<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 September 30, 1998 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 September 30, 1998 was 23,795,635.
- --------------------------------------------------------------------------------
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ENVIROGEN, INC.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 (Unaudited) 3
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C>
General 8
Results of Operations 9
Liquidity and Capital Resources 11
Other Matters 12
</TABLE>
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURE PAGE 14
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,118,801 $ 4,863,658
Accounts receivable-trade, net 6,435,313 6,977,161
Unbilled revenue 3,942,234 4,213,653
Inventory 225,638 248,712
Prepaid expenses and other current assets 804,920 517,960
------------- -------------
Total current assets 15,526,906 16,821,144
Property and equipment, net 1,602,899 1,757,577
Restricted cash 309,300 309,300
Investment in and advances to joint venture 97,785 87,648
Intangible assets, net 1,246,590 23,488,607
Other assets 261,633 262,736
------------- -------------
Total assets $19,045,113 $42,727,012
============= =============
LIABILITIES
Current liabilities:
Accounts payable $ 2,890,169 $ 3,449,512
Accrued expenses and other liabilities 1,683,662 1,948,215
Reserve for claim adjustments and warranties 2,554,998 2,577,218
Deferred revenue 998,125 730,365
Current portion of capital lease obligations 9,866 16,777
------------- -------------
Total current liabilities 8,136,820 8,722,087
Capital lease obligations, net of current portion 6,097 12,671
------------- -------------
Total liabilities 8,142,917 8,734,758
------------- -------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock 238,551 233,543
Additional paid-in capital 59,472,396 58,856,844
Accumulated deficit (48,802,801) (25,092,183)
Less: Treasury stock (5,950) (5,950)
------------- -------------
Total stockholders' equity 10,902,196 33,992,254
------------- -------------
Total liabilities and stockholders' equity $19,045,113 $42,727,012
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
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ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Commercial operations $6,311,204 $7,292,027 $18,956,699 $15,999,246
Research and development services 605,515 636,748 1,977,105 2,024,526
------------- ------------- ------------- -------------
Total revenues 6,916,719 7,928,775 20,933,804 18,023,772
------------- ------------- ------------- -------------
Cost of commercial operations 5,134,822 4,880,074 15,396,329 10,826,093
Research and development costs 729,124 617,492 2,198,961 1,954,965
Marketing, general and administrative expenses 1,744,151 2,628,245 5,505,235 5,851,623
Impairment of long-lived assets 21,670,028
------------- ------------- ------------- -------------
Total costs and expenses 7,608,097 8,125,811 44,770,553 18,632,681
------------- ------------- ------------- -------------
Other income (expense):
Interest income 43,338 63,855 141,766 189,618
Interest expense (4,523) (9,601) (17,185) (23,608)
Equity in income (loss) of joint venture 6,726 (41,346) 10,137 (189,019)
Other, net (8,587) 350 (8,587) 26,047
------------- ------------- ------------- -------------
Other income, net 36,954 13,258 126,131 3,038
------------- ------------- ------------- -------------
Net loss applicable to Common Stock ($654,424) ($183,778) ($23,710,618) ($605,871)
============= ============= ============= =============
Basic and diluted net loss per share applicable
to Common Stock ($0.03) ($0.01) ($1.00) ($0.03)
============= ============= ============= =============
Weighted average number of shares of
Common Stock used in computing basic
and diluted net loss per share 23,795,635 23,211,635 23,595,315 19,066,095
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
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ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($23,710,618) ($605,871)
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization 1,063,836 1,268,556
Provision for doubtful accounts 525,313 579,538
Equity in (gain) loss of joint venture (10,137) 189,019
Impairment of long-lived assets 21,670,028
Other 8,595 (1,047)
Changes in operating assets and liabilities:
Accounts receivable 526,311 218,555
Unbilled revenue 271,419 (446,195)
Prepaid expenses and other current assets (286,960) (194,001)
Inventory 23,074 9,408
Other assets 1,103 (101,920)
Accounts payable (559,343) (2,142,279)
Accrued expenses and other liabilities (264,553) (63,799)
Reserve for claim adjustments and warranties (531,996) (187,559)
Deferred revenue 267,760 144,723
-------------- --------------
Net cash used in operating activities (1,006,168) (1,332,872)
-------------- --------------
Cash flows from investing activities:
Capital expenditures (367,264) (420,093)
Investment in and advances to joint venture (304,770)
Expenses relating to purchase of remaining 50%
interest in joint venture (9,201)
Acquisition of Fluid Management, Inc. (13,577,932)
Proceeds from sale of property and equipment 21,500 22,004
-------------- --------------
Net cash used in investing activities (345,764) (14,289,992)
-------------- --------------
Cash flows from financing activities:
Capital lease principal repayments (13,485) (14,148)
Debt repayment (3,484)
Net proceeds from exercise of stock options 560 3,265
Net proceeds from issuance of Common Stock 620,000 15,711,376
-------------- --------------
Net cash provided by financing activities 607,075 15,697,009
-------------- --------------
Net (decrease) increase in cash and cash equivalents (744,857) 74,145
Cash and cash equivalents at beginning of period 4,863,658 4,614,062
-------------- --------------
Cash and cash equivalents at end of period $4,118,801 $4,688,207
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $26,333 $16,456
============= =============
Cash paid for income taxes $0 $113,151
============= =============
Supplemental disclosures of non-cash investing and financing activities:
-In August 1997, the Company purchased the 50% interest held by n.v. VAM in CVT America L.L.C.,
a joint venture between VAM and the Company, for 100,000 shares of Common Stock valued at
$265,600 and incurred expenses associated with the acquisition of $9,201.
-In April 1997, the Company acquired Fluid Management, Inc. for $12,191,266 in cash and 4,190,477 shares
of Common Stock valued at $11,000,002. In connection with the acquisition, the Company also paid
$1,386,666 of Fluid Management, Inc.'s outstanding debt.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
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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 consisting of
normal recurring accruals and the impairment of long-lived assets 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, 1997. Certain
reclassifications have been made to conform prior year's presentation with the
1998 financial statement presentation.
Since the Company incurred net losses for the three months ended September 30,
1998 and 1997 and the nine months ended September 30, 1998 and 1997, both basic
and diluted per share calculations are the same. The inclusion of additional
shares assuming the exercise of stock options and warrants would have been
antidilutive. There were options and warrants to purchase 4,233,229 and
3,893,029 shares of common stock outstanding at September 30, 1998 and 1997,
respectively.
2. LITIGATION
----------
On April 22, 1998, the Company and its subsidiary were served with a complaint
filed by a former customer of the subsidiary. According to the complaint, the
customer seeks to recover amounts paid to the Company's subsidiary prior to its
acquisition by the Company for work performed to investigate and remediate
contamination on the customer's property. The complaint seeks recovery of fees
and costs allegedly paid by the customer to the Company's subsidiary, plus an
additional unspecified sum. 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.
During June 1998, the Company reached a favorable settlement on a previously
disclosed litigation matter relating to services provided at a customer site.
In July 1998, the proceeds from the settlement were received by the Company.
6
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3. RELATED PARTY TRANSACTION
-------------------------
In April 1998, Robert S. Hillas, the Company's newly-appointed Chairman,
President and Chief Executive Officer, purchased 500,000 shares of Common Stock
from the Company at $1.25 per share in connection with the execution of his
employment agreement. The Company has granted Mr. Hillas certain registration
rights with respect to such shares.
4. IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
In April 1997 the Company acquired Fluid Management, Inc., the business of which
is now operated as the Company's Fluid Management Operations Group ("FMG"). The
majority of FMG's work is eligible for reimbursement to its clients under the
Wisconsin Petroleum Environmental Cleanup Fund Act ("PECFA"). On April 17,
1998, the State of Wisconsin adopted new emergency rules with regard to PECFA
which effectively reduce the expected average revenue per site that FMG can
capture under the program for the foreseeable future. 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 rule, lower cost natural attenuation is mandated unless certain
conditions exist which would indicate that active remediation is necessary.
This regulatory event dramatically reduces the expected revenue, net income and
cash flow for FMG.
As a result of this event, the Company reviewed the carrying value of long-lived
assets associated with its acquisition of Fluid Management, Inc. 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 FMG 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 of Fluid Management, Inc.
5. SUBSEQUENT EVENT
----------------
On October 28, 1998, the Company's Board of Directors approved a one-for-six
reverse split of the Company's Common Stock and directed that the split be
submitted for approval to the Company's stockholders at a Special Meeting of
Stockholders scheduled to be held on November 24, 1998.
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,
1997.
Certain statements made herein are forward-looking and are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. Such
statements involve risks and uncertainties which may cause results to differ
materially from those set forth in these statements. In particular,
unanticipated changes in the economic, competitive, governmental, technological,
marketing and other factors identified herein and in the Company's other filings
with the Securities and Exchange Commission could affect such results.
GENERAL
- -------
The source of the Company's revenues to date includes (i) remediation services,
including both in situ and ex situ bioremediation, (ii) commercial sales of the
Company's biological degradation systems, and (iii) funds received from third
parties and government agencies to conduct specific research and development
programs. While the Company has realized significant commercial revenues for
several years from remediation services, it has only recently seen the first
substantial revenues from sales of full-scale biodegradation systems for the
treatment of contaminated air and water. Although great strides have been made
in the commercialization of these systems, significant expenditures will be
required for continued research and development, additional marketing activities
and possibly the development of manufacturing capabilities for the further
commercialization of the Company's biodegradation systems. The amount and
timing of such expenditures will vary depending on several factors, including
the progress of development and testing, funding from third parties, the level
of enforcement of environmental regulations by federal and state agencies,
technological advances, changing competitive conditions and determinations with
respect to the commercial potential of the Company's systems. The amount and
timing of such expenditures cannot be predicted.
On April 10, 1997, the Company acquired Fluid Management, Inc., a full-service
environmental consulting and engineering firm, the business of which is now
operated as the Company's Fluid Management Operations Group ("FMG").
Remediation services are FMG's core business and generate the greatest portion
of FMG's revenues. The majority of FMG's work is eligible for reimbursement to
its clients (or their lending banks) under the Wisconsin Petroleum Environmental
Cleanup Fund Act ("PECFA"). Review of PECFA claims by the Wisconsin Department
of Commerce ("DCOM") and determination of any ineligible costs typically is not
completed until one to three years after the expense has been incurred and paid
by FMG's client (or its bank). This exposes the client to the risk that
remediation expenses it incurred and paid ultimately may be disallowed for PECFA
reimbursement by DCOM. While not contractually obligated to do so, FMG has
generally reimbursed its clients (or their lending banks) for the remediation
costs for services provided by FMG which ultimately were determined by DCOM to
be ineligible for reimbursement under PECFA.
8
<PAGE>
The PECFA program, established in 1987, is a grant-based program managed by DCOM
that provides reimbursement for costs incurred to remediate sites contaminated
by petroleum storage tank systems. The PECFA program historically has
maintained a fully-funded status by means of a state-assessed inspection fee on
the sale of gasoline and diesel fuel. The maximum coverage is $1 million per
site. The limit originally applied to all projects commenced prior to July 1,
1998. In October 1997, the state legislature reaffirmed these limits and
extended the program to all projects commencing prior to December 2001.
On April 17, 1998, the State of Wisconsin adopted new emergency rules
("Emergency Rules") with regard to PECFA which effectively reduce the expected
revenue per site that FMG 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. Under the Emergency
Rules, lower cost natural attenuation is mandated unless certain conditions
exist which would indicate that active remediation is necessary. This is a
significant change, since previously natural attenuation was not an approved
option by the DNR 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.
The Company's current assessment of the Emergency Rules is that natural
attenuation could reduce the revenues from a typical site to approximately
$40,000 to $100,000. 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. This regulatory event dramatically reduces the
expected revenue, net income and cash flow for FMG.
As a result of this event, the Company reviewed the carrying value of the long-
lived assets associated with its acquisition of Fluid Management, Inc. 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 FMG discounted at a rate commensurate with
the risk involved. The impairment charge fully eliminated the remaining
carrying value of the goodwill associated with the Fluid Management, Inc.
acquisition.
RESULTS OF OPERATIONS
- ---------------------
Nine Months Ended September 30, 1998 Compared to
- -------------------------------------------------
Nine Months Ended September 30, 1997
- ------------------------------------
For the nine months ended September 30, 1998, the Company's total revenues
increased 16% to $20,933,804 from $18,023,772 in the same period in 1997. The
net loss increased to $23,710,618 from $605,871 in the same period of 1997,
while the basic and diluted net loss per share was $1.00 compared to $0.03 in
the same period in 1997. The 1998 net loss includes the goodwill impairment
charge of $21,670,028 ($0.92 per share) taken in the second quarter.
Commercial revenues in 1998 increased 18% to $18,956,699 from $15,999,246 in the
same period in 1997. The increased commercial revenues are due primarily to the
inclusion of sales of FMG, which was acquired in April 1997, and a substantial
increase in revenues from the sale of the Company's air and water treatment
systems and systems-related products.
9
<PAGE>
Revenues from corporate and government research and development contracts
decreased in the nine-month period ended September 30, 1998 by 2% to $1,977,105.
In the nine-month period ended September 30, 1998, the Company recorded initial
revenues under a Phase I grant from the National Science Foundation, a grant
from the Department of Energy and two Phase II grants from the Department of
Defense.
Total costs and expenses increased 140% to $44,770,553 (or 24% to $23,100,525
exclusive of the goodwill impairment charge discussed above) in the nine-month
period ended September 30, 1998 from $18,632,681 in the same period in 1997.
The cost of commercial operations increased 42% to $15,396,329 during the first
nine months of 1998 from $10,826,093 in the same period in 1997 due primarily to
increased revenue levels and a greater percentage of systems sales, which
typically carry lower margins than the Company's remediation services, combined
with lower margins in remediation as the ratio of no margin subcontractor pass
through revenue under the PECFA program to higher margin labor revenue was
unfavorable in 1998 as compared to 1997. Research and development expenses
increased 12% to $2,198,961 during the first nine months of 1998 from $1,954,965
in the same period in 1997 due primarily to the increased costs of supplies used
to perform work under various corporate and government research and development
contracts as well as an increase in internally funded research. Marketing,
general and administrative expenses decreased 6% to $5,505,235 from $5,851,623
due primarily to a reduction in amortization of goodwill charges resulting from
the impairment of goodwill write-off taken as of April 30, 1998, combined with
the Company's continuing cost reduction efforts. As discussed above, during the
second quarter of 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 that have negatively impacted the performance of FMG. As
a result the Company concluded that the goodwill related to FMG was impaired and
was written off in the second quarter of 1998.
Interest income decreased 25% to $141,766 in the nine-month period ended
September 30, 1998 from $189,618 in 1997, due primarily to the decreased average
cash available for investment. Equity in income from joint venture increased to
$10,137 from a loss of $189,019 in the same period in 1997. The loss in 1997
was related to the CVT America joint venture which was subsequently acquired in
its entirety by the Company in August 1997. The Company dissolved the venture
and thereafter continued its operations as part of the Company's Commercial Air
Group.
Three Months Ended September 30, 1998 Compared to
- -------------------------------------------------
Three Months Ended September 30, 1997
- -------------------------------------
For the three months ended September 30, 1998, the Company reported revenues of
$6,916,719, a decrease of 13% from $7,928,775 for the same period in 1997. The
Company experienced a net loss in the period of $654,424 as compared to a net
loss of $183,778 in the same period of 1997, while the basic and diluted net
loss per share was $0.03 as compared to $0.01 in the same period in 1997.
Third quarter 1998 commercial revenues decreased 13% to $6,311,204 from
$7,292,027 in the same period in 1997. The Company's commercial revenues
decreased as lower revenues from FMG, due primarily to the issuance of the
Emergency Rules in April 1998, more than offset an increase in the Company's
systems sales from its Commercial Air and Commercial Water Groups.
Revenues from corporate and government research and development contracts
decreased 5% to $605,515 from $636,748 in 1997. In the three-month period ended
September 30, 1998, the Company recorded initial revenues under a Phase II grant
from the Department of Defense and a grant from the Department of Energy.
10
<PAGE>
Total costs and expenses decreased 6% to $7,608,097 in the third quarter of 1998
from $8,125,811 in the same period in 1997. The cost of commercial operations
increased 5% to $5,134,822 in the third quarter of 1998 from $4,880,074 in the
same period in 1997 due primarily to sales being comprised of a greater
percentage of systems sales which typically carry lower margins than the
Company's remediation services, combined with lower margins in remediation as
the ratio of no margin subcontractor pass through revenue under the PECFA
program to higher margin labor revenue was unfavorable in 1998 as compared to
1997. Research and development expenses increased 18% to $729,124 in the third
quarter of 1998 from $617,492 in the same period in 1997 due primarily to the
increased costs of supplies used to perform work under various corporate and
government research and development contracts as well as an increase in
internally funded research. Marketing, general and administrative expenses
decreased 34% to $1,744,151 in the third quarter of 1998 from $2,628,245 in the
same period in 1997 due primarily to the Company's continuing cost reduction
efforts, combined with the previously mentioned reduction in amortization of
goodwill charges resulting from the impairment of goodwill write-off taken as of
April 30, 1998.
Interest income decreased 32% to $43,338 in the three-month period ended
September 30, 1998 due primarily to the decreased average cash available for
investment. Equity in income from joint venture increased to $6,726 from a loss
of $41,346 in the same period in 1997.
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 September 30, 1998 the Company had cash and cash equivalents of $4,118,801
and working capital of $7,390,086. 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 $744,857 from December
31, 1997 to September 30, 1998 due primarily to cash used by operations of
$1,006,168 and capital expenditures of $367,264 offset by proceeds of $620,000
from the issuance of common stock. The Company expects to incur additional
expenditures in connection with the continued development and commercialization
of its core 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.
From December 31, 1997 to September 30, 1998 accounts receivable decreased by
$541,848 primarily as a result of reduced revenues, and accounts payable
decreased by $559,343 due to reduced revenue levels and shifts in the timing of
project expenses. Accrued expenses and other liabilities decreased by $264,553
from December 31, 1997 to September 30, 1998 primarily due to the payment in the
first quarter of 1998 of bonuses related to prior years. On September 30, 1998
the Company had $2,554,998 in reserve for claim adjustments and warranties,
$2,017,252 of which is available with respect to potential PECFA claim
adjustments related to approximately $57 million in unsettled PECFA submittals
and $537,746 of which is available with respect to potential systems warranty
claims and other contract issues. The Company is closely monitoring the reserve
for claim adjustments with respect to the unsettled PECFA submittals due to the
recent cost reduction measures undertaken by the State of Wisconsin. At this
time management believes the reserve is adequate.
11
<PAGE>
During the second quarter of 1998 the Company recorded a charge of $21,670,028
to reflect an impairment of goodwill. This is a non-cash charge with no impact
on current cash balances or liquidity. 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 the intermediate
term.
OTHER MATTERS
- -------------
As of December 31, 1997, the Company had a net operating loss carryforward of
approximately $21,000,000 for federal income tax reporting purposes available to
offset future taxable income, if any, through 2012. The timing and manner in
which these losses may be utilized are limited under Section 382 of the Internal
Revenue Code of 1986 to approximately $1,700,000 per year based on preliminary
calculations of certain ownership changes to date and may be further limited in
the event of additional ownership changes.
The Company believes that its financial, operation and other informational
systems, with limited modifications, will function properly with respect to
dates in the year 2000 and thereafter. Many of the Company's systems and related
software are presently Year 2000 compliant. The Company is in the process of
bringing the remaining systems and software into compliance and expects to
complete this process during the first half of 1999. To date, the Company has
not incurred any material costs related to the assessment of, and preliminary
efforts in connection with, its Year 2000 issues and does not anticipate future
expenditures to have a material impact on the Company's financial position or
operating results.
In addition to in-house efforts, the Company is requesting that its material
vendors, customers, banks and other third parties whose systems failures
potentially could have a significant impact on the Company's business or results
of operations verify their Year 2000 readiness and expects to complete this
process during the first half of 1999. The Company will not be able to
completely assess its Year 2000 readiness until such third parties assure the
Company of their Year 2000 compliance. The Company has not been notified of any
such noncompliance by any material third party. However, there can be no
assurance that these third parties will not have Year 2000 problems which will
affect the Company.
Based on the activities performed to date and subject to verification from major
vendors, customers, banks and other third parties, the Company does not believe
that the Year 2000 issue will have a material adverse effect on the Company's
business or results of operations. However, the failure to correct a Year 2000
problem by the Company or any material third party could result in an
interruption or failure in the Company's operations. Such interruption or
failure could adversely affect the Company's results of operations, cash flows
and financial condition.
At this time, the Company does not have a comprehensive contingency plan with
respect to the Year 2000 issue. However, if the Company identifies significant
risks related to Year 2000 noncompliance by the Company or any material third
parties, the Company will develop contingency plans as deemed necessary at that
time.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On September 23, 1998, the Company received a notice from The Nasdaq National
Stock Market, Inc. that the shares of Common Stock have failed to maintain a
closing bid price on the Nasdaq SmallCap Market of greater than or equal to
$1.00 per share for 30 consecutive trading days, subjecting such shares to
possible delisting. In order to stay the delisting, the shares of Common Stock
must trade at a closing bid price of $1.00 per share or greater for ten
consecutive trading days prior to December 23, 1998. On October 28, 1998, the
Company's Board of Directors approved a one-for-six reverse split of the
Company's Common Stock and directed that the split be submitted for approval to
the Company's stockholders at a Special Meeting of Stockholders scheduled to be
held on November 24, 1998. It is anticipated that following the reverse split,
the shares of Common Stock will trade at a price that is higher than $1.00 per
share during the relevant period to satisfy the Nasdaq continued listing
requirements. However, there can be no assurance that, after the consummation
of the reverse split, the shares of Common Stock will trade at six times the
market price of the shares of Common Stock prior to the reverse split or that
the Company will be able to satisfy all Nasdaq listing requirements (including
the minimum bid price requirement) on a continuing basis.
On September 28, 1998, William C. Smith, Vice Chairman of the Board and
Executive Vice President of the Company and President and Chief Executive
Officer of the Company's Fluid Management Operations Group, notified the Company
of his decision to retire effective December 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
13
<PAGE>
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: November 10, 1998 By: /s/ Robert S. Hillas
------------------------
Robert S. Hillas
President and Chief Executive Officer
By: /s/ Mark J. Maten
----------------------
Mark J. Maten
Vice President of Finance
and Chief Financial Officer
14
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,118,801
<SECURITIES> 0
<RECEIVABLES> 6,927,093
<ALLOWANCES> (491,780)
<INVENTORY> 225,638
<CURRENT-ASSETS> 15,526,906
<PP&E> 5,455,879
<DEPRECIATION> (3,852,980)
<TOTAL-ASSETS> 19,045,113
<CURRENT-LIABILITIES> 8,136,820
<BONDS> 0
0
0
<COMMON> 238,551
<OTHER-SE> 10,663,645
<TOTAL-LIABILITY-AND-EQUITY> 19,045,113
<SALES> 0
<TOTAL-REVENUES> 20,933,804
<CGS> 0
<TOTAL-COSTS> 44,770,553
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,185
<INCOME-PRETAX> (23,710,618)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,710,618)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,710,618)
<EPS-PRIMARY> ($1.00)
<EPS-DILUTED> ($1.00)
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