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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, 1999
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
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(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.
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The aggregate market value of the registrant's Common Stock (its only
voting stock) held by non-affiliates of the registrant as of February 25, 2000
was approximately $9,830,518. (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 25, 2000 was 3,966,670.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating to
its scheduled May 18, 2000 Annual Meeting of Stockholders (which proxy statement
is expected to be filed with the Commission not later than 120 days after the
end of the registrant's last fiscal year) are incorporated by reference in Part
III of this report.
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PART I
ITEM 1. BUSINESS
Envirogen, Inc. ("Envirogen" or the "Company") is 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. 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. 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.
While the activities of the Company are principally commercial remediation, a
portion of the activities of the Company to date have 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 the Envirex Division of United States Filter
Corporation ("US Filter") to jointly pursue opportunities in the treatment of
ammonium perchlorate, a component in rocket fuel, and methyl-tert-butyl-ether
("MTBE"), a gasoline additive. In February 1999, Envirogen expanded its
relationship with the Davis Process Division of 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.
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. Increasingly, the Company is identifying and focusing its marketing
efforts on markets that are distinguished by specific compounds such as MTBE or
ammonium perchlorate. In these markets, the Company has technological solutions
that offer advantages over competitive technologies. Envirogen's primary
business areas are described as follows.
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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 molecular make-up of a
contaminant, the more easily and quickly it will be degraded by bacteria that
use the contaminant as a "food source." For instance, when hydrocarbon-based
compounds such as gasoline or heating oil are spilled 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 of intervention ranges from the relatively
subtle, such as biostimulation (stimulating indigenous bacteria) and
bioaugmentation (injecting bacteria isolated 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. 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
Company has recently developed commercial in situ capabilities for destruction
of MTBE and trichloroethylene ("TCE"). The scope of Envirogen's economical in
situ capabilities has been 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 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,
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Envirogen provides specialized remediation services, including all aspects of
underground and aboveground storage tank management, a broad range of
engineering and construction services, air permitting, compliance management,
storm water management, complete solid waste services, landfill engineering and
waste characterization.
Envirogen's 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, such as MTBE, which
are difficult to degrade. 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 the installation in 1998
of an FBR system 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 groundwater.
Ammonium perchlorate is associated with a number of industries and has
been identified as a groundwater contaminant in 46 states. During 1999,
the Company was awarded a contract to provide an FBR system to treat
groundwater leachate on the site of a former manufactured gas plant for an
electric utility. The Company believes these systems have applications in
a number of industries including petrochemicals, pharmaceuticals, pulp and
paper, and industries using paints or solvents.
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. Membrane Bioreactor - The membrane bioreactor ("MBR") consists of a
liquid-phase bioreactor coupled with a membrane clarification unit.
Following the biological treatment of the contaminated stream, the
contents of the bioreactor are pumped to the membrane unit where the
solids and liquids are separated with clean effluent being discharged and
biomass being recycled back into the bioreactor. During 1999, the Company
developed and began offering a line of modular transportable membrane
biological reactor ("TIMBR") systems. These systems incorporate
proprietary designs and certain features for which a patent application
has been filed. The first TIMBR unit was delivered in 1999 to an
industrial/municipal wastewater treatment facility. Also, the Company
designed an MBR system to treat landfill leachate and other wastewaters as
part of a 13-acre pretreatment facility under construction by a
municipality. 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.
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 are attached to either an organic or inorganic
filter media and 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 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.
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Envirogen offers a line of patented modular biofiltration systems and other
technologies for the treatment of odors, air toxics and volatile organic
compounds for specific segments of the air pollution control market. These
technologies, combined with the customized biofilter and biotrickling filter
designs of Envirogen, underscore Envirogen's goal to attain a leadership
position in the biological air pollution control market. 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 to $1.8 million. In prior years, the Company designed and built
biofilters for a decorative hardwood panel manufacturer and for a synthetic
sponge manufacturer. During 1998 and 1999, 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 operates for the
Municipal Authority of Rockland County in New York.
In February 1999, Envirogen expanded its relationship with the Davis Process
Division of 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 1999, Envirogen spent
approximately $3.0 million on research and development projects, approximately
$2.9 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 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 MTBE, PCBs, TCE, chloroform and other chlorinated solvents,
hydrochlorofluorocarbons ("HCFCs," ozone-depleting refrigerants) and
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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.
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. Envirogen successfully completed a field demonstration of
its MTBE bioremediation technology and believes that the technology provides a
mechanism to remove MTBE from contaminated groundwater on a cost-effective
basis.
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. Throughout it's history the Company has been awarded numerous Phase
I and Phase II SBIRs for the development of advanced technologies. In 1999, the
Company performed a project for the Department of Defense ("DOD"), to develop
and field test a biotrickling filter for treating air containing paint and
paint-stripping solvents. Another SBIR was awarded in 1998, also for the DOD, to
continue development of an in situ biotreatment process for chlorinated solvents
using biostimulation.
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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 for safer, more responsive commercial
applications. The result is a cleaner environment achieved at a cost which is
reasonable for government and 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 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 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 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.
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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.
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 material 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
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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 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 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
MTBE and/or 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.
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Employees
As of December 31, 1999, Envirogen had 161 full-time employees, including 94 in
engineering, 23 in research and development, 32 in administration and finance
and 12 in marketing. Doctoral degrees are held by 11 employees and encompass the
disciplines of biochemistry, molecular biology, chemical engineering, civil
engineering, environmental engineering, hydrologic science, 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 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, research and
pilot facilities and for its commercial operations. The Company also leases an
aggregate of approximately 48,100 square feet of office and warehouse space for
its administrative and commercial operations 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.
11
<PAGE>
The Company is subject to claims and lawsuits in the ordinary course of its
business. In the opinion of management, such claims are either adequately
covered by insurance or, if not insured, will not individually or in the
aggregate result in a material adverse effect on the consolidated financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
12
<PAGE>
Additional Information
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:
Executive Officers of the Company
The executive officers of the Company serve at the discretion of the Board of
Directors. There are no family relationships between any of the executive
officers of the Company. The following information indicates the position and
age of the Company's executive officers as of the date of this report and their
previous business experience.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert S. Hillas 51 President, Chief Executive Officer and
Chairman of the Board
Ronald Unterman, Ph.D. 54 Senior Vice President and Chief
Scientific Officer
Mark J. Maten 42 Vice President, Finance and Chief
Financial Officer
David N. Enegess 53 Vice President Systems Sales and Services
Richard W. Schowengerdt 44 Vice President Wisconsin 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"), an investment
banking firm, 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. Mr. Hillas received his
undergraduate degree from Dartmouth College and a Masters in Business
Administration from Stanford University.
Ronald Unterman, Ph.D., 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 is also a director of About.com, Inc. 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 in January 1998 as Vice President, Finance and
Chief Financial Officer. From February 1997 until December 1997, Mr. Maten
served as a business 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 from Indiana University.
13
<PAGE>
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 in June 1988, 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.
Richard W. Schowengerdt joined the Company when Fluid Management, Inc. ("FMI"),
a full-service environmental consulting and engineering firm of which he was a
founder, was acquired by the Company in April 1997, and served as Vice President
of Design Engineering until May 1999. Mr. Schowengerdt was named Vice President
Wisconsin Operations in May 1999. He served as Vice President of Technical
Development at FMI since 1990. Mr. Schowengerdt's background includes management
and technical expertise in construction, engineering, geology and hydrogeology.
Mr. Schowengerdt received a B.S. in hydrology from Michigan Technological
University.
14
<PAGE>
PART II
ITEM 5. MARKET 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.
1999 HIGH LOW
---- ---- ---
1st Quarter $ 1.88 $1.09
2nd Quarter $ 1.75 $0.88
3rd Quarter $ 1.66 $0.75
4th Quarter $ 1.69 $0.81
1998
----
1st Quarter $ 9.75 $6.19
2nd Quarter $12.19 $6.57
3rd Quarter $ 7.88 $2.25
4th Quarter $ 3.00 $1.00
The closing price for the Common Stock on February 25, 2000 was $4.19. 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 February 7, 2000 was 219, which
includes stockholders whose shares were held in nominee name. The number of
beneficial stockholders at that date was over 1,600.
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,
-----------------------------------------------------------------------------------
1999 1998/(1)/ 1997/(2)/ 1996/(3)/ 1995
-------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues $24,049,968 $26,220,877 $25,769,509 $12,919,594 $ 8,033,698
Costs and expenses 25,601,135 52,541,064 28,885,818 15,689,306 10,279,694
Interest, net 134,765 159,277 210,573 170,783 169,972
Equity in (loss) income
of joint ventures (393) 13,688 (210,497) (52,629) (93,437)
Other, net (7,604) (3,804) 26,047 7,601 16,961
------------ ------------- ------------- ------------- -------------
Net loss (1,424,399) (26,151,026) (3,090,186) (2,643,957) (2,152,500)
Preferred stock
dividends - - - (36,458) (233,333)
------------ ------------- ------------- ------------- -------------
Net loss applicable to
Common Stock ($ 1,424,399) ($26,151,026) ($ 3,090,186) ($ 2,680,415) ($ 2,385,833)
============ ============= ============= ============= =============
Basic and diluted net
loss per share
applicable
to Common Stock(4) ($0.36) ($6.64) ($0.93) ($1.41) ($1.87)
============ ============= ============= ============= =============
<CAPTION>
Summary of Financial Position
December 31,
-----------------------------------------------------------------------------------
1999 1998 1997/(2)/ 1996/(3)/ 1995
-------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Total assets $ 16,370,865 $ 17,945,879 $ 42,727,012 $ 12,716,624 $ 8,585,233
Working capital 4,786,503 5,151,482 8,099,057 7,094,266 4,934,700
Long-term obligations - 4,644 12,671 42,176 60,951
Redeemable convertible
Preferred Stock - - - - 1,728,621
Stockholders' equity 7,093,390 8,461,789 33,992,254 10,047,233 4,863,357
</TABLE>
_____________
(1) Costs and expenses for 1998 includes a non-cash charge of $21,670,028
representing the impairment of goodwill associated with the FMI
acquisition.
(2) The financial data for 1997 includes the results of operations of FMI
(acquired April 10, 1997) from the date of acquisition.
(3) The financial data for 1996 includes the results of operations of MWR
(acquired February 9, 1996) from the date of acquisition.
(4) 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.
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 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
revenues from sales of full-scale biological degradation systems for the
treatment of contaminated air and water. Although full-scale commercial systems
have been installed for each current reactor type, additional expenditures will
be required for continued research and development and additional marketing
activities for the further commercialization of the Company's biodegradation
systems is planned. The amount and timing of such expenditures cannot be
predicted and 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.
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 and Illinois Divisions. Remediation services and
installation of traditional remediation systems are the Divisions' core business
and generate the greatest portion of the Divisions' 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
Wisconsin Division's clients (or their lending banks) are entitled to seek
reimbursement for a majority of the remediation costs paid to the Wisconsin
Division. 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 Wisconsin
Division'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 Wisconsin Division has historically reimbursed its
clients (or their lending banks) for the remediation costs for services provided
by the Wisconsin Division which ultimately were determined by DCOM to be
ineligible for reimbursement under PECFA. Since the Company acquired FMI, the
Company has reimbursed its clients and their lending banks an aggregate of
$1,343,311. At December 31, 1999, the Company had $3,328,034 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.
17
<PAGE>
On April 17, 1998, the State of Wisconsin adopted emergency rules ("Emergency
Rules") with regard to PECFA which effectively reduced the expected revenue per
site that the Wisconsin Division 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, because 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 have been 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 Division.
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 Division 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.
Results of Operations
- ---------------------
1999 Compared to 1998
- ---------------------
For the year ended December 31, 1999, the Company's total revenues decreased 8%
to $24,049,968 from $26,220,877 in 1998. The net loss decreased 95% to
$1,424,399 from $26,151,026 in 1998, while the basic and diluted net loss per
share was $0.36 compared to $6.64 in 1998. The 1998 net loss included a goodwill
impairment charge of $21,670,028, or approximately $5.50 per share.
Commercial revenues (net of reserves for ineligible PECFA claims) decreased 11%
in 1999 to $21,114,503 from $23,648,398 in 1998. The decreased commercial
revenues are due primarily to reduced revenue under the PECFA program related to
the adoption of the Emergency Rules in April 1998.
Revenues from corporate research and development contracts increased in 1999 by
14% to $2,935,465 from $2,572,479 in 1998. Revenues increased primarily due to
the timing of work associated with Phase II government projects on which the
Company worked in 1999.
Total costs and expenses decreased to $25,601,135 in 1999 from $52,541,064 in
1998. The 1998 costs included the impairment charge of $21,670,028. Exclusive of
the impairment charge, total costs and expenses decreased 17% for 1999. The cost
of commercial operations decreased 14% to $17,973,543 during 1999 from
$20,944,137 in 1998 due primarily to decreased revenue levels. Research and
development expenses decreased 1% to $2,981,959 during 1999 from $2,998,628 in
1998. Marketing, general and administrative expenses decreased 33% to $4,645,633
from $6,928,628 due primarily to ongoing cost reduction programs, continuing
headcount reductions and purchasing efficiencies. As discussed above, in 1998
the Company recorded a charge of $21,670,028 for impairment of goodwill due to
significant changes in the PECFA
18
<PAGE>
program that occurred in April 1998 and that have negatively impacted the
performance of the Wisconsin Division.
Interest income decreased 18% to $148,531 in 1999 from $180,545 in 1998, due
primarily to the decreased average cash available for investment.
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 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
Division. An analysis of trends indicated an increase in the claims that DCOM
was 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 was 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 82% 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
$20,994,137 in 1998 due to the inclusion of expenses of the Wisconsin Division
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.
19
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company has funded its operations to date primarily through revenues from
commercial services, sales of biodegradation systems, public offerings and
private placements of equity securities, research and development agreements
with major industrial companies and research grants from government agencies. At
December 31, 1999, the Company had cash and cash equivalents of $4,527,979 and
working capital of $4,786,503. Cash and cash equivalents increased $1,120,069
from December 31, 1998 to December 31, 1999 due primarily to cash provided by
operations of $1,182,285 and proceeds from the dissolution of the Company's
interest in Miller Environmental Technologies L.L.C. ("MET") of $174,653, offset
by capital expenditures of $245,485.
From December 31, 1998 to December 31, 1999, accounts receivable decreased by
$421,518 primarily as a result of reduced revenues and improved collections. In
the same period, accounts payable increased by $750,909 due to shifts in the
timing of project expenses and related subcontractor charges. Accrued expenses
and other liabilities decreased by $179,654 from December 31, 1998 to December
31, 1999 primarily due to the payment in the first quarter of 1999 of certain
deferred compensation related to prior years, the payment of accrued severance
and the timing of professional fees, which were partially offset by an accrual
for payments associated with the dissolution of the MET joint venture. At
December 31, 1999, the Company had $3,596,136 in reserve for claim adjustments
and warranties, $3,328,034 of which is available with respect to potential PECFA
claim adjustments related to approximately $56 million in unsettled PECFA
submittals and $268,102 of which is available with respect to potential systems
warranty claims and other contract issues.
It is anticipated that the Company's currently available cash, 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, 1999, the Company had a net operating loss carry forward of
approximately $25 million for federal income tax reporting purposes available to
offset future taxable income, if any, through 2019. 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.
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, as amended, effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1,
2001 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. The
implementation of SFAS 133 is not expected to have a material impact on the
Company's consolidated results of operations, financial position or cash flows.
20
<PAGE>
Impact of Year 2000
- -------------------
During 1999, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company spent
approximately $50,000 during 1999 in connection with remediating its systems.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has limited exposure to financial market risks, including changes in
interest rates. At December 31, 1999, all available excess funds are cash or
cash equivalents whose value is not subject to changes in interest rates. The
Company currently holds no derivative instruments and does not earn foreign-
source income.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,527,979 $ 3,407,910
Accounts receivable, net of allowance for doubtful
accounts of $740,522 in 1999 and $539,544 in 1998 5,906,081 6,327,599
Unbilled revenue 3,128,747 4,028,183
Inventory 43,415 185,553
Prepaid expenses and other current assets 457,756 681,683
------------ ------------
Total current assets 14,063,978 14,630,928
Property and equipment, net 1,128,562 1,478,003
Restricted cash 309,300
Investment in and advances to joint venture 101,336
Intangible assets, net 957,716 1,183,024
Other assets 220,609 243,288
------------ ------------
Total assets $ 16,370,865 $ 17,945,879
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 4,192,023 $ 3,441,114
Accrued expenses and other liabilities 942,263 1,121,917
Reserve for claim adjustments and warranties 3,596,136 4,150,133
Deferred revenue 542,409 759,060
Current portion of capital lease obligations 4,644 7,222
------------ ------------
Total current liabilities 9,277,475 9,479,446
Capital lease obligations, net of current portion 4,644
------------ ------------
Total liabilities 9,277,475 9,484,090
------------ ------------
Commitments and contingencies (see Note 14)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value (2,000,000 shares
authorized; none issued)
Common stock, $.01 par value (50,000,000 shares
authorized; 3,975,868 issued at December 31,
1999 and 1998) 39,759 39,759
Additional paid-in capital 59,727,189 59,671,189
Accumulated deficit (52,667,608) (51,243,209)
Less: Treasury stock, at cost (9,917 shares at
December 31, 1999 and 1998) (5,950) (5,950)
------------ ------------
Total stockholders' equity 7,093,390 8,461,789
------------ ------------
Total liabilities and stockholders' equity $ 16,370,865 $ 17,945,879
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997
----------------- --------------- --------------
<S> <C> <C> <C>
Revenues:
Commercial operations $ 21,114,503 $ 23,648,398 $ 23,044,622
Research and development services 2,935,465 2,572,479 2,724,887
---------------- -------------- -------------
Total revenues 24,049,968 26,220,877 25,769,509
---------------- -------------- -------------
Cost of commercial operations 17,973,543 20,944,137 16,799,454
Research and development costs 2,981,959 2,998,271 2,730,211
Marketing, general and administrative expenses 4,645,633 6,928,628 9,356,153
Impairment of long-lived assets 21,670,028
---------------- -------------- -------------
Total costs and expenses 25,601,135 52,541,064 28,885,818
---------------- -------------- -------------
Other income (expense):
Interest income 148,531 180,545 242,373
Interest expense (13,766) (21,268) (31,800)
Equity in (loss) income of joint ventures (393) 13,688 (210,497)
Other, net (7,604) (3,804) 26,047
---------------- -------------- -------------
Other income, net 126,768 169,161 26,123
---------------- -------------- -------------
Net loss $ (1,424,399) $(26,151,026) $ (3,090,186)
================ ============== =============
Basic and diluted net loss per share $ (0.36) $ (6.64) $ (0.93)
================ ============== =============
Weighted average number of shares of
Common Stock used in computing basic
and diluted net loss per share 3,965,951 3,940,269 3,340,336
================ ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated Treasury Stock
--------------------------- ---------------------------
Shares Amount Capital Deficit Shares Amount
------------- ------------ ---------------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 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)
Net loss (1,424,399)
Deferred fees 56,000
------------- ------------ ---------------- -------------- ------------ ----------
Balance at December 31, 1999 3,975,868 $39,759 $59,727,189 $ (52,667,608) (9,917) $ (5,950)
============= ============ ================ ============== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($1,424,399) ($26,151,026) ($3,090,186)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 796,792 1,336,935 1,826,595
Provision for claim adjustments and warranties 393,148 2,324,823 930,783
Provision for doubtful accounts 312,280 73,533 512,225
Deferred fees 56,000
Equity in loss (income) of loss of joint ventures 393 (13,688) 210,497
Impairment of long-lived assets 21,670,028
Other 7,604 3,811 3,707
Changes in operating assets and liabilities, net of the effect of
acquisitions and dissolutions:
Accounts receivable 109,238 576,029 (71,951)
Unbilled revenue 899,436 185,470 (696,417)
Inventory 142,138 63,159 7,817
Prepaid expenses and other current assets 253,159 (163,723) (184,631)
Restricted cash 309,300
Other assets 22,679 19,448 (76,824)
Accounts payable 750,909 (8,398) (941,189)
Accrued expenses and other liabilities (282,596) (826,298) 422,812
Reserve for claim adjustments and warranties (947,145) (751,908) (334,383)
Deferred revenue (216,651) 28,695 405,460
------------- -------------- --------------
Net cash provided by (used in) operating activities 1,182,285 (1,633,110) (1,075,685)
------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures (245,485) (453,307) (557,635)
Investment in and advances to joint venture (304,770)
Direct costs relating to purchase of remaining 50% interest
in joint venture (6,629)
Acquisition of Fluid Management, Inc. (13,574,197)
Proceeds from the dissolution of joint venture 174,653
Proceeds from sale of property and equipment 15,838 27,690 22,004
------------- -------------- --------------
Net cash used in investing activities (54,994) (425,617) (14,421,227)
------------- -------------- --------------
Cash flows from financing activities:
Debt repayment (4,287)
Capital lease principal repayments (7,222) (17,582) (18,810)
Net proceeds from exercise of stock options 561 56,229
Net proceeds from issuance of Common Stock 620,000 15,713,376
------------- -------------- --------------
Net cash (used in) provided by financing activities (7,222) 602,979 15,746,508
------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 1,120,069 (1,455,748) 249,596
Cash and cash equivalents at beginning of year 3,407,910 4,863,658 4,614,062
------------- -------------- --------------
Cash and cash equivalents at end of year $4,527,979 $3,407,910 $4,863,658
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
- -------------------------------------------------
Cash paid for interest $20,925 $29,251 $ 21,304
============= ============== ==============
Cash (refunded) paid for income taxes ($ 7,264) ($94,152) $112,354
============= ============== ==============
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
- -----------------------------------------------------------------------
- -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.
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
1. Business and Organization
-------------------------
Envirogen, Inc. ("Envirogen" 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 and Illinois Divisions". 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. While the Company has
realized 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 revenues from sales of full-scale
biological degradation systems for the treatment of contaminated air and
water. Although full-scale commercial systems have been installed for each
current reactor type, additional expenditures will be required for continued
research and development and additional marketing activities for the further
commercialization of the Company's biodegradation systems is planned. 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
its wholly-owned subsidiary, MWR, Inc. ("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.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates in the preparation of these financial
statements include provisions made for doubtful accounts, reserve for claim
adjustments and warranties and amortization periods for intangibles.
27
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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, ranging from 5 to
20 years. 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 established 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. At
December 31, 1999, the Company had $3,328,034 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
28
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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.
The Company also had $268,102 in reserves at December 31, 1999 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.
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, 1999 of $55,766 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, 1999.
Research and Development
All costs relating to research and development activities are expensed as
incurred.
Per Share Data
Basic per share amounts are computed by dividing net loss applicable to
common stock by the weighted average number of common shares outstanding
during the period. Diluted per share amounts are computed by dividing net
loss applicable to common stock by the weighted average number of common
shares outstanding plus the dilutive effect of common share equivalents.
Since the Company incurred net losses for all periods presented, both basic
and diluted per share calculations are the same. Accordingly, options,
warrants and other rights to purchase 499,719, 501,739 and 631,911 shares
of common stock that were outstanding at December 31, 1999, 1998
29
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
and 1997, 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 prior period
references 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 Statement of Financial
Accounting Standards 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).
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, as amended, is
effective for all fiscal quarters of all fiscal years beginning after June
15, 2000 (January 1, 2001 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. The implementation of SFAS 133 is not
expected to have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
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" ("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 (see Note 10).
30
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
3. Business Acquisitions
---------------------
On April 10, 1997, the Company acquired Fluid Management, Inc. ("FMI") 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, Onalaska, Ashwaubenon and Mosinee, Wisconsin and St.
Charles, Illinois, is now operated as the Wisconsin and Illinois Divisions.
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.
4. Impairment of Long-Lived Assets
-------------------------------
In April 1997, the Company acquired FMI, now known as the Wisconsin and
Illinois Divisions. The majority of the Wisconsin Division 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 Division 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 Division 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.
31
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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 trends at that time 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 in
1998.
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.
6. Property and Equipment
----------------------
Property and equipment, net at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Computer equipment $ 681,101 $ 610,678
Acquired computer software 556,006 550,385
Vehicles 42,300 42,300
Laboratory and field equipment 2,582,717 2,566,452
Equipment and vehicles under
capital leases 598,975 598,975
Furniture and office equipment 630,299 569,319
Leasehold improvements 583,204 568,203
Construction in progress 4,850 14,659
--------- ---------
5,679,452 5,520,971
Less: Accumulated depreciation and
amortization 4,550,890 4,042,968
---------- ----------
$1,128,562 $1,478,003
========== ==========
</TABLE>
Accumulated amortization on equipment under capital leases amounted to
$594,544 and $584,173 at December 31, 1999 and 1998, respectively.
Depreciation expense amounted to $553,480, $641,957 and $647,569 for the
years ended December 31, 1999, 1998 and 1997, respectively. Amortization
expense on equipment under capital leases and leasehold improvements
amounted to $18,004, $59,423 and $118,134 for the years ended December 31,
1999, 1998 and 1997, respectively. No interest has been capitalized in
1999, 1998 or 1997.
32
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
7. Restricted Cash
---------------
At December 31, 1998, the Company had $309,300 of restricted cash
classified as a non-current asset. These funds served as collateral on a
performance bond for a major contract. In 1999 the project was completed
and the restriction on the collateral was lifted.
8. Intangible Assets
-----------------
Intangible assets, net at December 31, 1999 and 1998 consisted of the
following:
1999 1998
---------- ----------
Goodwill $1,431,700 $1,431,700
Patents 222,611 222,611
Covenant not to compete 232,000 232,000
---------- ----------
1,886,311 1,886,311
Less: Accumulated amortization 928,595 703,287
---------- ----------
$ 957,716 $1,183,024
========== ==========
Amortization expense for intangible assets amounted to $225,308, $635,555
and $1,060,891 for the years ended December 31, 1999, 1998 and 1997,
respectively.
9. Accrued Expenses and Other Liabilities
--------------------------------------
Accrued expenses and other liabilities at December 31, 1999 and 1998
consisted of the following:
1999 1998
----------- ----------
Salaries, benefits and payroll taxes $ 521,987 $ 642,536
Taxes 223,684 199,589
Joint venture distribution 100,942 -
Professional fees 60,269 148,500
Severance - 75,477
Other 35,381 55,815
---------- ----------
$ 942,263 $1,121,917
========== ==========
10. Income Taxes
------------
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, 1999 was a decrease
of $757,595.
33
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
Deferred Tax Deferred Tax
Assets (Liabilities) Assets (Liabilities)
-------------------- --------------------
<S> <C> <C>
Accrued liabilities $ 1,277,428 $ 1,405,010
Contract reserve 78,880 147,046
Depreciation 154,695 (29,183)
Amortization 100,555 48,010
Bad debts 251,777 183,445
Net operating loss - federal 8,555,880 7,914,308
State taxes 1,990,212 3,498,386
Tax credits 297,187 297,187
------------ -----------
Total 12,706,614 13,464,209
Valuation allowance - federal (10,716,402) (9,965,823)
Valuation allowance - state (1,990,212) (3,498,386)
------------ -----------
Total net deferred taxes $ 0 $ 0
============ ===========
</TABLE>
As of December 31, 1999, the Company had a net operating loss carryforward
of approximately $25,000,000 for Federal income tax purposes which is
available to offset future taxable income, if any, between the years 2000
and 2019. 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.
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.
In May 1999, the Company adopted the "Deferred Fee Plan for Non-Employee
Directors" ("Deferred Fee Plan"). Under the terms of the Deferred Fee Plan,
non-employee directors of the Company can defer receipt of all quarterly
and meeting fees and permit such deferred fees to be credited to stock
accounts. These stock accounts accumulate shares of the Company's Common
Stock at the fair market price of the Common Stock for each deferral date
equivalent to the value of fees earned. At December 31, 1999 there were
deferred fees of $56,000 for 42,083 shares of common stock.
34
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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,
1999, there were 167,915 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,
1999, there were 16,958 additional options available for grant under the
1993 Plan.
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.
35
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
Following is a summary of the stock option transactions for 1997, 1998 and
1999:
<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, 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 $1.20 - $35.28
---------
Granted 49,954 $ 1.28 $ 0.84
Forfeited (94,056) $ 4.42
Exercised - - $1.20 - $35.28
---------
Balance December 31, 1999 400,969 $ 4.82
=========
Exercisable at December 31, 1997 93,018 $ 16.77
Exercisable at December 31, 1998 45,751 $ 16.68
Exercisable at December 31, 1999 105,572 $ 8.79
</TABLE>
The following table summarizes the information about stock options
outstanding at December 31, 1999:
<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 1999 Life (Years) Price 1999 Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.20 to $ 2.40 270,259 8.90 $ 2.22 47,572 $ 2.35
$ 6.54 to $ 14.28 99,952 7.97 $ 7.36 28,875 $ 8.55
$ 16.80 to $ 23.28 27,174 6.44 $ 17.80 25,541 $ 17.86
$ 30.00 to $ 35.28 3,584 2.56 $ 31.51 3,584 $ 31.51
- --------------------------------------------------------------------------------------------------------------------
$ 1.20 to $ 35.28 400,969 8.45 $ 4.82 105,572 $ 8.79
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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>
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Pro forma net loss applicable to
Common Stock ($1,630,168) ($26,777,247) ($3,561,695)
Pro forma basic and diluted net loss per
share applicable to Common Stock ($0.41) ($6.80) ($1.07)
</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 $205,769, $626,221 and $471,509 for
1999, 1998 and 1997, 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>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Dividend yield 0 0 0
Expected volatility 63.8% 51.2% 40.6%
Risk free interest rate 4.71%-5.88% 4.99% 6.39%
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.
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.
37
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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, 1999:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
<S> <C> <C>
2000 $ 4,837 $1,154,158
2001 - 866,513
2002 - 830,525
2003 - 694,670
2004 - 283,107
Thereafter - -
-------- ----------
Total minimum lease payments 4,837 $3,828,973
==========
Less amount representing interest (193)
--------
Present value of net minimum capital
lease payments $ 4,644
========
</TABLE>
Rent expense for operating leases was $1,408,315, $1,655,676 and $1,389,345
for the years ended December 31, 1999, 1998 and 1997, 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 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
38
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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
since 1996. At December 31, 1999, 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.
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 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 a two-year financial advisory agreement with
the placement agent and agreed to pay an annual fee of $100,000.
In May 1996, a 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
39
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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 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. A partner 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 shares were registered in 1999.
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, including those employed by the Wisconsin and Illinois Divisions
beginning January 1, 1999. The Company's contribution expense related to
the 401(k) savings plan was $142,247, $77,573 and $83,488 for the years
ended December 31, 1999, 1998 and 1997, respectively. There was no
contribution expense related to the profit sharing plan.
In 1998 and 1997 the Wisconsin and Illinois Divisions had a 401(k) plan
which provided for employee salary deferral contributions. Substantially
all Wisconsin and Illinois employees were eligible to participate in this
Plan. No Company contributions were made to this plan. The Company's
401(k) plans were merged on December 31, 1998. 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.
The Company maintains demand deposits with two major banks and money market
accounts with two financial institutions. At December 31, 1999 and 1998,
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, 1999, 1998 and 1997 was $2,673,745, $2,248,509 and $2,103,243,
respectively. These revenues are primarily from research and development
contracts.
40
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
18. Segment Information
-------------------
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, installation and operation of 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.
41
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
Information about reported segments for the years ended December 31, 1999,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Research and
Commercial Development
Operations Services Other Total
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
1999
----
Revenues $ 21,114,503 $ 2,935,465 - $ 24,049,968
Segment profit (loss) 3,140,960 (46,494) (4,518,865) (1,424,399)
Depreciation and amortization 423,032 87,668 60,784 571,484
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
</TABLE>
The following table presents the details of "Other" segment for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Marketing, general and
administrative expenses ($ 4,645,633) ($ 6,928,628) ($ 9,356,153)
Impairment of long-lived assets - (21,670,028) -
Interest income 148,531 180,545 242,373
Interest expense (13,766) (21,268) (31,800)
Equity in (loss) income of joint-venture (393) 13,688 (210,497)
Other, net (7,604) (3,804) 26,047
------------- -------------- -------------
($ 4,518,865) ($28,429,495) ($ 9,330,030)
============= ============== =============
</TABLE>
No customer accounted for more than 10% of the Company's revenues in 1999,
1998 or 1997.
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
42
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
substantially all of the assets, including a license agreement for the
technology related to the biological treatment of chemical contaminants in
air streams, of its wholly-owned subsidiary, CVT Air Technologies. For its
50% interest in CVT America, the Company paid $48,250 in cash and issued
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. In December 1999,
the net assets of MET were liquidated and the venture dissolved. MET was
jointly-owned by the Company and a subsidiary of a Milwaukee, Wisconsin
based scrap metal recycler. MET provided comprehensive environmental
services to the scrap metal recycling industry throughout the United
States. The service areas addressed by MET included 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 were conducted by the
Company through subcontracting arrangements. The Company also received 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 $71,831 and $152,242 for the years ended December 31, 1999
and 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, 1999, 1998
and 1997 was $109,600, $179,473 and $225,248, respectively.
43
<PAGE>
Schedule II
Envirogen, Inc.
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance
beginning costs and other accounts Deductions at end of
Description of period expenses (a) (b) period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful accounts $ 539,544 $ 312,280 $111,302 $ 740,522
Tax valuation allowance 13,464,209 (757,595) 12,706,614
Reserve for claim adjustments
and warranties 4,150,133 393,148 947,145 3,596,136
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 $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 1,802,743 334,383 2,577,218
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Balance in the financial statements of FMI, Inc. at acquisition
(b) Actual write-offs
44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Envirogen, Inc.
We have audited the accompanying consolidated balance sheet of Envirogen, Inc.
as of December 31, 1999, and the related consolidated statements of operations,
stockholder's equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Envirogen, Inc. at
December 31, 1999, and the consolidated results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
MetroPark, New Jersey
February 15, 2000
45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Envirogen, Inc.:
In our opinion, the consolidated balance sheet as of December 31, 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1998 (listed in
the index appearing under Item 14(a)(1) on page 48) present fairly, in all
material respects, the financial position, results of operations and cash flows
of Envirogen, Inc. at December 31, 1998 and for each of the two years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles in the United States. In addition, in our opinion, the financial
statement schedule for each of the two years in the period ended December 31,
1998 (listed in the index appearing under Item 14(a)(2) on page 48) present
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 in the United States, 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 statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements or financial
statement schedule of Envirogen, Inc. for any period subsequent to December 31,
1998.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 17,1999
46
<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
in Part I 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 18, 2000 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.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
1. Financial Statements:
---------------------
Consolidated Balance Sheets as of December 31, 1999 and 1998........ 22
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.................................... 23
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997................ 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.................................... 25
Notes to Consolidated Financial Statements.......................... 27
2. Financial Statement Schedules:
------------------------------
II. Valuation and Qualifying Accounts.............................. 44
Report of Independent Auditors - 1999............................... 45
Report of Independent Accountants - 1998 and 1997................... 46
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 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.......................................................... (4) (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>
48
<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.................................... (7) (Exh. 3)
3.2 By-Laws, as amended......................................................... (2) (Exh. 3.2)
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*.................................... (5) (Exh. 10.22)
10.4 Envirogen, Inc. 1993 Director's Non-Qualified Stock
Option Plan, as amended*.................................................... (3) (Exh. 10.27)
10.5 Securities Purchase Agreement dated January 14, 1997 by
and between Warburg, Pincus Ventures, L.P. and the Company.................. (4) (Exh. 2.2)
10.6 Employment Agreement dated April 16, 1998 between
the Company and Robert S. Hillas*........................................... (6) (Exh. 10)
10.7(a) Employment Agreement dated April 10, 1997 between the Company
and Richard W. Schowengerdt*................................................ (1)
10.7(b) Amendment No. 1 dated November 3, 1998 to Schowengerdt Employment
Agreement*.................................................................. (1)
21 Subsidiaries of the Company................................................. (1)
23.1 Consent of Ernst & Young LLP................................................ (1)
23.2 Consent of PricewaterhouseCoopers LLP....................................... (1)
24 Powers of Attorney.......................................................... (1)
27 Financial Data Schedule..................................................... (1)
</TABLE>
49
<PAGE>
- ----------------------
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-48576) which became
effective on August 11, 1992.
(3) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1995.
(4) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 14, 1997.
(5) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1996.
(6) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed April 16, 1998.
(7) 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
None
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ENVIROGEN, INC.
Dated: March 28, 2000 By: /s/ Robert S. Hillas
-------------------------
Robert S. Hillas
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on behalf of the registrant, in the capacities indicated,
on the 28th day of March, 2000.
<TABLE>
Signature Title
--------- -----
<S> <C>
Robert S. Hillas* President, Chief Executive Officer and Chairman of the Board
- -----------------------------
Robert S. Hillas (Principal Executive Officer)
/s/ Mark J. Maten Vice President, Finance and Chief Financial Officer
- -----------------------------
Mark J. Maten (Principal Financial and Accounting Officer)
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
51
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 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, (4) (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, (7) (Exh. 3)
3.2 By-Laws, as amended, (2) (Exh. 3.2)
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*, (5) (Exh. 10.22)
10.4 Envirogen, Inc. 1993 Director's Non-Qualified Stock Option Plan, as
amended*, (3) (Exh. 10.27)
10.5 Securities Purchase Agreement dated January 14, 1997 by and between
Warburg, Pincus Ventures, L.P. and the Company, (4) (Exh. 2.2)
10.6 Employment Agreement dated April 16, 1998 between the Company and
Robert S. Hillas*, (6) (Exh. 10)
10.7(a) Employment Agreement dated April 10, 1997 between the Company and
Richard W. Schowengerdt*, (1)
10.7(b) Amendment No. 1 dated November 3, 1998 to Schowengerdt Employment
Agreement*, (1)
21 Subsidiaries of the Company, (1)
23.1 Consent of Ernst & Young, LLP, (1)
23.2 Consent of PricewaterhouseCoopers LLP, (1)
24 Powers of Attorney, (1)
52
<PAGE>
Exhibit No. Description
----------- -----------
27 Financial Data Schedule (1)
- ---------------
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-48576) which became
effective on August 11, 1992.
(3) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1995.
(4) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed January 14, 1997.
(5) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1996.
(6) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K filed April 16, 1998.
(7) 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.
53
<PAGE>
Exhibit 10.7(a)
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of this 10th day of April, 1997,
between Envirogen, Inc., a Delaware corporation ("Envirogen"), and Richard W.
Schowengerdt (the "Executive").
WHEREAS, Envirogen, Fluid Management, Inc., a Wisconsin corporation
("FMI"), and all of the stockholders of FMI, including Executive, have entered
into an Agreement and Plan of Merger dated as of January 14, 1997 pursuant to
which FMI will merge with and into Envirogen and Envirogen will be the surviving
corporation (the "Merger");
WHEREAS, Executive has been employed by FMI as a senior executive officer
pursuant to an Employment and Non-Compete Agreement dated June 5, 1995 (the
"Previous Employment Agreement");
WHEREAS, an important factor in Envirogen's decision to acquire FMI and to
effectuate the Merger is the assurance that, for a sufficient period following
the Merger, Envirogen will have available the continued services of Executive
and Executive will enter into certain confidentiality and non-competition
agreements with Envirogen, all on the terms and conditions set forth herein, and
that Executive will waive any and all rights to which he would otherwise have
been entitled under Section 3(a) of the Previous Employment Agreement in
connection with the Merger; and
WHEREAS, as an inducement to Envirogen to consummate the Merger, Executive
and Envirogen are entering into this Agreement, which supercedes in its entirety
the Previous Employment Agreement.
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 hereby agree as follows:
1. EMPLOYMENT
A. Agreement. Envirogen hereby agrees to employ the Executive, and the
---------
Executive hereby agrees to serve Envirogen, all on the terms and conditions set
forth herein.
B. Expiration Date. The employment of the Executive by Envirogen shall
---------------
be for the period commencing on the date hereof and expiring on December 31,
1998 (the "Expiration Date"), unless such employment shall have been extended or
sooner terminated as hereinafter set forth. On the Expiration Date, the
Agreement shall be renewed automatically for successive terms of one year each
unless either party hereto shall have given notice to the other party at least
three months prior to the end of the then current Expiration Date that the
Agreement shall not be renewed. Upon each such automatic renewal, the Expiration
Date shall become the first anniversary of the last Expiration Date then in
effect. As used herein, the term "Contract Year" means the twelve-month period
beginning April 10 of each year this Agreement is in effect.
54
<PAGE>
2. POSITION AND DUTIES. The Executive shall serve in the capacity or
capacities and have the duties of Vice President of Technical Development of the
FMI Division of Envirogen, and shall report to, be accountable to and subject to
the supervision of, and shall also have such other powers, duties and
responsibilities as may from time to time be prescribed by, the Board of
Directors of Envirogen, provided that such other duties and responsibilities are
not inconsistent with the Executive's position and those duties set forth herein
and in the bylaws of Envirogen.
The Executive shall perform and discharge, faithfully, diligently and to
the best of his ability, such duties and responsibilities. The Executive shall
not, without the prior consent of the Board of Directors of Envirogen, accept a
position on the Board of Directors of any company other than (i) Envirogen or a
subsidiary thereof, (ii) HJS of Wisconsin, Inc. or (iii) any charitable or
similar organization. The Executive shall devote substantially all his working
time and efforts to the business and affairs of Envirogen and its subsidiaries
and affiliates.
The Executive represents to Envirogen that on the date hereof he is not
party to any agreement which conflicts with his obligations hereunder and that
he will not become party to any such agreement; should this representation prove
false at any time, then Envirogen shall have no further obligations hereunder.
3. COMPENSATION
A. Salary. During the term of his employment hereunder, the Executive
------
shall receive a Base Salary at the initial annual rate of $140,000. Such initial
Base Salary shall be subject to increase, but not decrease, by the Board of
Directors of Envirogen upon prior recommendation of the Executive Compensation
and Stock Option Committee thereof. Base Salary shall be payable in
substantially equal bi-weekly installments, less any amounts required to be
withheld under applicable law. In the event that, during the term hereof,
Envirogen shall determine to make salary payments to its executives at intervals
other than bi-weekly, Envirogen may adjust the intervals at which it makes
payments of Base Salary hereunder to such intervals as are consistent with the
intervals at which other executives of Envirogen are then compensated. Except as
otherwise provided in this Agreement, the Base Salary shall be pro-rated for any
period of service less than a full Contract Year.
B. Bonuses; Stock Options. The Executive will be eligible to receive an
----------------------
annual incentive bonus for each fiscal year of Envirogen this agreement is in
effect based upon the obtainment of corporate and individual performance goals
fixed by the Board of Directors of Envirogen upon the prior recommendation of
the Executive Compensation and Stock Option Committee thereof. The Executive
will also be eligible to receive grants of stock options under such stock option
plans of Envirogen as are in effect from time to time in such amounts, and on
such terms, as the committee or committees administering such plans may fix and
determine.
C. Expenses. During the term of his employment hereunder, the Executive
--------
shall be entitled to receive prompt reimbursement for all reasonable business
expenses incurred by him on behalf of Envirogen (in accordance with the policies
and procedures established by the Board of Directors of Envirogen from time to
time for Envirogen's senior executive officers) in performing services
hereunder, provided that the Executive properly accounts therefor in accordance
with requirements for federal income tax deductibility and Envirogen's policies
and procedures.
55
<PAGE>
D. Fringe Benefits. During the term of his employment hereunder, the
---------------
Executive shall be entitled to participate in or receive such benefits as other
executives and key employees of Envirogen are entitled to receive from time to
time, including but not limited to life insurance, health and accident plans,
retirement programs or other arrangements made generally available by Envirogen
to its executives and key management employees, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. Nothing herein shall preclude Envirogen, during the term
hereof, from amending, modifying or eliminating any such benefits so long as any
such changes apply consistently to all executives and key employees of
Envirogen.
E. Vacations. During the term of his employment hereunder, the Executive
---------
shall be entitled to twenty (20) paid vacation days in each calendar year (less,
in 1997, those vacation days taken by the Executive in 1997 prior to the date
hereof under the Previous Employment Agreement and, in any other year, prorated
for any partial calendar year this Agreement is in effect), and shall also be
entitled to all paid holidays given by Envirogen to its employees generally.
Vacation days allotted in any calendar year and not used in such year shall
expire if not used by March 31 of the immediately following calendar year.
4. RESTRICTIVE COVENANTS
A. Non-competition. Executive covenants that he will not directly or
---------------
indirectly own, manage, operate or control, nor be a director, officer or
employee of, or consultant to, any business or enterprise competing with
Envirogen or any affiliate of Envirogen, anywhere in (i) the 50 states of the
United States, (ii) all of the provinces of Canada, and (iii) any other
jurisdiction in which Envirogen derived in excess of $250,000 in revenues during
the period this Agreement was in effect. For purposes hereof, a business
competing with Envirogen shall mean any business (i) which does research with
respect to, designs, develops, produces or manufactures any products which are
the same as or substantially similar to or are intended for uses similar to
those with respect to which Envirogen or any affiliate does research or which
Envirogen or any affiliate designs, develops, produces or manufactures; or (ii)
which furnishes services similar to those furnished by Envirogen or any
affiliate. The provisions of this paragraph, however, shall not prohibit
Executive from investing in the securities of any such business or enterprise
which are traded publicly and constitute less than one percent (1%) of the
particular class of such business's or enterprises's securities outstanding from
time to time. The foregoing covenant shall be binding on Executive during his
employment hereunder and for a period of two (2) years after termination of his
employment hereunder.
Furthermore, Executive agrees not to engage or participate in any effort or
act to induce any of the associates, consultants, customers, officers or
employees of Envirogen or any affiliate to take any action which might be
disadvantageous to Envirogen or any affiliate.
B. Disclosure and Assignment of Inventions; Patents.
------------------------------------------------
(a) Executive shall communicate to Envirogen promptly and fully, and
hereby assigns, sells and transfers to Envirogen Executive's entire right, title
and interest in and to, all inventions, whether or not patentable, made or
conceived by Executive (alone or jointly with others and whether or not made or
conceived during regular business hours) from the time of entering the employ of
Envirogen or any affiliate until the termination thereof which (i) are related
in any manner, directly or indirectly, to the business, products, research or
development of Envirogen or any affiliate or (ii) result from or are suggested
by any work which Executive may do for or on behalf of Envirogen or any
affiliate. For purposes of this Agreement, the term "invention" shall include,
without limitation, any new, useful or
56
<PAGE>
original art, machine, process, method, product, apparatus, compound, formula,
shape, lifeform, composition of matter or configuration of any kind.
(b) Executive agrees to assist Envirogen and its nominees during and
subsequent to his employment with Envirogen or any affiliate in every proper way
(entirely at its or their expense) to obtain for its or their own benefit
patents for such inventions in any and all countries, said inventions to be and
remain the sole and exclusive property of Envirogen or its nominees, whether
patented or not.
(c) Executive agrees to make and maintain adequate and current written
records of all such inventions, in the form of notes, sketches, drawings, or
reports relating thereto, which records shall be and remain the property of and
available to Envirogen at all times.
(d) Executive agrees to notify Envirogen in writing before Executive makes
any disclosure or performs or causes to be performed any work for or on behalf
of Envirogen or any affiliate, which appears to threaten or conflict with (i)
rights Executive claims in any invention or idea conceived by Executive or
others prior to the Executive's employment with Envirogen or any affiliate or
outside the scope of this Agreement, or (ii) rights of others arising out of
obligations incurred by Executive prior to his employment with or outside the
scope of this Agreement. In the event of the Executive's failure to give notice
under the circumstances specified, Envirogen may assume that no such conflicting
invention or idea exists and Executive agrees not to make any claim against
Envirogen or any affiliate with respect to the use of any such invention or idea
in any work which Executive performs or causes to be performed for or on behalf
of Envirogen or any affiliate.
C. Copyrights. Executive understands and acknowledges that Executive may
----------
from time to time during the term of Executive's employment with Envirogen
create or contribute to, either alone or with others, the creation of a
copyrightable subject matter relating to the business, products, research or
development of Envirogen or its affiliates and it is understood and agreed that
such creative effort on the part of Executive shall be "work for hire", and all
right, title and interest in such subject matter shall be the sole and exclusive
property of Envirogen or its nominees, including the right to copyright such
subject matter in the name of Envirogen.
D. Confidentiality. Executive acknowledges and agrees that in the course
---------------
of, or incident to, Executive's employment hereunder, Envirogen and/or its
affiliates has provided and may in the future provide to Executive, or Executive
has been and may otherwise become in the future exposed to, Confidential
Information. For purposes of this Agreement, the term "Confidential Information"
shall mean all information concerning the business or affairs of Envirogen
and/or its affiliates and all information received from third parties and held
in confidence by Envirogen and/or its affiliates including, without limitation,
all information relating to existing and potential customers, suppliers,
markets, contracts, prices, programs, requirements, strategies, products,
technology, know-how, information, data, processes, inventions, developments,
formulations, applications and methods of manufacture, except such information
that, as of the date of disclosure to or development by Executive, is shown to
have been voluntarily disclosed to the public by Envirogen, to have been
independently developed and disclosed by third parties, or to have been
disclosed in published literature or which has otherwise entered the public
domain by lawful means, all of which Confidential Information is acknowledged to
be the property of Envirogen. Executive acknowledges that his obtaining the
Confidential Information is intended to, and necessary to, enable Executive to
perform his duties for Envirogen and/or its affiliates. Executive recognizes and
agrees that the confidentiality of the Confidential Information is necessary to
the ability of Envirogen and/or its affiliates to compete effectively with their
competitors. Executive recognizes and acknowledges that, in many instances,
57
<PAGE>
Envirogen and/or its affiliates are bound by contractual or other obligations to
hold and use Confidential Information received from third parties in confidence,
and that Executive's failure to do so may constitute a breach of such
obligations. Executive therefore acknowledges and agrees that Executive's
undertakings in this Section 4.D with respect to the use and dissemination of
such third party Confidential Information are made and intended for the benefit
not only of Envirogen and its affiliates but also of all parties that provide
Envirogen with Confidential Information. In light of the foregoing, Executive
agrees that:
(a) during the term of Executive's employment with Envirogen and/or any
affiliates and at all times thereafter, Executive will hold the Confidential
Information in the strictest confidence and will not retain in writing,
duplicate, use, divulge, furnish or make accessible to anyone (which terms, as
used in this Agreement, shall include, without limitation, any individual, firm,
corporation, association or group) such Confidential Information, except as
required in the performance of Executive's duties for Envirogen and/or any
affiliate;
(b) upon and subsequent to the termination of Executive's employment with
Envirogen and/or any affiliate for any reason whatever Executive will not, at
any time, retain in writing, duplicate, use, divulge, furnish or make accessible
to anyone or make any use whatever of the Confidential Information or any
portion thereof, either on Executive's own behalf or in conjunction with or on
behalf of any other person or entity; and
(c) upon termination of Executive's employment with Envirogen and/or any
affiliate for any reason whatever, Executive will immediately return to
Envirogen or such affiliate all documents or other tangible records, and any and
all copies thereof, within Executive's possession, custody or control,
containing or reflecting any Confidential Information.
E. Return of Materials Upon Termination. Upon termination of Executive's
------------------------------------
employment by either party for any reason, Executive hereby agrees to return to
Envirogen as a condition to receiving Executive's final salary check, any and
all books, records, reports, notes, and materials of any nature or kind
whatsoever furnished to or developed by Executive, or developed by any third
party for Envirogen, which Executive may have obtained during the term of
employment relating directly or indirectly to the property or business of
Envirogen or any affiliate.
5. TERMINATION
A. Death. The Executive's employment hereunder shall terminate upon his
-----
death.
B. Incapacity. If in the reasonable judgment of the Board of Directors
----------
of Envirogen, as a result of the Executive's incapacity due to physical or
mental illness or otherwise, the Executive shall for three consecutive months
during the term of this Agreement have been unable to perform satisfactorily all
of his duties hereunder on a full-time basis after taking into account such
accommodation for any physical or mental illness as may be required by law,
Envirogen may terminate the Executive's employment hereunder by notice to the
Executive.
58
<PAGE>
C. Cause. Envirogen may terminate the Executive's employment hereunder
-----
for Cause. For the purposes of this Agreement, Envirogen shall have "Cause" to
terminate the Executive's employment hereunder upon the Executive's (i) material
failure, refusal or neglect to perform and discharge his duties and
responsibilities hereunder, or willful action that is materially inconsistent
with the terms hereof, or material breach of his fiduciary duties as an officer
or as a director of Envirogen, or (ii) gross misconduct that is injurious to
Envirogen, or (iii) unethical business conduct, or (iv) conviction of a felony.
Notwithstanding any other provision of this Agreement, Envirogen shall provide
written notice to the Executive of its intent to terminate for Cause and of the
specific Cause for termination. Upon the Executive's receipt of such written
notice, he shall have ten (10) business days in which to cure, correct or remedy
any stated act or omission constituting Cause. If the Executive cures, corrects
or remedies such act or omission within such ten (10) business day period to the
full satisfaction of the Board of Directors of Envirogen, there shall be no
termination for the stated Cause, and this Agreement shall continue in full
force and effect according to its terms.
D. Termination by the Executive. The Executive may terminate his
----------------------------
employment hereunder for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean (A) any removal of the Executive from the position indicated
in Section 2 hereof, except in connection with termination of the Executive's
employment for incapacity or Cause, or (B) a reduction in the Executive's Base
Salary below that set forth in Section 3.A. hereof, or (C) any other action by
Envirogen that is in material breach of the terms of this Agreement or (D) a
decision made in good faith by the Executive within six (6) months following a
"Change in Control" that he has been assigned, without his prior written
consent, duties or responsibilities inconsistent with his positions, duties,
responsibilities and status immediately prior to the Change in Control. As used
herein, the term "Change in Control" shall have the meaning set forth in
Appendix I hereto.
E. Date of Termination; Term of Employment. The term "Date of
---------------------------------------
Termination" shall mean the earlier of (i) the Expiration Date or (ii) if the
Executive's employment is terminated (a) by his death, the date of his death, or
(b) for any other reason whether or not specified in this Section 5 or for no
reason, the date on which such termination is to be effective pursuant to the
notice of termination given by the party terminating the employment
relationship. For all purposes of this Agreement, references to the "term" of
the Executive's employment hereunder shall mean the period commencing on the
date hereof and ending on the Date of Termination.
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 and 3.E (in
respect of accrued and unused vacation). In the event of the Executive's death,
unexpired stock options held at his death shall remain exercisable for such
period or periods as are set forth in the plan or plans under which they were
granted. In the event of termination by reason of incapacity, Envirogen shall
continue to pay the Executive the Base Salary as then in effect for the twelve-
month period following the Date of Termination and shall, during such same
twelve-month period, continue in effect all medical and life insurance which was
maintained by Envirogen for the benefit of the Executive on the Date of
Termination.
59
<PAGE>
B. Cause or Executive's Termination other than for Good Reason.
-----------------------------------------------------------
Notwithstanding any other provision of this Agreement, if Envirogen shall
terminate the Executive's Employment for Cause, or if this Agreement shall
terminate by reason of the Executive's determination not to renew or by reason
of the Executive's termination of this Agreement other than for Good Reason,
Envirogen shall pay Executive all sums accrued and unpaid to the Date of
Termination under Sections 3.A, 3.C, 3.D and 3.E (in respect of accrued and
unused vacation) and shall permit the Executive to exercise any stock options
vested to the Date of Termination to the extent permitted by the terms of such
options. Envirogen shall thereafter have no further obligations to the Executive
under this Agreement.
C. Good Reason or Other Termination. If Envirogen shall determine not to
--------------------------------
renew this Agreement on any Expiration Date or shall terminate the Executive's
employment other than pursuant to paragraphs A, B or C of Section 5 hereof or if
the Executive shall terminate his employment for Good Reason, then Envirogen
shall pay to the Executive all sums accrued under Sections 3.A, 3.C, 3.D and 3.E
hereof through the Date of Termination. In addition, Envirogen shall pay
severance pay to Executive, bi-weekly, at a rate equal to Executive's Base
Salary as in effect on the Date of Termination, (A) in the case of termination
arising from Envirogen's notice of election not to renew, for a period of twelve
months following the Expiration Date; (B) in the case of any other termination
by Envirogen other than by reason of paragraphs A, B, or C of Section 5 hereof,
for a period of twelve months following the Date of Termination; and (C) in the
case of termination by the Executive by reason of paragraph D of Section 5
hereof, for a period of twelve months following the Date of Termination. In
addition, if this Agreement is terminated by reason of clause (A), (B) or (C) of
the preceding sentence, (X) Envirogen shall continue all medical and life
insurance benefits maintained by it for the benefit of the Executive on the Date
of Termination for a period of twelve months following the Date of Termination,
and (Y) all options held by the Executive which would vest in the twelve-month
period following the Date of Termination shall become exercisable on the Date of
Termination. In addition, if this Agreement is terminated by the Executive by
reason of clause (D) of paragraph D of Section 5, then, subject to the next
sentence, during the period commencing twelve months following the Date of
Termination and ending twenty-four months following the Date of Termination,
Envirogen shall continue to pay, on a bi-weekly basis, the amounts described in
the second preceding sentence and provide the benefits provided in clause (X) of
the immediately preceding sentence for so long as, during such period, the
Executive is unable to obtain satisfactory full-time employment during such
period, provided he continuously and diligently seeks the same. Anything in
this paragraph C of this Section 6 to the contrary notwithstanding, in the event
this Agreement is terminated by the Executive by reason of clause (D) of
paragraph D of Section 5 and the sum of the aggregate of the salary continuation
payments and the value of the accelerated options which would be payable under
this paragraph C of this Section 6 would result in the inability of Envirogen to
deduct any such amounts so paid from its taxable income for federal income tax
purposes by reason of the provisions of Section 280G of the Internal Revenue
Code of 1986, as amended, or under any provision successor thereto, and the
regulations of the Internal Revenue Service thereunder, then the aggregate of
such salary continuation payments and other payments or benefits in the nature
of compensation (including the value of accelerated options) shall be reduced by
the minimum amount as may be necessary so that all such amounts shall be
eligible for deduction by Envirogen from its taxable income for federal income
tax purposes. The payments provided for in this paragraph under the
circumstances set forth in this paragraph shall constitute the sole obligation
of Envirogen to the Executive for any termination of Employment referred to in
this paragraph.
60
<PAGE>
7. BINDING AGREEMENT. This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. This Agreement shall inure to the benefit
of Envirogen and its corporate successors and permitted assigns; provided that
Envirogen may not assign its rights or obligations hereunder without the prior
consent of the Executive. This Agreement and the provisions of Appendix I hereto
represent the sole agreements between Envirogen and the Executive relating to
the Executive's employment by Envirogen and supersede all prior agreements and
communications, oral and written to the extent that they relate to any terms and
conditions of the Executive's proposed employment with Envirogen. Executive and
Envirogen agree that the Previous Employment Agreement is hereby terminated and
of no further force or effect, and Executive hereby waives any and all rights to
which he otherwise would have been entitled under Section 3(a) of the Previous
Employment Agreement in connection with the Merger. No provision of this
Agreement may be modified, waived, or discharged unless such waiver,
modification or discharge is approved by the Board of Directors and agreed to in
writing signed by the Executive and such officer as may be specifically
authorized by the Board of Directors. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
8. EFFECTIVE DATE AND EFFECTIVENESS. This Agreement shall take effect as of
the date hereof.
9. NOTICES. For all purposes of this Agreement, notices and all other
communications to either party hereunder provided for in this Agreement shall be
in writing and shall be deemed to have been duly given when delivered or mailed
by United States certified or registered mail, return receipt requested, postage
prepaid, addressed, in the case of Envirogen, to the President of Envirogen at
the principal place of business of Envirogen, or in the case of the Executive,
to the Executive at his principal residence address as on file with Envirogen at
the time such notice is given; or to such other address as either party shall
designate by giving like notice of such change to the other party.
10. ARBITRATION; INJUNCTION. Subject to the provisions of the last sentence of
this Section 10, any disputes or controversies arising with respect to the
provisions or operation of this Agreement shall be settled by binding
arbitration by a single arbitrator in Philadelphia, Pennsylvania, under the
commercial arbitration rules of the American Arbitration Association then in
effect. Judgment on the award may be entered in any court of competent
jurisdiction. Anything in the foregoing to the contrary notwithstanding, the
Executive acknowledges and agrees that, because Envirogen's legal remedies would
be inadequate in the event of a breach of, or other failure to perform, any of
the covenants and agreements set forth in Section 4 hereof by the Executive,
Envirogen may, in addition to obtaining any other remedy or relief available to
it under this Section 10 (including without limitation damages at law), enforce
the provisions of said Section 4 by injunction and other equitable relief in any
court of competent jurisdiction.
11. INDEMNIFICATION; INSURANCE. Envirogen shall indemnify the Executive to the
extent set forth in the By-Laws of Envirogen as in effect from time to time.
Envirogen shall use its best efforts to maintain a level of directors and
officers liability insurance equivalent to that in effect on the date hereof.
61
<PAGE>
12. MISCELLANEOUS. Executive acknowledges that amounts which become payable
hereunder will be subject to withholding to the extent provided in the Internal
Revenue Code of 1986 and analogous provisions of state and local law. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the domestic substantive laws of the State of New Jersey without
giving effect to any choice or conflict of laws provision or rule that would
cause the application of the domestic substantive laws of any other
jurisdiction.
13. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect, and in the event that any provision hereof shall be determined to be
invalid or unenforceable for any reason, such provision shall be construed by
limiting it so as to be valid and enforceable to the fullest extent compatible
with and possible under applicable law.
14. COUNTERPARTS. This Agreement may be executed in any one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands, as of
the date first above written.
ENVIROGEN, INC.
By: /s/ HARCHARAN S. GILL
---------------------------------
Harcharan S. Gill
President
/s/ RICHARD W. SCHOWENGERDT
---------------------------------
Richard W. Schowengerdt
62
<PAGE>
APPENDIX I
"Change in Control" shall mean:
1. The acquisition by any person, entity or "group" required to file
a Schedule 13D or Schedule 14D-1 promulgated under the Securities Exchange Act
of 1934 (the "Exchange Act") (excluding, for this purpose, Envirogen, its
subsidiaries, or any employee benefit plan of Envirogen or its subsidiaries
which acquires beneficial ownership of voting securities of Envirogen) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 51% or more of either the then-outstanding shares of common
stock or the combined voting power of Envirogen's then-outstanding voting
securities entitled to vote generally in the election of directors; or
(B) The election or appointment to the Board of Directors, or
resignation of or removal from the Board of Directors, of directors by virtue of
which the individuals who as of the date hereof constituted the Board of
Directors (the "Incumbent Board") no longer constitute at least a majority of
the Board, provided that any person who becomes a director subsequent to the
date hereof whose appointment, election, or nomination for election by
Envirogen's stockholders, was nominated by or approved by a vote of at least a
majority of the Incumbent Board (other than an appointment, election or
nomination of an individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
directors of Envirogen, as such terms are used in Rule 14a-1 promulgated under
the Exchange Act) shall be, for purposes of this Agreement, considered as though
such person were a member of the Incumbent Board; or
(C) Approval by the stockholders of Envirogen of: (i) a
reorganization, merger or consolidation by reason of which persons who were the
stockholders of Envirogen immediately prior to such reorganization, merger or
consolidation do not, immediately thereafter, own more than 51% of the combined
voting power of the reorganized, merged or consolidated company's then
outstanding voting securities entitled to vote generally in the election of
directors, or (ii) a liquidation or dissolution of Envirogen or the sale,
transfer, lease or other disposition of all or substantially all of the assets
of Envirogen (whether such assets are held directly or indirectly).
63
<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 Richard W. Schowengerdt (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 an executive capacity or
capacities, 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 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 and 3.E
hereof (in respect of accrued and unused vacation). In the event of the
Executive's death, unexpired stock options held
64
<PAGE>
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/ Richard W. Schowengerdt
-------------------------------------
Richard W. Schowengerdt
65
<PAGE>
Exhibit 21
ENVIROGEN, INC. - SUBSIDIARIES OF THE COMPANY
MWR, Inc., a Michigan corporation, was acquired by the Company on February
9, 1996.
66
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
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 15, 2000,
on our audit of the consolidated financial statements and financial statement
schedule of Envirogen, Inc. as of December 31, 1999 and for the year ended
December 31, 1999, which report is included in this Annual Report on Form 10-K.
Ernst & Young LLP
MetroPark, New Jersey
March 27, 2000
67
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements 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 Envirogen, Inc. of our report dated
February 17, 1999 relating to of the consolidated financial statements and
financial statement schedule as of December 31, 1998 and the years ended
December 31, 1998 and 1997, which report is included in this Annual Report on
Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 28, 2000
68
<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, 1999, 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
20th day of March, 2000.
/s/ Robert F. Hendrickson
-------------------------
Robert F. Hendrickson
69
<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, 1999, 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
20th day of March, 2000.
/s/ Robert F. Johnston
----------------------
Robert F. Johnston
70
<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, 1999, 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
20th day of March, 2000.
/s/ Nicholas J. Lowcock
-----------------------
Nicholas J. Lowcock
71
<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, 1999, 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
20th day of March, 2000.
/s/ Robert C. Miller
--------------------
Robert C. Miller
72
<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, 1999, 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
20th day of March, 2000.
/s/ Peter J. Neff
-----------------
Peter J. Neff
73
<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, 1999, 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
20th day of March, 2000.
/s/ William C. Smith
--------------------
William C. Smith
74
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,527,979
<SECURITIES> 0
<RECEIVABLES> 6,646,603
<ALLOWANCES> (704,522)
<INVENTORY> 43,415
<CURRENT-ASSETS> 14,063,978
<PP&E> 5,679,452
<DEPRECIATION> (4,550,890)
<TOTAL-ASSETS> 16,370,865
<CURRENT-LIABILITIES> 9,277,475
<BONDS> 0
0
0
<COMMON> 39,759
<OTHER-SE> 7,053,631
<TOTAL-LIABILITY-AND-EQUITY> 16,370,865
<SALES> 0
<TOTAL-REVENUES> 24,049,968
<CGS> 0
<TOTAL-COSTS> 25,601,135
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,766
<INCOME-PRETAX> (1,424,399)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,424,399)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,424,399)
<EPS-BASIC> ($0.36)
<EPS-DILUTED> ($0.36)
</TABLE>
