<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 June 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 June 30, 1998 was 23,795,635.
- --------------------------------------------------------------------------------
1
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ENVIROGEN, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS
<C> <S> <C>
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997 (Unaudited) 3
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General 9
Results of Operations 10
Liquidity and Capital Resources 12
Other Matters 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 13
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE PAGE 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,088,381 $ 4,863,658
Accounts receivable-trade, net 5,986,067 6,977,161
Unbilled revenue 4,319,085 4,213,653
Inventory 203,702 248,712
Prepaid expenses and other current assets 627,410 517,960
------------ ------------
Total current assets 15,224,645 16,821,144
Property and equipment, net 1,598,938 1,757,577
Restricted cash 309,300 309,300
Investment in and advances to joint venture 91,059 87,648
Intangible assets, net 1,310,155 23,488,607
Other assets 268,776 262,736
------------ ------------
Total assets $ 18,802,873 $ 42,727,012
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 2,670,669 $ 3,449,512
Accrued expenses and other liabilities 1,394,065 1,948,215
Reserve for claim adjustments and warranties 2,479,148 2,577,218
Deferred revenue 682,650 730,365
Current portion of capital lease obligations 11,760 16,777
------------ ------------
Total current liabilities 7,238,292 8,722,087
Capital lease obligations, net of current portion 7,961 12,671
------------ ------------
Total liabilities 7,246,253 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 (48,148,377) (25,092,183)
Less: Treasury stock (5,950) (5,950)
------------ ------------
Total stockholders' equity 11,556,620 33,992,254
------------ ------------
Total liabilities and stockholders' equity $ 18,802,873 $ 42,727,012
============ ============
</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 Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Commercial operations $ 6,835,569 $ 6,942,247 $ 12,645,495 $ 8,707,219
Research and development services 657,070 698,040 1,371,590 1,387,778
----------- ------------ ------------ ------------
Total revenues 7,492,639 7,640,287 14,017,085 10,094,997
----------- ------------ ------------ ------------
Cost of commercial operations 5,845,269 4,376,398 10,261,507 5,946,019
Research and development costs 749,337 695,656 1,469,837 1,337,473
Marketing, general and administrative expenses 1,775,251 2,364,430 3,761,084 3,223,378
Impairment of long-lived assets 21,670,028 21,670,028
----------- ------------ ------------ ------------
Total costs and expenses 30,039,885 7,436,484 37,162,456 10,506,870
----------- ------------ ------------ ------------
Other income (expense):
Interest income 46,981 69,374 98,428 125,763
Interest expense (5,719) (10,690) (12,662) (14,007)
Equity in income (loss) of joint venture 5,614 (82,710) 3,411 (147,673)
Other, net 25,697 25,697
----------- ------------ ------------ ------------
Other income (expense), net 46,876 1,671 89,177 (10,220)
----------- ------------ ------------ ------------
Net (loss) income applicable to Common Stock ($22,500,370) $ 205,474 $ (23,056,194) $ (422,093)
=========== ============ ============ ============
Basic net (loss) income per share applicable
to Common Stock (0.95) $ 0.01 $ (0.98) $ (0.02)
=========== ============ ============ ============
Diluted net (loss) income per share applicable
to Common Stock (0.95) $ 0.01 $ (0.98) $ (0.02)
=========== ============ ============ ============
Weighted average number of shares of
Common Stock used in computing basic
net (loss) income per share 23,670,435 20,589,356 23,509,464 17,282,292
=========== ============ ============ ============
Weighted average number of shares of
Common Stock used in computing diluted
net (loss) income per share 23,670,435 20,877,022 23,509,464 17,282,292
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(23,056,194) $(422,093)
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization 830,328 704,994
Provision for doubtful accounts 428,777 228,156
Equity in loss of joint venture (3,411) 147,673
Impairment of long-lived assets 21,670,028
Other (552)
Changes in operating assets and liabilities:
Accounts receivable 906,952 893,494
Unbilled revenue (105,432) (802,176)
Prepaid expenses and other current assets (109,450) (252,227)
Inventory 45,010
Other assets (6,040) (116,437)
Accounts payable (778,843) (1,821,487)
Accrued expenses and other liabilities (554,150) (255,847)
Reserve for claim adjustments and warranties (442,705) (67,175)
Deferred revenue (47,715) 116,304
----------- ------------
Net cash used in operating activities (1,222,845) (1,647,373)
----------- ------------
Cash flows from investing activities:
Capital expenditures (163,265) (243,614)
Investment in and advances to joint venture (254,694)
Acquisition of Fluid Management, Inc. (13,550,410)
Proceeds from sale of property and equipment 21,500
----------- ------------
Net cash used in investing activities (163,265) (14,027,218)
----------- ------------
Cash flows from financing activities:
Capital lease principal repayments (9,727) (9,935)
Debt repayment (2,299)
Net proceeds from exercise of stock options 560 3,265
Net proceeds from issuance of Common Stock 620,000 15,723,125
----------- ------------
Net cash provided by financing activities 610,833 15,714,156
----------- ------------
Net (decrease) increase in cash and cash equivalents (775,277) 39,565
Cash and cash equivalents at beginning of period 4,863,658 4,614,062
----------- ------------
Cash and cash equivalents at end of period $ 4,088,381 $ 4,653,627
=========== ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 23,319 $ 9,403
=========== ============
Cash paid for income taxes $ 0 $ 7,954
=========== ============
</TABLE>
Supplemental disclosures of non-cash investing and financing
------------------------------------------------------------
activities:-
----------
In April 1997, the Company acquired Fluid Management, Inc. for
$12,163,744 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.
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.
2. PER SHARE DATA
--------------
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
1998 1997 1998 1997
--------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Net (loss) income applicable to
Common Stock ($22,500,370) $ 205,474 ($23,056,194) ($422,093)
=========== =========== =========== ==========
Denominator for basic earnings per share:
Weighted average number of
common shares outstanding 23,670,435 20,589,356 23,509,464 17,282,292
Effect of dilutive securities:
Stock options 183,680
Warrants 103,986
----------- ----------- ------------ ----------
Denominator for diluted
earnings per share 23,670,435 20,877,022 23,509,464 17,282,292
=========== =========== ============ ==========
Basic net (loss) income per share
applicable to Common Stock ($0.95) $ 0.01 ($0.98) ($0.02)
=========== =========== ============ ==========
Diluted net (loss) income per share
applicable to Common Stock ($0.95) $ 0.01 ($0.98) ($0.02)
=========== =========== ============ ==========
</TABLE>
6
<PAGE>
Since the Company incurred net losses for the three months ended June 30, 1998
and six months ended June 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 4,318,429 and 4,020,529 shares of common stock
that were outstanding at June 30, 1998 and 1997, respectively.
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
----------------------------------------------
The Company adopted Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130") in the first quarter of 1998. Comprehensive
income represents the change in net assets of a business enterprise as a result
of nonowner transactions. The adoption of SFAS 130 did not have any effect on
the Company's consolidated financial statements.
4. 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 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.
5. 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.
6. 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.
7
<PAGE>
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.
8
<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 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.
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.
9
<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 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 new emergency rules is 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 new 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
- ---------------------
Six Months Ended June 30, 1998 Compared to
- ------------------------------------------
Six Months Ended June 30, 1997
- ------------------------------
For the six months ended June 30, 1998, the Company's total revenues increased
39% to $14,017,085, as compared to $10,094,997 in the same period in 1997. The
net loss was $23,056,194 as compared to $422,093, while the basic and diluted
net loss per share was $0.98 as compared to $0.02 in the same period in 1997.
Commercial revenues in 1998 increased 45% to $12,645,495 from $8,707,219 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. In addition,
systems sales contributed to the increase as revenues from the sale of the
Company's air and water treatment systems and systems-related products accounted
10
<PAGE>
for $1,698,135 or 13% of the Company's commercial revenues in the six-month
period ended June 30, 1998, as compared to $198,105 or 2% in 1997.
Revenues from corporate and government research and development contracts
decreased in 1998 by 1% to $1,371,590 from $1,387,778 in 1997. In the six-month
period ended June 30, 1998, the Company recorded initial revenues under a Phase
I grant from the National Science Foundation and a Phase II grant from the
Department of Defense.
For the six-month period ended June 30, 1998 total costs and expenses increased
to $37,162,456 from $10,506,870 in the same period in 1997. The cost of
commercial operations increased 73% to $10,261,507 from $5,946,019 due to the
increased revenue levels. Research and development expenses increased 10% to
$1,469,837 from $1,337,473 due primarily to the increased costs of supplies used
to perform work under various corporate and government research and development
contracts as well as additional internally funded research efforts. Marketing,
general and administrative expenses increased 17% to $3,761,084 from $3,223,378
due primarily to the inclusion of expenses of FMG and the amortization of
goodwill associated with the Fluid Management, Inc. acquisition. As discussed
above, during the period 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 FMG.
As a result, the Company concluded that the goodwill related to FMG is impaired
and should be written-off.
Interest income decreased 22% to $98,428 in the six-month period ended June 30,
1998 from $125,763 in 1997, due to the decreased cash available for investment.
Equity in income of joint venture increased to $3,411 from a loss of $147,673
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 Air Group.
Three Months Ended June 30, 1998 Compared to
- --------------------------------------------
Three Months Ended June 30, 1997
- --------------------------------
For the three months ended June 30, 1998, the Company reported a decrease in
revenues of 2% to $7,492,639 from $7,640,287 for the same period in 1997. The
Company experienced a net loss in the period of $22,500,370 compared to net
income of $205,474 in the same period of 1997, while the basic and diluted net
loss per share was $0.95 compared to basic and diluted net income per share of
$0.01 in the same period in 1997.
Commercial revenues in 1998 of $6,835,569 reflected a decrease of 2% from
revenue of $6,942,247 in the same period in 1997. The Company's commercial
revenues remained relatively flat as an increase in the Company's systems sales
from its Commercial Air and Commercial Water Groups offset a decrease in
revenues from FMG. Revenues from the sale of the Company's air and water
treatment systems and systems-related products accounted for $1,047,325 or 15%
of the Company's commercial revenues in the three-month period ended June 30,
1998 compared to $78,743 or 1% for the comparable period in 1997.
Revenues from corporate and government research and development contracts
decreased slightly from $698,040 to $657,070 in 1997 due primarily to the timing
of projects. In the three-month period ended June 30, 1998, the Company
recorded initial revenues under a Phase II grant from the Department of Defense.
11
<PAGE>
Total costs and expenses increased to $30,039,885 in the second quarter of 1998
from $7,436,484 in the same period in 1997. The cost of commercial operations
increased 34% to $5,845,269 from $4,376,398 in the same period in 1997 due
primarily to the 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 unfavorably high in 1998 as
compared to 1997. Research and development expenses increased 8% to $749,337
from $695,656 due primarily to the increased costs of supplies used to perform
work under various research and development contracts as well as increased
internally funded research efforts. Marketing, general and administrative
expenses decreased 25% to $1,775,251 from $2,364,430 compared to the same period
in 1997 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 period 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 is impaired and
should be written-off.
Interest income decreased 32% to $46,981 in the three-month period ended June
30, 1998 due primarily to the decreased average cash available for investment.
Equity in income of joint venture increased to $5,614 from a loss of $82,710 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 June 30, 1998 the Company had cash and cash equivalents of $4,088,381 and
working capital of $7,986,353. 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 $775,277 from December 31, 1997 to
June 30, 1998 due primarily to cash used by operations of $1,222,845 and capital
expenditures of $163,265 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
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 June 30, 1998 accounts receivable decreased by
$991,094 primarily as a result of reduced revenues, and accounts payable
decreased by $778,843 due to reduced revenue levels and shifts in the timing of
project expenses. Accrued expenses and other liabilities decreased by $554,150
from December 31, 1997 to June 30, 1998 primarily due to the payment in the
first quarter of 1998 of bonuses related to prior years. On June 30, 1998 the
Company had $2,479,148 in reserve for claim adjustments and warranties,
$2,009,740 of which is available with respect to potential PECFA claim
adjustments related to approximately $56 million in unsettled PECFA submittals
and $469,408 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.
12
<PAGE>
During the six months ended June 30, 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.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 21, 1998, and in
connection therewith proxies were solicited by management pursuant to Regulation
14 under the Securities Exchange Act of 1934. The total number of outstanding
shares of Common Stock entitled to vote at the meeting was 23,294,835. At the
meeting the following matters (not including ordinary procedural matters) were
submitted to a vote to the stockholders, with the results indicated below:
1. Election of directors to serve until the 1999 Annual Meeting.
-------------------------------------------------------------
The following persons, all of whom were management's nominees, were
elected. Nicholas J. Lowcock is a new director. There was no solicitation
in opposition to such nominees. The tabulation of votes was as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- ---------- --------
<S> <C> <C>
Robert F. Hendrickson 20,535,199 37,600
Robert S. Hillas 20,548,899 23,900
Robert F. Johnston 20,548,899 23,900
Nicholas J. Lowcock 20,548,899 23,900
Robert C. Miller 20,548,899 23,900
Peter J. Neff 20,548,899 23,900
William C. Smith 20,547,299 25,500
</TABLE>
2. Ratification of independent auditors. The appointment of
-------------------------------------
PricewaterhouseCoopers LLP as the Company's independent auditors was
ratified. The tabulation of votes was as follows:
For Against Abstentions
--- ------- -----------
20,536,794 17,750 18,255
13
<PAGE>
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission (the "Commission") recently amended
certain rules under the Securities Exchange Act of 1934 regarding the use of a
company's discretionary proxy voting authority with respect to stockholder
proposals submitted to the company for consideration at the company's next
annual meeting.
Pursuant to amended Rules 14a-5(e)(2) and 14a-4(c)(1), stockholder proposals
submitted to the Company outside the processes of Rule 14a-8 (i.e., procedures
for placing a stockholder's proposal in the Company's proxy materials) with
respect to the Company's 1999 annual meeting of stockholders will be considered
untimely if received by the Company after March 2, 1999. Accordingly, the proxy
with respect to the Company's 1999 annual meeting of shareholders will confer
discretionary authority to vote on any stockholder proposals received by the
Company after such date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10 Employment Agreement dated as of April 16, 1998 between
Envirogen, Inc. and Robert S. Hillas (incorporated by reference
to the indicated exhibit to the Company's Report on Form 8-K
filed with the Commission on April 17, 1998).
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 16, 1998, the Company filed a Report on Form 8-K reporting the
execution of an Employment Agreement dated April 16, 1998 between the
Company and Robert S. Hillas. The agreement provides for Mr. Hillas to
serve as Chairman, President and Chief Executive Officer of the Company.
14
<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: August 6, 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
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,088,381
<SECURITIES> 0
<RECEIVABLES> 6,643,412
<ALLOWANCES> (657,345)
<INVENTORY> 203,702
<CURRENT-ASSETS> 15,224,645
<PP&E> 5,282,929
<DEPRECIATION> (3,683,991)
<TOTAL-ASSETS> 18,802,873
<CURRENT-LIABILITIES> 7,238,292
<BONDS> 0
0
0
<COMMON> 238,551
<OTHER-SE> 11,318,069
<TOTAL-LIABILITY-AND-EQUITY> 18,802,873
<SALES> 0
<TOTAL-REVENUES> 14,017,085
<CGS> 0
<TOTAL-COSTS> 37,162,456
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,662
<INCOME-PRETAX> (23,056,194)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,056,194)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,056,194)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> (0.98)
</TABLE>
