,000,000) 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 five hundred
thousand (500,000) 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.
F-2
<PAGE>
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).
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
F-3
<PAGE>
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.
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
F-4
<PAGE>
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 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,
F-5
<PAGE>
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 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
F-6
<PAGE>
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 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.
F-7
<PAGE>
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 Prop. 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:
F-8
<PAGE>
(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 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
F-9
<PAGE>
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-10
<PAGE>
ENVIROGEN, INC.
4100 QUAKERBRIDGE ROAD
LAWRENCEVILLE, NEW JERSEY 08648
PROXY - SPECIAL MEETING OF STOCKHOLDERS - _________, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Harcharan S. Gill and Patricia McQueary as
proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse, side
hereof all the shares of Common Stock of Envirogen, Inc. (the "Company") held of
record by the undersigned on January 31, 1997 at the Special Meeting of
Stockholders to be held on ________, 1997 or at any adjournment of the
postponement thereof.
(CONTINUED, AND TO BE SIGNED, ON REVERSE SIDE)
________________________________________________________________________________
<TABLE>
<CAPTION>
<S> <C> <C>
FOR AGAINST ABSTAIN
[X] Please mark your vote 1. Proposal to approve and adopt the [_] [_] [_]
as in this example Agreement and Plan of Merger among the
Company, Fluid Management, Inc. ("FMI")
and FMI's stockholders.
2. Proposal to approve and adopt the [_] [_] [_]
Securities Purchase Agreement between
Warburg, Pincus Ventures, L.P. and the
Company.
3. Proposal to approve and adopt the [_] [_] [_]
amendment to the Company's Amended and
Restated Certificate of Incorporation,
as amended.
4. Proposal to approve and adopt the [_] [_] [_]
amended and restated Envirogen, Inc. 1990
Incentive Stock Option and Non-Qualified
Stock Option Plan.
5. In their discretion, the Proxies are authorized, to the extent permitted by
the rules of the Securities and Exchange Commission, to vote upon such other
business as may properly come before the meeting or any adjournment or
postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED IN FAVOR OF PROPOSALS 1,2,3 AND 4 AND IN ACCORDANCE WITH THE PROXIES'
JUDGEMENT UPON OTHER MATTERS PROPERLY COMING BEFORE THE MEETING AND ANY
ADJOURNMENT OR POSTPONEMENT THEREOF.
PLEASE MARK, END, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
</TABLE>
SIGNATURE ____________ DATE ____________ SIGNATURE ___________ DATE _________
NOTE: Please sign exactly as name appears above. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign with full corporate name by the President or other authorized officer. If
a partnership, please sign in partnership name by authorized person.
