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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, 1998
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
(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 26, 1999
was approximately $3,943,162. (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 26, 1999 was 3,965,951.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating to
its scheduled May 13, 1999 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 1
ITEM 1. BUSINESS
Envirogen, Inc. ("Envirogen" or the "Company") is organized primarily on the
basis of products and services being broken down into commercial operations and
research and development services. The Company provides systems and services to
remove pollutants from the air, water and soil. Many of its system and service
offerings rely on advanced biological techniques that have been developed or
refined by the Company. The developmental efforts at Envirogen focus on the
isolation of naturally occurring organisms, enhancement of their performance and
the design of advanced systems to optimize their activity for the biodegradation
of various compounds in soil, air and water. Envirogen's approach is to utilize
the appropriate technology to provide its clients with the most efficient, safe
and cost-effective solutions to hazardous waste cleanup and treatment needs.
While the activities of the Company are principally commercial remediation, a
substantial portion of the activities of the Company to date has been related to
research funded by corporate and governmental sponsors to determine when
advanced biological treatment systems are appropriate to treat hazardous or
noxious waste.
GROWTH STRATEGY
Envirogen's growth model incorporates both an internal and external growth
strategy. The internal growth strategy centers on increasing sales of the
Company's core products and services through the continued commercialization of
its technologies in concert with focused marketing and sales efforts. To
supplement its internal growth, Envirogen has extended its product and service
lines and geographical presence through 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 strategy, in 1998 Envirogen entered into a collaborative marketing
agreement with United States Filter Corporation's Envirex Division to jointly
pursue opportunities in the treatment of ammonium perchlorate, a component in
rocket fuel, and methyl-tert-butyl-ether ("MTBE"), a gasoline additive.
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 which have added 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 expansion of its geographic
presence. Envirogen's primary business areas are described below.
Soil Treatment
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The majority of 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
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heating oil are spilled onto the ground, 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. As molecular complexity increases the presence of
indigenous bacteria that are capable of degrading the compound is less likely,
resulting in the need for intervention to enhance the degradation process. The
extent or degree of intervention ranges from the relatively subtle, such as
biostimulation (stimulating indigenous bacteria) and 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.
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,
treatment or 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
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 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. The Company
has recently developed commercial in situ capabilities for destruction of MTBE
and trichloroethylene ("TCE"). 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 Massachusetts-based Vapex Environmental Technologies, Inc.
("Vapex") in 1991 and Michigan-based MWR in 1996 provided it with a portfolio of
proprietary in situ capabilities. The scope of economical in situ capabilities
is a major factor in Envirogen's success in receiving several contract awards
from groups of prestigious Fortune 100 clients for the cleanup of Superfund
sites.
Envirogen acquired Wisconsin-based Fluid Management, Inc. ("FMI") in April 1997.
The acquisition 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.
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Envirogen's ex situ capabilities for soil treatment 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. 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.
Water Treatment
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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.
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 MTBE. 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 contaminated liquid flows through the
reactor where microorganisms degrade the contaminants. The reactor
maintains high concentrations of biomass under high flow rate
conditions. The optimal use of this system is for the treatment of
high flow, medium concentration waste streams containing contaminants
such as hydrocarbons, aromatics, solvents, ammonia or nitrates.
Envirogen's efforts in its water program include installation of an
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
remediation project when compared to conventional technologies. In
addition, during 1998 Envirogen designed and installed an FBR at an
industrial site for the removal of ammonium perchlorate from ground
water. Ammonium perchlorate is associated with a number of industries
and has been identified as a ground water contaminate in 46 states.
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 1998, the Company
designed an FBR system to treat ground water leachate on the site of a
former manufactured gas plant for an electric utility.
. Membrane Bioreactor - The Membrane Bioreactor ("MBR") consists of a
liquid-phase bioreactor coupled with a membrane clarification unit.
Following the biological treatment
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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 being recycled back into
the bioreactor. The optimal use of this system is for high
concentration, moderate flow-rate streams with complex or difficult to
degrade compounds, such as MTBE, 1,4-dioxane and pesticides.
During 1998, the Company entered into a contract to design an MBR
system to treat landfill leachate and other wastewaters as part of a
13-acre pretreatment facility under construction by a municipality.
. In addition, Envirogen applies other reactor systems for specific
applications. These systems include Submerged Fixed-Film reactors and
Suspended Growth reactors.
During 1997, the Company worked with Rhone-Poulenc to develop high-performance
biological technologies and systems for the industrial wastewater treatment
market. During 1998, the Company and Rhone-Poulenc restructured the agreement
thereby allowing each company to move forward on a more independent basis.
Air Treatment
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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 treatment of odors and contaminants such as hydrogen sulfide,
carbon disulfide, styrene, terpenes, alcohols, aldehydes, mixed solvents
associated with the printing and surface coating industry and hydrocarbons
associated with remediation.
A biofiltration system consists of a large containment vessel ("reactor"),
within which microorganisms, 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. Research and numerous
field trials done by Envirogen 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 capital costs when compared to 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
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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 with the advantage 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 goal to attain a 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 Biofilters the Company built for a
decorative hardwood panel manufacturer and for a synthetic sponge
manufacturer.
During 1998 Envirogen designed and built a large flow capacity system, under a
contract with Waste Management of New York ("WMNY"). The contract with WMNY
called for Envirogen to provide a turn-key biofiltration odor control system to
treat exhaust air from a municipal waste/biosolids composting facility that WMNY
constructed and will operate for the Municipal Authority of Rockland County in
New York.
In February 1999, Envirogen expanded its relationship with United States Filter
Corporation Davis Process Division ("US Filter") in the biofilter market to
treat noxious odors in municipal waste water applications. Under the agreement,
US Filter will be responsible for sales, marketing and manufacturing, while
Envirogen will continue product development.
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 1998, Envirogen spent
approximately $3.0 million on research and development projects, approximately
$2.6 million of which was funded by third parties or government agencies.
Microorganisms
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Envirogen's biodegradation processes are based on naturally occurring
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
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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 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 many 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.
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 (acid or base) 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.
In 1998, Envirogen was awarded a patent on its process for the biodegradation of
MTBE. The invention utilizes a class of microorganisms that use propane and
propanol as their growth substrate while also biodegrading MTBE and other ether-
base fuel additives.
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Externally Funded 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 two two-year Phase II
SBIR contracts in 1998 for the development of advanced technologies. One SBIR,
for the Department of Defence ("DOD"), is to develop and test a field
biotrickling filter for treating air containing paint and stripping solvents.
The second SBIR, also for the DOD, is to continue development of an in situ
biotreatment process for chlorinated solvents using biostimulation.
The Company contracts with major corporations and government entities to conduct
feasability 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 feasability 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.
With limited exceptions, the Company is not subject to any royalty or exclusive
license agreements arising from its research and development contracts. See
Note 14 to the Company's Consolidated Financial Statements for a description of
existing license agreements.
Envirogen's research and development efforts with microorganisms and engineered
systems, along with many other existing products and systems still under
development, lay the scientific groundwork to safer, more responsive commercial
applications. The result is a cleaner environment achieved with cost-savings
for industry.
MARKETING
The Company's products and services are marketed to customers by both a
dedicated sales staff and by the Company's technical staff. Once a potential
client or project opportunity is identified, the Company uses its expertise in a
variety of disciplines as appropriate to provide specific solutions to meet an
individual client's needs.
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
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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, any manufacture of genetically-
modified microorganisms that Envirogen may consider in the future 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, 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.
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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. The
Company competes primarily on the basis of price by using its technologies to
provide remediation solutions which are more cost effective than alternative
approaches. 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.
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
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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, 1998, Envirogen had 185 full-time employees, including 113 in
engineering, 25 in research and development, 32 in administration and finance
and 15 in marketing. Doctoral degrees are held by 11 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.
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 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
11
<PAGE>
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 60,200
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 where remediation work was performed. This customer
filed a claim against the Company for professional malpractice, breach of
warranty of professional services contract and misrepresentation. 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, such other 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.
During 1998, the Company reached settlement on previously disclosed litigation
matters relating to services at customer sites. These settlements did not have
a material impact on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on November 24, 1998 to vote
on a proposal to effect a one-for-six reverse split of the Company's Common
Stock, and in connection therewith proxies were solicited by management pursuant
to Regulation 14 under the Securities Exchange Act of 1934. The total number of
outstanding shares of Common Stock entitled to vote at the meeting was
23,795,635 (pre-reverse split). At the meeting the proposal was submitted to a
vote to the stockholders, with the tabulation of votes as follows:
For Against Abstentions
--- ------- -----------
16,089,200 506,644 2,000
12
<PAGE>
ADDITIONAL INFORMATION
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company serve at the discretion of the Board of
Directors. There are no family relationships between any of the executive
officers of the Company. The following information indicates the position and
age of the Company's executive officers as of the date of this report and their
previous business experience.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert S. Hillas 50 President, Chief Executive Officer and
Chairman of the Board
Ronald Unterman, Ph.D. 53 Senior Vice President and Chief
Scientific Officer
Mark J. Maten 41 Vice President, Finance and Chief
Financial Officer
Douglas W. Jacobson 53 Senior Vice President
David N. Enegess 52 Vice President Systems Sales and Services
Peter Nangeroni 40 Vice President Operations
</TABLE>
Robert S. Hillas, President, Chief Executive Officer and Chairman of the Board,
joined the Company in April 1998. Mr. Hillas served as a Managing Director and
a member of E.M. Warburg, Pincus & Co., L.L.C. ("Warburg") and its predecessors
from 1993 until April 1998. Mr. Hillas served as Warburg's nominee director to
the Company from April 1997 to April 1998. Mr. Hillas is also a director of
ATMI, Inc. and United States Filter Corporation. Mr. Hillas received his
undergraduate degree from Dartmouth College and a Masters in Business
Administration from Stanford University.
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 electric utility
industry. Mr. Maten also served as a member 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.
13
<PAGE>
Douglas W. Jacobson joined the Company as Senior Vice President and Vice
President of the Company's Wisconsin Operations Group when Fluid Management,
Inc., 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 since its
inception in 1989. 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 was appointed Vice President Systems Sales and Services in
January 1999. Mr. Enegess is a founder of the Company and has served as Vice
President of Marketing and Commercial Development (June 1988 until March 1997)
as well as Vice President of Product Development (April 1997 until December
1998). 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.
Peter E. Nangeroni joined the Company when Vapex was acquired in 1991 and served
as Vice President of the Vapex Division until 1995. In 1996 Mr. Nangeroni was
named Vice President of Operations and was appointed a corporate officer in
February 1999. Mr. Nangeroni's background includes management and technical
experience in the remediation, consulting/engineering, waste management and
construction industries. Mr. Nangeroni has a degree in Civil Engineering from
Tufts University and is a registered Professional Engineer in the Commonwealth
of Massachusetts.
14
<PAGE>
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Envirogen's Common Stock is traded in the Nasdaq SmallCap Market under the
symbol "ENVG". 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. The
stock prices have been adjusted to reflect the one-for-six reverse split of the
Company's common stock on November 24, 1998 on a retroactive basis.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ---- ---
<S> <C> <C>
1st Quarter $ 9.75 $ 6.19
2nd Quarter $12.19 $ 6.57
3rd Quarter $ 7.88 $ 2.25
4th Quarter $ 3.00 $ 1.00
1997
----
1st Quarter $21.39 $15.00
2nd Quarter $19.50 $15.00
3rd Quarter $21.00 $15.00
4th Quarter $21.00 $ 9.00
</TABLE>
The closing price for the Common Stock on February 26, 1999 was $1.69. 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 March 12, 1999 was 245, which
includes stockholders whose shares were held in nominee name. The number of
beneficial stockholders at that date was over 1,800.
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,
------------------------------------------------------------------------------------
1998 1997/(1)/ 1996/(2)/ 1995 1994
--------------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 26,220,877 $ 25,769,509 $ 12,919,594 $ 8,033,698 $ 6,134,577
Costs and expenses 52,541,064 28,885,818 15,689,306 10,279,694 10,503,989
Interest, net 159,277 210,573 170,783 169,972 111,659
Equity in income (loss) of
joint ventures 13,688 (210,497) (52,629) (93,437) -
Other, net (3,804) 26,047 7,601 16,961 -
------------- ------------- ------------- ------------- ------------
Net loss (26,151,026) (3,090,186) (2,643,957) (2,152,500) (4,257,753)
Preferred stock
dividends - - (36,458) (233,333) -
------------- ------------- ------------- ------------- ------------
Net loss applicable to
Common Stock ($26,151,026) ($ 3,090,186) ($ 2,680,415) ($ 2,385,833) ($4,257,753)
============= ============= ============= ============= ============
Basic and diluted net
loss per share applicable
to Common Stock/(3)/ ($6.64) ($0.93) ($1.41) ($1.87) ($3.43)
============= ============= ============= ============ =============
SUMMARY OF FINANCIAL POSITION
December 31,
----------------------------------------------------------------------------
1998 1997/(1)/ 1996/(2)/ 1995 1994
---- --------- --------- ---- ----
Total assets $ 17,945,879 $ 42,727,012 $ 12,716,624 $ 8,585,233 $ 6,704,806
Working capital 5,151,482 8,099,057 7,094,266 4,934,700 3,628,377
Long-term obligations 4,644 12,671 42,176 60,951 177,704
Redeemable convertible
Preferred Stock - - - 1,728,621 -
Stockholders' equity 8,461,789 33,992,254 10,047,233 4,863,357 5,400,207
- ---------------
(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.
(3) The per share amounts have been adjusted to reflect the one-for-six reverse stock split of the
Company's common stock on November 24, 1998 on a retroactive basis.
</TABLE>
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 Company's revenues to date have been from (i) commercial operations,
consisting of revenue from remediation services, conventional treatment systems
and soil vapor extraction systems and the Company's biological degradation
systems (including both in situ and ex situ bioremediation), and (ii) 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 and from traditional
remediation systems such as soil vapor extraction systems, 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. 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 Fluid Management, Inc. ("FMI"), a full-
service environmental consulting and engineering firm that is now operated as
the Company's Wisconsin Operations Group (the "Group"). Remediation services
and installation of traditional remediation systems are the Group's core
business and generate the greatest portion of the Group's revenues. Pursuant to
the Wisconsin Petroleum Environmental Cleanup Fund Act ("PECFA"), a program
funded by the State of Wisconsin for cleaning up underground storage tanks, the
Group's clients (or their lending banks) are entitled to seek reimbursement for
a majority of the remediation costs paid to the Group. The Wisconsin Department
of Commerce ("DCOM") reviews claims for reimbursement under PECFA to determine
the extent to which submitted claims will be reimbursed. Typically the DCOM
review process is not completed until one to three years after the expense has
been incurred and paid by the Group'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. The Group has historically
reimbursed its clients (or their lending banks) for the remediation costs for
services provided by the Group which ultimately were determined by DCOM to be
ineligible for reimbursement under PECFA. In certain instances, the Company has
written guarantees to banks which, under certain conditions, could obligate the
Company to reimburse the bank for items disallowed under the program. Since the
Company acquired FMI, the Company has reimbursed
17
<PAGE>
its clients and their lending banks an aggregate of $834,225. At December 31,
1998, the Company had $3,659,043 in reserves with respect to potential
ineligible claims related to approximately $56 million in claims that had not
yet been fully reviewed by DCOM. There can be no assurance that the amount of
such reserve, which was determined by management based on historic reimbursement
disallowance rates under the PECFA program, will be adequate.
On April 17, 1998, the State of Wisconsin adopted new emergency rules
("Emergency Rules") with regard to PECFA which effectively reduced the expected
revenue per site that the Wisconsin Operations Group can capture under the
program for the foreseeable future. The State of Wisconsin's stated intent for
issuance of the Emergency Rules was to reduce the amount of funds being paid for
cleanup efforts under the PECFA program. Until the issuance of the Emergency
Rules, the Wisconsin Department of Natural Resources ("DNR") determined the
appropriate remedial activity for each site under the program in every instance.
Per the Emergency Rules, DNR's authority extends only to sites where groundwater
contamination is evident. Where contamination of soil exists without
groundwater contamination, DCOM administers the remedial program with no DNR
involvement. Under the Emergency Rules, lower-cost natural attenuation is
mandated unless certain conditions exist which would indicate that active
remediation is necessary. This is a significant change, since natural
attenuation was previously not an approved option and virtually all sites were
actively remediated. Based upon the Company's experience, it is estimated that
the active remediation approach under PECFA resulted in revenues ranging from
$50,000 to $1,000,000 per site. Since the adoption of the Emergency Rules, the
Company's revenues from a typical site were reduced to approximately $40,000 to
$100,000. This regulatory event has resulted, and is expected to continue to
result, in a dramatic decrease in revenue, net income and cash flow from the
Wisconsin Operations Group. The Company is not aware of any proposed or pending
changes to the PECFA program that would have a materially favorable impact on
the business of the Wisconsin Operations Group.
As a result of this event, the Company reviewed the carrying value of the long-
lived assets associated with its acquisition of FMI and recorded a non-cash
charge of $21,670,028 in the second quarter of 1998 representing the impairment
of the goodwill. This charge is based on the amount by which the book value
exceeded the current estimated fair market value of the goodwill. The current
estimated fair market value was determined primarily using the anticipated cash
flows of the Wisconsin Operations Group discounted at a rate commensurate with
the risk involved. The impairment charge fully eliminated the remaining
carrying value of the goodwill associated with the FMI acquisition.
As a result of the acquisition of FMI in April 1997, the Company's results of
operations during each of the years presented below may not be directly
comparable.
RESULTS OF OPERATIONS
- ---------------------
1998 COMPARED TO 1997
- ---------------------
The Company reported revenues in 1998 of $26,220,877 as compared to $25,769,509
for 1997, an increase of 2%. The net loss applicable to common stock in 1998
increased to $26,151,026 from $3,090,186 in 1997, while the basic and diluted
net loss per share was $6.64 compared to $0.93 in 1997. The 1998 net loss
includes the goodwill impairment charge of $21,670,028 ($5.50 per share) taken
in the second quarter.
Commercial revenues (net of reserves for ineligible PECFA claims) increased 3%
to $23,648,398 from $23,044,622 in 1997 while revenues from corporate and
government research and development contracts decreased 6% to $2,572,479 from
$2,724,887 in 1997. The increased commercial revenues are due
18
<PAGE>
primarily to increased sales of the Company's services and products related to
biological degradation systems, offset in part by decreases in service and
conventional systems related revenues generated under the PECFA program at the
Wisconsin Operations Group. An analysis of recent trends indicate an increase
in the claims DCOM is declaring ineligible for reimbursement, which resulted in
an additional $1,650,000 charge against revenue in the fourth quarter of 1998.
Revenues from corporate and government research and development contracts
decreased primarily due to the decreased volume of Phase II Small Business
Innovative Research Grants ("SBIR") the Company is actively working on. In
1998, the Company recorded initial revenues under two Phase I SBIRs from the
National Science Foundation, two Phase II SBIRs from the Department of Defense,
as well as a Phase II SBIR and a grant from the Department of Energy.
Total costs and expenses increased to $52,541,064 (or 7% to $30,871,036
exclusive of the $21,670,028 goodwill impairment charge discussed above) in 1998
from $28,885,818 in 1997. The cost of commercial operations increased 25% to
$20,994,139 in 1998 due to the inclusion of expenses of the Wisconsin Operations
Group for the entire year. Research and development expenses increased 10% to
$2,998,271 in 1998 due to an increase in internal development projects to
develop new commercial products. Marketing, general and administrative expenses
decreased 26% to $6,928,628 in 1998 from $9,356,153 in 1997 due primarily to
headcount reductions, other overhead expense reduction efforts and reduced
amortization of goodwill associated with the FMI acquisition after recording the
goodwill impairment charge in the second quarter of 1998.
Interest income decreased 26% to $180,545 in 1998 due primarily to the lower
level of cash available for investment in 1998. Equity in income of joint
ventures amounted to $13,688 in 1998 compared to a loss of $210,497 in 1997 due
primarily to the Company's participation in the losses of the CVT America joint
venture in 1997. On August 10, 1997, the Company acquired the remaining 50% of
the venture, dissolved the venture and thereafter continued its business as part
of the Company's commercial 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 $0.93 compared to
$1.41 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 in 1997 from $10,892,871 in
1996 while revenues from corporate and government research and development
contracts increased 34% to $2,724,887 in 1997 from $2,026,723 in 1996. The
increased commercial revenues are due primarily to the inclusion of sales of the
Company's Wisconsin Operations Group, acquired on April 10, 1997.
Revenues from corporate and government research and development contracts
increased primarily due to the increased volume of Phase II SBIRs 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.
19
<PAGE>
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 in 1997
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
in 1997 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 Wisconsin 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 systems the Company
built for the Nylonge Corporation. The repairs to the system were completed and
the system restarted in late 1996.
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 ventures 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 business as part of the Company's
commercial operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has funded its operations to date primarily through revenues from
commercial operations, research grants from government agencies, public
offerings and private placements of equity securities and research and
development agreements with major industrial companies. At December 31, 1998,
the Company had cash and cash equivalents of $3,407,910 and working capital of
$5,151,482. 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 decreased $1,455,748 from December 31, 1997 to December 31,
1998 as proceeds from the issuance of common stock of $620,000 were offset by
cash used by operations of $1,633,110 and capital expenditures of $453,307. 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, 1998, unbilled revenue was $185,470
lower than at December 31, 1997 due primarily to lower revenue in the last
quarter of 1998 versus the same period in 1997.
20
<PAGE>
Accounts receivable decreased by $649,562 from December 31, 1997 to December 31,
1998 on lower fourth quarter 1998 revenue. Accrued expenses and other
liabilities decreased by $826,298 from December 31, 1997 to December 31, 1998
primarily due to the payment in 1998 of bonuses and severance related to prior
years and to lower state tax reserves. On December 31, 1998, the Company had
$4,150,133 in reserve for claim adjustments and warranties, $3,659,043 of which
is attributable to potential PECFA claim adjustments related to approximately
$56 million in unsettled PECFA submittals and $491,090 of which is attributable
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 at least the next 18 to 24 months. The Company
may seek additional funds through equity or debt financing. However, there can
be no assurance that such additional funds will be available on terms favorable
to the Company, if at all.
OTHER MATTERS
- -------------
As of December 31, 1998, the Company had a net operating loss carryforward of
approximately $23,000,000 for federal income tax reporting purposes available to
offset future taxable income, if any, through 2018. 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 Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") in 1998. Comprehensive income
represents the change in net assets of a business enterprise as a result of
nonowner transactions. The adoption of SFAS 130 did not have any effect on the
Company's consolidated financial statements.
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS 131 did not affect the Company's results
of operations or financial position but did affect the disclosure of segment
information.
The Company also adopted Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
132") in 1998. SFAS 132 changed current financial statement disclosure
requirements for pension and other postretirement benefit plans. SFAS 132 did
not, however, change the measurement or recognition provisions of existing
accounting standards. The adoption of SFAS 132 did not have any effect on the
Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of the
derivatives are recorded each period in current
21
<PAGE>
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. SFAS 133 is not expected to have a material impact on the
Company's consolidated results of operations, financial position or cash flows.
THE YEAR 2000 ISSUE - READINESS DISCLOSURE
- ------------------------------------------
The Year 2000 issue is the result of computer systems and other equipment with
processors that identify a year with only two digits rather than four. If not
corrected, many computer applications and date sensitive equipment could fail or
create erroneous results before, during and after the Year 2000. The Company
utilizes information technology ("IT") systems such as computer networking
systems and non-IT devices such as building security equipment, that are subject
to potential failure due to the Year 2000 issue.
The Company has developed and implemented a plan to achieve year 2000 readiness
(the "Y2K Program"). The Y2K Program is coordinated at the corporate level and
is implemented by individuals in the Company's offices throughout the country.
The Y2K Program has been implemented in the following phases: (1) identification
and assessment of all critical computer systems and equipment requiring
modification or replacement; (2) remediation or replacement and testing of
modifications to critical items; (3) evaluation of third parties; and (4)
development of contingency and business continuity plans to mitigate the effect
of any system or equipment failure to the Company's operations, systems and
equipment arising from the Year 2000 issue. Progress reports on the Y2K Program
will be presented regularly to the Company's senior management and periodically
to the Audit Committee of the Company's Board of Directors.
The Year 2000 issue could affect the systems, transaction processing, computer
applications and devices used by the Company to operate and monitor all major
aspects of its business, including financial systems, marketing services,
proprietary engineering and procurement systems and technical reference
databases. With respect to business systems, such as general ledgers, human
resources and payroll and field accounting software, phases (1) and (2) of the
Y2K Program are expected to be completed by June 1999. Operating software,
network capabilities and hardware are being addressed via upgrades. Completion
of the upgrade process is expected by June 1999. A standard compliance process
will be used to certify Year 2000 compliance with vendors of purchased software.
Remediation/replacement and testing of the Company's mission critical systems
and equipment in use at the Company's locations is expected to be completed by
June 1999. Mission critical items are those that might have a significant
adverse effect in one or more of the following areas: safety, environmental,
legal or financial exposure and Company credibility and image.
With respect to systems and equipment provided to clients, the Company does not
control and is not responsible for the upgrades, additions and/or changes made
by its clients, or by others for its clients, to those systems and equipment.
Accordingly, the Company does not provide to its clients any assurances, nor
current information about Year 2000 capabilities, nor potential Year 2000
problems, with respect to past projects.
Regarding current projects, the Company is currently evaluating those projects
for Year 2000 readiness and determining whether any additional action is
required. The Company relies directly and indirectly on external systems
utilized by its suppliers and on equipment and materials provided by those
suppliers and used for the Company's business. The Company has established a
procedure for reviewing Year 2000
22
<PAGE>
compliance by each of its suppliers. As part of that process, the Company has
identified critical suppliers and is currently assessing the level of compliance
for each. The Company requires its suppliers to certify and guarantee Year 2000
compliance of their systems and equipment provided. Given the number of
suppliers utilized by the Company, compliance assessment is ongoing. Although
initial reviews indicate that Year 2000 compliance by the Company's suppliers
should not have a material adverse affect on the Company's operations, there can
be no assurance that suppliers will resolve all Year 2000 issues with their
systems and equipment in a timely manner.
The Company uses both internal and external resources in its Y2K Program. The
Company has estimated that to date it has spent less than $10,000, primarily on
software upgrades, on the Year 2000 issue. It anticipates spending an
additional $50,000 to $100,000 for additional software upgrades, hardware
modifications and administrative costs. The program will be funded out of
working capital and expensed as incurred. The Y2K Program has not affected any
other IT initiatives. This estimate was derived utilizing numerous assumptions,
including the assumption that the Company has already identified its most
significant Year 2000 issues and that the plans of its third party suppliers
will be fulfilled in a timely manner without cost to the Company. These costs
are the Company's best estimate given other ongoing systems initiatives.
However, there can be no guarantee that these assumptions are accurate, and
actual results could differ materially from those anticipated.
The Company is developing contingency plans to address the Year 2000 issues that
may pose a significant risk to its ongoing operations and existing projects.
Such plans will include the implementation of alternate procedures to compensate
for any systems and equipment malfunctions or deficiencies with the Company's
internal systems and equipment, with systems and equipment utilized at the
Company's project sites and with systems and equipment provided to clients.
During the remediation phase of the internal business systems, the Company has
been and will be evaluating potential failures and will attempt to develop
responses in a timely manner. However, there can be no assurance that any
contingency plans implemented by the Company would be adequate to meet the
Company's needs without materially impacting its operations, that any such plan
would be successful or that the Company's results of operations would not be
materially and adversely affected by the delays and inefficiencies inherent in
conducting operations in an alternative manner.
The Company's Y2K Program is subject to a variety of risks and uncertainties,
some of which are beyond the Company's control. Those risks and uncertainties
include, but are not limited to, availability of qualified computer personnel,
the Year 2000 readiness of third parties and the Year 2000 compliance of systems
and equipment provided by suppliers. No assurance can be given that the Company
will achieve Year 2000 readiness. Further, there is the possibility that
significant litigation may occur due to business and equipment failures caused
by the Year 2000 issue. It is uncertain whether, or to what extent, the Company
may be affected by such litigation. The failure of the Company, its clients
(including governmental agencies), suppliers of computer systems and equipment,
joint venture partners and other third parties upon whom the Company relies, to
achieve Year 2000 readiness could materially and adversely affect the Company's
results from operations, liquidity or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,407,910 $4,863,658
Accounts receivable, net of allowance for doubtful
accounts of $539,544 in 1998 and $605,963 in 1997 6,327,599 6,977,161
Unbilled revenue 4,028,183 4,213,653
Inventory 185,553 248,712
Prepaid expenses and other current assets 681,683 517,960
------------- -------------
Total current assets 14,630,928 16,821,144
Property and equipment, net 1,478,003 1,757,577
Restricted cash 309,300 309,300
Investment in and advances to joint venture 101,336 87,648
Intangible assets, net 1,183,024 23,488,607
Other assets 243,288 262,736
------------- -------------
Total assets $17,945,879 $42,727,012
============= =============
LIABILITIES
Current liabilities:
Accounts payable $3,441,114 $3,449,512
Accrued expenses and other liabilities 1,121,917 1,948,215
Reserve for claim adjustments and warranties 4,150,133 2,577,218
Deferred revenue 759,060 730,365
Current portion of capital lease obligations 7,222 16,777
------------- -------------
Total current liabilities 9,479,446 8,722,087
Capital lease obligations, net of current portion 4,644 12,671
------------- -------------
Total liabilities 9,484,090 8,734,758
-------------- --------------
Commitments and contingencies (see Note 14)
STOCKHOLDERS' EQUITY
Common stock, 3,975,868 and 3,892,400 shares issued and
outstanding at December 31, 1998 and 1997, respectively 39,759 38,924
Additional paid-in capital 59,671,189 59,051,463
Accumulated deficit (51,243,209) (25,092,183)
Less: Treasury stock, at cost (5,950) (5,950)
------------- -------------
Total stockholders' equity 8,461,789 33,992,254
------------- -------------
Total liabilities and stockholders' equity $17,945,879 $42,727,012
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
The consolidated financial statements have been adjusted to reflect the 1 for 6 reverse stock split (see Note 2).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Commercial operations $23,648,398 $23,044,622 $10,892,871
Research and development services 2,572,479 2,724,887 2,026,723
--------------- -------------- --------------
Total revenues 26,220,877 25,769,509 12,919,594
--------------- -------------- --------------
Cost of commercial operations 20,944,137 16,799,454 9,676,960
Provision for contract claim 650,000
Research and development costs 2,998,271 2,730,211 2,403,566
Marketing, general and administrative expenses 6,928,628 9,356,153 2,958,780
Impairment of long-lived assets 21,670,028
--------------- -------------- --------------
Total costs and expenses 52,541,064 28,885,818 15,689,306
--------------- -------------- --------------
Other income (expense):
Interest income 180,545 242,373 193,776
Interest expense (21,268) (31,800) (22,993)
Equity in income (loss) of joint ventures 13,688 (210,497) (52,629)
Other, net (3,804) 26,047 7,601
--------------- -------------- --------------
Other income, net 169,161 26,123 125,755
--------------- -------------- --------------
Net loss (26,151,026) (3,090,186) (2,643,957)
Preferred stock dividends (36,458)
--------------- -------------- --------------
Net loss applicable to Common Stock ($26,151,026) ($3,090,186) ($2,680,415)
============== ============= =============
Basic and diluted net loss per share applicable
to Common Stock ($6.64) ($0.93) ($1.41)
============== ============= =============
Weighted average number of shares of
Common Stock used in computing basic
and diluted net loss per share 3,940,269 3,340,336 1,895,825
============== ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
The consolidated financial statements have been adjusted to relect the 1 for 6 reverse stock split (see Note 2).
</TABLE>
25
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
<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, 1995,
as previously reported 9,049,460 $90,495 $24,100,394 ($19,321,582) (59,500) ($5,950)
1 for 6 reverse stock split (7,541,217) (75,413) 75,413 49,583
--------------- --------- ------------- -------------- ---------- ----------
Balance at December 31, 1995
restated to reflect the 1998
reverse stock split 1,508,243 $15,082 $24,175,807 ($19,321,582) (9,917) ($5,950)
Net loss (2,680,415)
Conversion of Convertible
Preferred Stock 233,334 2,333 1,726,288
Issuance of Common Stock for cash 333,334 3,334 4,604,650
Issuance of Common Stock to
acquire MWR, Inc. 76,084 761 1,510,254
Exercise of stock options 4,336 43 16,628
--------------- ------- ----------- ------------- --------- --------
Balance at December 31, 1996 2,155,331 $21,553 $32,033,627 ($22,001,997) (9,917) ($5,950)
Net loss (3,090,186)
Issuance of Common Stock to
Warburg, Pincus Ventures, L.P.
for cash 1,015,873 10,159 15,703,217
Issuance of Common Stock to
acquire Fluid Management, Inc. 698,413 6,984 10,993,018
Issuance of Common Stock to
acquire remaining interest in
joint venture 16,667 167 265,433
Exercise of stock options 6,116 61 56,168
--------------- ------- ----------- ------------- --------- --------
Balance at December 31, 1997 3,892,400 $38,924 $59,051,463 ($25,092,183) (9,917) ($5,950)
Net loss (26,151,026)
Issuance of Common Stock for cash 83,334 833 619,167
Exercise of stock options 134 2 559
-------------- ------- ----------- ------------- --------- --------
Balance at December 31, 1998 3,975,868 $39,759 $59,671,189 ($51,243,209) (9,917) ($5,950)
============== ======= =========== ============= ========= ========
Preferred Stock: Authorized 2,000,000 shares, par value $.01 per share. No preferred shares issued or outstanding
at December 31, 1996, 1997 and 1998.
Common Stock: Authorized 50,000,000 shares, par value $.01 per share.
The accompanying notes are an integral part of these consolidated financial statements.
The consolidated financial statements have been adjusted to reflect the 1 for 6 reverse stock split (see Note 2).
</TABLE>
26
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996
-------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($26,151,026) ($3,090,186) ($2,643,957)
Adjustments to reconcile net loss to cash used by
operating activities:
Depreciation and amortization 1,336,935 1,826,595 992,697
Provision for claim adjustments and warranties 2,324,823 930,783 650,000
Provision for doubtful accounts 73,533 512,225 84,800
Equity in (income) and loss of joint ventures (13,688) 210,497 52,629
Impairment of long-lived assets 21,670,028
Other 3,811 3,707 (8,521)
Changes in operating assets and liabilities, net of the effect
of acquisitions:
Accounts receivable 576,029 (71,951) (850,546)
Unbilled revenue 185,470 (696,417) 107,213
Prepaid expenses and other current assets (163,723) (184,631) 216,271
Inventory 63,159 7,817 48,606
Other assets 19,448 (76,824) 56,423
Accounts payable (8,398) (941,189) 182,942
Accrued expenses and other liabilities (826,298) 422,812 (7,380)
Reserve for claim adjustments and warranties (751,908) (334,383) (823,775)
Deferred revenue 28,695 405,460 (111,804)
-------------- ------------ -------------
Net cash used by operating activities (1,633,110) (1,075,685) (2,054,402)
-------------- ------------ -------------
Cash flows from investing activities:
Capital expenditures (453,307) (557,635) (102,744)
Investment in and advances to joint venture (304,770) (100,000)
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 27,690 22,004 9,750
-------------- ------------ -------------
Net cash used in investing activities (425,617) (14,421,227) (1,524,994)
-------------- ------------ -------------
Cash flows from financing activities:
Debt repayment (4,287) (4,333)
Capital lease principal repayments (17,582) (18,810) (124,020)
Net proceeds from exercise of stock options 561 56,229 16,671
Net proceeds from issuance of Common Stock 620,000 15,713,376 4,607,984
Cash dividends paid on Redeemable Cumulative
Convertible Preferred Stock (51,041)
-------------- ------------ -------------
Net cash provided by financing activities 602,979 15,746,508 4,445,261
-------------- ------------ -------------
Net (decrease) increase in cash and cash equivalents (1,455,748) 249,596 865,865
Cash and cash equivalents at beginning of year 4,863,658 4,614,062 3,748,197
-------------- ------------ -------------
Cash and cash equivalents at end of year $3,407,910 $4,863,658 $4,614,062
============= =========== ============
The accompanying notes are an integral part of these consolidated financial statements.
The consolidated financial statements have been adjusted to reflect the 1 for 6
reverse stock split (see Note 2).
</TABLE>
27
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996
-------------- ------------ -------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
- -------------------------------------------------
Cash paid for interest $29,251 $21,304 $23,041
============= =========== ============
Cash (refunded) paid for income taxes ($94,152) $112,354 $2,110
============= =========== ============
Supplemental disclosures of non-cash investing and financing activities:
-----------------------------------------------------------------------
-The Company entered into capital lease obligations amounting to $48,932 during 1996. No capital leases were
entered into in 1998 and 1997.
-In April 1997, the Company acquired Fluid Management, Inc. for $12,187,531 in cash and 698,413 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 76,084 shares of Common Stock
valued at $1,511,015.
</TABLE>
The accompanying notes are an integral part of these financial statements.
The consolidated financial statements have been adjusted to reflect the 1 for 6
reverse stock split (see Note 2).
28
<PAGE>
ENVIRONGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
1. BUSINESS AND ORGANIZATION
-------------------------
Envirogen, Inc. ("Envirogen" or the "Company") offers systems and services
to remove pollutants from the air, water and soil. Many of its system and
service offerings rely on advanced biological techniques, developed or
refined by the Company. To supplement its internal growth, Envirogen has
expanded its capabilities and geographical presence through acquisitions.
The most recent of these acquisitions was Wisconsin-based Fluid Management,
Inc. ("FMI") that was acquired by the Company on April 10, 1997 and is now
known as the "Wisconsin Operations Group". MWR, Inc. ("MWR") of Lansing,
Michigan, a wholly-owned subsidiary, was acquired on February 9, 1996. On
August 8, 1997, the Company purchased the 50% interest held by nv VAM
("VAM") in CVT America L.L.C., a 50/50 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 the Company are principally commercial remediation,
a substantial 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 or noxious wastes. Certain of
Envirogen's bioremediation systems have proven commercial viability, while
others may require substantial additional research, development and testing
to determine their commercial viability and may 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 Envirogen 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 the presentation of
prior years with the 1998 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.
29
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
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.
RESERVES FOR CLAIM ADJUSTMENTS AND WARRANTIES
The Company provides for potential amounts it could repay to customers
related to remediation performed by the Company under the State of
Wisconsin Petroleum Environmental Cleanup Fund Act ("PECFA"). On each
PECFA related revenue dollar a reserve is set up to cover amounts which may
be declared ineligible. The Wisconsin Department of Commerce ("DCOM")
reviews claims for reimbursement under PECFA to determine the extent to
which submitted claims will be reimbursed. Typically the DCOM review
process is not completed until one to three years after the expense has
been incurred and paid by the Company'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. The Company
has historically reimbursed its clients (or their lending banks) for the
remediation costs for services provided by the Company which ultimately
were determined by DCOM to be ineligible for reimbursement under PECFA. In
certain instances, the Company has written guarantees to banks which, under
certain conditions, could obligate the Company to reimburse the bank for
items disallowed under the program. At December 31, 1998, the Company had
$3,659,043 in reserves with respect to potential ineligible claims related
to approximately $56 million in claims that had not yet been fully reviewed
by DCOM. There can be no assurance that the amount of such reserve, which
was determined by management based on historic reimbursement disallowance
rates under the PECFA program, will be adequate
30
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The Company also had $491,090 in reserves at December 31, 1998 with respect
to potential systems warranty claims and other contract issues. 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.
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, 1998 of $57,710 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, 1998.
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
31
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
calculations are the same. Accordingly, options and warrants to purchase
501,739, 631,911 and 523,349 shares of common stock that were outstanding
at December 31, 1998, 1997 and 1996, respectively, were not included in
diluted per share calculations, as their effect would be antidilutive.
On October 28, 1998, the Company's Board of Directors authorized a one-for-
six reverse split of the Company's common stock. Effective November 24,
1998, the stockholders approved the reverse split. All references herein
to number of shares, per share amounts, stock option data, warrants and
market prices of the Company's common stock have been adjusted to reflect
the reverse stock split on a retroactive basis.
SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption
of SFAS 131 did not affect the Company's results of operations or financial
position but did affect the disclosure on segment information (see Note
18).
ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") in 1998. Comprehensive
income represents the change in net assets of a business enterprise as a
result of nonowner transactions. The adoption of SFAS 130 did not have any
effect on the Company's consolidated financial statements.
The Company also adopted Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132") in 1998. SFAS 132 changed current financial
statement disclosure requirements for pension and other postretirement
benefit plans. SFAS 132 did not, however, change the measurement or
recognition provisions of existing accounting standards. The adoption of
SFAS 132 did not have any effect of the Company's consolidated financial
statements.
IMPACT OF THE FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999
(January 1, 2000 for the Company). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes
in the fair value of the derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative
is designated as part of a hedge transaction and, if it is, the type of
hedge transaction. SFAS 133 is not expected to have a material impact on
the Company's consolidated results of operations, financial position or
cash flows.
32
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
INCOME TAXES
The Company accounts for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (see Note 10).
3. BUSINESS ACQUISITIONS
---------------------
On April 10, 1997, the Company acquired Fluid Management, Inc. ("FMI") of
Pewaukee, Wisconsin for approximately $12.2 million in cash and 698,413
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. FMI, a full-service environmental consulting and
engineering firm with offices in Pewaukee, La Crosse, Ashwaubenon and
Mosinee, Wisconsin and Geneva, Illinois, was merged into the Company and is
now operated as the Wisconsin and Illinois Operations Groups. The
acquisition has been accounted for under the purchase method of accounting
and the excess of the aggregate purchase price over the fair market value
of net assets acquired resulted in goodwill of $22,877,482. The goodwill
was to be amortized over 20 years. In April 1998 a regulatory change
caused the Company to review the carrying value of long-lived assets
associated with the FMI acquisition. Based upon this evaluation, the
Company concluded that the long-lived assets related to FMI were impaired
and the remaining goodwill was written-off (see Note 4).
On August 8, 1997, the Company issued 16,667 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.
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 76,084 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.
33
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
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.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
(Unaudited) (Unaudited)
------------------ ------------------
<S> <C> <C>
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 ($ 0.51) ($ 0.01)
</TABLE>
4. IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
In April 1997, the Company acquired FMI, now known as the Wisconsin and
Illinois Operations Groups. The majority of the Wisconsin Operations
Groups work is eligible for reimbursement to its clients under the
Wisconsin Petroleum Environmental Cleanup Fund Act ("PECFA"), the program
funded by the State of Wisconsin for cleaning up leaking underground
storage tanks. On April 17, 1998, the State of Wisconsin adopted new
emergency rules with regard to PECFA which effectively reduced, and is
expected to continue to reduce, the revenue per site that the Wisconsin
Operations Group can capture under the program. The State of Wisconsin's
stated intent for issuance of the new emergency rules is to reduce the
amount of funds being paid for cleanup efforts under the PECFA program.
Pursuant to the emergency rules, lower cost natural attenuation is mandated
unless certain conditions exist which would indicate that active
remediation is necessary.
As a result of this event, the Company reviewed the carrying value of long-
lived assets associated with its acquisition of FMI and recorded a non-cash
charge of $21,670,028 in the second quarter of 1998 representing the
impairment of goodwill. This charge is based on the amount by which the
book value exceeded the current estimated fair market value of the
goodwill. The current estimated fair market value was determined primarily
using the anticipated cash flows of the Wisconsin Operations Group
discounted at a rate commensurate with the risk involved. The impairment
charge fully eliminated the remaining carrying value of the goodwill
associated with the acquisition. The Company is not aware of any proposed
or pending changes to the PECFA program that would have a materially
favorable impact on the business of the Wisconsin Operations Group.
5. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
--------------------------------------
During the fourth quarter of 1998, the Company recorded a $1,650,000 charge
to increase the reserve for ineligible PECFA claims. On each PECFA related
revenue dollar a reserve is set up to cover amounts which may be declared
ineligible (see Note 2). DCOM reviews claims for reimbursement under PECFA
to determine the extent to which submitted claims will be reimbursed.
Typically the DCOM review process is not completed until one to three years
after the expense has been incurred and paid by the Company's client (or
its bank). An analysis of recent trends indicated an increase in the
claims the State is declaring ineligible for reimbursement, which resulted
in an increase in the reserve and the additional charge to earnings.
34
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
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.
<TABLE>
<CAPTION>
<S> <C>
6. PROPERTY AND EQUIPMENT
----------------------
</TABLE>
Property and equipment, net at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Computer equipment $ 801,423 $ 739,271
Acquired computer software 359,640 210,000
Vehicles 42,300 42,300
Laboratory and field equipment 2,566,452 2,038,718
Equipment and vehicles under
capital leases 598,975 598,975
Furniture and office equipment 569,319 564,895
Leasehold improvements 568,203 565,822
Construction in progress 14,659 359,683
---------- ----------
5,520,971 5,119,664
Less: Accumulated depreciation and
amortization 4,042,968 3,362,087
---------- ----------
$1,478,003 $1,757,577
========== ==========
</TABLE>
Accumulated amortization on equipment under capital leases amounted to
$570,083 and $497,855 at December 31, 1998 and 1997, respectively.
Depreciation and amortization expense amounted to $701,380, $765,703 and
$797,049 for the years ended December 31, 1998, 1997 and 1996,
respectively. No interest has been capitalized in 1998, 1997 or 1996.
7. RESTRICTED CASH
---------------
At December 31, 1998 and 1997, 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.
<TABLE>
<CAPTION>
<S> <C>
8. INTANGIBLE ASSETS
-----------------
</TABLE>
Intangible assets, net at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Goodwill $1,431,700 $24,309,182
Patents 222,611 222,611
Covenant not to compete 232,000 232,000
---------- -----------
1,886,311 24,763,793
Less: Accumulated amortization 703,287 1,275,186
---------- -----------
$1,183,024 $23,488,607
========== ===========
</TABLE>
Amortization expense for intangible assets amounted to $635,555,
$1,060,891, and $195,648 for the years ended December 31, 1998, 1997 and
1996, respectively.
35
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
9. ACCRUED EXPENSES AND OTHER LIABILITIES
--------------------------------------
Accrued expenses and other liabilities at December 31, 1998 and 1997
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Salaries, benefits and payroll taxes $ 642,536 $ 927,804
Taxes 199,589 429,540
Professional Fees 148,500 113,576
Severance 75,477 322,050
Other 55,815 155,245
---------- ----------
$1,121,917 $1,948,215
========== ==========
</TABLE>
10. INCOME TAXES
------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company has provided a full
valuation allowance against the net deferred tax debits due to the
uncertainty of realization. The change in the valuation allowance for the
year ended December 31, 1998 was an increase of $1,411,812.
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
Deferred Tax Deferred Tax
Assets (Liabilities) Assets (Liabilities)
-------------------- --------------------
<S> <C> <C>
Accrued liabilities $ 1,405,010 $ 1,248,537
Contract reserve 147,046 34,000
Depreciation (29,183) 30,274
Amortization 48,010 67,143
Bad debts 183,445 206,027
Partnership interest 29,580
Net operating loss - federal 7,914,308 7,274,556
State taxes 3,498,386 2,865,093
Tax credits 297,187 297,187
----------- -----------
Total 13,464,209 12,052,397
Valuation allowance - federal (9,965,823) (9,187,304)
Valuation allowance - state (3,498,386) (2,865,093)
----------- -----------
Total net deferred taxes $ 0 $ 0
=========== ===========
</TABLE>
As of December 31, 1998, the Company had a net operating loss carryforward
of approximately $23,000,000 for Federal income tax purposes which is
available to offset future taxable income, if any, between the years 1999
and 2018. 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.
36
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
11. CAPITAL STOCK
-------------
COMMON STOCK
On April 10, 1997, the Company issued 1,015,873 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 FMI acquisition and to supplement the working capital
of the combined enterprise. An officer of Warburg Pincus is also a
director of the Company.
On May 24, 1996, the Company successfully completed the private placement
of 333,334 shares of Common Stock resulting in net proceeds of $4,607,984.
Allen & Company Incorporated ("Allen & Company"), a former principal
stockholder of the Company, acted as the placement agent. An officer of
Allen & Company is also a director of the Company.
PREFERRED STOCK
---------------
In May 1996, all outstanding Convertible Preferred Stock was voluntarily
converted into an additional 233,334 shares of Common Stock. Regular
Preferred Stock dividends of $36,458 were recognized in 1996. 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.
12. 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 583,334 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,
1998, there were 118,809 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 2,500 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 834 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 a
Non-Employee Chairman of the Board shall be granted an option to purchase
1,250 instead of 834 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 834 shares (or 1,250 shares with respect to a Non-
Employee 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,
1998, there were 21,963 additional options available for grant under the
1993 Plan.
37
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
In 1998, the Board of Directors approved a program allowing employees to
exchange all options held for an equal number of replacement options at the
greater of (i) the then-current market price or (ii) $2.40 per share.
Participating employees received new stock options with an exercise price
of $2.40 per share and agreed to a new five-year vesting schedule (20% per
year) commencing on December 7, 1998. As a result, options for 296,495
shares were forfeited in exchange for new options to purchase the same
number of shares. The President of the Company excluded himself from
participating in the option exchange program.
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 1996, 1997 and
1998:
<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, 1995 134,906 $14.67 $1.20 - $43.50
Granted 129,985 $19.03 $11.76
Forfeited ( 5,220) $19.88
Exercised ( 4,336) $ 3.85
--------
Balance December 31, 1996 255,335 $16.96 $1.20 - $43.50
--------
Granted 229,255 $15.65 $ 8.04
Forfeited ( 94,077) $17.97
Exercised ( 6,116) $ 9.20
--------
Balance December 31, 1997 384,397 $16.06 $1.20 - $43.50
--------
Granted 404,000 $ 3.69 $ 1.60
Forfeited (343,192) $15.67
Exercised ( 134) $ 4.20
--------
Balance December 31, 1998 445,071 $ 5.16 $2.40 - $35.28
========
Exercisable at December 31, 1995 34,560 $14.18
Exercisable at December 31, 1996 55,629 $15.37
Exercisable at December 31, 1997 93,018 $16.77
</TABLE>
38
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The following table summarizes the information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life (Years) Price 1998 Price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.20 to $ 4.20 301,414 9.81 $ 2.41 5,003 $ 2.95
6.54 to 10.26 90,001 9.05 6.82 4,000 10.26
10.50 to 14.28 12,785 7.81 11.83 3,531 12.65
16.80 to 23.28 36,034 7.36 18.08 28,383 17.94
30.00 to 35.28 4,834 4.52 31.71 4,834 31.71
------------------------------------------------------------------------------------------------
$ 1.20 to $ 35.28 445,068 9.34 $ 5.16 45,751 $16.68
------------------------------------------------------------------------------------------------
</TABLE>
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 as all options have been granted at or greater than fair
market value. Had compensation costs for the above plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock Based Compensation", the Company's net loss
and net loss per share would have been increased to the pro forma amounts
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Pro forma net loss applicable to
Common Stock ($26,777,247) ($3,561,695) ($3,031,940)
Pro forma basic and diluted net loss per
share applicable to Common Stock ($6.80) ($1.07) ($1.60)
</TABLE>
As options vest over a varying number of years, and awards are generally
made each year, the pro forma impacts shown here are likely to increase
given the same level of activity in the future.
The pro forma compensation expense of $626,221, $471,509 and $351,525 for
1998, 1997 and 1996, respectively, was calculated based on the fair value
of each option grant using the Black-Scholes model with the following
weighted-average assumptions used for grants:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield 0 0 0
Expected volatility 51.2% 40.6% 41.9%
Risk free interest rate 4.99% 6.39% 6.53%
Expected option lives 6.5 years 6.5 years 6.5 years
</TABLE>
In May 1996, the Company issued warrants to purchase an aggregate of 33,334
shares of the Company's Common Stock at an exercise price of $15.00 per
share, including warrants to purchase 25,000 shares to a principal
stockholder. The warrants expire seven years from the date of issuance.
39
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
13. 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. Generally, the Company is not subject
to any royalty or exclusive license agreements arising from its research
and development contracts, except as described in Note 14.
14. 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 equipment.
Future minimum payments under capital and noncancelable operating leases
consisted of the following at December 31, 1998:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------- ----------
<S> <C> <C>
1999 $ 8,291 $1,320,748
2000 4,837 1,073,190
2001 - 752,539
2002 - 730,515
2003 - 603,592
Thereafter - 201,197
-------- ----------
Total minimum lease payments 13,128 $4,681,781
Less amount representing interest ( 1,262) ==========
--------
Present value of net minimum capital
lease payments $ 11,866
========
</TABLE>
Rent expense for operating leases was $1,655,676, $1,389,345 and $700,985
for the years ended December 31, 1998, 1997 and 1996, 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 5,834 shares of Common Stock valued at $3,500 as consideration
for the licenses. The licenses terminate in each
40
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
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 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
1998. At December 31, 1998, 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 where remediation work was
performed. This customer filed a claim against the Company for
professional malpractice, breach of warranty of professional services
contract and misrepresentation. 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, such other 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.
During 1998, the Company reached settlement on previously disclosed
litigation matters relating to services at customer sites. These
settlements did not have a material impact 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
contractor's pollution liability insurance, 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.
15. RELATED PARTY TRANSACTIONS
--------------------------
In April 1995, a former 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 23,334 shares of Common Stock at an exercise price of $7.50 per
share. The warrants expire five years from the date of issuance. In April
1995, the Company entered into
41
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
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 16,667 shares of Common
Stock at $16.92 per share to one of its directors under the 1990 Incentive
Stock Option and Non-Qualified Stock Option Plan. The options vested one
year from the date of grant and expire ten years from the date of issuance.
The director is an officer of a former principal stockholder.
In May 1996, a former principal stockholder of the Company acted as the
placement agent for the Company's private placement of 333,334 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 25,000 shares of the Company's Common Stock at an exercise
price of $15.00 per share. The warrants expire seven years from the date
of issuance.
In December 1996, the Company engaged a former 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 11). The
Company agreed to pay the stockholder $250,000. An officer of the
stockholder is also a director of the Company.
In April 1998, Robert S. Hillas, the Company's newly-appointed Chairman,
President and Chief Executive Officer, purchased 83,334 shares of Common
Stock from the Company at $7.50 per share in connection with the execution
of his employment agreement. The Company granted Mr. Hillas certain
registration rights with respect to such shares.
16. 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 Wisconsin and Illinois
Operations Group's. The Company's contribution expense related to the
401(k) savings plan was $77,573, $83,488 and $81,630 for the years ended
December 31, 1998, 1997 and 1996, respectively. There was no contribution
expense related to the profit sharing plan.
The Wisconsin and Illinois Operation Group's also have a 401(k) plan which
provides for employee salary deferral contributions. Substantially all
Wisconsin and Illinois employees are eligible to participate in this Plan.
No Company contributions have been made to this plan. The Company's 401(k)
plans were merged December 31, 1998 and the Company will make contributions
under the merged plan. The Company does not maintain other pension or
postretirement benefit plans.
17. 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 probability of loss.
42
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The Company maintains demand deposits with two major banks and money market
accounts with three financial institutions. At December 31, 1998 and 1997,
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, 1998, 1997 and 1996 was $2,248,509, $2,103,243 and $1,417,059,
respectively. These revenues are primarily from research and development
contracts.
18. SEGMENT INFORMATION
-------------------
In 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. The information for 1997 and 1996 has
been restated from the prior years' presentation in order to conform to the
1998 presentation.
The Company is organized primarily on the basis of products and services
being broken down into two reportable segments (i) commercial operations
and (ii) research and development services. The commercial operations
segment is comprised of a number of business units in various locations
which offer similar products and services to address the hazardous waste
clean-up and treatment needs of a variety of customers throughout the
United States. The Company offers products and services to provide its
customers with solutions across all types of matter (soil, water and air).
Usually, environmental problems affect more than one form of matter. As an
example, a clean-up project at an industrial facility may include the
following: 1) consulting services to define the problem and develop a
clean-up strategy; 2) design, install and operate a soil vapor extraction
system to remove contaminants from the soil; 3) design and installation of
air treatment systems to prevent atmospheric contamination; and 4) design
and installation of a ground water treatment system to treat pollutants
which have passed through the contaminated soil and into the ground water.
The research and development services segment identifies and develops
innovative techniques to address pollution problems. The primary source of
revenue for this segment consists of funding provided by third parties and
government agencies to perform contract research to identify the techniques
and technologies to address the problem, as opposed to commercial
utilization of those techniques. This segment includes a core group based
in the Company's Lawrenceville, New Jersey headquarters.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies" (see Note 2). The Company
evaluates the performance of its segments on income before marketing,
general and administrative expenses, income taxes, interest and other non-
operating income and expense items. Intersegment sales and transfers are
not significant.
43
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
<TABLE>
<CAPTION>
Information about reported segments for the years ended December 31, 1998,
1997 and 1996 are as follows:
Research and
Commercial Development
Operations Services Other Total
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
1998
----
Revenues $23,648,398 $2,572,479 - $ 26,220,877
Segment profit (loss) 2,704,261 (425,792) (28,429,495) (26,151,026)
Depreciation and amortization 278,293 159,434 263,653 701,380
1997
----
Revenues $23,044,622 $2,724,887 - $ 25,769,509
Segment profit (loss) 6,245,168 (5,324) (9,330,030) (3,090,186)
Depreciation and amortization 305,744 233,994 225,965 765,703
1996
----
Revenues $10,892,871 $2,026,723 - $ 12,919,594
Segment profit (loss) 565,911 (376,843) (2,869,483) (2,680,415)
Depreciation and amortization 400,190 277,983 118,876 797,049
The following table presents the details of "Other" segment for the years ended December 31,
1998, 1997 and 1996:
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Marketing, general and
administrative expenses ($ 6,928,628) ($ 9,356,153) ($ 2,958,780)
Impairment of long-lived assets (21,670,028) - -
Interest income 180,545 242,373 193,776
Interest expense (21,268) (31,800) (22,993)
Equity in income (loss) of joint-venture 13,688 (210,497) (52,629)
Preferred stock dividends - - (36,458)
Other, net (3,804) 26,047 7,601
------------- ------------- -------------
($ 28,429,495) ($ 9,330,030) ($ 2,869,483)
=========== ============= =============
</TABLE>
No customer accounted for more than 10% of the Company's revenues in 1998
or 1997. In 1996, one customer comprised 12% of the Company's revenues.
The Company's business is conducted principally in the United States.
Foreign revenues are not material. Asset information by reportable segment
is not reported as the Company does not produce such information
internally.
19. 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
44
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
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 9,690 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 16,667 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. Fees earned for providing services to MET
amounted to $152,242 for the year ended December 31, 1998 and $116,690 from
April 10, 1997 through December 31, 1997.
20. SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
-------------------------------------------------
Maintenance and repairs expense for the years ended December 31, 1998, 1997
and 1996 was $179,473, $225,248 and $79,325, respectively.
45
<PAGE>
Schedule II
ENVIROGEN, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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, 1998:
Allowance for doubtful accounts $ 605,963 $ 73,533 $139,952 $ 539,544
Tax valuation allowance 12,052,397 1,411,812 13,464,209
Reserve for claim adjustments
and warranties 2,577,218 2,324,823 751,908 4,150,133
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 $ 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
- --------------------------------------------------------------------------------------------------------------------
</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
46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Envirogen, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 49 present fairly, in all material
respects, the financial position of Envirogen, Inc. (the "Company") at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
on page 49 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. 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 financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 17, 1999
47
<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 13, 1999 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.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as a part of this Report.
[CAPTION]
<TABLE>
1. Financial Statements:
---------------------
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and 1997..................... 24
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996................................................. 25
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996............................. 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996................................................. 27
Notes to Consolidated Financial Statements....................................... 29
2. Financial Statement Schedules:
------------------------------
II. Valuation and Qualifying Accounts........................................... 46
Report of Independent Accountants................................................ 47
</TABLE>
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 ........................................... (4) (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............................................ (6) (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))
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Location
---------- ----------- --------
<S> <C> <C>
3.1(c) Certificate of Amendment to Amended and Restated
Certificate of Incorporation dated November 24, 1998 ......... (11) (Exh. 3)
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 ................ (3) (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 Envirogen, Inc. 1990 Incentive Stock Option and Non-
Qualified Stock Option Plan, as amended* ..................... (7) (Exh. 10.22)
10.4 Envirogen, Inc. 1993 Director's Non-Qualified Stock
Option Plan, as amended* ..................................... (5) (Exh. 10.27)
10.5 Securities Purchase Agreement dated January 14, 1997 by
and between Warburg, Pincus Ventures, L.P. and the
Company ...................................................... (6) (Exh. 2.2)
10.6 Employment Agreement dated April 10, 1997 between
the Company and William C. Smith* ............................ (8) (Exh. 10.1)
10.7(a) Employment Agreement dated April 10, 1997 between
the Company and Douglas W. Jacobson ("Jacobson Employment
Agreement")* ................................................. (8) (Exh. 10.2)
10.7(b) Amendment No. 1 dated November 3, 1998 to Jacobson
Employment Agreement* ........................................ (1)
10.8 Letter Agreement dated October 20, 1997 between
Harcharan S. Gill and the Company ............................ (9) (Exh. 10)
10.9 Employment Agreement dated April 16, 1998 between
the Company and Robert S. Hillas* ............................ (10) (Exh. 10)
21 Subsidiaries of the Company .................................. (1)
23 Consent of PricewaterhouseCoopers LLP ........................ (1)
24 Powers of Attorney ........................................... (1)
27 Financial Data Schedule ...................................... (1)
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
- ------------------------
<S> <C>
(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-Q for the quarter ended March 31, 1995.
(4) Incorporated by reference to the indicated exhibit to the Company's Report on Form
8-K filed January 5, 1996.
(5) Incorporated by reference to the indicated exhibit to the Company's Report on Form
10-K for the year ended December 31, 1995.
(6) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 14, 1997.
(7) Incorporated by reference to the indicated exhibit to the Company's Report on Form
10-K for the year ended December 31, 1996.
(8) Incorporated by reference to the indicated exhibit to the Company's Report on Form
10-Q for the quarter ended June 30, 1997.
(9) Incorporated by reference to the indicated exhibit to the Company's Report on Form 8-K
filed October 20, 1997.
(10) Incorporated by reference to the indicated exhibit to the Company's Report on Form 8-K
filed April 16, 1998.
(11) Incorporated by reference to the indicated exhibit to the Company's Report on Form 8-K
filed November 24, 1998.
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
</TABLE>
On October 28, 1998, the Company filed a Report on Form 8-K reporting
an announcement that its Board of Directors had approved a one-for-
six reverse split of the Company's common stock, subject to
stockholder approval.
On November 24, 1998, the Company filed a Report on Form 8-
K reporting that its stockholders had approved an amendment to the
Company's Amended and Restated Certificate of Incorporation to effect
a one-for-six reverse split of the Company's common stock.
51
<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.
<TABLE>
<CAPTION>
Envirogen, Inc.
<S> <C>
Dated: March 29, 1999 By: /s/ Robert S. Hillas
--------------------------------
Robert S. Hillas
President
</TABLE>
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 29th day of March, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Robert S. Hillas* President, Chief Executive Officer and Chairman of the Board
------------------------------------------- (Principal Executive Officer)
Robert S. Hillas
/s/ Mark J. Maten Vice President of Finance and Chief Financial Officer
------------------------------------------- (Principal Financial and Accounting Officer)
Mark J. Maten
Robert F. Hendrickson* Director
---------------------------------------------
Robert F. Hendrickson
Robert F. Johnston* Director
-------------------------------------------
Robert F. Johnston
Nicholas J. Lowcock* Director
-------------------------------------------
Nicholas J. Lowcock
Robert C. Miller* Director
--------------------------------------------
Robert C. Miller
Peter J. Neff* Director
------------------------------------------
Peter J. Neff
William C. Smith* Director
-------------------------------------------
William C. Smith
</TABLE>
- ------------------
*Robert S. Hillas, 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/ Robert S. Hillas
----------------------------------
Robert S. Hillas
52
<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, (4) (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, (6) (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))
3.1(c) Certificate of Amendment to Amended and Restated Certificate of
Incorporation dated November 24, 1998, (11) (Exh. 3)
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, (3) (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 Envirogen, Inc. 1990 Incentive Stock Option and Non-Qualified Stock
Option Plan, as amended*, (7) (Exh. 10.22)
10.4 Envirogen, Inc. 1993 Director's Non-Qualified Stock Option Plan, as
amended*, (5) (Exh. 10.27)
10.5 Securities Purchase Agreement dated January 14, 1997 by and between
Warburg, Pincus Ventures, L.P. and the Registrant, (6) (Exh. 2.2)
10.6 Employment Agreement dated April 10, 1997 between the Company and
William C. Smith*, (8) (Exh. 10.1)
10.7(a) Employment Agreement dated April 10, 1997 between the Company and
Douglas W. Jacobson ("Jacobson Employment Agreement")*, (8) (Exh.
10.2)
10.7(b) Amendment No. 1 dated November 3, 1998 to Jacobson Employment
Agreement*, (1)
53
<PAGE>
Exhibit No. Description
----------- -----------
10.8 Letter Agreement dated October 20, 1997 between Harcharan S. Gill
and the Company, (9) (Exh. 10)
10.9 Employment Agreement dated April 16, 1998 between the Company and
Robert S. Hillas*, (10) (Exh. 10)
21 Subsidiaries of the Company, (1)
23 Consent of PricewaterhouseCoopers LLP, (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-Q for the quarter ended March 31, 1995.
(4) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 5, 1996.
(5) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1995.
(6) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 14, 1997.
(7) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1996.
(8) Incorporated by reference to the indicated exhibit to the Company's
Report on form 10-Q for the quarter ended June 30, 1997.
(9) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed October 20, 1997.
(10) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed April 16, 1998.
(11) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed November 24, 1998.
* Indicates a management contract or compensatory plan or arrangement.
54
<PAGE>
Exhibit 10.7(b)
AMENDMENT NO. 1 TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT is made as of this 3rd day
of November, 1998 between Envirogen, Inc., a Delaware corporation ("Envirogen"),
and Douglas W. Jacobson (the "Executive").
WHEREAS, Envirogen and Executive entered into an Employment Agreement dated
as of April 10, 1997 (the "Agreement").
WHEREAS, Envirogen and Executive now desire to amend the Agreement as
provided herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and legal
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto agree as follows.
1. The letter from Envirogen to Executive dated September 28, 1998
notifying Executive of Envirogen's determination not to renew the Agreement is
hereby rescinded.
2. Section 1.B of the Agreement is hereby amended to read in its entirety
as follows:
"B. Expiration Date. The employment of the Executive by Envirogen shall
---------------
be for the period commencing on the date hereof and expiring on December 31,
1999 (the "Expiration Date"), unless such employment shall have been sooner
terminated as hereinafter set forth. As used herein, the term "Contract Year"
means the twelve-month period beginning April 10 of each year this Agreement is
in effect."
3. The first paragraph of Section 2 of the Agreement is hereby amended to
read in its entirety as follows:
"2. POSITION AND DUTIES. The Executive shall serve the Fluid Management
Operations Group of Envirogen and/or Envirogen in the capacity of Senior
Vice President of Envirogen, and shall report to, be accountable to and
subject to the supervision of, and shall also have such powers, duties and
responsibilities as may from time to time be prescribed by, the Chief
Executive Officer of Envirogen, provided that such powers, duties and
responsibilities are not inconsistent with the Executive's position and
those duties set forth herein and in the bylaws of Envirogen."
4. Section 5.D of the Agreement is hereby amended by adding the following
clause at the end of the second sentence thereof:
"or (E) any requirement or written demand by Envirogen to relocate the
Executive's principal place of employment outside of the Milwaukee, Wisconsin
area without the written consent of the Executive."
5. Section 6 of the Agreement is hereby amended to read in its entirety as
follows:
"6. COMPENSATION UPON TERMINATION
A. Death or Incapacity. Notwithstanding any other provision of this
-------------------
Agreement, if the Executive's employment shall be terminated by reason of his
death or incapacity, Envirogen shall pay or cause to be paid all sums accrued
and unpaid to the Date of Termination under Sections 3.A, 3.C, 3.D
55
<PAGE>
and 3.E hereof (in respect of accrued and unused vacation). In the event of the
Executive's death, unexpired stock options held at his death shall remain
exercisable for such period or periods as are set forth in the plan or plans
under which they were granted. In the event of termination by reason of
incapacity, Envirogen shall continue to pay the Executive the Base Salary as
then in effect through December 31, 1999 and shall continue in effect through
December 31, 1999 all medical and life insurance which was maintained by
Envirogen for the benefit of the Executive on the Date of Termination.
B. Cause or Executive's Termination other than for Good Reason.
-----------------------------------------------------------
Notwithstanding any other provision of this Agreement, if Envirogen shall
terminate the Executive's employment for Cause, or if the Executive shall
terminate his employment other than for Good Reason, then (i) Envirogen shall
pay to the Executive all sums accrued and unpaid to the Date of Termination
under Sections 3.A, 3.C, 3.D and 3.E hereof (in respect of accrued and unused
vacation); (ii) Envirogen shall permit the Executive to exercise any stock
options vested to the Date of Termination to the extent permitted by the terms
of such options; (iii) the covenants of Executive set forth in Sections 5.16(a)
and (c) of the Agreement and Plan of Merger dated as of January 17, 1997 between
Envirogen, FMI and all of the stockholders of FMI, including Executive (the
"Merger Agreement"), shall apply only until the second anniversary of the Date
of Termination; and (iv) Envirogen shall have no further obligations to the
Executive under this Agreement after the Date of Termination.
C. Good Reason or Other Termination. If Envirogen shall terminate the
--------------------------------
Executive's employment other than pursuant to Sections 5.A, 5.B or 5.C hereof
(it being agreed that the expiration of Executive's employment term on the
Expiration Date shall not constitute termination by Envirogen), or if the
Executive shall terminate his employment for Good Reason, then (i) Envirogen
shall pay to the Executive all sums accrued and unpaid to the Date of
Termination under Sections 3.A, 3.C, 3.D and 3.E hereof (in respect of accrued
and unused vacation); (ii) Envirogen shall pay severance pay to Executive, bi-
weekly through December 31, 1999, at a rate equal to Executive's Base Salary as
in effect on the Date of Termination; (iii) Envirogen shall continue through
December 31, 1999 all medical and life insurance benefits maintained by it for
the benefit of the Executive on the Date of Termination; (iv) all options held
by the Executive which would vest on or before December 31, 1999 shall become
exercisable on the Date of Termination; and (v) the covenants of Executive set
forth in Section 4.A of this Agreement and in Sections 5.16(a) and (c) of the
Merger Agreement shall terminate on the Date of Termination. The payments
provided for in this paragraph under the circumstances set forth in this
paragraph shall constitute the sole obligation of Envirogen to the Executive for
any termination of Employment referred to in this paragraph."
6. Except as amended hereby, all other provisions of the Agreement shall
remain in full force and effect. Terms used but not otherwise defined herein
shall have the same meanings as set forth in the Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of
the date first above written.
ENVIROGEN, INC.
By: /s/ Robert S. Hillas
-----------------------------
Robert S. Hillas
President and Chief Executive Officer
/s/ Douglas W. Jacobson
-------------------------------
Douglas W. Jacobson
56
<PAGE>
Exhibit 21
ENVIROGEN, INC. - SUBSIDIARIES OF THE COMPANY
MWR, Inc., a Michigan corporation, was acquired by the Company on February 9,
1996.
57
<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 17, 1999,
on our audits of the consolidated financial statements and financial statement
schedule of Envirogen, Inc. as of December 31, 1998 and 1997, and the years
ended December 31, 1998, 1997 and 1996, which report is included in this Annual
Report on Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 29, 1999
58
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert S. Hillas 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, 1998, 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
26th day of March, 1999.
/s/ Robert F. Hendrickson
-------------------------
Robert F. Hendrickson
59
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert S. Hillas 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, 1998, 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
26th day of March, 1999.
/s/ Robert F. Johnston
----------------------
Robert F. Johnston
60
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert S. Hillas 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, 1998, 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
26th day of March, 1999.
/s/ Nicholas J. Lowcock
-----------------------
Nicholas J. Lowcock
61
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert S. Hillas 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, 1998, 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
26th day of March, 1999.
/s/ Robert C. Miller
-----------------------
Robert C. Miller
62
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert S. Hillas 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, 1998, 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
26th day of March, 1999.
/s/ Peter J. Neff
----------------------
Peter J. Neff
63
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below constitutes and appoints Robert S. Hillas 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, 1998, 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
26th day of March, 1999.
/s/ William C. Smith
-------------------------
William C. Smith
64
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