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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No. 0-20404
December 31, 1997
ENVIROGEN, INC.
(Registrant)
Delaware 22-2899415
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(State of incorporation) (IRS Employer Identification No.)
4100 Quakerbridge Road
Lawrenceville, NJ 08648
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(Address of principal executive (Zip code)
offices)
Registrant's telephone number, including area code: (609) 936-9300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share Common Stock Purchase Warrants
- -------------------------------------- ------------------------------
(Title of class) (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The aggregate market value of the registrant's Common Stock (its only
voting stock) held by non-affiliates of the registrant as of February 13, 1998
was approximately $21,544,700. (Reference is made to p. 15 herein for a
statement of the assumptions upon which this calculation is based.)
The number of shares of the registrant's Common Stock outstanding as of
February 13, 1998 was 23,294,835.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating to
its scheduled May 21, 1998 Annual Meeting of Stockholders (which proxy statement
is expected to be filed with the Commission not later than 120 days after the
end of the registrant's last fiscal year) are incorporated by reference in Part
III of this report.
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PART I
ITEM 1. BUSINESS
Envirogen, Inc. ("Envirogen" or the "Company") is a technology-based
environmental systems and services company that provides solutions to the
industrial effluent and hazardous waste remediation problems of the private and
public sectors. The Company also designs and implements effluent treatment
systems, vapor extraction systems and other integrated systems for the on-site
treatment of organic contaminants in soils and groundwater. The Company's
unique combination of scientific and engineering expertise has allowed it to
develop proprietary biological technologies to complement its non-biological
capabilities. The developmental efforts at Envirogen focus on the isolation of
naturally occurring organisms and the creation of genetically modified
organisms, enhancing their performance and then engineering advanced systems to
optimize their activity for the biodegradation of various compounds in soil, air
and water. Envirogen's strategic approach is to utilize the appropriate
technology to provide its clients with the most efficient, safe and cost-
effective solution to their hazardous waste cleanup and treatment needs.
Envirogen's capabilities mirror the needs of the marketplace, and its
development of innovative, cost-effective technologies should be timely. The
Environmental Protection Agency (the "EPA") is currently believed to be more
receptive to innovative approaches than at any previous time. In addition, new
regulations create more stringent requirements for chemical releases, which now
require the destruction of specific, difficult to destroy compounds. This has
resulted in 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.
Growth Strategy
Envirogen has developed a two-tier growth model that incorporates both an
internal and external growth strategy. The internal growth strategy centers on
increasing sales of the Company's core businesses through the continued
commercialization of its technologies in concert with focused marketing and
sales efforts. The Company combines this with an external growth strategy that
includes the selective acquisitions of companies with complementary capabilities
aimed at producing synergistic results. The external growth strategy also
includes entering into joint ventures and collaborative marketing agreements
with firms that are interested in exploring and developing alternative
remediation and pollution control technologies. In connection with this
external growth strategy, Envirogen has completed the following acquisitions in
the past 12 months:
. Acquired Fluid Management, Inc. ("FMI") of Pewaukee, Wisconsin, a full-
service environmental consulting firm with offices in Wisconsin and
Illinois. The business and operations of FMI are now fully integrated
into the Company through the FMI Operations Group, which provides
specialized services in the area of remedial investigation, design and
construction, solid waste and landfill management, air sciences,
engineering and compliance management.
. Acquired from nv VAM of the Netherlands the remaining 50% ownership of CVT
America, LLC (a former joint venture between the Company and VAM). The
Company has integrated the operations of CVT America into the Company by
providing advanced biofiltration systems and services for the treatment of
odors, air toxics and volatile organic compounds in the air pollution
control market.
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Business Areas
Envirogen's core competency is the application of biotechnology and
biocomplementary technologies combined with expertise in traditional remediation
technology for both the remediation of contaminated waste sites and for the
treatment of contaminated waste streams. The evolution of the Company, catalyzed
by acquisitions that have layered synergistic technologies and capabilities onto
its core base of expertise, is demonstrated by its increased scope of services
and products offered to the marketplace and the broadening of its geographic
presence. Envirogen's primary business areas are described below:
REMEDIATION
The majority of industry's environmental problems are the result of the release
into the environment of contaminants ranging from simple hydrocarbons to complex
chlorinated compounds. Generally, the less complex a contaminant's molecular
make-up, the more easily and quickly it will be degraded by bacteria that use
the contaminant as a "food source." For instance, when hydrocarbon-based
compounds such as gasoline or heating oil are spilled into the environment,
depending on various factors, indigenous soil bacteria are likely to be present
to begin the biodegradation process to break down the contaminant into its core
components of carbon dioxide and water. Contaminants with more complex molecular
structures generally are more difficult to degrade, and as complexity increases,
the likelihood of indigenous bacteria being present that are capable of
degrading the compound decreases, resulting in the need for intervention to
accelerate the natural process. Degrees of intervention range from the
relatively subtle, such as biostimulation (stimulating indigenous bacteria) to
bioaugmentation (injecting bacteria produced in a laboratory into the
subsurface), to the more conspicuous, such as excavation and transport to
another location. With an understanding of the direct relationship between cost
and intervention, whereby costs generally increase with added degrees of
intervention, Envirogen designs solutions that employ the least amount of
intervention necessary in each given case to achieve an environmentally
effective and cost-efficient solution.
Envirogen acquired Pewaukee, Wisconsin-based FMI in April 1997. The acquisition
of this company significantly enhanced Envirogen's remediation capabilities and
provided Envirogen with greater technical resources, broader geographical
presence and broader client coverage. As a result of its acquisition of FMI,
Envirogen provides specialized remediation services, including all aspects of
underground and aboveground storage tank management, a broad range of
engineering and construction services, air permitting, compliance management,
storm water management, complete solid waste services, landfill engineering and
waste characterization.
Envirogen's full range of in situ technologies include: traditional approaches,
such as soil vapor extraction and air sparging; innovative biological-based
techniques, such as biostimulation and bioaugmentation; and approaches combining
the two, such as biosparging and bioventing, both of which stimulate degradative
microbial activity through the addition of oxygen to the subsurface. Envirogen
has steadily increased its in situ capabilities both through its internal
developmental efforts as well as through acquisitions of companies with
technologies in this category. Envirogen's acquisition of Vapex Environmental
Technologies, Inc. in 1991 and Lansing-based MWR in 1996 provided it with a
portfolio of proprietary in situ capabilities. The scope of economical in situ
capabilities is behind Envirogen's success in receiving several contract awards
from groups of prestigious Fortune 100 clients for the cleanup of Superfund
sites.
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Depending on the specific circumstances, the remediation of contaminated soils
and groundwater may be undertaken with the contamination remaining in place, or
in situ, or it may require removal of material from the contaminated area(s)
for ex situ destruction. In the latter case, additional costs associated with
the removal process, as well as the costs associated with increased handling,
storage and transport of contaminated matter, are incurred.
Accordingly, Envirogen's process of designing solutions to maximize cost savings
for its clients employs a hierarchical model of increasingly aggressive cleanup
techniques. In situations where the cleanup can be performed in situ, the most
"passive" form of biodegradation, known as intrinsic remediation, is first
considered by Envirogen. Intrinsic remediation is the approach that allows for
contamination to be biodegraded through microbial degradation processes that
have developed naturally at a contaminated site, and thereby occurs without any
intervention. Based on the increased regulatory acceptance of intrinsic
remediation in recent years, Envirogen has accelerated its efforts with this
approach by developing intrinsic remediation protocols for a wide range of
target contaminants from petroleum hydrocarbons to chlorinated solvents.
Envirogen's ex situ capabilities also include both traditional and innovative
approaches. Envirogen is a provider of reactor-based biosystems for the on-site
destruction of vapor streams as a final remediation step that follows initial
processes such as vapor extraction. Solid Phase Extraction (SoPE/TM/) is a non-
biological patented process developed by Envirogen that uses a foam, typically
polystyrene foam, to desorb contaminants such as pesticides, polyaromatic
hydrocarbons and polychlorinated biphenyls ("PCBs") from soils for disposal or
destruction by other treatment methods. Other ex situ technologies used by
Envirogen include advanced landfarming, which involves the periodic mixing of
contaminated soil with a solid sludge or aqueous slurry surface layer that
contains degradative bacteria, and soil pile treatment, which uses soil mounded
in rows and periodic tilling of the rows to stimulate biological degradation of
contaminants.
POLLUTION CONTROL
The enforcement of more rigorous regulations combined with the high cost of
conventional physical and chemical treatment methods has created the need for
cost-effective specialized bioreactor systems and biocatalysts to degrade
difficult contaminants in industrial air and water effluent streams.
Envirogen's pollution control products to degrade contaminants in air and waste
water streams are described below:
Air
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Motivated by the 1990 Clean Air Act Amendments ("CAAA"), which have increasingly
regulated the release of toxic compounds into the atmosphere, Envirogen embarked
upon a program in the early 1990's to commercialize biotechnology to treat both
odor-causing chemicals and volatile organic compounds. Referred to as
biofiltration technology, the biological treatment of contaminated air streams
is generally recognized as a cost effective alternative to physical and chemical
treatment methods such as incineration, adsorption and chemical scrubbing.
Envirogen's advancements in biofiltration include the development of systems for
the cost-effective destruction of contaminants such as odors, hydrogen sulfide,
carbon disulfide, styrene, terpenes, alcohol, aldehydes, isobutane, isopentane,
mixed solvents associated with the printing and surface coating industry, and
hydrocarbons associated with remediation.
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A biofiltration system consists of a large containment vessel ("reactor"),
within which microorganisms, in the form of a moistened layer attached to either
an organic or inorganic filter media, are used to catalyze chemical reactions
that break down airborne contaminants into less harmful compounds. As a
contaminated vapor stream passes through the filter bed, contaminants are
transferred from the vapor to the biofilm layer and are consumed by the
microorganisms. The initial research of Envirogen, and numerous field trials,
resulted in the following bioreactor technologies:
. Biofilter - A Biofilter utilizes an organic filter media as the support
for the biofilm layer containing the microorganisms. The system, which is
optimized for dilute waste streams, provides destruction efficiencies of
up to 99% and typically provides substantial operating cost savings and
equivalent or lower initial capital costs than the more traditional
chemical or physical removal technologies.
. Biotrickling Filter - A Biotrickling Filter operates on the same principle
as a Biofilter but utilizes a synthetic packing material instead of the
organic filter media used in the Biofilter. The Biotrickling Filter
operates with a recirculating liquid flow over the packing material. This
recirculating liquid flow is initially inoculated with microorganisms
which form a biofilm layer on the packing. The contaminants are
transferred to, and degraded by, microorganisms present within both the
recirculating liquid and the biofilm layer. The Biotrickling Filter is an
attractive alternative for the treatment of more difficult to degrade
compounds and provides the added benefit of reduced system footprint and
reduced operating costs as compared to more traditional technologies.
To expand on Envirogen's portfolio of air treatment products and services,
Envirogen formed a joint venture in 1995 with nv VAM of the Netherlands. The
venture was acquired in its entirety by Envirogen in August 1997 and now
provides Envirogen with a line of patented modular biofiltration systems and
other technologies for the treatment of odors, air toxics and volatile organic
contaminants for specific segments of the air pollution control market. The
acquired technologies, combined with the Biofilter and Biotrickling Filter
designs of Envirogen, underscore Envirogen's leadership position in the
biological air pollution control market. The Company believes that these
products have applications in a number of industries which include municipal
waste treatment facilities, composting plants and the forest products
industries.
Envirogen is distinguished in this market by having completed work on numerous
full-scale air system installations ranging in contract size from approximately
$35,000 up to $1.8 million. This includes a Biofilter the Company built for a
decorative hardwood panel manufacturer and a Biofilter for a synthetic sponge
manufacturer.
Envirogen began work in late 1997 on a large flow capacity system, under a
contract with Waste Management of New York ("WMNY"). The contract with WMNY
calls for Envirogen to provide a turn-key biofiltration odor control system to
treat exhaust air from a municipal waste/biosolids composting facility that WMNY
is constructing and will operate for the Municipal Authority of Rockland County
in New York.
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Water
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The enforcement of more rigorous water quality regulations has created a need
for cost-effective systems to degrade contaminants in groundwater and plant
effluent streams. The biological treatment of contaminated water streams is
generally recognized as a cost effective alternative to more traditional
physical and chemical methods such as thermal, UV-based and adsorption
processes.
Consistent with Envirogen's approach to the treatment of contaminated air
streams, the biological treatment of contaminated water streams relies on the
destruction of chemicals by microorganisms, attached to a filter media or
otherwise contained in a reactor, to catalyze chemical reactions that break down
contaminants into less harmful compounds. Utilizing its knowledge of
biocatalysis and advanced reactor design, the Company is able to combine
efficient microorganisms with the optimum bioreactor design to achieve the
destruction of a given contaminant. Envirogen's research and development has
led to full-scale reactor systems for the treatment of contaminants ranging in
complexity from simple hydrocarbons to complex compounds which are difficult to
degrade such as methyl tertiary butyl ether ("MTBE", a gasoline octane
enhancer). The Company has developed the following reactor designs:
. Fluidized Bed Reactor - The Fluidized Bed Reactor ("FBR") consists of a
columnar reactor containing media that serves as an attachment surface for
microorganisms. The reactor maintains high concentrations of biomass
under high flow rate conditions. The contaminated liquid flows through the
reactor where microorganisms degrade the contaminants. The optimal use of
this system is for the treatment of high flow, low concentration waste
streams containing contaminants such as simple hydrocarbons, aromatics,
solvents, ammonia or nitrates.
. Membrane Bioreactor - The Membrane Bioreactor consists of a liquid-phase
bioreactor coupled with a membrane clarification unit. Following the
biological treatment of the contaminated stream, the contents of the
bioreactor are pumped to the membrane unit where the solids and liquids
are separated with clean effluent being discharged and biomass and excess
effluent being recycled back into the bioreactor. The optimal use of this
system is for high concentration, low flow-rate streams with complex
compounds such as MTBE, 1,4-dioxane, phenols, and pesticides.
In addition, Envirogen has developed other reactor systems for specific
applications. These systems include Sequencing Batch reactors, Submerged Fixed-
Film reactors and Suspended Growth reactors. Envirogen's commercialization
efforts in its water program includes installation of a full-scale FBR at an
industrial site for the removal of aniline and nitrobenzene from groundwater.
As evidence of the cost-effectiveness of the technology, the client estimated
that the FBR system would save at least $1.8 million in capital and operating
costs over the life of the project when compared to conventional technologies.
The Company believes these products have applications in a number of industries
including petrochemicals, pharmaceuticals, pulp and paper, and industries using
paints or solvents.
During 1997, the Company worked with Rhone-Poulenc to develop high-performance
biological technologies and systems for the industrial wastewater treatment
market. The Company and Rhone-Poulenc are in the process of restructuring their
agreement which will allow each company to move forward on a more independent
basis.
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Technology
Envirogen conducts research and development aimed at developing new, more
efficient environmental technologies for the remediation of hazardous waste and
for pollution control. Envirogen's technology is based on two elements:
microorganisms (biocatalysts) with exceptional degradative abilities; and
engineered systems, including proprietary bioreactors and processes. 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, hydrology, chemical and
mechanical engineering and systems design. During 1997, Envirogen spent
approximately $2.7 million on research and development projects.
Microorganisms
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Envirogen's biodegradation processes are based on naturally occurring or
genetically modified microorganisms that are either indigenous to a hazardous
waste site or are introduced to the site for controlled usage by Envirogen. The
microorganisms under development are primarily bacteria, which are microscopic,
single-cell organisms that under defined conditions can break down contaminants
into less complex substances. For example, if the contaminant is benzene, the
byproducts from its complete degradation are carbon dioxide and water.
There are naturally occurring bacteria capable of degrading nearly all natural
organic compounds under appropriate conditions. However, highly effective
naturally occurring bacteria capable of degrading many synthetic compounds
(such as polychlorinated biphenyls ("PCB's") and trichloroethylene ("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, MTBE,
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
contaminated sites. Envirogen is also designing and testing genetically-modified
bacteria that can have several advantages over naturally occurring bacteria.
These advantages include the ability to degrade wastes faster, reducing the
overall cost of remediation or waste stream treatment.
Envirogen's commitment to developing leading edge technologies not only serves
to provide new business opportunities for Envirogen, but has also helped
establish Envirogen as a leader in environmental biotechnology. As mentioned
earlier, one of the major areas of focus for Envirogen 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 and 1997, Envirogen successfully
demonstrated this technology, in combination with complementary delivery
technologies, at two sites, one of which was for a Fortune 100 petroleum company
and the second for the U.S. Air Force. This work is significant because it
proves the capability for the destruction of chlorinated organics at a
geologically-complex site. Additional field testing is ongoing in the area which
may result in a cost effective solution to in-situ remediation of TCE.
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Engineered Systems
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Envirogen has designed and constructed several different engineered systems
using bioreactors to enhance the biodegradative capabilities of the
microorganisms when they make contact with the contaminated air, water or soil.
By using a bioreactor, variables such as temperature and pH (acidity or
alkalinity) can be controlled, and measured amounts of oxygen and nutrients can
be added to the mixture of microorganisms and contaminated materials, thereby
optimizing the degradative 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 chemicals. The design of a
bioreactor to be used at a particular site or in a particular waste stream
depends on the types of wastes to be degraded, the media (e.g., soil, water or
air) 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 bioreactor
designs utilizing naturally occurring and genetically-modified bacteria for the
degradation of PCE, TCE, MTBE, air toxics, industrial wastewater effluents, and
groundwater contaminants. Envirogen has successfully completed a field
demonstration of its MTBE bioremediation technology and believes the technology
provides a mechanism to cost-effectively remove MTBE from contaminated
groundwater.
Government Supported Research
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As discussed earlier, strict regulations and the prohibitive cost of traditional
treatment methods have forced business and government 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. In addition to the numerous Phase I and Phase II SBIRs that
Envirogen has previously received, Envirogen was awarded four two-year Phase II
SBIR contracts in 1997 for the development of advanced technologies. One SBIR,
for the National Science Foundation ("NSF"), is to engineer biocatalysts to not
only destroy hazardous wastes more efficiently, but also to convert those wastes
into valuable specialty chemicals. Another SBIR, for the NSF, is to test a
process that utilizes surfactant foams in conjunction with bacteria to enhance
the degradation of chlorinated solvents. A third SBIR, for the Department of
Defense, is to continue development of a combined anaerobic/aerobic bio-reactor
to treat ground water streams contaminated with chlorinated solvents. The
fourth SBIR, for the NSF, is to develop biosensors for detecting and measuring
chlorinated solvents in ground water.
These examples of Envirogen's research and development efforts with
microorganisms and engineered systems, along with many other existing products
and systems still under development, all lay the scientific groundwork which
lead the way to safer, more responsive commercial applications. The result is a
cleaner environment achieved with cost-savings for industry.
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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 costly. 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. In April 1997, the EPA adopted new
regulations for its TSCA biotechnology program that define the criteria under
which the use of genetically-modified microorganisms in a bioreactor will be
considered "contained." Envirogen believes the time and cost of obtaining EPA
approval for its commercial systems may be reduced as a result of the EPA's new
regulations for its TSCA biotechnology program. Envirogen continues to monitor
regulatory approvals required by the EPA under TSCA and by various state and
local authorities related to Envirogen's intended use of genetically-modified
bacteria.
Recombinant DNA research conducted with grants from the National Institute of
Health ("NIH") must comply with NIH's Guidelines for Research Involving
Recombinant DNA Molecules (the "Guidelines"). Although compliance with the
Guidelines is not currently mandated for entities that do not receive any NIH
funding, Envirogen has conducted its research involving genetically-modified
microorganisms in compliance with the Guidelines. The Guidelines prohibit or
restrict certain recombinant DNA experiments, set forth levels of biological and
physical containment of recombinant DNA molecules for various types of research
and require that institutional biosafety committees, composed of representatives
of Envirogen and the public, approve certain experiments before they are
initiated.
Envirogen's research and development activities on PCBs currently require a
permit under TSCA, and certain of its other research activities on other
hazardous substances require state permits. These permits have been obtained.
Additionally, other permits may be required from the EPA and various state and
local agencies in connection with the installation, use or operation of
Envirogen's biodegradation systems.
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,
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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 based on tons of
contaminated soil excavated and transported to a hazardous waste landfill.
Additional competitive factors include corporate presence in a geographic area,
regulatory support, performance standards and technical reliability and
competence. Envirogen's competitive position is premised upon the lower-cost
treatment approach traditionally associated with conventional biodegradation
techniques, with particular focus upon Envirogen's distinctive approach to
degrading recalcitrant hazardous waste.
Envirogen and many other 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 other firms in conjunction with Envirogen's biodegradation
technology. To date, Envirogen has been able to establish acceptable levels of
such teaming arrangements on satisfactory terms.
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In response to the search for alternatives to incineration, deep-well injection
and hazardous waste landfills, various developmental chemical and physical
treatment technologies are being explored by sources within industry, university
research centers and the EPA. Any of these alternative technologies, if found
to be effective and cost efficient, may directly or indirectly compete with
Envirogen's technologies. Certain present remediation alternatives are under
regulatory review and, as in the case of incineration, their availability may be
limited or restricted in the future, thereby increasing the need to develop
acceptable alternatives.
Envirogen is aware of a number of potential competitors seeking to develop
commercial systems employing biological degradation technology, many of which
have considerably greater financial resources than Envirogen. Some of these
companies are focusing directly on the enhancement of the degradative activities
of indigenous microorganisms, and some have isolated strains of microorganisms
that alone or in combination with other isolated strains of bacteria will
degrade certain hazardous wastes. Envirogen does not expect that other entities
seeking solely to enhance conventional biological treatment systems will be able
to demonstrate these systems' effectiveness in degrading the more recalcitrant
hazardous chemicals targeted by Envirogen. There are, however, a number of
companies attempting to develop advanced biological treatment techniques similar
to those of Envirogen for treatment of these recalcitrant chemicals. The less
stable hydrocarbon wastes are not particularly difficult to degrade using
conventional biological methods, and Envirogen expects greater competition in
that market sector.
Envirogen is aware of other companies that have targeted the biodegradation of
TCE and have performed various degrees of testing. Envirogen is not aware of
any competitor that has had substantial positive results in the biodegradation
of PCB wastes, although Envirogen believes that various companies have targeted
the PCB biodegradation market. Envirogen is aware of and expects continued
competition in the areas of remediation of industrial air toxics, industrial
wastewaters, groundwater and soils.
In addition, there are a significant number of companies that offer soil vapor
extraction and related remediation services. The EPA has rated soil vapor
extraction as one of the top innovative technologies. Changes in governmental
regulations, the enforcement of regulations or advances in technology may result
in a decrease in the demand for vapor extraction services or affect the
competitive environment in which Envirogen operates.
Employees
As of December 31, 1997, Envirogen had 231 full-time employees, including 127 in
engineering, 26 in research and development, 54 in administration and finance
and 24 in marketing. Doctoral degrees are held by nine employees and encompass
the disciplines of biochemistry, molecular biology, chemical engineering,
microbiology and microbial physiology. Each of Envirogen's key employees is
subject to a confidentiality agreement with Envirogen covering Envirogen's
processes and plans relating to its business and activities. Envirogen is not
subject to any collective bargaining agreements and believes that its
relationship with its employees is excellent.
11
<PAGE>
Environmental Liability and Insurance
Envirogen could be held strictly liable under various laws and regulations if
microorganisms or hazardous wastes cause harm to humans or the environment, even
if Envirogen were not negligent. Although Envirogen has a $5,000,000 combined
professional liability and contractor's pollution liability insurance program
that also provides limited product liability coverage, there can be no assurance
that environmental liabilities that may be incurred by Envirogen will be covered
by its insurance or that the dollar amount of covered liabilities will not
exceed policy limits. Accordingly, a partially or completely uninsured judgment
against Envirogen could have a materially adverse effect on Envirogen.
Liability insurance market conditions may make it impossible or uneconomical for
Envirogen to obtain combined professional and contractor's pollution liability
or product liability insurance, which may adversely affect its ability to market
its products and services. Although Envirogen attempts to mitigate some of the
uninsured risks by typically not taking title to its customers' waste or
transporting such waste, such measures may not be 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, and under certain circumstances, its subcontractors performance
under such contract or contracts is faulty or not conducted in compliance with
deadlines. Although Envirogen will make every effort to mitigate losses under
indemnification clauses contained in its contracts, a claim, if successful and
of sufficient magnitude, could have a materially adverse effect on the business
or financial condition of Envirogen.
ITEM 2. PROPERTIES
The Company's headquarters is located in Lawrenceville, New Jersey, where it
leases 40,200 square feet of office space for its administrative, laboratory and
pilot facilities. The Company also leases an aggregate of approximately 80,300
square feet of office and warehouse space in Illinois, Massachusetts, Michigan,
Texas and Wisconsin. Management believes that the Company's facilities are
adequate and suitable for its current and proposed operations for the
immediately foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in litigation relating to services previously
provided at a customer site. This customer, against whom the Company filed suit
to recover amounts due for work performed, filed a counter-claim against the
Company for breach of contract, declaratory relief and interpleader. No
specific damages have been claimed by this customer and, at the present time,
management of the Company is unable to predict the outcome of this matter or to
determine whether the outcome of this matter will materially affect the
Company's results of operations, cash flows or financial position.
The Company is also subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, all such pending claims are
either adequately covered by insurance or, if not insured, will not individually
or in the aggregate result in a material adverse effect on the consolidated
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
12
<PAGE>
Additional Information
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:
Executive Officers of the Company
The executive officers of the Company serve at the discretion of the Board of
Directors. There are no family relationships between any of the executive
officers of the Company. The following information indicates the position and
age of the Company's executive officers as of the date of this report and their
previous business experience.
Name Age Position
---- --- --------
William C. Smith 66 Chief Executive Officer and Chairman
of the Board
Ronald Unterman, Ph.D. 52 Senior Vice President and Chief
Scientific Officer
Mark J. Maten 40 Vice President of Finance and Chief
Financial Officer
Douglas W. Jacobson 52 Senior Vice President of Marketing
David N. Enegess 51 Vice President of Product Development
William C. Smith has been the Chief Executive Officer of the Company since
October 1997. He has been the Company's Chairman of the Board since April 1997
and serves as the President and Chief Executive Officer of the Company's FMI
Operations Group. Mr. Smith joined the Company when Fluid Management, Inc.
("FMI"), a company of which he was a founder, was acquired in April 1997. Mr.
Smith was the President and Chief Executive Officer of FMI. 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 environmental matters and to a major
oil company on lignite utilization and recovery and other environmental matters.
Mr. Smith has a degree in Chemical Engineering from the University of Wisconsin
and is a Wisconsin registered Professional Engineer.
Ronald Unterman, Senior Vice President and Chief Scientific Officer, is a
founder of the Company and has been with the Company since August 1988. From
1981 until he joined the Company, Dr. Unterman served as a staff scientist (from
November 1981 to December 1987) and as a manager (from January 1988 to July
1988) of the Environmental Technology Program at General Electric Company. His
primary area of research expertise is in the development of methods for
biodegrading PCBs. Dr. Unterman received a B.A. in biology from Haverford
College, studied under a Molecular Biology Fellowship at Rockefeller University
and holds a Ph.D. in biochemistry from Columbia University.
Mark J. Maten joined the Company on January 1, 1998 as Vice President of Finance
and Chief Financial Officer. From February 1997 until December 1997, Mr. Maten
served as a business consultant and financial advisor in a consulting capacity
to a number of companies. From June 1992 until January 1997, Mr. Maten was
Senior Vice President and Chief Financial Officer of Enviroplan, Inc., a leading
provider of continuous emission monitoring systems to the acid rain market. Mr.
Maten also served as a member
13
<PAGE>
of the Board of Directors for Enviroplan, Inc. Mr. Maten is a member of the
American Institute of Certified Public Accountants. Mr. Maten received his
undergraduate degree from the University of Michigan and a Masters in Business
Administration degree from Indiana University.
Douglas W. Jacobson joined the Company as Senior Vice President of Marketing and
Vice President of the Company's FMI Operations Group when FMI, a company of
which he was a founder, was acquired by the Company in April 1997. Mr. Jacobson
was the Vice President and Secretary of FMI. Mr. Jacobson has over 25 years of
technical and marketing experience in the petroleum products, oil re-refining
and solvent recovery programs for numerous manufacturing facilities and served
in a sales management capacity for several manufacturing and service companies.
Mr. Jacobson has a degree in Mechanical Engineering from the University of
Wisconsin and is a Wisconsin registered Professional Engineer.
David N. Enegess is a founder of the Company and has been its Vice President of
Marketing and Commercial Development from June 1988 until April 1997, at which
time he was appointed Vice President of Product Development. From 1982 until he
joined the Company, he served in various capacities, most recently as Vice
President of Corporate Development, for American NuKEM Corporation (formerly
known as WasteChem Corporation), a company which sells equipment, systems and
services for the treatment of hazardous wastes. Mr. Enegess received his
undergraduate and masters degrees in chemical engineering from Tufts University.
14
<PAGE>
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Envirogen's Common Stock and Common Stock Purchase Warrants are traded in the
Nasdaq SmallCap Market under the symbols "ENVG" and "ENVGW," respectively. Each
Common Stock Purchase Warrant entitles the holder to purchase one-half of one
share of Common Stock at an exercise price of $5.20 per full share, subject to
adjustment, until October 13, 1998. The Common Stock prices are inter-dealer
prices, without retail markup, markdown or commission, and may not necessarily
represent actual transactions. The following table sets forth for the periods
indicated the high and low closing prices for Envirogen's Common Stock as
reported by Nasdaq.
1997 HIGH LOW
---- ----- -----
1st Quarter $3.63 $2.38
2nd Quarter $3.38 $2.38
3rd Quarter $3.56 $2.38
4th Quarter $3.50 $1.31
1996
----
1st Quarter $4.00 $2.50
2nd Quarter $4.63 $2.38
3rd Quarter $4.00 $2.13
4th Quarter $3.75 $2.38
The closing price for the Common Stock on February 13, 1998 was $1.50. For
purposes of calculating the aggregate market value of the shares of Common Stock
of the Company held by nonaffiliates, as shown on the cover page of this report,
it has been assumed that all the outstanding shares were held by nonaffiliates
except for the shares held by directors and executive officers of the Company
and stockholders owning 10% or more of outstanding shares. However, this should
not be deemed to constitute an admission that all such persons are, in fact,
affiliates of the Company, or that there are not other persons who may be deemed
to be affiliates of the Company. Further information concerning ownership of
the Company's securities by executive officers, directors and principal
stockholders will be included in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission.
The number of stockholders of record as of December 31, 1997 was 284, which
includes stockholders whose shares were held in nominee name. The number of
beneficial stockholders at that date was over 2,350.
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.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected financial data for each of the Company's
last five fiscal years. This data should be read in conjunction with the
Company's consolidated financial statements and related notes appearing
elsewhere in this report and with Item 7 of this report.
<TABLE>
<CAPTION>
Summary of Operations
Years Ended December 31,
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997/(1)/ 1996/(2)/ 1995 1994 1993
---- ---- ---- ---- ----
Revenues $ 25,769,509 $ 12,919,594 $ 8,033,698 $ 6,134,577 $ 4,714,752
Costs and expenses 28,885,818 15,689,306 10,279,694 10,503,989 9,879,694
Interest, net 210,573 170,783 169,972 111,659 216,696
Equity in loss of
joint venture (210,497) (52,629) (93,437) - -
Other, net 26,047 7,601 16,961 - -
------------ ------------- ------------- ------------- -------------
Net loss (3,090,186) (2,643,957) (2,152,500) (4,257,753) (4,948,246)
Preferred stock
dividends - (36,458) (233,333) - -
------------ ------------- ------------- ------------- -------------
Net loss applicable to
Common Stock ($3,090,186) ($ 2,680,415) ($ 2,385,833) ($ 4,257,753) ($ 4,948,246)
============ ============= ============= ============= =============
Basic and diluted net
loss per share applicable
to Common Stock ($0.15) ($0.24) ($0.31) ($0.57) ($0.79)
======= ====== ======= ======= =======
</TABLE>
Summary of Financial Position
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1997/(1)/ 1996/(2)/ 1995 1994 1993
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Total assets $42,727,012 $12,716,624 $8,585,233 $6,704,806 $11,945,079
Working capital 8,099,057 7,094,266 4,934,700 3,628,377 8,204,251
Long-term obligations 12,671 42,176 60,951 177,704 298,709
Redeemable convertible
Preferred Stock - - 1,728,621 - -
Stockholders' equity 33,992,254 10,047,233 4,863,357 5,400,207 9,694,715
</TABLE>
/(1)/ The financial data for 1997 includes the results of operations of FMI
(acquired April 10, 1997) from the date of acquisition.
/(2)/ The financial data for 1996 includes the results of operations of MWR
(acquired February 9, 1996) from the date of acquisition.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in this report.
Certain statements made herein are forward-looking and are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. Such
statements involve risks and uncertainties which may cause results to differ
materially from those set forth in these statements. In particular,
unanticipated changes in the economic, competitive, governmental, technological,
marketing and other factors identified herein and in the Company's other filings
with the Securities and Exchange Commission could affect such results.
General
- -------
The source of the Company's revenues to date includes (i) remediation services,
including both in situ and ex situ bioremediation, (ii) commercial sales of the
Company's biological degradation systems, and (iii) funds received from third
parties and government agencies to conduct specific research and development
programs. While the Company has realized significant commercial revenues for
several years from remediation services, it has only recently seen the first
substantial revenues from sales of full-scale biological degradation systems for
the treatment of contaminated air and water streams. Although great strides
have been made in the commercialization of these systems, significant
expenditures will be required for continued research and development, additional
marketing activities and ultimately the development of manufacturing
capabilities for the further commercialization of the Company's biodegradation
systems. The amount and timing of such expenditures will vary depending on
several factors, including the progress of development and testing, funding
from third parties, the level of enforcement of environmental regulations by
federal and state agencies, technological advances, changing competitive
conditions and determinations with respect to the commercial potential of the
Company's systems. The amount and timing of such expenditures cannot be
predicted.
On April 10, 1997 the Company acquired FMI, a full-service environmental
consulting and engineering firm that is now operated as the Company's FMI
Operations Group. Remediation services are FMI's core business and generate the
greatest portion of FMI's revenues. The majority of FMI's work is eligible for
reimbursement to its clients (or their lending banks) under the Wisconsin
Petroleum Environmental Cleanup Fund Act ("PECFA"). Review of the PECFA claims
by the Wisconsin Department of Commerce ("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 bank). This exposes
the client to the risk that remediation expenses it incurred and paid ultimately
may be disallowed for PECFA reimbursement by DCOM. While not contractually
obligated to do so, FMI has historically reimbursed its clients (or their
lending banks) for the remediation costs for services provided by FMI which
ultimately were determined by DCOM to be ineligible for reimbursement under
PECFA.
The 1997 Wisconsin state budget bill, which was passed in October 1997, extended
through December 2001 the $1 million maximum per site reimbursement under the
PECFA program (which, under previous legislation, was to be reduced to $190,000
for sites entering the program after June 1, 1998). However, revised
administrative policies and procedures recently implemented by DCOM in
connection with the legislative process have limited, and are expected to
continue to limit, the types and costs of services reimbursable by DCOM. DCOM
has recently limited approval, absent special circumstances, for
17
<PAGE>
implementation of remediation activities, instead favoring natural attenuation
as the presumed remedy and generally allowing reimbursement primarily for site
investigation and monitoring costs. The implementation of such revised policies
has resulted, and is expected to continue to result, in a decrease in revenues
per site generated by FMI. A more aggressive marketing strategy has been
implemented with the goal of bringing a greater number of sites under contract
and increasing overall revenue.
As a result of the acquisition of FMI in April 1997, the Company's results of
operations during 1997 and 1996 are not directly comparable.
Results of Operations
- ---------------------
1997 Compared to 1996
- ---------------------
The Company reported revenues in 1997 of $25,769,509, an increase of 99% from
1996. The net loss applicable to common stock in 1997 increased 15% to
$3,090,186, while the basic and diluted net loss per share was $0.15 compared to
$0.24 in 1996. The decrease in basic and diluted net loss per share is due to
an increase in the number of shares outstanding primarily from issuance of
common stock in connection with the FMI acquisition and a related private
placement.
Commercial revenues increased 112% to $23,044,622 from $10,892,871 in 1996 while
revenues from corporate and government research and development contracts
increased 34% to $2,724,887 from $2,026,723 in 1996. The increased commercial
revenues are due primarily to the inclusion of sales of the Company's FMI
Operations Group, acquired on April 10, 1997. Increased commercial remediation
revenues more than offset decreased revenues from the Company's pollution
control business. The Company recognized significant revenues from a major
biofilter project during 1996, when the project was completed. Revenues from
remediation activities accounted for 98% of the Company's commercial revenues in
1997.
Revenues from corporate and government research and development contracts
increased primarily due to the increased volume of Phase II Small Business
Innovative Research Grants ("SBIR") the Company is actively working on. In
1997, the Company recorded initial revenues under a Phase I SBIR from the
National Science Foundation, three Phase II SBIRs from the National Science
Foundation, two Phase I and one Phase II SBIRs from the Department of Defense,
as well as two other grants from the Department of Defense and the Department of
Energy.
Total costs and expenses increased 84% to $28,885,818 in 1997 from $15,689,306
in 1996. The cost of commercial operations increased 74% to $16,799,454 due to
increased revenue levels combined with the establishment of a $500,000 warranty
reserve relating to systems and a $330,000 increase in reserve for bad debts to
cover the write-off of certain uncollectible receivables of the MWR Operations
Group. Research and development expenses increased 14% to $2,730,211 due to an
increase in work under corporate and government research and development
contracts. Marketing, general and administrative expenses increased 216% to
$9,356,153 due primarily to expenses of the FMI Operations Group, amortization
of goodwill associated with the FMI acquisition, severance related expenses
associated with the resignation of the Company's former Chief Executive Officer,
and increased marketing expenses associated with the Company's development
programs. In 1996 the Company provided for a contract claim of $650,000 to
cover the cost of repairing the biofiltration system the Company built for the
Nylonge Corporation. The repairs to the system were completed and the system
restarted in late 1996. While the ultimate responsibility for these expenses
has not yet been determined, the Company is actively pursuing
18
<PAGE>
reimbursement of these expenses from third parties. However, there can be no
assurance that any such recoveries will be attained.
Interest income increased 25% to $242,373 due primarily to the increased level
of cash available for investment as a result of the Company's private placement
of common stock in April 1997. Equity in loss of joint venture amounted to
$210,497 in 1997 compared to $52,629 in 1996 due primarily to the Company's
participation in the losses of the CVT America joint venture. On August 10,
1997, the Company acquired the remaining 50% of the venture, dissolved the
venture and thereafter continued its operations.
1996 Compared to 1995
- ---------------------
The Company reported revenues in 1996 of $12,919,594, an increase of 61% from
1995. The net loss applicable to common stock in 1996 increased 12% to
$2,680,415, while the basic and diluted net loss per share was $0.24 compared to
$0.31 in 1995. The decrease in basic and diluted net loss per share was due to
a greater number of shares outstanding resulting from the issuance of Common
Stock in May 1996.
Commercial revenues increased 82% to $10,892,871 from $5,971,278 in 1995 while
revenues from corporate and government research and development contracts
decreased 2% to $2,026,723 from $2,062,420 in 1995. The increase in commercial
revenues was due primarily to revenues of approximately $3.4 million from the
Company's MWR subsidiary that was acquired in February 1996 combined with
increased systems sales of approximately $1.6 million by the Company's
Commercial Air Group related to the ABTco biofilter project. Revenues from
remediation activities accounted for 81% of the Company's commercial revenues
during 1996.
Revenues from corporate and government research and development contracts
decreased slightly from 1995 as revenues from numerous new projects partially
offset the loss of revenues due to the conclusion in December 1995 of PCB work
the Company performed for the Texas Eastern Transmission Corporation. The
Company's Phase II SBIR, Phase II Department of Defense SBIR and Phase II
National Science Foundation SBIR all contributed significantly to 1996 results.
The Company also recorded initial revenues in 1996 under a new Phase I grant
from the Department of Energy, a new Phase I grant from the National Science
Foundation and a new Phase II grant from the Department of Defense.
Total costs and expenses increased 53% to $15,689,306 in 1996 from $10,279,694
in 1995, due primarily to the increased cost of commercial services and products
associated with the higher revenue levels. The cost of commercial operations
increased 89% to $9,676,960 due to higher revenue levels, a greater proportion
of which were attributable to lower margin systems sales. Research and
development expenses decreased 2% to $2,403,566. Marketing, general and
administrative expenses increased 10% to $2,958,780 due largely to the increased
amortization of intangible assets associated with the acquisition of MWR in
February 1996, increased legal expenses associated with patent applications and
the growth of the Company offset by a decrease in marketing expenses due
primarily to reduced personnel related costs combined with other cost reduction
efforts. In January 1996, a biofiltration system installed by the Company for
the Nylonge Corporation suffered a shutdown, which the Company believes was
primarily caused by a failure of internal grating material supplied by third
parties. Throughout 1996 the Company investigated the cause of the failure,
redesigned the internal grating and rebuilt and restarted the system at a cost
of approximately $650,000. While the ultimate responsibility for these expenses
has not yet been determined, the Company is actively pursuing reimbursement of
these expenses from third parties. However, there can be no assurance that any
such recoveries will be attained.
19
<PAGE>
Interest income decreased by 4% to $193,776 due to the decreased interest rates
available on the Company's cash balances. Equity in loss of joint venture,
which resulted from the Company's participation in the CVT America joint
venture, decreased 44% to $52,629. Prior to the conversion of the Company's
preferred stock in May 1996, the Company paid dividends on the preferred stock
of $36,458 in 1996.
Liquidity and Capital Resources
- -------------------------------
The Company has funded its operations to date primarily through revenues from
commercial services and sales of biological degradation systems, public
offerings and private placements of equity securities, research and development
agreements with major industrial companies and research grants from government
agencies. At December 31, 1997 the Company had cash and cash equivalents of
$4,863,658 and working capital of $8,099,057. Additionally, the Company had
restricted cash of $309,300 that was being used to collateralize a bond for a
large commercial project. Cash and cash equivalents increased $249,596 from
December 31, 1996 to December 31, 1997 as proceeds from the issuance of common
stock of $15,713,376 more than offset cash utilized in connection with the
acquisition of FMI of $13,574,197, cash used by operations of $1,075,685
(including $610,857 to pay FMI accounts payable that were assumed by the Company
as part of the FMI acquisition), cash invested in and advanced to CVT America of
$304,770 and capital expenditures of $557,635. The Company expects to incur
additional capital expenditures in connection with the continued development and
commercialization of its technologies. The timing and amount of such
expenditures will fluctuate depending on the timing of field tests, systems
development activity, the rapidity with which the Company's biodegradation
systems can be further commercialized and the availability of capital.
Furthermore, future projects may require the Company to set aside additional
capital to collateralize performance bonds.
Revenue from certain of the Company's contracts is recognized as services are
provided and costs are incurred. For fixed-price contracts, revenue is
recognized on the percentage-of-completion method, measured by the percentage
relationship of costs incurred from contract inception to date to the estimated
total costs for each contract. The asset "Unbilled revenue" represents revenues
recognized in excess of amounts billed. Correspondingly, the liability "Deferred
revenue" represents billings in excess of costs and estimated earnings. The
balance in these accounts will fluctuate depending on a number of factors,
including the number and size of fixed-price contracts, contract terms and other
timing and cost issues. At December 31, 1997, unbilled revenue was $2,437,649
higher than at December 31, 1996 due primarily to the increased revenue levels
resulting from the FMI acquisition.
Accounts receivable increased by $3,876,714, prepaid expenses increased by
$342,019 and accounts payable increased by $2,113,558 from December 31, 1996 to
December 31, 1997 primarily due to the acquisition of FMI. Accrued expenses and
other liabilities increased by $1,170,404 in the same period primarily due to
the acquisition of FMI combined with accrued severance related expenses. On
December 31, 1997 the Company had $2,577,218 in reserve for claim adjustments
and warranties, $1,919,660 of which is available with respect to potential PECFA
claim adjustments related to approximately $53 million in unsettled PECFA
submittals and $657,558 of which is available with respect to potential systems
warranty claims and other contract issues.
It is anticipated that the Company's currently available cash and cash
equivalents and cash expected to be generated from operations will provide
sufficient operating capital for the foreseeable future.
20
<PAGE>
Other Matters
- -------------
As of December 31, 1997, the Company had a net operating loss carryforward of
approximately $21,000,000 for federal income tax reporting purposes available to
offset future taxable income, if any, through 2012. The timing and manner in
which these losses may be utilized are limited under Section 382 of the Internal
Revenue Code of 1986 to approximately $1,700,000 per year based on preliminary
calculations of certain ownership changes to date and may be further limited in
the event of additional ownership changes.
The Financial Accounting Standards Board issued Financial Accounting Standard
No. 130, "Reporting Comprehensive Income" ("SFAS 130") in June 1997.
Comprehensive income represents the change in net assets of a business
enterprise as a result of nonowner transactions. Management does not believe
that the future adoption of SFAS 130 will have a material effect on the
Company's financial statements. The Company will adopt SFAS 130 for the year
ending December 31, 1998.
Also in June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires that a business enterprise
report certain information about operating segments, products and services,
geographic areas of operation and major customers in complete sets of financial
statements and in condensed financial statements for interim periods. The
Company is required to adopt this standard in 1998 and is currently evaluating
the impact of the standard.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 changes current
financial statement disclosure requirements for pension and other postretirement
benefit plans. SFAS 132 does not, however, change the measurement or
recognition provisions of existing accounting standards. Management does not
believe that the future adoption of SFAS 132 will have a material effect on the
Company's financial statements. The Company will adopt SFAS 132 for the year
ending December 31, 1998.
The Company believes that its financial and operational systems, with limited
modifications, will function properly with respect to dates in the year 2000 and
thereafter. The Company estimates that the costs associated with the Year 2000
issue will be insignificant and as such will not have a material impact on the
Company's financial position or operating results. However, there is no
assurance that our customers or vendors will not have Year 2000 problems which
will affect us.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,863,658 $ 4,614,062
Accounts receivable, net of allowance for doubtful
accounts of $605,963 in 1997 and $245,138 in 1996 6,977,161 3,100,447
Unbilled revenue 4,213,653 1,776,004
Inventory 248,712 55,027
Prepaid expenses and other current assets 517,960 175,941
------------ ------------
Total current assets 16,821,144 9,721,481
Property and equipment, net 1,757,577 922,320
Restricted cash 309,300 309,300
Investment in and advances to joint venture 87,648 228,934
Intangible assets, net 23,488,607 1,348,677
Other assets 262,736 185,912
------------ ------------
Total assets $ 42,727,012 $ 12,716,624
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 3,449,512 $ 1,335,954
Accrued expenses and other liabilities 1,948,215 777,811
Reserve for claim adjustments and warranties 2,577,218 178,075
Deferred revenue 730,365 312,784
Current portion of note payable 4,287
Current portion of capital lease obligations 16,777 18,304
------------ ------------
Total current liabilities 8,722,087 2,627,215
Deferred rent 12,222
Capital lease obligations, net of current portion 12,671 29,954
------------ ------------
Total liabilities 8,734,758 2,669,391
------------ ------------
Commitments and contingencies (see Note 13)
STOCKHOLDERS' EQUITY
Common stock, 23,354,335 and 12,931,940 shares issued
at December 31, 1997 and 1996, respectively 233,543 129,319
Additional paid-in capital 58,856,844 31,925,861
Accumulated deficit (25,092,183) (22,001,997)
Less: Treasury stock, at cost (5,950) (5,950)
------------ ------------
Total stockholders' equity 33,992,254 10,047,233
------------ ------------
Total liabilities and stockholders' equity $ 42,727,012 $ 12,716,624
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995
---------------- --------------- --------------------
<S> <C> <C> <C>
Revenues:
Commercial operations $23,044,622 $10,892,871 $5,971,278
Research and development services 2,724,887 2,026,723 2,062,420
---------------- --------------- ----------------
Total revenues 25,769,509 12,919,594 8,033,698
---------------- --------------- ----------------
Cost of commercial operations 16,799,454 9,676,960 5,126,901
Provision for contract claim 650,000
Research and development costs 2,730,211 2,403,566 2,459,580
Marketing, general and administrative expenses 9,356,153 2,958,780 2,693,213
---------------- --------------- ----------------
Total costs and expenses 28,885,818 15,689,306 10,279,694
---------------- --------------- ----------------
Other income (expense):
Interest income 242,373 193,776 201,130
Interest expense (31,800) (22,993) (31,158)
Equity in loss of joint venture (210,497) (52,629) (93,437)
Other, net 26,047 7,601 16,961
---------------- --------------- ----------------
Other income, net 26,123 125,755 93,496
---------------- --------------- ----------------
Net loss (3,090,186) (2,643,957) (2,152,500)
Preferred stock dividends (36,458) (233,333)
---------------- --------------- ----------------
Net loss applicable to Common Stock ($3,090,186) ($2,680,415) ($2,385,833)
================ =============== ================
Basic and diluted net loss per share applicable
to Common Stock ($0.15) ($0.24) ($0.31)
================ =============== ================
Weighted average number of shares of
Common Stock used in computing basic
and diluted net loss per share 20,041,958 11,374,922 7,669,639
================ =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
<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, 1994 7,544,750 $ 75,447 $22,266,459 ($16,935,749) (59,500) ($5,950)
Net loss (2,385,833)
Conversion of Convertible
Preferred Stock 1,400,000 14,000 1,697,121
Issuance of Common Stock for
interest in joint venture 58,140 582 124,418
Exercise of stock options 46,570 466 12,396
----------- -------- ----------- ------------ ------- -------
Balance at December 31, 1995 9,049,460 $ 90,495 $24,100,394 ($19,321,582) (59,500) ($5,950)
Net loss (2,680,415)
Conversion of Convertible
Preferred Stock 1,400,000 14,000 1,714,621
Issuance of Common Stock for cash 2,000,000 20,000 4,587,984
Issuance of Common Stock to
acquire MWR, Inc. 456,500 4,565 1,506,450
Exercise of stock options 25,980 259 16,412
----------- -------- ----------- ------------ ------- -------
Balance at December 31, 1996 12,931,940 $129,319 $31,925,861 ($22,001,997) (59,500) ($5,950)
Net loss (3,090,186)
Issuance of Common Stock to
Warburg, Pincus Ventures, L.P.
for cash 6,095,238 60,952 15,652,424
Issuance of Common Stock to
acquire Fluid Management, Inc. 4,190,477 41,905 10,958,097
Issuance of Common Stock to
acquire remaining interest in
joint venture 100,000 1,000 264,600
Exercise of stock options 36,680 367 55,862
----------- -------- ----------- ------------ ------- -------
Balance at December 31, 1997 23,354,335 $233,543 $58,856,844 ($25,092,183) (59,500) ($5,950)
=========== ======== =========== ============ ======= =======
</TABLE>
Preferred Stock: Authorized 2,000,000 shares, par value $.01 per share. No
preferred shares issued or outstanding at December 31, 1996
and 1997.
Common Stock: Authorized 50,000,000 shares, par value $.01 per share.
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
--------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($3,090,186) ($2,643,957) ($2,152,500)
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization 1,826,595 992,697 574,183
Provision for doubtful accounts 861,223 84,800 60,000
Equity in loss of joint venture 210,497 52,629 93,437
Other 3,707 (8,521) (1,941)
Changes in operating assets and liabilities, net of the effect
of acquisitions:
Accounts receivable 10,878 (850,546) (12,759)
Unbilled revenue (696,417) 107,213 (793,410)
Prepaid expenses and other current assets (184,631) 216,271 (42,621)
Inventory 7,817 48,606 (44,430)
Other assets (76,824) 56,423 (20,410)
Accounts payable (941,189) 182,942 349,877
Accrued expenses and other liabilities 422,812 (7,380) 65,380
Reserve for claim adjustments and warranties 164,573 (173,775)
Deferred revenue 405,460 (111,804) 347,978
--------------- -------------- ----------------
Net cash used by operating activities (1,075,685) (2,054,402) (1,577,216)
--------------- -------------- ----------------
Cash flows from investing activities:
Capital expenditures (557,635) (102,744) (94,742)
Investment in and advances to joint venture (304,770) (100,000) (150,000)
Direct costs relating to purchase of remaining 50% interest
in joint venture (6,629)
Acquisition of Fluid Management, Inc. (13,574,197)
Acquisition of MWR, Inc. (1,332,000)
Proceeds from sale of property and equipment 22,004 9,750 3,000
--------------- -------------- ----------------
Net cash used in investing activities (14,421,227) (1,524,994) (241,742)
--------------- -------------- ----------------
Cash flows from financing activities:
Debt repayment (4,287) (4,333) (4,002)
Capital lease principal repayments (18,810) (124,020) (128,084)
Net proceeds from exercise of stock options 56,229 16,671 12,862
Net proceeds from issuance of Common Stock 15,713,376 4,607,984
Net proceeds from issuance of Redeemable
Cumulative Convertible Preferred Stock 3,457,242
Expenses of converting 50% of Redeemable
Cumulative Convertible Preferred Stock (17,500)
Cash dividends paid on Redeemable Cumulative
Convertible Preferred Stock (51,041) (218,750)
--------------- -------------- ----------------
Net cash provided by financing activities 15,746,508 4,445,261 3,101,768
--------------- -------------- ----------------
Net increase in cash and cash equivalents 249,596 865,865 1,282,810
Cash and cash equivalents at beginning of year 4,614,062 3,748,197 2,465,387
--------------- -------------- ----------------
Cash and cash equivalents at end of year $4,863,658 $4,614,062 $3,748,197
=============== ============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
--------------- -------------- ---------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
- -------------------------------------------------
Cash paid for interest $21,304 $23,041 $31,061
=============== ============== ===============
Cash paid for income taxes $112,354 $2,110 $200
=============== ============== ===============
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
- ------------------------------------------------------------------------
- The Company entered into capital lease obligations amounting to $48,932 and
$42,924 for the years ended December 31, 1996 and 1995, respectively. No
capital leases were entered into in 1997.
- In April 1997, the Company acquired Fluid Management, Inc. for $12,187,531 in
cash and 4,190,477 shares of Common Stock valued at $11,000,002. In
connection with the acquisition, the Company also paid $1,386,666 of FMI's
outstanding debt.
- In February 1996, the Company acquired MWR, Inc. for $1,332,000 in cash and
456,500 shares of Common Stock valued at $1,511,015.
- In December 1995, there was a voluntary conversion of 140,000 shares of
Series C Convertible Preferred Stock into 1,400,000 shares of Common Stock.
In May 1996, there was a voluntary conversion of the remaining 140,000 shares
of Series C Convertible Preferred Stock into 1,400,000 shares of Common
Stock.
- In May 1995, the Company and nv VAM of the Netherlands formed a joint
venture, CVT America, L.L.C. For its 50% interest, the Company paid $48,250
in cash and issued 58,140 shares of Envirogen common stock to VAM valued at
$125,000. In August 1997, the Company purchased the 50% interest held by VAM
in CVT America for 100,000 shares of Common Stock valued at $265,600 and
incurred direct costs associated with the acquisition of $6,629.
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------
1. Business and Organization
-------------------------
Envirogen, Inc. ("Envirogen") is an environmental biotechnology company
engaged in the development and design of advanced biological systems to
treat and degrade hazardous wastes. The Company has also been engaged in
commercial remediation activities through internal operations as well as
through Wisconsin-based Fluid Management, Inc. ("FMI") that was acquired by
the Company on April 10, 1997 and through MWR, Inc. ("MWR") of Lansing,
Michigan, a wholly-owned subsidiary that was acquired on February 9, 1996
(see Note 3). On August 8, 1997, the Company purchased the 50% interest
held by nv VAM ("VAM") in CVT America L.L.C., a joint venture between VAM
and the Company. CVT America was dissolved upon the closing of the
transaction and the Company continued its operations thereafter (see Note
3).
While the activities of FMI and MWR are principally commercial remediation,
a significant portion of the activities of Envirogen to date have been
related to research with corporate and governmental sponsors and the
determination of the feasibility of designed and advanced biological
systems to treat and degrade hazardous wastes. Certain of Envirogen's
bioremediation systems will require substantial additional research,
development and testing to determine their commercial viability and will
require significant additional financing. The Company is subject to a
number of other risks similar to those of other companies in similar stages
of development, including but not limited to short operating history,
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.
2. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of FMI and MWR.
Investments in companies in which ownership interests range from 20 to 50
percent are accounted for using the equity method. All material
intercompany balances and transactions are eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to conform prior year's
presentation with the 1997 financial statement presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates in the preparation of these financial
statements include provisions made for doubtful accounts, reserve for claim
adjustments and warranties and amortization periods for intangibles.
27
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Inventory
Inventories, which consist of components used to assemble a variety of
systems offered for sale by the Company, are stated at the lower of cost or
market. Cost is determined on a first-in, first-out basis.
Property and Equipment
Property and equipment is recorded at cost and consists primarily of
office, laboratory 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 expensed as incurred; significant
renewals and betterments are capitalized. Property and equipment leased
under capital leases are capitalized at the lower of the present value of
minimum lease payments or the fair value of the leased property.
Intangible Assets
Intangible assets are recorded at cost and are amortized using the
straight-line method over their estimated useful lives. It is the
Company's policy to periodically review and evaluate whether there has been
a permanent impairment in the value of intangibles. Factors considered in
the valuation include current operating results, trends, prospects and
anticipated undiscounted future cash flows.
Reserve for Claim Adjustments and Warranties
The Company provides for potential amounts it could repay to customers
related to remediation performed under the State of Wisconsin Petroleum
Environmental Cleanup Act ("PECFA"). At December 31, 1997 the Company had
$1,919,660 in reserve with respect to potential PECFA claim adjustments
related to approximately $53 million in unsettled submittals.
The Company also has $657,558 in reserve at December 31, 1997 with respect
to potential systems warranty claims and other contract issues, the
majority of which are expected to be settled in 1998. Estimated warranty
reserves are related to specific projects and are provided for by charges
to operations in the period in which the related revenue is recognized or
at such time as a potential claim arises.
In January 1996, a biofiltration system installed by the Company for the
Nylonge Corporation suffered a shutdown, which the Company believes was
primarily caused by a failure of internal grating material supplied by
third parties. Throughout 1996, the Company investigated the cause of the
failure, redesigned the internal grating and rebuilt and restarted the
system at a cost of approximately $650,000.
28
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------
Deferred Rent
The Company has received rent abatements for limited periods in connection
with the lease for certain office and laboratory space. Costs associated
with this lease recorded on a straight-line basis over the full lease term
resulted in deferred rent liability of $12,222 at December 31, 1996. The
lease term expired in 1997.
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, 1997 of $76,525 is
expected to be collected within the next 12 months.
An allowance for doubtful accounts has been established based on
management's assessment of the collectibility of all amounts billed and
unbilled (including amounts subject to retainage) as of December 31, 1997.
Research and Development
All costs relating to research and development activities are expensed as
incurred.
Per Share Data
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128") to calculate net loss
per share applicable to common stock. All prior periods presented have
been retroactively restated to conform to the SFAS 128 requirements. SFAS
128 requires the presentation of basic and diluted per share amounts.
Basic per share amounts are computed by dividing net loss applicable to
common stock by the weighted average number of common shares outstanding
during the period. Diluted per share amounts are computed by dividing net
loss applicable to common stock by the weighted average number of common
shares outstanding plus the dilutive effect of common share equivalents.
Since the Company incurred net losses for all periods presented, both basic
and diluted per share calculations are the same. Accordingly, options and
warrants to purchase 3,790,579, 3,139,409 and 2,428,524 shares of common
stock that were outstanding at December 31, 1997, 1996 and 1995,
respectively, and 140,000 shares of Series C Convertible Preferred Stock
convertible into
29
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------
1,400,000 shares of common stock that were outstanding at December 31, 1995
were not included in diluted per share calculations, as their effect would
be antidilutive.
Impact of the Future Adoptions of Recently Issued Accounting Standards
The Financial Accounting Standards Board issued Financial Accounting
Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130") in June
1997. Comprehensive income represents the change in net assets of a
business enterprise as a result of nonowner transactions. Management does
not believe that the future adoption of SFAS 130 will have a material
effect on the Company's financial statements. The Company will adopt SFAS
130 for the year ending December 31, 1998.
Also in June 1997, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that a
business enterprise report certain information about operating segments,
products and services, geographic areas of operation and major customers in
complete sets of financial statements and in condensed financial statements
for interim periods. The Company is required to adopt this standard in
1998 and is currently evaluating the impact of the standard.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 changes
current financial statement disclosure requirements for pension and other
postretirement benefit plans. SFAS 132 does not, however, change the
measurement or recognition provisions of existing accounting standards.
Management does not believe that the future adoption of SFAS 132 will have
a material effect on the Company's financial statements. The Company will
adopt SFAS 132 for the year ending December 31, 1998.
3. Business Acquisitions
---------------------
On April 10, 1997, the Company acquired Fluid Management, Inc. of Pewaukee,
Wisconsin for approximately $12.2 million in cash and 4,190,477 shares of
the Company's common stock valued at $11,000,002. In connection with the
acquisition, the Company also paid approximately $1.4 million of FMI's
outstanding debt. A portion of the purchase price is being held in escrow
to satisfy the sellers' indemnification obligations under the Merger
Agreement. FMI is a full-service environmental consulting and engineering
firm with offices in Pewaukee, La Crosse, Ashwaubenon and Mosinee,
Wisconsin and Geneva, Illinois. FMI was merged into the Company and the
acquisition has been accounted for under the purchase method of accounting.
The excess of the aggregate purchase price over the fair market value of
net assets acquired resulted in goodwill of $22,877,482 and is being
amortized over 20 years.
On August 8, 1997, the Company issued 100,000 shares of common stock valued
at $265,600 to nv VAM in exchange for the transfer by VAM to the Company of
(i) VAM's 50% ownership interest in CVT America L.L.C. (a joint venture
between the Company and VAM) and (ii) certain patents and proprietary
technology related to the biological treatment of chemical contaminants in
air streams. The Company also incurred $6,629 in direct costs associated
with the acquisition. The acquisition, which has been accounted for under
the purchase method of accounting, resulted in goodwill of $323,340 which
is being amortized over ten years. CVT America was dissolved upon the
closing of the transaction and the Company continued its operations
thereafter.
30
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-----------------
On February 9, 1996, the Company purchased all of the outstanding capital
stock of MWR, Inc. for approximately $2,843,000. The purchase price
included 456,500 shares of Company Common Stock valued at approximately
$1,511,000. MWR is a provider of in situ remediation services with
particular expertise in soil vapor extraction. The acquisition has been
accounted for under the purchase method of accounting. The excess of the
aggregate purchase price over the fair market value of net assets acquired
resulted in goodwill of $1,063,615 and a covenant not to compete of
$232,000. These intangibles are being amortized over ten and five years,
respectively.
The operating results of the acquisitions are included in the Company's
consolidated results of operations from the dates of acquisition. The
following pro forma financial information assumes the acquisitions occurred
at the beginning of the periods presented and does not purport to be
indicative of what would have occurred had the acquisitions been made as of
those dates or of results which may occur in the future.
Year Ended Year Ended
December 31, 1997 December 31, 1996
(Unaudited) (Unaudited)
------------------ ------------------
Net revenues $ 32,292,697 $34,022,818
Net loss ($ 1,994,228) ($ 23,383)
Basic and diluted net loss per share
applicable to Common Stock ($ 0.09) ($ 0.00)
4. Significant Fourth Quarter Adjustments
--------------------------------------
During the fourth quarter of 1997, the Company recorded approximately $1.2
million of adjustments which had a negative impact on the Company's
operations, including warranty reserves associated with systems of $490,000
and severance-related expenses of $369,000.
5. Property and Equipment
----------------------
Property and equipment, net at December 31, 1997 and 1996 consisted of the
following:
1997 1996
---------- ----------
Computer equipment $ 739,271 $ 283,624
Acquired computer software 210,000 210,000
Vehicles 42,300
Laboratory and field equipment 2,038,718 1,650,326
Equipment and vehicles under
capital leases 598,975 598,975
Furniture and office equipment 564,895 278,551
Leasehold improvements 565,822 542,030
Construction in progress 359,683 12,839
---------- ----------
5,119,664 3,576,345
Less: Accumulated depreciation and
amortization 3,362,087 2,654,025
---------- ----------
$1,757,577 $ 922,320
========== ==========
31
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
--------------------
Accumulated amortization on equipment under capital leases amounted to
$497,855 and $397,524 at December 31, 1997 and 1996, respectively.
Depreciation and amortization expense amounted to $765,703, $797,049 and
$569,590 for the years ended December 31, 1997, 1996 and 1995,
respectively. No interest has been capitalized in 1997, 1996 or 1995.
6. Restricted Cash
---------------
At December 31, 1997 and 1996, 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.
7. Intangible Assets
-----------------
Intangible assets, net at December 31, 1997 and 1996 consisted of the
following:
1997 1996
----------- ----------
Goodwill $24,309,182 $1,108,361
Patents 222,611 222,611
Covenant not to compete 232,000 232,000
Other 8,928
----------- ----------
24,763,793 1,571,900
Less: Accumulated amortization 1,275,186 223,223
----------- ----------
$23,488,607 $1,348,677
=========== ==========
Amortization expense for intangible assets amounted to $1,060,891, $195,648
and $4,593 for the years ended December 31, 1997, 1996 and 1995,
respectively.
8. Accrued Expenses and Other Liabilities
--------------------------------------
Accrued expenses and other liabilities at December 31, 1997 and 1996
consisted of the following:
1997 1996
---------- --------
Salaries, benefits and payroll taxes $ 927,804 $279,933
Taxes 429,540 417,618
Severance 322,050
Other 268,821 80,260
---------- --------
$1,948,215 $777,811
========== ========
9. 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 assets due to the uncertainty of realization.
The change in the valuation allowance for the year ended December 31, 1997
was an increase of $3,186,626.
32
<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, 1997 and 1996 are as follows:
1997 1996
Deferred Tax Deferred Tax
Assets (Liabilities) Assets (Liabilities)
-------------------- --------------------
Accrued liabilities $ 1,248,537 $ 216,702
Contract reserve 34,000 60,546
Deferred rent 4,155
Depreciation 30,274 266,502
Amortization 67,143 (41,769)
Bad debts 206,027 69,615
Partnership interest 29,580 (18,243)
Net operating loss - federal 7,274,556 6,613,615
State taxes 2,865,093 1,397,461
Tax credits 297,187 297,187
----------- -----------
Total 12,052,397 8,865,771
Valuation allowance - federal (9,187,304) (7,468,310)
Valuation allowance - state (2,865,093) (1,397,461)
----------- -----------
Total deferred taxes $ 0 $ 0
=========== ===========
As of December 31, 1997, the Company had a net operating loss carryforward
of approximately $21,000,000 for Federal income tax purposes which is
available to offset future taxable income, if any, between the years 1998
and 2012. The timing and manner in which these losses may be utilized are
limited to approximately $1,700,000 per year based on preliminary
calculations of ownership changes to date under Internal Revenue Code
Section 382.
10. Common Stock
------------
On April 10, 1997, the Company issued 6,095,238 shares of common stock to
Warburg, Pincus Ventures, L.P. ("Warburg Pincus") resulting in net proceeds
of $15,713,376. The net proceeds from the financing were used to fund the
cash portion of the Fluid Management, Inc. acquisition and to supplement
the working capital of the combined enterprise. An officer of Warburg
Pincus was elected to the Company's Board of Directors at its 1997 annual
meeting.
On May 24, 1996, the Company successfully completed the private placement
of 2,000,000 shares of Common Stock resulting in net proceeds of
$4,607,984. Allen & Company Incorporated ("Allen & Company"), a principal
stockholder of the Company, acted as the placement agent. An officer of
Allen & Company is also a director of the Company.
Preferred Stock
---------------
On April 27, 1995, the Company completed the private placement of 280,000
shares of Series C Convertible Preferred Stock ("Preferred Stock") for
$12.50 per share, resulting in net proceeds of $3,457,242. Allen &
Company, a principal stockholder of the Company, acted as the placement
agent and purchased 138,000 shares of Preferred Stock for its own account.
An officer of Allen & Company is a director of the Company. The following
directors of the Company at that time also purchased the indicated number
of shares of Preferred Stock in the private placement: James A. Courter
(8,000), Harcharan S. Gill (8,000), Robert F. Hendrickson (8,000), Robert
F. Johnston
33
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------
(16,000), Seymour L. Meisel (10,000) and Robert C. Miller (10,000). The
shares of Preferred Stock were convertible at the option of each holder at
a conversion rate of ten shares of Common Stock for each share of Preferred
Stock and were subject to mandatory conversion in April 1997 upon the
fulfillment of certain conditions. Quarterly dividends on the Preferred
Stock were payable at a rate of $.625 per share per annum. The Preferred
Stock was redeemable by the holders if certain financial covenants were not
met. The Company was in compliance with all covenants at December 31, 1995.
On December 28, 1995, Preferred Stockholders voluntarily converted 50% of
their shares of Preferred Stock into 1,400,000 shares of Common Stock, and
in consideration of such voluntary conversion, a special dividend of
$116,667 was paid. In May 1996, the remainder of the Preferred Stock was
voluntarily converted into an additional 1,400,000 shares of Common Stock.
Regular Preferred Stock dividends of $36,458 and $116,666 were recognized
in 1996 and 1995, respectively. In 1997, the shares of Common Stock issued
upon conversion of the Preferred Stock were registered with the Securities
and Exchange Commission for resale by the holders thereof.
11. 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 3,500,000 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. At December 31,
1997, there were 1,045,180 additional options available for grant under the
Plan.
In May 1993, the Company adopted the 1993 Directors' Non-Qualified Stock
Option Plan (the "1993 Plan") which expires in May 2003. Under the amended
terms of the 1993 Plan, an option to purchase 15,000 shares of Common Stock
shall be automatically granted to each new Non-Employee Director on the day
the Non-Employee Director is first elected as a member of the Board of
Directors. Thereafter, an option to purchase 5,000 shares of Common Stock
shall be granted on June 1 of each year to each Non-Employee Director who
is elected at subsequent annual meetings of stockholders, except that the
Chairman of the Board shall be granted an option to purchase 7,500 instead
of 5,000 shares of Common Stock. Non-Employee Directors who are not
initially elected at an Annual Meeting of Stockholders will receive a pro
rata portion of 5,000 shares (or 7,500 shares with respect to the Chairman
of the Board) of Common Stock based on the number of full months remaining
from the date of election until the next Annual Meeting of Stockholders
divided by twelve. Any fractional shares resulting from such calculation
shall be rounded up to the nearest whole number. Standard provisions of
the Plan, which may vary with Board and stockholder approval, require that
the term of each grant not exceed ten years. At December 31, 1997, there
were 145,335 additional options available for grant under the 1993 Plan.
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.
34
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------
Generally, options granted become exercisable at a rate of 20% per annum
from the date of grant, and the option price may not be less than 100% and
75% of the fair market value on the date of grant for ISOs and NQSOs,
respectively. The annual Non-Employee Director grants vest at the end of
the first year of grant.
Following is a summary of the stock option transactions for 1995, 1996 and
1997:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Fair Value
Shares Price Per Option per Option
Outstanding Share Price Range Granted
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Balance December 31, 1994 569,770 $3.04 $0.20 - $ 7.50
Granted 391,750 $2.02 $1.25
Forfeited ( 106,000) $5.04
Exercised ( 46,570) $0.28
---------
Balance December 31, 1995 808,950 $2.44 $0.20 - $ 7.25
---------
Granted 779,665 $3.17 $1.96
Forfeited ( 31,300) $3.31
Exercised ( 25,980) $0.64
---------
Balance December 31, 1996 1,531,335 $2.83 $0.20 - $ 7.25
---------
Granted 1,375,250 $2.61 $1.34
Forfeited ( 564,400) $2.99
Exercised ( 36,680) $1.53
---------
Balance December 31, 1997 2,305,505 $2.68 $0.20 - $ 7.25
=========
Exercisable at December 31, 1994 180,980 $2.37
Exercisable at December 31, 1995 207,360 $2.36
Exercisable at December 31, 1996 333,770 $2.56
Exercisable at December 31, 1997 558,105 $2.79
</TABLE>
The weighted average remaining contractual lives of outstanding options at
December 31, 1997 was approximately 8.12 years.
The Company applies the provisions of APB 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no
compensation has been recognized in the financial statements in respect to
the above plans. Had compensation costs for the above plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock Based Compensation", the Company's net loss
and net loss per share would have been increased to the pro forma amounts
below:
1997 1996 1995
------------ ------------ ------------
Pro forma net loss applicable
to Common Stock ($3,561,695) ($3,031,940) ($2,449,400)
Pro forma basic and diluted
net loss per share applicable
to Common Stock ($0.18) ($0.27) ($0.32)
35
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------
As options vest over a varying number of years, and awards are generally
made each year, the pro forma impacts shown here are likely to increase
given the same level of activity in the future.
The pro forma compensation expense of $471,509, $351,525 and $63,567 for
1997, 1996 and 1995, respectively, was calculated based on the fair value
of each option grant using the Black-Scholes model with the following
weighted-average assumptions used for grants:
1997 1996 1995
---------- ---------- ----------
Dividend yield 0 0 0
Expected volatility 40.6% 41.9% 45.3%
Risk free interest rate 6.39% 6.53% 6.28%
Expected option lives 6.5 years 6.5 years 6.5 years
In October 1993, the Company completed a public offering of 1,500,000
units, each unit consisted of one share of Common Stock and a warrant to
purchase one-half of one share of Common Stock for $5.20 per full share
subject to adjustment. The warrants are exercisable for five years.
In October 1993, the Company also issued 790,148 redeemable Common Stock
Purchase Warrants. Each warrant entitles the holder to purchase one-half of
one share of Common Stock for $5.20 per full share subject to adjustment.
The warrants are exercisable for five years.
In May 1996, the Company issued warrants to purchase an aggregate of
200,000 shares of the Company's Common Stock at an exercise price of $2.50
per share, including warrants to purchase 150,000 shares to a principal
stockholder. The warrants expire seven years from date of issuance. See
Note 14 for additional information regarding the Company's other warrants.
12. Research and Development Contracts
----------------------------------
The Company contracts with major corporations and government entities to
conduct feasibility studies, sponsored research and development and to
remediate contamination problems. Pursuant to the Company's contracts, the
work is generally conducted in phases beginning with feasibility studies to
demonstrate that the Company's bacteria will degrade the targeted waste.
Each sponsoring corporation or governmental entity may terminate the work
being conducted by the Company upon the completion of each phase and each
additional phase generally is separately contracted for by the sponsoring
corporation or governmental entity.
13. Commitments and Contingencies
-----------------------------
Leases
The Company is party to various operating leases relating to office,
laboratory and pilot plant facilities, as well as vehicles and office
equipment. All leases expire prior to 2005. The leases include escalation
clauses and require that the Company pay for certain operating costs. It
is expected that in the normal course of business the majority of the
leases will be renewed or replaced by other leases. The Company also has
capitalized leases consisting principally of leases for office and
laboratory equipment.
36
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
-------------------
Future minimum payments under capital and noncancelable operating leases
consisted of the following at December 31, 1997:
Capital Operating
Leases Leases
--------- -----------
1998 $ 19,146 $1,626,611
1999 9,048 1,401,030
2000 5,527 1,024,017
2001 - 753,033
2002 - 730,515
Thereafter - 804,789
-------- ----------
Total minimum lease payments 33,721 $6,339,995
Less amount representing ==========
interest ( 4,273)
--------
Present value of net minimum
capital lease payments $ 29,448
========
Rent expense for operating leases was $1,389,345, $700,985 and $557,361 for
the years ended December 31, 1997, 1996 and 1995, 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.
The Company has granted a customer, exclusively for its own operations, an
irrevocable, non-exclusive, nontransferable license to use all presently
existing and any future technology that the Company may own relating to PCB
remediation and that it is not otherwise subject to restrictions imposed by
third parties. With certain limited exceptions, the Company is required to
pay the customer a royalty based on gross revenues received by the Company
from the utilization of any jointly-owned technology or any PCB-related
remediation technology owned, developed or obtained by the Company. The
maximum aggregate royalty payable to the customer by the Company under the
technology agreement may not exceed the development funding received by the
Company from the customer. The customer provided no additional funding in
1997. At December 31, 1997, the Company had no obligations under the
royalty agreement and had received development funding from the inception
of the development work in 1990 of approximately $3,523,000.
Litigation
The Company is currently involved in litigation relating to services
previously provided at a customer site. This customer, against whom the
Company filed suit to recover amounts due for work performed, filed a
counter-claim against the Company for breach of contract, declaratory
relief and interpleader. No specific damages have been claimed by this
customer and, at the
37
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------
present time, management of the Company is unable to predict the outcome of
this matter or to determine whether the outcome of this matter will
materially affect the Company's results of operations, cash flows or
financial position.
The Company is also subject to other claims and lawsuits in the ordinary
course of its business. In the opinion of management, all such pending
claims are either adequately covered by insurance or, if not insured, will
not individually or in the aggregate result in a material adverse effect on
the Company's results of operations, cash flows or financial position.
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.
14. Related Party Transactions
--------------------------
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 10
for additional information on related parties who purchased Preferred Stock
in the private placement. In April 1995, the Company entered into a two-
year financial advisory agreement with the placement agent and agreed to
pay an annual fee of $100,000.
In March 1996, the Company issued options for 100,000 shares of Common
Stock at $2.82 per share to one of its directors under the 1990 Incentive
Stock Option and Non-Qualified Stock Option Plan. The options vest one
year from date of grant and expire ten years from date of issuance. The
director is an officer of a principal stockholder.
In May 1996, a principal stockholder of the Company acted as the placement
agent for the Company's private placement of 2,000,000 shares of Common
Stock. An officer of the placement agent is also a director of the
Company. The placement agent received a placement fee of $300,000, was
reimbursed for certain legal fees and other expenses and received warrants
to purchase 150,000 shares of the Company's Common Stock at an exercise
price of $2.50 per share. The warrants expire seven years from date of
issuance.
In December 1996, the Company engaged a principal stockholder to provide
financial advisory services, including the preparation and delivery of an
opinion to the Company's Board of Directors regarding the fairness, from a
financial point of view, of the terms of the acquisition of FMI and related
private placement to Warburg Pincus (see Notes 3 and 10). The Company
agreed to pay the stockholder $250,000. An officer of the stockholder is
also a director of the Company.
38
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------
15. 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, with the exception of those employed by the FMI Operations Group.
The Company's contribution expense related to the 401(k) savings plan was
$83,488, $81,630 and $53,992 for the years ended December 31, 1997, 1996
and 1995, respectively. There was no contribution expense related to the
profit sharing plan.
The FMI Operations Group also has a 401(k) plan which provides for FMI
employee salary deferral contributions. Substantially all FMI employees
are eligible to participate in this Plan. No Company contributions have
been made to this plan. The Company does not maintain other pension or
postretirement benefit plans.
Employees of the FMI Operations Group have a bonus plan which provides for
10% of FMI pre-tax profits to be distributed to FMI employees. The
Company's expense related to the FMI bonus plan was $325,125 for the year
ended December 31, 1997.
In 1995 the Company maintained an Executive Bonus Plan. The plan was
administered by the compensation committee, which set the performance
targets for the year and authorized bonuses to the extent to which those
targets were met. The Company incurred no expense relating to the plan
during 1995.
16. 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 two major banks and money market
accounts with three financial institutions. At December 31, 1997 and 1996,
substantially all of the Company's cash and cash equivalents were held in
these money market accounts.
The Company earns revenues under contracts for various federal government
agencies. Revenue recognized under these contracts for the years ended
December 31, 1997, 1996 and 1995 was $2,103,243, $1,417,059 and $834,818,
respectively. These revenues are primarily from research and development
contracts.
17. Industry Segment and Major Customer Data
----------------------------------------
The Company's operations are conducted within one business segment. There
are minimal revenues attributable to foreign customers. Customers
comprising 10% or greater of the Company's revenues are summarized as
follows:
1997 1996 1995
---- ----- -----
Customer A - 12% -
Customer B - - 21%
Customer C - - 10%
39
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------
18. Joint Ventures
--------------
On May 5, 1995, the Company and nv VAM of the Netherlands formed a joint
venture, CVT America, L.L.C. ("CVT America"), to supply advanced
biofiltration systems and services for the treatment of odors, air toxics
and volatile organic contaminants to the air pollution control market in
North and South America. Under the terms of the transaction, VAM
transferred to CVT America substantially all of the assets, including a
license agreement for the technology related to the biological treatment of
chemical contaminants in air streams, of its wholly-owned subsidiary, CVT
Air Technologies. For its 50% interest in CVT America, the Company paid
$48,250 in cash and issued 58,140 shares of Envirogen common stock (valued
at $125,000) to VAM and made an initial capital contribution to CVT America
of $3,500. Additional capital contributions totaling $98,250 were made in
the second half of 1995. In April 1996, the Company made an interest
bearing loan of $100,000 to CVT America. The Company also entered into a
sublicense agreement with CVT America for the technology licensed from VAM.
The joint venture had 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 was to be amortized over the initial three year term of the
joint venture. During 1997 the Company advanced an additional $304,770 to
CVT America. On August 8, 1997, the Company purchased VAM's 50% interest
in CVT America for 100,000 shares of common stock valued at $265,600. CVT
America was dissolved upon the closing of the transaction and the Company
continued its operations thereafter (see Note 3).
The Company obtained a 50% interest in Miller Environmental Technologies
L.L.C. ("MET") when it acquired FMI on April 10, 1997. MET is jointly-
owned by the Company 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 the Company through
subcontracting arrangements. The Company also receives a monthly fee in the
amount of $1,000 from MET for the provision of certain office and record
keeping services. From April 10, 1997 through December 31, 1997, fees
earned for providing services to MET amounted to $116,690 (including the
monthly office and record keeping services fee).
19. Supplementary Statement of Operations Information
-------------------------------------------------
Maintenance and repairs expense for the years ended December 31, 1997, 1996
and 1995 was $225,248, $79,325 and $44,356, respectively.
40
<PAGE>
Schedule II
Envirogen, Inc.
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance
beginning costs and other accounts Deductions at end of
Description of period expenses -describe -describe (a) period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts $245,138 $512,225 $120,000 (b) $271,400 $605,963
Tax valuation allowance 8,865,771 3,186,626 12,052,397
Reserve for claim adjustments
and warranties 178,075 930,783 1,802,743 (b) 334,383 2,577,218
Year ended December 31, 1996:
Allowance for doubtful accounts $131,381 $84,800 $46,000 (c) $17,043 (c) $245,138
Tax valuation allowance 8,029,507 836,264 8,865,771
Reserve for claim adjustments
and warranties 50,000 650,000 344,760 (c) 866,685 178,075
Year ended December 31, 1995:
Allowance for doubtful accounts $107,932 $60,000 $36,551 $131,381
Tax valuation allowance 7,155,060 874,447 8,029,507
Reserve for claim adjustments
and warranties 50,000 50,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Actual write-offs
(b) Balance in the financial statements of FMI, Inc. at acquisition
(c) Balance in the financial statements of MWR, Inc. at acquisition
41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Envirogen, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Envirogen, Inc. as listed in Item 14(a) of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Envirogen, Inc. as
of December 31, 1997 and 1996 and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Princeton, New Jersey
February 19, 1998
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
INCORPORATED BY REFERENCE
The information called for by Item 10 "Directors and Executive Officers of the
Registrant" (other than the information concerning executive officers set forth
after Item 4 herein), Item 11 "Executive Compensation", Item 12 "Security
Ownership of Certain Beneficial Owners and Management" and Item 13 "Certain
Relationships and Related Transactions" is incorporated herein by reference to
the Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on May 21, 1998 which definitive proxy statement is
expected to be filed with the Commission not later than 120 days after the end
of the fiscal year to which this report relates.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. Financial Statements:
---------------------
Consolidated Balance Sheets as of December 31, 1997 and 1996........ 22
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.................................... 23
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995........................ 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................... 25
Notes to Consolidated Financial Statements.......................... 27
2. Financial Statement Schedules:
------------------------------
II. Valuation and Qualifying Accounts.............................. 41
Report of Independent Accountants................................... 42
All other schedules not listed above have been omitted, since they are not
applicable or are not required, or because the required information is
included in the consolidated financial statements or notes thereto.
3. Exhibits:
---------
<TABLE>
<CAPTION>
Exhibit No. Description Location
---------- ----------- --------
<S> <C> <C>
2.1 Stock Purchase Agreement dated February 9, 1996 by and among
ETG Environmental, Inc., MWR, Inc. and the Registrant........... (6) (Exh. 2)
2.2 Agreement and Plan of Merger dated January 14, 1997 by and
among Fluid Management, Inc., William C. Smith,
Douglas W. Jacobson, Gary W. Hawk, Richard W. Schowengerdt
and the Registrant (the "Merger Agreement")..................... (8) (Exh. 2.1)
3.1(a) Restated Certificate of Incorporation dated September 5, 1991... (2) (Exh. 3.1(a))
3.1(b) Certificate of Amendment to Restated Certificate of
Incorporation dated August 18, 1992............................. (2) (Exh. 3.1(c))
3.2 By-Laws, as amended............................................. (2) (Exh. 3.2)
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Location
---------- ----------- --------
<S> <C> <C>
3.3 Certificate of Designation, Preferences and Rights of Series C
Convertible Preferred Stock of the Company as filed with the
Delaware Secretary of State on April 26, 1995................... (4) (Exh. 3)
10.1 License Agreement dated February 27, 1990 between the Company
and Amgen, Inc., as amended March 4, 1992....................... (2) (Exh. 10.12)
10.2 Envirogen, Inc. 401(k) Plan..................................... (2) (Exh. 10.18)
10.3 Agreement between Baker Environmental, Inc. and the Company
dated November 8, 1994.......................................... (3) (Exh. 10.29)
10.4 Agreement between the Department of the Air Force and the
Company dated September 21, 1995................................ (5) (Exh. 10.1)
10.5 Agreement between the Department of Energy and the Company dated
September 25, 1995.............................................. (5) (Exh. 10.2)
10.6 Envirogen, Inc. 1990 Incentive Stock Option and Non-Qualified
Stock Option Plan, as amended*.................................. (9) (Exh. 10.22)
10.7 Envirogen, Inc. 1993 Director's Non-Qualified Stock Option Plan,
as amended*..................................................... (7) (Exh. 10.27)
10.8 Agreement between ABTco and the Company dated October 30, 1995.. (7) (Exh. 10.29)
10.9 Securities Purchase Agreement dated January 14, 1997 by and
between Warburg, Pincus Ventures, L.P. and the Company.......... (8) (Exh. 2.2)
10.10 Employment Agreement dated April 10, 1997 between the Company
and William C. Smith*........................................... (10) (Exh. 10.1)
10.11 Employment Agreement dated April 10, 1997 between the Company
and Douglas W. Jacobson*........................................ (10) (Exh. 10.2)
10.12 Letter Agreement dated October 20, 1997 between
Harcharan S. Gill and the Company............................... (11) (Exh. 10)
21 Subsidiaries of the Company..................................... (1)
23 Consent of Coopers & Lybrand L.L.P............................. (1)
24 Powers of Attorney.............................................. (1)
27 Financial Data Schedule......................................... (1)
- -----------------------------
</TABLE>
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-48576) which became
effective on August 11, 1992.
45
<PAGE>
(3) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended March 31, 1995.
(5) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended September 30, 1995.
(6) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 5, 1996.
(7) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1995.
(8) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 14, 1997.
(9) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1996.
(10) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended June 30, 1997.
(11) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed October 20, 1997.
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
On October 20, 1997, the Company filed a Report on Form 8-K reporting
the resignation of Harcharan S. Gill, the Company's President and
Chief Executive Officer.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Envirogen, Inc.
Dated: March 26, 1998 By: /s/ William C. Smith
--------------------------------
William C. Smith
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on behalf of the registrant, in the capacities indicated,
on the 26th day of March, 1998.
Signature Title
--------- -----
William C. Smith* Chief Executive Officer and Chairman of the
- ------------------------------- Board (Principal Executive Officer)
William C. Smith
/s/ Mark J. Maten Vice President of Finance and Chief
- ------------------------------- Financial Officer (Principal Financial
Mark J. Maten and Accounting Officer)
Robert F. Hendrickson* Director
- -------------------------------
Robert F. Hendrickson
Robert S. Hillas* Director
- -------------------------------
Robert S. Hillas
Robert F. Johnston* Director
- -------------------------------
Robert F. Johnston
Robert C. Miller* Director
- -------------------------------
Robert C. Miller
Peter J. Neff* Director
- -------------------------------
Peter J. Neff
- ------------------
*William C. Smith, pursuant to a Power of Attorney executed by each of the
directors noted above and filed with the Securities and Exchange Commission as
Exhibit 24 to this Annual Report on Form 10-K, by signing his name hereto, does
hereby sign and execute this Annual Report on Form 10-K on behalf of each of the
persons noted above, in the capacities indicated, and does hereby sign and
execute this Annual Report on Form 10-K on his own behalf, in the capacities
indicated.
/s/ William C. Smith
----------------------------------
William C. Smith
47
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Stock Purchase Agreement dated February 9, 1996
by and among ETG Environmental, Inc., MWR, Inc.
and the Registrant, (6) (Exh. 2)
2.2 Agreement and Plan of Merger dated January 14, 1997 by and
among Fluid Management, Inc., William C. Smith,
Douglas W. Jacobson, Gary W. Hawk, Richard W. Schowengerdt
and the Registrant, (8) (Exh. 2.1)
3.1(a) Restated Certificate of Incorporation dated
September 5, 1991, (2) (Exh. 3.1(a))
3.1(b) Certificate of Amendment to Restated
Certificate of Incorporation dated August 18, 1992, (2) (Exh. 3.1(c))
3.2 By-Laws, as amended, (2) (Exh. 3.2)
3.3 Certificate of Designation, Preferences and
Rights of Series C Convertible Preferred Stock of
the Company as filed with the Delaware
Secretary of State on April 26, 1995, (4) (Exh. 3)
10.1 License Agreement dated February 27, 1990 between the
Company and Amgen, Inc., as amended March 4, 1992, (2) (Exh. 10.12)
10.2 Envirogen, Inc. 401(k) Plan, (2) (Exh. 10.18)
10.3 Agreement between Baker Environmental, Inc. and the Company
dated November 8, 1994, (3) (Exh. 10.29)
10.4 Agreement between the Department of the Air Force and the
Company dated September 21, 1995, (5) (Exh. 10.1)
10.5 Agreement between the Department of Energy and the Company
dated September 25, 1995, (5) (Exh. 10.2)
10.6 Envirogen, Inc. 1990 Incentive Stock Option and Non-
Qualified Stock Option Plan, as amended*, (9) (Exh. 10.22)
10.7 Envirogen, Inc. 1993 Director's Non-Qualified Stock
Option Plan, as amended*, (7) (Exh. 10.27)
10.8 Agreement between ABTco and the Company dated
October 30, 1995, (7) (Exh. 10.29)
48
<PAGE>
Exhibit No. Description
- ----------- -----------
10.9 Securities Purchase Agreement dated January 14, 1997 by
and between Warburg, Pincus Ventures, L.P. and the
Registrant, (8) (Exh. 2.2)
10.10 Employment Agreement dated April 10, 1997 between
the Company and William C. Smith*, (10) (Exh. 10.1)
10.11 Employment Agreement dated April 10, 1997 between
the Company and Douglas W. Jacobson*, (10) (Exh. 10.2)
10.12 Letter Agreement dated October 20, 1997 between
Harcharan S. Gill and the Company, (11) (Exh. 10)
21 Subsidiaries of the Company, (1)
23 Consent of Coopers & Lybrand L.L.P., (1)
24 Powers of Attorney, (1)
27 Financial Data Schedule (1)
- -------------------------------
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-48576) which became
effective on August 11, 1992.
(3) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended March 31, 1995.
(5) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-Q for the quarter ended September 30, 1995.
(6) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 5, 1996.
(7) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1995.
(8) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 14, 1997.
(9) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1996.
(10) Incorporated by reference to the indicated exhibit to the Company's
Report on form 10-Q for the quarter ended June 30, 1997.
(11) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed October 20, 1997.
* Indicates a management contract or compensatory plan or arrangement.
49
<PAGE>
Exhibit 21
ENVIROGEN, INC. - SUBSIDIARIES OF THE COMPANY
MWR, Inc., a Michigan corporation, was acquired by the Company on February 9,
1996.
50
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Envirogen, Inc. on Form S-8 (File 333-09267), Form S-8 (File No. 33-54708), Form
S-3 (File No. 333-12883), Form S-3 (File No. 333-6991), Form S-3 (File No. 33-
78982) and Form S-3 (File No. 333-34021) of our report dated February 19, 1998,
on our audits of the consolidated financial statements and financial statement
schedule of Envirogen, Inc. as of December 31, 1997 and 1996, and the years
ended December 31, 1997, 1996 and 1995, which report is included in this Annual
Report on Form 10-K.
Coopers & Lybrand L.L.P.
Princeton, New Jersey
March 26, 1998
51
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints William C. Smith and Mark J. Maten, or either of
them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, to do any and all acts, including the
execution of documents, which said attorneys, or either of them, may deem
necessary or advisable to enable Envirogen, Inc. (the "Company") to comply with
the Securities Exchange Act of 1934, as amended, and the rules and regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing under such Act of an annual report of the Company on Form 10-K for
the year ended December 31, 1997, including the power and authority to sign in
the name and on behalf of the undersigned, in any and all capacities in which
the signature of the undersigned would be appropriate, such annual report and
any and all amendments thereto and generally to do and perform all things
necessary to be done in the premises as fully and effectually in all respects
as the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand this
25th day of March, 1998.
/s/ Robert F. Hendrickson
-------------------------
Robert F. Hendrickson
52
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints William C. Smith and Mark J. Maten, or either of
them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, to do any and all acts, including the
execution of documents, which said attorneys, or either of them, may deem
necessary or advisable to enable Envirogen, Inc. (the "Company") to comply with
the Securities Exchange Act of 1934, as amended, and the rules and regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing under such Act of an annual report of the Company on Form 10-K for
the year ended December 31, 1997, including the power and authority to sign in
the name and on behalf of the undersigned, in any and all capacities in which
the signature of the undersigned would be appropriate, such annual report and
any and all amendments thereto and generally to do and perform all things
necessary to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand this
25th day of March, 1998.
/s/ Robert S. Hillas
--------------------
Robert S. Hillas
53
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints William C. Smith and Mark J. Maten, or either of
them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, to do any and all acts, including the
execution of documents, which said attorneys, or either of them, may deem
necessary or advisable to enable Envirogen, Inc. (the "Company") to comply with
the Securities Exchange Act of 1934, as amended, and the rules and regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing under such Act of an annual report of the Company on Form 10-K for
the year ended December 31, 1997, including the power and authority to sign in
the name and on behalf of the undersigned, in any and all capacities in which
the signature of the undersigned would be appropriate, such annual report and
any and all amendments thereto and generally to do and perform all things
necessary to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand this
25th day of March, 1998.
/s/ Robert F. Johnston
----------------------
Robert F. Johnston
54
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints William C. Smith and Mark J. Maten, or either of
them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, to do any and all acts, including the
execution of documents, which said attorneys, or either of them, may deem
necessary or advisable to enable Envirogen, Inc. (the "Company") to comply with
the Securities Exchange Act of 1934, as amended, and the rules and regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing under such Act of an annual report of the Company on Form 10-K for
the year ended December 31, 1997, including the power and authority to sign in
the name and on behalf of the undersigned, in any and all capacities in which
the signature of the undersigned would be appropriate, such annual report and
any and all amendments thereto and generally to do and perform all things
necessary to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand this
25th day of March, 1998.
/s/ Robert C. Miller
--------------------
Robert C. Miller
55
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints William C. Smith and Mark J. Maten, or either of
them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, to do any and all acts, including the
execution of documents, which said attorneys, or either of them, may deem
necessary or advisable to enable Envirogen, Inc. (the "Company") to comply with
the Securities Exchange Act of 1934, as amended, and the rules and regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing under such Act of an annual report of the Company on Form 10-K for
the year ended December 31, 1997, including the power and authority to sign in
the name and on behalf of the undersigned, in any and all capacities in which
the signature of the undersigned would be appropriate, such annual report and
any and all amendments thereto and generally to do and perform all things
necessary to be done in the premises as fully and effectually in all respects as
the undersigned could do if personally present.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand this
25th day of March, 1998.
/s/ Peter J. Neff
-----------------
Peter J. Neff
56
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