<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
- --------------------------------------------------------------------------------
For Quarter Ended March 31, 1997 Commission File Number 0-20404
ENVIROGEN, INC.
---------------
(Exact name of registrant as specified in its charter)
Delaware 22-2899415
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4100 Quakerbridge Road
Princeton Research Center
Lawrenceville, NJ 08648
-----------------------
(Address of principal executive offices)
(609) 936-9300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, as of March 31, 1997 was 12,873,520.
________________________________________________________________________________
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ENVIROGEN, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<C> <S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 1997 and
December 31, 1996 (Unaudited) 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General 8
Results of Operations 8
Liquidity and Capital Resources 9
Other Matters 10
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURE PAGE 12
</TABLE>
2
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PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,690,325 $4,614,062
Accounts receivable-trade, net 2,411,963 3,100,447
Unbilled revenue 1,618,455 1,776,004
Inventory 55,027 55,027
Prepaid expenses and other current assets 228,349 175,941
------------- ------------
Total current assets 8,004,119 9,721,481
Property and equipment, net 836,625 922,320
Restricted cash 309,300 309,300
Investment in and advances to joint venture 232,744 228,934
Intangible assets, net 1,293,194 1,348,677
Deferred acquisition costs (see footnote 2) 297,161 43,293
Other assets 304,015 142,619
------------- ------------
Total assets $11,277,158 $12,716,624
============= ============
LIABILITIES
Current liabilities:
Accounts payable $628,557 $1,335,954
Accrued expenses and other liabilities 902,013 955,886
Deferred revenue 325,256 312,784
Current portion of note payable 3,149 4,287
Current portion of capital lease obligations 18,386 18,304
------------- ------------
Total current liabilities 1,877,361 2,627,215
Deferred rent 3,056 12,222
Capital lease obligations, net of current portion 25,781 29,954
------------- ------------
Total liabilities 1,906,198 2,669,391
------------- ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock 129,330 129,319
Additional paid-in capital 31,927,019 31,925,861
Accumulated deficit (22,629,564) (22,001,997)
Less: Treasury stock (5,950) (5,950)
Deferred financing costs (see footnote 2) (49,875)
------------- ------------
Total stockholders' equity 9,370,960 10,047,233
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Total liabilities and stockholders' equity $11,277,158 $12,716,624
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1997 1996
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<S> <C> <C>
Revenues:
Commercial operations $1,764,972 $2,223,255
Research and development services 689,738 451,269
-------------- --------------
Total revenues 2,454,710 2,674,524
-------------- --------------
Cost of commercial operations 1,569,621 2,138,106
Research and development costs 641,817 599,940
Marketing, general and administrative expenses 858,948 675,096
-------------- --------------
Total costs and expenses 3,070,386 3,413,142
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Other income (expense):
Interest income 56,389 36,227
Interest expense (3,317) (6,079)
Equity in gain (loss) of joint venture (64,963) 91,631
--------------- --------------
Other income (expense), net (11,891) 121,779
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Net loss (627,567) (616,839)
Preferred stock dividends (21,875)
--------------- --------------
Net loss applicable to Common Stock ($627,567) ($638,714)
=============== ==============
Net loss per share applicable to Common Stock ($0.05) ($0.07)
=============== ==============
Weighted average number of shares of
Common Stock outstanding 12,873,035 9,220,380
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss ($627,567) ($616,839)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation and amortization 192,695 195,787
Provision for doubtful accounts 24,849 19,700
Equity in (earnings) loss of joint venture 64,963 (91,631)
Changes in assets and liabilities:
Decrease in accounts receivable 663,635 140,912
Decrease in unbilled revenue 157,549 24,710
(Increase) decrease in prepaid expenses and
other current assets (52,408) 6,433
(Increase) in other assets (118,103) (2,057)
Increase (decrease) in accounts payable (707,397) 150,775
(Decrease) in accrued expenses and other liabilities (63,039) (48,206)
Increase (decrease) in deferred revenue 12,472 (209,258)
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Net cash used by operating activities (452,351) (429,674)
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Cash flows from investing activities:
Capital expenditures (51,517) (86,129)
Investment in and advances to joint venture (68,773)
Purchase of MWR, Inc. (1,297,355)
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Net cash used in investing activities (120,290) (1,383,484)
----------- ------------
Cash flows from financing activities:
Debt repayment (1,138) (1,051)
Capital lease principal repayments (4,091) (33,135)
Deferred acquisition costs (297,161)
Deferred financing costs (49,875)
Net proceeds from exercise of stock options 1,169 2,230
Cash dividends paid on Redeemable Cumulative
Convertible Preferred Stock (21,875)
----------- ------------
Net cash used in financing activities (351,096) (53,831)
----------- ------------
Net decrease in cash and cash equivalents (923,737) (1,866,989)
Cash and cash equivalents at beginning of period 4,614,062 3,748,197
----------- ------------
Cash and cash equivalents at end of period $3,690,325 $1,881,208
=========== ============
Supplemental disclosures of cash flow information:
-------------------------------------------------
Cash paid for interest $3,008 $5,366
=========== ============
Cash paid for income taxes $7,954 $1,250
=========== ============
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
------------------------------------------------------------------------
-The Company entered into capital lease obligations amounting to $22,350
for the three months ended March 31, 1996.
-In February 1996, the Company purchased MWR, Inc. for $1,332,000 in
cash and 456,500 shares of Common Stock valued at $1,511,015.
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
ENVIROGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
The financial information presented reflects all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods. The results for the interim periods are not necessarily
indicative of the results to be expected for the entire year.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the fiscal year ended December 31, 1996. Certain
reclassifications have been made to conform prior year's presentation with the
1997 financial statement presentation.
2. SUBSEQUENT EVENTS
-----------------
On April 10, 1997, the Company acquired Fluid Management, Inc. (FMI) of
Pewaukee, Wisconsin for approximately $11 million in cash and 4,190,477 shares
of the Company's common stock pursuant to which FMI was merged into the Company.
In connection with the acquisition, the Company paid approximately $1.4 million
of FMI's outstanding debt. A portion of the purchase price is being held in
escrow to satisfy the sellers' indemnification obligations under the Merger
Agreement. FMI is a full-service environmental consulting and engineering firm
with offices in Pewaukee, La Crosse, Ashwaubenon and Mosinee, Wisconsin and
Geneva, Illinois. In 1996, FMI reported revenues of $21.6 million and pre-tax
income of $4.3 million. The acquisition will be accounted for under the
purchase method.
On April 10, 1997, the Company issued 6,095,238 shares of common stock to
Warburg, Pincus Ventures, L.P. for an aggregate purchase price of $16 million.
The net proceeds from the financing were used to fund the cash portion of the
FMI acquisition and will also supplement the working capital of the combined
enterprise.
6
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The following pro forma financial information assumes the acquisition occurred
at the beginning of the period presented and does not purport to be indicative
of what would have occurred had the acquisition been made as of that date or of
results which may occur in the future.
<TABLE>
<CAPTION>
Year Ended
1996
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<S> <C>
Net revenues $33,711,613
Net loss ($ 365,436)
Net loss per share applicable to
Common Stock ($ 0.02)
Weighted average number of shares
of Common Stock outstanding 23,217,655
</TABLE>
3. EARNINGS PER SHARE
------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share
("EPS") and supersedes APB Opinion No. 15, "Earnings Per Share" ("Opinion 15").
SFAS 128 replaces the presentation of primary EPS with a presentation of basic
EPS which excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. This statement also requires dual presentation of basic EPS
and diluted EPS on the face of the income statement for all periods presented.
Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15,
with some modifications. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. Early
adoption is not permitted and the statement requires restatement of all prior-
period EPS data presented after the effective date.
The Company will adopt SFAS 128 effective with its 1997 year-end. If SFAS 128
had been adopted at March 31, 1997, there would have been no change in the EPS
as reflected in the accompanying financial statements for the periods ended
March 31, 1997 and 1996.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto included in this
Quarterly Report and the consolidated financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Form 10-K for the fiscal year ended December 31,
1996.
General
- -------
The source of the Company's revenues to date includes (i) commercial sales of
the Company's biological degradation systems, (ii) remediation services,
including both in situ and ex situ bioremediation, and (iii) funds received from
third parties and government agencies to conduct specific research and
development programs. While the Company has realized significant commercial
revenues for several years from remediation services, it has only recently seen
the first substantial revenues from sales of full-scale biological degradation
systems for the treatment of contaminated air and water streams. Although great
strides have been made in the commercialization of these systems, significant
expenditures will be required for continued research and development, additional
marketing activities and ultimately the development of manufacturing
capabilities for the further commercialization of the Company's biodegradation
systems. The amount and timing of such expenditures will vary depending on
several factors, including the progress of development and testing, funding
from third parties, the level of enforcement of environmental regulations by
federal and state agencies, technological advances, changing competitive
conditions and determinations with respect to the commercial potential of the
Company's systems. The amount and timing of such expenditures cannot be
predicted.
Results of Operations
- ---------------------
Three Months Ended March 31, 1997 Compared to
- ---------------------------------------------
Three Months Ended March 31, 1996
- ---------------------------------
For the three months ended March 31, 1997, the Company reported revenues of
$2,454,710, a decrease of 8% from the same period in 1996. The net loss in the
period decreased 2% to $627,567, while the net loss per share was $0.05 compared
to $0.07 in the same period in 1996. The decrease in net loss per share is due
primarily to a greater number of shares outstanding resulting from a private
placement of common stock in the second quarter of 1996.
Commercial revenues decreased 21% to $1,764,972 from $2,223,255 in the same
period in 1996, while revenues from corporate research and development contracts
increased 53% to $689,738 from $451,269 in the same period in 1996. The lower
commercial revenues are due primarily to decreased systems sales from the
Commercial Air Group. In the first quarter of 1996, the Company recognized
significant revenues from the ABTCo biofilter project which was completed in
1996. Revenues from remediation services increased due primarily to an increase
in activity from the Company's Midatlantic Operations Group. Revenues from
remediation services accounted for essentially all of the Company's commercial
revenues in the three-month period ended March 31, 1997.
8
<PAGE>
Revenues from corporate and government research and development contracts
increased primarily due to the greater volume of Phase II government projects
that the Company is actively working on. In the three-month period ended March
31, 1997, the Company recorded initial revenues under a new Phase I grant from
the National Science Foundation, a new Phase II grant from the National Science
Foundation and a new Phase II grant from the Department of Defense.
Total costs and expenses decreased 10% to $3,070,386 in the first quarter of
1997 from $3,413,142 in the same period in 1996. The cost of commercial
operations decreased 27% to $1,569,621 due to the decreased revenue levels.
Research and development expenses increased 7% to $641,817 due to the increased
revenues from corporate and government research and development contracts.
Marketing, general and administrative expenses increased 27% to $858,948 due
primarily to increased marketing expenses associated with the newly-created
Rhone-Poulenc arrangement and increased personnel related costs as additional
marketing staff was hired.
Interest income increased 56% to $56,389 due primarily to the increased level of
cash available for investment as a result of the Company's May 1996 private
placement of common stock. Equity in loss of joint venture was $64,963 for the
first quarter of 1997 as compared to income of $91,631 in the first quarter of
1996.
Liquidity and Capital Resources
- -------------------------------
The Company has funded its operations to date primarily through public offerings
and private placements of equity securities, research and development agreements
with major industrial companies, research grants from government agencies and
revenues from commercial services and sales of biological degradation systems.
At March 31, 1997 the Company had cash and cash equivalents of $3,690,325 and
working capital of $6,126,758. Additionally, the Company had restricted cash of
$309,300 that was being used to collateralize a bond for a large commercial
project. Cash and cash equivalents decreased $923,737 from December 31, 1996 to
March 31, 1997 primarily due to cash used by operations of $452,351, costs
associated with the acquisition of Fluid Management, Inc. of $297,161, deferred
financing costs of $49,875, capital expenditures of $51,517 and cash invested in
and advanced to CVT America of $68,773. The Company expects to incur additional
capital expenditures in connection with the continued development and
commercialization of its technologies. The timing and amount of such
expenditures will fluctuate depending on the timing of field tests, systems
development activity, the rapidity with which the Company's biodegradation
systems can be further commercialized and the availability of capital.
Furthermore, future projects may require the Company to set aside additional
capital to collateralize performance bonds.
Revenue from certain of the Company's contracts is recognized as services are
provided and costs are incurred. For fixed-price contracts, revenue is
recognized on the percentage-of-completion method, measured by the percentage
relationship of costs incurred from contract inception to date to the estimated
total costs for each contract. The asset "Unbilled revenue" represents revenues
recognized in excess of amounts billed. Correspondingly, the liability "Deferred
revenue" represents billings in excess of costs and estimated earnings. The
balance in these accounts will fluctuate depending on a number of factors,
including the number and size of fixed-price contracts, contract terms and other
timing and cost issues. At March 31, 1997, unbilled revenue was $157,549 less
than at December 31, 1996 due primarily to lower revenue levels.
9
<PAGE>
Accounts receivable decreased by $688,484 from December 31, 1996 to March 31,
1997 primarily due to the timing of collections and reduced revenue levels.
Accounts payable decreased by $707,397 and accrued expenses and other
liabilities decreased by $63,039 in the same period due primarily to the timing
of project expenses and the payment of year end bonuses, respectively. Other
assets increased by $118,103 from December 31, 1996 to March 31, 1997 due to
broker costs associated with the lease renewal on the Company's headquarters
building.
On April 10, 1997, the Company acquired Fluid Management, Inc. (FMI) of
Pewaukee, Wisconsin for approximately $11 million in cash and 4,190,477 shares
of common stock. On April 10, 1997 the Company also issued and sold 6,095,238
shares of common stock to Warburg, Pincus Ventures L.P. (Warburg) for an
aggregate purchase price of $16 million. The net proceeds from the financing
were used to fund the cash portion of the FMI acquisition and will also
supplement the working capital of the combined enterprise. It is anticipated
that the Company's currently available cash and cash expected to be generated
from the newly combined operations will provide sufficient operating capital for
the foreseeable future.
Other Matters
- -------------
As of December 31, 1996, the Company had a net operating loss carryforward of
approximately $19,300,000 for federal income tax reporting purposes available to
offset future taxable income, if any, through 2011. 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 through the date of this Report and
may be further limited in the event of additional ownership changes, if any, as
a result of future equity issuances.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
On January 14, 1997 the Company filed a Report on Form 8-K reporting the
execution of a Merger Agreement with Fluid Management, Inc. and the
shareholders thereof and a Securities Purchase Agreement with Warburg, Pincus
Ventures, L.P.
11
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SIGNATURES
----------
Pursuant to the requirements 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.
(Registrant)
Date: May 13, 1997 By: /s/ Harcharan S. Gill
---------------------
Harcharan S. Gill
President and Chief Executive Officer
/s/ William C. Smith
--------------------
William C. Smith
Acting Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,690,325
<SECURITIES> 0
<RECEIVABLES> 2,681,950
<ALLOWANCES> (269,987)
<INVENTORY> 55,027
<CURRENT-ASSETS> 8,004,119
<PP&E> 3,627,862
<DEPRECIATION> (2,791,237)
<TOTAL-ASSETS> 11,277,158
<CURRENT-LIABILITIES> 1,877,361
<BONDS> 0
0
0
<COMMON> 129,330
<OTHER-SE> 9,241,630
<TOTAL-LIABILITY-AND-EQUITY> 11,277,158
<SALES> 0
<TOTAL-REVENUES> 2,454,710
<CGS> 0
<TOTAL-COSTS> 3,070,386
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,317
<INCOME-PRETAX> (627,567)
<INCOME-TAX> 0
<INCOME-CONTINUING> (627,567)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (627,567)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0.00
</TABLE>
