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 is responsible for sales, marketing and manufacturing, while Envirogen continues product development and pursues sales opportunities as appropriate.
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, aided 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.
Soil Treatment - --------------
The majority of environmental problems is 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, 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 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'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 - ---------------
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, ultraviolet-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.
Examples of applications of Envirogen's FBR system include the removal of aniline and nitrobenzene from groundwater at an industrial site, to treat groundwater leachate on the site of a former manufactured gas plant for an electric utility and for the removal of ammonium perchlorate from groundwater. Ammonium perchlorate is associated with a number of industries and has been suspected as a groundwater contaminant in 46 states.
. 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. The Company offers 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. Examples of applications of Envirogen's MBR and TIMBR systems include leachate treatment at an industrial/municipal wastewater treatment facility and process wastewater treatment in a fine chemicals production facility. The MBR is very effective in the treatment of high concentration, moderate flow-rate streams with complex or difficult to degrade compounds, such as MTBE, 1,4-dioxane and pesticides.
Air Treatment - -------------
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 1990s 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 that 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.
Envirogen offers a line of 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 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 is responsible for sales, marketing and manufacturing, while Envirogen continues product development and to pursue sales opportunities as appropriate.
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 2000, Envirogen spent approximately $2.0 million on research and development projects, approximately $1.6 million of which was funded by third parties or government agencies.
Microorganisms - --------------
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 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 - ------------------
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 perchloroethylene ("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- based 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 - --------------------------
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 its history the Company has been awarded numerous Phase I and Phase II SBIRs for the development of advanced technologies. In 2000, the Company completed two projects for the Department of Defense ("DOD"), to develop and field test bioreactor systems for treating air containing odors, and paint and paint-stripping solvents. Another DOD SBIR (awarded in 1998), for in situ biotreatment of chlorinated solvents using biostimulation, was also completed in 2000. Three other Phase I SBIRs conducted during the year involved technology development for MTBE remediation, biocatalysis, and foams for in situ metal remediation. Through another DOD/EPA/DOE Strategic Environmental Research & Development Program ("SERDP"), the Company has also been developing and testing an in situ technology for cleanup of aquifers contaminated with ammonium perchlorate (a major component of rocket fuel). In 2000, Envirogen also began a major field trial in California for its proprietary in situ MTBE remediation technology. This project is funded by the DOD Environmental Security Technology Certification Program ("ESTCP") and has been chosen to be evaluated under an EPA verification program.
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. With limited exceptions, the Company is not subject to any royalty or exclusive license agreements arising from its research and development contracts. See Note 12 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 that 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.
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 that are more cost effective than alternative approaches. Competitors include engineering and construction firms, environmental management service firms and specialized technology companies, including companies focusing on developing advanced biological remediation technologies similar to Envirogen's technologies. As technological advances are made and become more widely known, the larger environmental firms may acquire these companies and technologies and offer such technologies as part of an overall solution to a hazardous waste remediation project. Because these companies have significantly greater financial resources than Envirogen and can offer a wider range of services, Envirogen may be at a competitive disadvantage.
In general, competition in the hazardous waste management industry is based primarily upon the cost of the volume of waste treated, contained or removed. Where the waste is removed, customers are typically charged based on tons of contaminated soil excavated and transported to a hazardous waste landfill. Additional competitive factors include corporate presence in a geographic area, regulatory support, performance standards and technical reliability and competence. Envirogen's competitive position is premised upon the lower-cost treatment approach traditionally associated with 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.
Employees
As of December 31, 2000, Envirogen had 148 full-time employees, including 87 in engineering, 18 in research and development, 30 in administration and finance and 13 in marketing. Doctoral degrees are held by 11 employees and encompass the disciplines of biochemistry, molecular biology, chemical engineering, environmental engineering, hydrogeology, 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.
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 42,000 square feet of office and warehouse space for its administrative and commercial operations in Illinois, Massachusetts, Michigan 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.
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 were 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 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.
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.
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.
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"), a specialized investment 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 a B. A. in mathematics 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 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.
David N. Enegess was appointed Vice President National Group in January 1999. The group was formerly known as Systems Sales and Services. 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.
PART II
ITEM 5.
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 closing price for the Common Stock on February 23, 2001 was $1.22. 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 5, 2001 was 204, which includes stockholders whose shares were held in nominee name. The number of beneficial stockholders at that date was over 1,300.
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.
ITEM 6.
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
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 has received most of its revenue from commercial remediation services and systems, which includes, primarily, revenue attributable to traditional remediation services such as soil vapor extraction and air sparging. In addition, a portion of the Company's revenue to date has been derived from research funded largely by corporate and governmental sponsors to develop cost effective advanced biological treatment systems. Revenues from these advanced treatment technologies are still in the early stages of commercial development, and additional expenditures by the Company will be required for continued research and development and expanded marketing activities. 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. The DCOM review process may not be 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 in a number of cases 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 $1,857,394, including $514,083 in the year ended December 31, 2000. At December 31, 2000, the Company had $3,039,122 in reserves with respect to potential ineligible claims related to approximately $41 million in claims that had not yet been fully reviewed by DCOM. There can be no assurance that the amount of such reserve, which was determined by management based on historic reimbursement disallowance rates under the PECFA program, will be adequate.
On April 17, 1998, the State of Wisconsin adopted 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 - ---------------------
2000 Compared to 1999 - ---------------------
For the year ended December 31, 2000, the Company's total revenues decreased 15% to $20,339,401 from $24,049,968 in 1999. The net loss increased 44% to $2,051,161 from $1,424,399 in 1999, while the basic and diluted net loss per share was $0.52 compared to $0.36 in 1999.
Commercial revenues (net of reserves for ineligible PECFA claims) decreased 11% in 2000 to $18,723,719 from $21,114,503 in 1999. The decreased commercial revenues are due primarily to reduced revenue in the Wisconsin Division under the PECFA program related to the adoption of the Emergency Rules in April 1998.
Revenues from corporate research and development contracts decreased in 2000 by 45% to $1,615,682 from $2,935,465 in 1999. Revenues decreased primarily due to the timing of work associated with Phase II government projects and to the fewer number of projects as compared to 1999.
Total costs and expenses decreased to $22,585,697 in 2000 from $25,601,135 in 1999. The cost of commercial operations decreased 12% to $15,773,287 during 2000 from $17,973,543 in 1999 due primarily to decreased revenue levels and slightly improved project margins. Research and development expenses decreased 33% to $2,001,165 during 2000 from $2,981,959 in 1999 as a result of lower revenue levels. Marketing, general and administrative expenses increased 4% to $4,811,245 from $4,645,633 due primarily to increased marketing costs and as a result of increased marketing efforts.
Interest income increased 38% to $205,538 in 2000 from $148,531 in 1999, due primarily to the increased average cash available for investment and higher interest rates.
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 $2,998,271 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 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.
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, 2000, the Company had cash and cash equivalents of $3,826,006 and working capital of $3,212,674. Cash and cash equivalents decreased $701,973 from December 31, 1999 to December 31, 2000 due primarily to cash used in operations of $354,328 and capital expenditures of $343,990.
From December 31, 1999 to December 31, 2000, accounts receivable decreased by $1,847,558 primarily as a result of reduced revenues and improved collections. In the same period, accounts payable decreased by $1,683,285 due to shifts in the timing of project expenses and related subcontractor charges. At December 31, 2000, the Company had $3,210,622 in reserve for claim adjustments and warranties, $3,039,122 of which is available for potential PECFA claim adjustments related to approximately $41 million in unsettled PECFA submittals and $171,500 of which is available for 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, 2000, the Company had a net operating loss carry forward of approximately $27.5 million for federal income tax reporting purposes available to offset future taxable income, if any, through 2020. 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 any impact on the Company's consolidated results of operations, financial position or cash flows.
ITEM 7A.
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, 2000, 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ENVIROGEN, INC. CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
ENVIROGEN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
ENVIROGEN, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of these consolidated financial statements.
ENVIROGEN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
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.
The Company has received most of its revenue from commercial remediation services and systems, which includes, primarily, revenue attributable to traditional remediation services such as soil vapor extraction and air sparging. In addition, a portion of the Company's revenue to date has been derived from research funded largely by corporate and governmental sponsors to develop cost effective advanced biological treatment systems. Revenues from these advanced treatment technologies are still in the early stages of commercial development, and additional expenditures by the Company will be required for continued research and development and expanded marketing activities. 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 accounting principles generally accepted in the United States, 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.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________________
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 10 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. The DCOM review process may not be 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 in a number of cases 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, 2000, the Company had $3,039,122 in reserves with respect to potential ineligible claims related to approximately $41 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.
The Company also had $171,500 in reserves at December 31, 2000 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.
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________________
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, 2000 of $17,323 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, 2000.
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 615,777, 499,719 and 501,739 shares of common stock that were outstanding at December 31, 2000, 1999 and 1998, 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.
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________________
Segment Information
The Company discloses its segment information using the management approach, which 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. The Company also provides disclosures about products and services, geographic areas and major customers (see Note 16).
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 any 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, which 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 8).
3. 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 that 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
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________________
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.
4. 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.
5. Property and Equipment ----------------------
Property and equipment, net at December 31, 2000 and 1999 consisted of the following:
Accumulated amortization on equipment under capital leases amounted to $598,975 and $594,544 at December 31, 2000 and 1999, respectively. Depreciation expense amounted to $520,124, $548,786 and $641,957 for the years ended December 31, 2000, 1999 and 1998, respectively. Amortization expense on equipment under capital leases and leasehold improvements amounted to $15,902 $22,698 and $76,969 for the years ended December 31, 2000, 1999 and 1998, respectively. No interest has been capitalized in 2000, 1999 or 1998.
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________________
6. Intangible Assets -----------------
Intangible assets, net at December 31, 2000 and 1999 consisted of the following:
2000 1999 ----------- ----------- 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 1,118,170 928,595 ----------- ----------- $ 768,141 $ 957,716 =========== ===========
Amortization expense for intangible assets amounted to $189,575, $225,308 and $635,555 for the years ended December 31, 2000, 1999 and 1998, respectively.
7. Accrued Expenses and Other Liabilities --------------------------------------
Accrued expenses and other liabilities at December 31, 2000 and 1999 consisted of the following:
2000 1999 ---------- --------- Salaries, benefits and payroll taxes $ 607,006 $ 521,987 Taxes 245,992 223,684 Joint venture distribution 103,938 100,942 Professional fees 92,063 60,269 Other 15,654 35,381 ---------- --------- $1,064,653 $ 942,263 ========== ========= 8. Income Taxes ------------
The Company has provided a full valuation allowance against the net deferred tax assets due to the uncertainty of realization. The change in the valuation allowance for the year ended December 31, 2000 was an increase of $2,180,225.
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________________
Temporary differences and carryforwards which give rise to deferred tax assets and liabilities at December 31, 2000 and 1999 are as follows:
As of December 31, 2000, the Company had a net operating loss carryforward of approximately $27,500,000 for Federal income tax purposes which is available to offset future taxable income, if any, between the years 2001 and 2020. 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.
9. Capital Stock -------------
Common Stock
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. There were deferred fees of $114,000 for 75,982 shares of common stock at December 31, 2000 and deferred fees of $56,000 for 42,083 shares of common stock at December 31, 1999. In 2000, the Company issued 5,137 shares of common stock to a former non-employee director from his stock account.
10. Options and Warrants --------------------
The Company's 1990 Incentive Stock Option and Non-Qualified Stock Option Plan (the "Plan") expired in March 2000. Under the amended terms of the Plan, the Company's Stock Option Committee was 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
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________________
Stock. Standard provisions of the Plan, which varied with Board and stockholder approval, required that the term of each grant not exceed ten years. At December 31, 2000, there were no 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. The 1993 Plan provides for grants to purchase an aggregate of 41,667 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, 2000, there were 14,942 additional options available for grant under the 1993 Plan.
In May 2000, the Company adopted the 2000 Incentive Stock Option and Non- Qualified Stock Option Plan (the "2000 Plan"), which expires on February 28, 2010. Under the terms of the 2000 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 350,000 shares of Common Stock. Standard provisions of the 2000 Plan, which may vary with Board and stockholder approval, require that the term of each grant not exceed ten years. At December 31, 2000, there were 329,500 additional options available for grant under the 2000 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.
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________
Following is a summary of the stock option transactions for 1998, 1999 and 2000:
The following table summarizes the information about stock options outstanding at December 31, 2000:
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:
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 $262,968, $205,769 and $626,221 for 2000, 1999 and 1998, 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:
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.
11. Research and Development Contracts ----------------------------------
The Company contracts with major corporations and government entities to conduct feasibility studies, sponsored research and development and to remediate contamination problems. Pursuant to the Company's contracts, the work is generally conducted in phases beginning with feasibility studies to demonstrate that the Company's bacteria will degrade the targeted waste. Each sponsoring corporation or governmental entity may terminate the work being conducted by the Company upon the completion of each phase and each additional phase generally is separately contracted for by the sponsoring corporation or governmental entity. 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 12.
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ______________
12. 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 had no capitalized leases at December 31, 2000.
Future minimum payments under noncancelable operating leases consisted of the following at December 31, 2000:
Operating Leases ------------ 2001 $ 1,117,119 2002 1,074,657 2003 923,474 2004 509,066 2005 - Thereafter - ----------- Total minimum lease payments $ 3,624,316 ===========
Rent expense for operating leases was $1,224,649, $1,408,315 and $1,655,676 for the years ended December 31, 2000, 1999 and 1998, respectively.
Licenses
The Company has granted a customer, exclusively for its own operations, an irrevocable, non-exclusive, nontransferable license to use all presently existing and any future technology that the Company may own relating to PCB remediation and that is not otherwise subject to restrictions imposed by third parties. With certain limited exceptions, the Company is required to pay the customer a royalty based on gross revenues received by the Company from the utilization of any jointly-owned technology or any PCB-related remediation technology owned, developed or obtained by the Company. The maximum aggregate royalty payable to the customer by the Company under the technology agreement may not exceed the development funding received by the Company from the customer. The customer provided no additional funding since 1996. At December 31, 2000, 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
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS _______________
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.
13. Related Party Transactions --------------------------
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.
14. Employee Benefits -----------------
The Company sponsors a combined 401(k) employee savings and retirement plan and profit sharing plan covering all employees, who are at least 21 years of age. The Company's contribution expense related to the 401(k) savings plan was $126,609, $142,247 and $77,573 for the years ended December 31, 2000, 1999 and 1998, respectively. There was no contribution expense related to the profit sharing plan.
In 1998, the Wisconsin and Illinois Divisions had a 401(k) plan that 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 post retirement benefit plans.
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS _______________
15. Concentration of Credit Risk/Other ----------------------------------
The Company provides credit to customers on an unsecured basis after evaluating customer credit worthiness. The Company also provides a reserve for bad debts for accounts receivable where there is a probability of loss.
The Company maintains demand deposits with two major banks and money market accounts with two financial institutions. At December 31, 2000 and 1999, 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, 2000, 1999 and 1998 was $1,886,415, $2,673,745 and $2,248,509, respectively. These revenues are primarily from research and development contracts.
16. 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.
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS _______________
Information about reported segments for the years ended December 31, 2000, 1999 and 1998 are as follows:
The following table presents the details of "Other" segment for the years ended December 31, 2000, 1999 and 1998:
No customer accounted for more than 10% of the Company's revenues in 2000, 1999 or 1998.
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.
ENVIROGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS _______________
17. Joint Venture -------------
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. 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.
18. Supplementary Statement of Operations Information -------------------------------------------------
Maintenance and repairs expense for the years ended December 31, 2000, 1999 and 1998 was $139,953, $109,600 and $179,473, respectively.
19. Subsequent Event ----------------
In January 2001, under a program in place in the state of New Jersey, the Company sold a portion of its available potential New Jersey net operating loss tax benefits related to losses incurred in prior years. The net amount received by the Company was $210,790.
20. Quarterly Financial Data (Unaudited) -------------------------------------
The following is a summary of the quarterly results of operations for the years ended December 31, 2000 and 1999.
Schedule II Envirogen, Inc. Valuation and Qualifying Accounts Years Ended December 31, 2000, 1999 and 1998
(a) Uncollectible accounts written-off to the allowance account
(b) Actual write-offs and cash payments
REPORT OF INDEPENDENT AUDITORS
The Board of Directors Envirogen, Inc.
We have audited the accompanying consolidated balance sheets of Envirogen, Inc. at December 31, 2000 and 1999, and the related consolidated statements of operations, stockholder's equity, and cash flows for the years then ended. Our audits 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Envirogen, Inc. at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years 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 14, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Envirogen, Inc.:
In our opinion, the consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1998 (listed in the index appearing under Item 14(a)(1) on page 43) present fairly, in all material respects, the results of operations and cash flows of Envirogen, Inc. for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year ended December 31, 1998 (listed in the index appearing under Item 14(a)(2) on page 43) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, 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 audit provides a reasonable basis for our opinion. 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
ITEM 9.
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
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report.
All other schedules not listed above have been omitted because 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: ---------
(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.
(8) Incorporated by reference to the indicated exhibit to the Company's Report on Form 10-K for the year ended December 31, 1999.
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None
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 23, 2001 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 23rd day of March, 2001.
*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
EXHIBIT INDEX
(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.
(8) Incorporated by reference to the indicated exhibit to the Company's Report on Form 10-K for the year ended December 31, 1999.
* Indicates a management contract or compensatory plan or arrangement.
Exhibit 10.7
ENVIROGEN, INC.
2000 INCENTIVE STOCK OPTION AND NON-QUALIFIED STOCK OPTION PLAN -------------------------------
1. PURPOSE. This Envirogen, Inc. 2000 Incentive Stock Option and Non- ------- Qualified Stock Option Plan ("Plan") is intended to provide a means whereby Envirogen, Inc. (the "Company") may, through the grant of incentive stock options ("ISOs") to purchase common stock of the Company ("Common Stock") to officers and other key employees ("Key Employees") and through the grant of nonqualified stock options ("NQSOs" and, collectively with ISOs, "Options") to Key Employees, directors, scientific advisory board members and consultants (together with Key Employees, "Optionees"), attract and retain such Key Employees and other Optionees and motivate such Key Employees and other Optionees to exercise their best efforts on behalf of the Company and of any related corporation ("Related Corporation").
For purposes of the Plan, a Related Corporation of the Company shall mean either a corporate subsidiary of the Company, as defined in section 424(f) of the Internal Revenue Code of 1986, as amended ("Code"), or the corporate parent of the Company, as defined in section 424(e) of the Code. Further, as used in the Plan, (a) the term "incentive stock option" shall mean an option which, at the time such option is granted under the Plan, qualifies as an ISO within the meaning of section 422 of the Code and is designated as an ISO in the Option Agreement (as hereinafter defined); and (b) the term "nonqualified stock option" shall mean an option which, at the time such option is granted, does not qualify as an ISO and/or is designated as an NQSO in the Option Agreement.
2. ADMINISTRATION. The Plan shall be administered by the Company's -------------- Executive Compensation and Stock Option Committee ("Committee"), which shall consist of not less than three (3) non-employee directors (within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor thereto) who are also outside directors (within the meaning of Treas. Reg.ss.1.162-27(e)(3), or any successor thereto) of the Company who shall be appointed by, and shall serve at the pleasure of, the Company's Board of Directors ("Board"). Each member of such Committee, while serving as such, shall be deemed to be acting in his capacity as a director of the Company.
The Committee shall have full authority, subject to the terms of the Plan, to select the Key Employees and other Optionees to be granted ISOs and NQSOs under the Plan, to grant options on behalf of the Company and to set the date of grant and the other terms of such Options. The Committee also shall have the authority to establish such rules and regulations, not inconsistent with the provisions of the Plan, for the proper administration of the Plan, and to amend, modify or rescind any such rules and regulations, and to make such determinations and interpretations under, or in connection with, the Plan, as it deems necessary or advisable. All such rules, regulations, determinations and interpretations shall be binding and conclusive upon the Company, its stockholders and all employees, and upon their respective legal representatives, beneficiaries, successors and assigns and upon all other persons claiming under or through any of them.
3. ELIGIBILITY. The class of employees who shall be eligible to receive ----------- ISOs under the Plan and the class of persons who shall be eligible to receive NQSOs under the Plan shall be, respectively, the Key Employees of the Company and/or a Related Corporation and the other Optionees employed by or otherwise associated with the Company and/or of a Related Corporation. More than one Option may be granted to an Optionee under the Plan.
4. STOCK. Options may be granted under the Plan to purchase up to a ----- maximum of three hundred fifty thousand (350,000) shares of the Company's Common Stock, par value $.01 per share, subject to adjustment as hereinafter provided; provided, however that no optionee may be granted Options in one calendar year with respect to more than one half of the total number of shares of the Company's Common Stock reserved for issuance pursuant to the Plan. Shares issuable under the Plan may be authorized but unissued shares or reacquired shares, and the Company may purchase shares required for this purpose, from time to time, if it deems such purchase to be advisable.
If any Option granted under the Plan expires or otherwise terminates for any reason whatever (including, without limitation, the Optionee's surrender thereof) without having been exercised, the shares subject to the unexercised portion of such Option shall continue to be available for the granting of Options under the Plan as fully as if such shares had never been subject to an Option; provided, however, that (a) if an Option is cancelled, the cancelled Option is counted against the maximum number of shares for which Options may be granted to a Key Employee, and (b) if the Option price is reduced after the date of grant, the transaction is treated as a cancellation of an Option and the grant of a new Option for purposes of counting the maximum number of shares for which Options may be granted to a Key Employee.
5. GRANTING OF OPTIONS. From time to time until the expiration or earlier ------------------- suspension or discontinuance of the Plan, the Committee may, on behalf of the Company, grant to Optionees under the Plan such Options as it determines are warranted; provided, however, that grants of ISOs and NQSOs shall be separate and not in tandem. The granting of an Option under the Plan shall not be deemed either to entitle the Optionee to, or to disqualify the Optionee from, any participation in any other grant of Options under the Plan. In making any determination as to whether an Optionee shall be granted an Option and as to the number of shares to be covered by such Option, the Committee shall take into account the duties of the Optionee, his present and potential contributions to the success of the Company or a Related Corporation, and such other factors as the Committee shall deem relevant in accomplishing the purposes of the Plan. Moreover, the Committee may provide in the Option that said Option may be exercised only if certain conditions, as determined by the Committee, are fulfilled.
6. ANNUAL LIMIT. ------------
a. ISOs. ----
The aggregate fair market value (determined as of the time the ISO is granted) of the Common Stock with respect to which ISOs are exercisable for the first time by a Key Employee during any calendar year (under this Plan and any other ISO plan of the Company or a Related Corporation) shall not exceed one hundred thousand dollars ($100,000).
b. NQSOs. -----
The annual limits set forth above for ISOs shall not apply to NQSOs.
7. TERMS AND CONDITIONS OF OPTIONS. The Options granted pursuant to the ------------------------------- Plan shall expressly specify whether they are ISOs or NQSOs. In addition, the Options granted pursuant to the Plan shall include expressly or by reference the following terms and conditions, as well as such other provisions not inconsistent with the provisions of this Plan and, for ISOs granted under this Plan, the provisions of section 422(b) of the Code, as the Committee shall deem desirable:
a. Number of Shares. ----------------
A statement of the number of shares to which the Option pertains.
b. Price. -----
A statement of the Option price which shall be determined and fixed by the Committee in its discretion but, in the case of an ISO, shall not be less than the higher of one hundred percent (100%) (one hundred ten percent (110%) in the case of more than ten percent (10%) stockholders as discussed in (j) below) of the fair market value of the optioned shares of Common Stock, or the par value thereof, on the date the ISO is granted and, in the case of an NQSO, shall not be less than the higher of seventy-five percent (75%) of the fair market value of the optioned shares of Common Stock, or the par value thereof, on the date the NQSO is granted.
The fair market value of the optioned shares of Common Stock shall be arrived at by a good faith determination of the Committee and shall be (i) the mean between the highest and lowest quoted selling price, if there is a market for the Common Stock on a registered securities exchange or in an over the counter market, on the date of grant, or (ii) the weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the date of grant, if there are no sales on the date of grant but there are sales on dates within a reasonable period both before and after the date of grant, or (iii) the means between the bid and asked prices, as reported by the National Quotation Bureau on the date of grant, if actual sales are not available during a reasonable period beginning before and ending after the date of grant, or (iv) such other method of determining fair market value as shall be authorized by the Code, or the rules or regulations thereunder, and adopted by the Committee. Where the fair market value of the optioned shares of Common Stock is determined under (ii) above, the average of the means between the highest and lowest sales on the nearest date before and the nearest date after the date of grant is to be weighted inversely by the respective numbers of trading days between the date of grant and such sales dates, in accordance with Treas. Reg. (S) 20.2031-2(b)(1)
c. Term
Subject to earlier termination as provided in Subsections (e), (f), (g) and (j) below and in Section 9 hereof, the term of each Option shall be not more than ten (10) years (five (5) years in the case of ISOs granted to more than ten percent (10%) stockholders as discussed in (j) below) from the date of grant.
d. Exercise. --------
Options shall be exercisable in such installments and on such dates as the Committee may specify, provided that (i) unless approved by the Stock Option Committee, in no event shall any Option become exercisable at a rate in excess of 20% per annum from the date of grant (except that all outstanding Options shall be immediately exercisable in the case of merger, consolidation, or other business combination involving the sale or transfer of all (or substantially all) of the assets of the Company, or other business combination involving the sale or transfer of all (or substantially all) of the capital stock of the Company in which the Company is not the surviving entity, or, if it is the surviving entity, either (a) does not survive as an operating ongoing concern in substantially the same line of business, or (b) is controlled by persons or entities previously unaffiliated with the Company), (ii) in the case of new Options granted to an Optionee in replacement for options (whether granted under the Plan or otherwise) held by the Optionee, the new Options may be made exercisable, if so determined by the Committee, in its discretion, at the earliest date the replaced options were exercisable, but not earlier than three (3) months from the date of grant of the new Options, and (iii) the Committee may accelerate the exercise date of any outstanding Options, in its discretion, if it deems such acceleration to be desirable. Any Option shares, the right to the purchase of which has accrued, may be purchased at any time up to the expiration or termination of the Option. Exercisable Options may be exercised, in whole or in part, from time to time by giving written notice of exercise to the Company at its principal office, specifying the number of shares to be purchased and accompanied by payment in full of the aggregate Option price for such shares. Only full shares shall be issued under the Plan, and any fractional share which might otherwise be issuable upon exercise of an Option granted hereunder shall be forfeited.
The Option price shall be payable (i) in cash or its equivalent, (ii) in the discretion of the Committee, in Company Common Stock previously acquired by the Optionee, provided that if such shares of Common Stock were acquired through exercise of an ISO and are used to pay the Option price of an ISO, such shares have been held by the Key Employee for a period of not less than the holding period described in section 422(a)(1) of the Code on the date of exercise, or if such shares of Common Stock were acquired through exercise of an NQSO or of an option under a similar plan, such shares have been held by the Optionee for a period of more than one (1) year on the date of exercise, (iii) in the discretion of the Committee, in any combination of (i) and (ii) above, or (iv) in the discretion of the Committee, by delivering a properly executed notice of exercise of the Option to the Company and a broker, with irrevocable instructions to the broker promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price of the Option, provided that the payment procedure specified in this clause (iv) shall not be available if such payment procedure would result in a violation of section 16(b) of the Exchange Act.
In the event such Option price is paid, in whole or in part, with shares of Common Stock, the portion of the Option price so paid shall be equal to the "fair market value" on the date of tender, as such "fair market value" is determined in Subsection (b) above, of the Common Stock so tendered in payment of such Option price.
e. Termination of Employment. -------------------------
If an Optionee's employment by the Company (and Related Corporations) is terminated by either party prior to the expiration date fixed for this Option for any reason other than death or disability, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of such termination, by the Optionee at any time prior to the earlier of (i) the expiration date specified in such option, or (ii) 30 days after the date of the Optionee's termination of employment, or (iii) an accelerated termination date of the option determined by the Committee, in its discretion, except that such accelerated termination date shall not be earlier than the date of the Optionee's termination of employment.
For purposes of this Plan, in the case of an Optionee who is a director or a scientific advisory board member of the Company or a Related Corporation but who is not an employee of the Company or a Related Corporation, such Optionee's "employment" with the Company and all related Corporations shall be deemed to terminate when such Optionee ceases to be a director or a scientific board member of the Company and all Related Corporations, and is no longer providing ongoing consulting or advisory services to the Company and all Related Corporations. For purposes of this Plan, in the case of an Optionee who is a consultant to the Company or a Related Corporation, such Optionee's "employment" with the Company and all Related Corporations shall be deemed to terminate when such Optionee is no longer providing ongoing consulting or advisory services to the Company and all Related Corporations.
f. Exercise upon Disability of Optionee. ------------------------------------
If an Optionee shall become disabled (within the meaning of section 22(e)(3) of the Code) during his employment and, prior to the expiration date fixed for his Option, his employment is terminated as a consequence of such disability, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of such termination, or to any greater extent permitted by the Committee, by the Optionee at any time prior to the earlier of (i) the expiration date specified in such Option, or (ii) an accelerated termination date determined by the Committee, in its discretion, except that such accelerated termination date shall not be earlier than the date of the Optionee's termination of employment by reason of disability, and in the case of ISOs, such date shall not be later than one (1) year after such termination of employment. In the event of the Optionee's legal disability, such Option may be so exercised by the Optionee's legal representative.
g. Exercise upon Death of Optionee. -------------------------------
If an Optionee shall die during his employment and prior to the expiration date fixed for his Option, or if an Optionee whose employment is terminated by reason of Optionee's disability (as described in Subsection (f) above) shall die following his termination of employment but prior to the earliest of (i) the expiration date fixed for his Option, or (ii) the expiration of the period determined under Subsection (f) above, or (iii) in the case of an ISO, three (3) months following termination of employment, such Option may be exercised, to the extent of the number of shares with respect to which the Optionee could have exercised it on the date of his death, or to any greater extent permitted by the Committee, by the Optionee's estate, personal representative or beneficiary who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the Optionee, at any time prior to the earlier of (i) the expiration date specified in such Option or (ii) an accelerated termination date determined by the Committee, in its discretion, except that such accelerated termination date shall not be later than one (1) year after the date of death.
h. Non-Transferability. -------------------
No Option shall be assignable or transferable by the Optionee otherwise than by will or by the laws of descent and distribution, and during the lifetime of the Optionee, the Option shall be exercisable only by him or by his guardian or legal representative. If the Optionee is married at the time of exercise and if the Optionee so requests at the time of exercise, the certificate or certificates shall be registered in the name of the Optionee and the Optionee's spouse, jointly, with right of survivorship.
i. Rights as a Stockholder. -----------------------
An Optionee shall have no rights as a stockholder with respect to any shares covered by his Option until the issuance of a stock certificate to him for such shares.
j. Ten Percent Stockholder. -----------------------
If the Key Employee owns more than ten percent (10%) of the total combined voting power of all shares of stock of the Company or of a Related Corporation at the time an ISO is granted to him, the Option price for the ISO shall be not less than one hundred ten percent (110%) of the fair market value of the optioned shares of Common Stock on the date the ISO is granted, and such ISO, by its terms, shall not be exercisable after the expiration of five (5) years from the date the ISO is granted. The conditions set forth in this Subsection (j) shall not apply to NQSOs.
k. Listing and Restriction of Shares. ---------------------------------
Each Option shall be subject to the requirement that, if at any time the Committee shall determine, in its discretion, that the listing, registration or qualifications of the shares covered thereby upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the purchase of shares thereunder, or that action by the Company or by the Optionee should be taken in order to obtain an exemption for any such requirement, no such Option may be exercised, in whole or in part, unless and until such action shall have been effected, obtained, or taken under conditions acceptable to the Committee. Without limiting the generality of the foregoing, each Optionee or his legal representative or beneficiary may also be required to give satisfactory assurance that shares purchased upon exercise of an Option are being purchased for investment and not with a view to distribution, and certificates representing such shares may be legended accordingly.
l. Withholding and Use of Shares to Satisfy Tax Obligations. --------------------------------------------------------
The obligation of the Company to deliver shares of Common Stock upon the exercise of any Option shall be subject to applicable federal, state and local tax withholding requirements.
If the exercise of any Option is subject to the withholding requirements of applicable federal tax laws, the Committee, in its discretion (and subject to such withholding rules ("Withholding Rules") as shall be adopted by the Committee), may permit the Optionee to satisfy the federal withholding tax, in whole or in part, by electing to have the Company withhold (or by returning to the Company) shares of Common Stock, which shares shall be valued, for this purpose, at their fair market value on the date the amount of tax required to be withheld is determined (the "Determination Date"). Such election must be made in compliance with and subject to the Withholding Rules, and the Company may not withhold shares in excess of the number necessary to satisfy the minimum federal income tax withholding requirements. In the event shares of Common Stock acquired under the exercise of an ISO are used to satisfy such withholding requirement, such shares of Common Stock must have been held by the Key Employee for a period of not less than the holding period described in section 422(a)(1) of the Code on the Determination Date. In the event shares of Common Stock acquired through exercise of an NQSO or of an option under a similar plan are used to satisfy such withholding requirements, such shares must have been held by the Optionee for a period of more than one (1) year on the Determination Date.
8. OPTION INSTRUMENTS - OTHER PROVISIONS. Options granted under the Plan ------------------------------------- shall be evidenced by written documents ("Option Agreements") in such form as the Committee shall, from time to time, approve, which Option Agreements shall contain such provisions, not inconsistent with the provisions of the Plan for NQSOs granted pursuant to the Plan, and such conditions, not inconsistent with the provisions of the Plan and section 422(b) of the Code for ISOs granted pursuant to the Plan, as the Committee shall deem advisable, and which Option Agreements shall specify whether the Option is an ISO or NQSO. Each Optionee shall enter into, and be bound by, such Option Agreements, as soon as practicable after the grant of an Option.
9. CAPITAL ADJUSTMENTS. The number of shares which may be issued under ------------------- the Plan, as stated in Section 4 hereof, and the maximum number of shares with respect to which options may be granted to any Key Employee under the Plan as stated in Section 4 hereof, and the number of shares issuable upon exercise of outstanding Options under the Plan (as well as the Option price per share under such outstanding Options), shall, subject to the provisions of section 424(a) of the Code, be proportionately adjusted, as may be deemed appropriate by the Committee, to reflect any stock dividend, stock split, share combination, or similar change in the capitalization of the Company.
10. AMENDMENT OR DISCONTINUANCE OF THE PLAN. ---------------------------------------
(a) General. The Board from time to time may suspend or discontinue the ------- Plan or amend it in any respect whatsoever, except that the following amendments shall require stockholder approval (given in the manner set forth in Section 10(b) below):
(i) With respect to ISOs, any amendment which would: (A) change the class of employees eligible to participate in the Plan, (B) except as permitted under Section 9 hereof, increase the maximum number of shares of Common Stock with respect to which ISOs may be granted under the Plan, or (C) extend the duration of the Plan under Section 15 hereof with respect to any ISOs granted hereunder; and
(ii) With respect to Options, any amendment which would require stockholder approval pursuant to Treas. Reg.(S)1.162-27(e)(4)(vi) or any successor thereto.
Notwithstanding the foregoing, no such suspension, discontinuance or amendment shall materially impair the rights of any holder of an outstanding Option without the consent of such holder.
(b) Stockholder Approval Requirements. The approval of stockholders must --------------------------------- comply with all applicable provisions of the corporate charter, bylaws, and applicable state law prescribing the method and degree of stockholder approval required for the issuance of corporate stock or options. If the applicable state law does not prescribe a method and degree of stockholder approval in such case, the approval of stockholders must be effected:
(i) By a method and in a degree that would be treated as adequate under applicable state law in the case of an action requiring stockholder approval (i.e., an action on which stockholders would be entitled to vote if the action were taken at a duly held stockholders' meeting); or
(ii) By a majority of the votes cast at a duly held stockholders' meeting at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting on the plan.
11. RIGHTS. Neither the adoption of the Plan nor any action of the Board ------ or the Committee shall be deemed to give any individual any right to be granted an Option, or any other right hereunder, unless and until the Committee shall have granted such individual an Option, and then his rights shall be only such as are provided by the Option Agreement.
Any Option under the Plan shall not entitle the holder thereof to any rights as a stockholder of the Company prior to the exercise of such Option and the issuance of the shares pursuant thereto. Further, notwithstanding any provisions of the Plan or the Option Agreement with an Optionee, the Company shall have the right, in its discretion, to retire an Optionee at any time in accordance with its policies or otherwise to terminate his employment at any time in accordance with its policies for any reason whatsoever.
12. APPLICATION OF FUNDS. The proceeds received by the Company from the -------------------- sale of Common Stock pursuant to Options granted under the Plan shall be used for general corporate purposes. Any cash received in payment for shares upon exercise of an Option to purchase Common Stock shall be added to the general funds of the Company and shall be used for its corporate purposes. Any Common Stock received in payment for shares upon exercise of an Option to purchase Common Stock shall become treasury stock.
13. EFFECTIVE DATE. This Plan shall become effective on May 18, 2000 (the -------------- date the Plan was approved by the stockholders).
14. NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall -------------------------------- impose no obligation upon an Optionee to exercise such Option.
15. TERMINATION OF THE PLAN. Unless earlier terminated as provided in the ----------------------- Plan, the Plan and all authority granted hereunder shall terminate absolutely at 12:00 midnight on February 28, 2010, which date is within ten (10) years after the date the Plan was adopted by the Board, and no Options hereunder shall be granted thereafter. Nothing contained in this Section 15, however, shall terminate or affect the continued existence of rights created under Options issued hereunder and outstanding on February 28, 2010, which by their terms extend beyond such date.
16. GOVERNING LAW. With respect to any ISOs granted pursuant to the Plan ------------- and the Option Agreements thereunder, the Plan, such Option Agreements and any ISOs granted pursuant thereto shall be governed by the applicable Code provisions to the maximum extent possible. Otherwise, the laws of the State of Delaware shall govern the operation of, and the rights of Optionees under, the Plan, the Option Agreements and any Options granted thereunder.