<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, 1999 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, 1999 was 3,965,951.
- --------------------------------------------------------------------------------
1
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ENVIROGEN, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. CONDENSED FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets at September 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998
(Unaudited) 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General 8
Results of Operations 9
Liquidity and Capital Resources 11
Other Matters 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE PAGE 15
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited) (Audited)
---------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,820,092 $ 3,407,910
Accounts receivable, net 5,225,614 6,327,599
Unbilled revenue 2,892,610 4,028,183
Inventory 59,230 185,553
Prepaid expenses and other current assets 452,749 681,683
---------------- --------------
Total current assets 12,450,295 14,630,928
Property and equipment, net 1,167,423 1,478,003
Restricted cash 309,300
Investment in and advances to joint venture 101,148 101,336
Intangible assets, net 1,005,110 1,183,024
Other assets 223,143 243,288
---------------- --------------
Total assets $ 14,947,119 $ 17,945,879
================ ==============
LIABILITIES
Current liabilities:
Accounts payable $ 2,361,986 $ 3,441,114
Accrued expenses and other liabilities 564,300 1,121,917
Reserve for claim adjustments and warranties 3,675,087 4,150,133
Deferred revenue 963,270 759,060
Current portion of capital lease obligations 6,534 7,222
---------------- --------------
Total current liabilities 7,571,177 9,479,446
Capital lease obligations, net of current portion 4,644
---------------- --------------
Total liabilities 7,571,177 9,484,090
---------------- --------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock 39,759 39,759
Additional paid-in capital 59,728,189 59,671,189
Accumulated deficit (52,386,056) (51,243,209)
Less: Treasury stock, at cost (5,950) (5,950)
---------------- --------------
Total stockholders' equity 7,375,942 8,461,789
---------------- --------------
Total liabilities and stockholders' equity $ 14,947,119 $ 17,945,879
================ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ENVIROGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Commercial operations $5,267,455 $6,311,204 $14,693,415 $18,956,699
Research and development services 723,247 605,515 2,232,245 1,977,105
------------- ------------- ------------- -------------
Total revenues 5,990,702 6,916,719 16,925,660 20,933,804
------------- ------------- ------------- -------------
Cost of commercial operations 4,282,324 5,134,822 12,327,911 15,396,329
Research and development costs 775,243 729,124 2,235,388 2,198,961
Marketing, general and administrative expenses 1,173,968 1,744,151 3,594,593 5,505,235
Impairment of long-lived assets 21,670,028
------------- ------------- ------------- -------------
Total costs and expenses 6,231,535 7,608,097 18,157,892 44,770,553
------------- ------------- ------------- -------------
Other income (expense):
Interest income 36,741 43,338 107,205 141,766
Interest expense (4,467) (4,523) (10,397) (17,185)
Equity in income (loss) of joint venture (118) 6,726 (188) 10,137
Other, net 840 (8,587) (7,235) (8,587)
------------- ------------- ------------- -------------
Other income, net 32,996 36,954 89,385 126,131
------------- ------------- ------------- -------------
Net loss ($207,837) ($654,424) ($1,142,847) ($23,710,618)
============= ============= ============= =============
Basic and diluted net loss per share ($0.05) ($0.17) ($0.29) ($6.03)
============= ============= ============= =============
Weighted average number of shares of
Common Stock used in computing basic
and diluted net loss per share 3,965,951 3,965,951 3,965,951 3,932,564
============= ============= ============= =============
</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>
Nine Months Ended
September 30,
----------------------------------
1999 1998
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,142,847) ($23, 710,618)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 598,001 1,063,836
Provision for claim adjustments and warranties 367,958 509,776
Provision for doubtful accounts 223,373 15,537
Deferred fees 57,000
Equity in loss (income) of joint venture 188 (10,137)
Impairment of long-lived assets 21,670,028
Other 7,235 8,595
Changes in operating assets and liabilities:
Accounts receivable 878,612 526,311
Unbilled revenue 1,135,573 271,419
Inventory 126,323 23,074
Prepaid expenses and other current assets 228,934 (286,960)
Restricted cash 309,300
Other assets 20,145 1,103
Accounts payable (1,079,128) (559,343)
Accrued expenses and other liabilities (557,617) (264,553)
Reserve for claim adjustments and warranties (843,004) (531,996)
Deferred revenue 204,210 267,760
----------- -------------
Net cash provided by (used in) operating activities 534,256 (1,006,168)
----------- -------------
Cash flows from investing activities:
Capital expenditures (132,580) (367,264)
Proceeds from sale of property and equipment 15,838 21,500
----------- -------------
Net cash used in investing activities (116,742) (345,764)
----------- -------------
Cash flows from financing activities:
Capital lease principal repayments (5,332) (13,485)
Net proceeds from exercise of stock options 560
Net proceeds from issuance of Common Stock 620,000
----------- -------------
Net cash (used in) provided by financing activities (5,332) 607,075
----------- -------------
Net increase (decrease) in cash and cash equivalents 412,182 (744,857)
Cash and cash equivalents at beginning of period 3,407,910 4,863,658
----------- -------------
Cash and cash equivalents at end of period $3,820,092 $4,118,801
=========== =============
Supplemental disclosures of cash flow information:
- ----------------------------------------------------
Cash paid for interest $17,517 $26,333
=========== =============
Cash refunded for income taxes ($9,764) $0
=========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
ENVIROGEN, INC.
NOTES TO CONDENSED 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 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, 1998. Certain
reclassifications have been made to conform prior year's presentation with the
1999 financial statement presentation.
Since the Company incurred net losses for the nine months ended September 30,
1999 and 1998, both basic and diluted per share calculations are the same. The
inclusion of additional shares assuming the exercise of options, warrants and
stock credits would have been antidilutive. There were options, warrants and
other rights to purchase 537,356 and 648,840 shares of common stock outstanding
at September 30, 1999 and 1998, respectively.
2. LITIGATION
----------
The Company is currently involved in litigation relating to remediation services
previously provided at a customer site. This customer filed a claim against the
Company for professional malpractice, breach of warranty of professional
services contract and misrepresentation. No specific damages have been claimed
by this customer and, at the present time, management of the Company is unable
to predict the outcome of this matter or to determine whether the outcome of
this matter will materially affect the Company's results of operations, cash
flows or financial position.
The Company is also subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, such other claims are either
covered by insurance or, if not insured, will not individually or in the
aggregate result in a material adverse effect on the consolidated financial
condition of the Company.
6
<PAGE>
3. SEGMENT INFORMATION
-------------------
Information about reported segments for the three and nine months ended
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Research and
Commercial Development
Operations Services Other Total
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Three Months Ended September 30,
1999
----
Revenues $ 5,267,455 $ 723,247 - $ 5,990,702
Segment profit (loss) 985,131 (51,996) (1,140,972) (207,837)
1998
----
Revenues $ 6,311,204 $ 605,515 - $ 6,916,719
Segment profit (loss) 1,176,382 (123,609) (1,707,197) (654,424)
Nine Months Ended September 30,
1999
----
Revenues $14,693,415 $2,232,245 - $ 16,925,660
Segment profit (loss) 2,365,504 (3,143) (3,505,208) (1,142,847)
1998
----
Revenues $18,956,699 $1,977,105 - $ 20,933,804
Segment profit (loss) 3,560,370 (221,856) (27,049,132) (23,710,618)
</TABLE>
The following table presents the details of the "Other" segment for the three
and nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Marketing, general and
administrative expenses ($ 1,173,968) ($ 1,744,151) ($ 3,594,593) ($ 5,505,235)
Impairment of long-lived
assets - - - (21,670,028)
Interest income 36,741 43,338 107,205 141,766
Interest expense (4,467) (4,523) (10,397) (17,185)
Equity in income (loss) of
joint venture (118) 6,726 (188) 10,137
Other, net 840 (8,587) (7,235) (8,587)
------------ ----------- ----------- ------------
($ 1,140,972) ($ 1,707,197) ($ 3,505,208) ($ 27,049,132)
============ =========== =========== ============
</TABLE>
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,
1998.
Certain statements made herein are forward-looking and are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. Such
statements involve risks and uncertainties which may cause results to differ
materially from those set forth in these statements. In particular,
unanticipated changes in the economic, competitive, governmental, technological,
marketing and other factors identified herein and in the Company's other filings
with the Securities and Exchange Commission could affect such results.
General
- -------
The Company's revenues to date have been from (i) commercial operations,
consisting of revenue from remediation services, conventional treatment systems
and soil vapor extraction systems and the Company's biological degradation
systems (including both in situ and ex situ bioremediation), and (ii) funds
received from third parties and government agencies to conduct specific research
and development programs. While the Company has realized significant commercial
revenues for several years from remediation services and from traditional
remediation systems such as soil vapor extraction systems, it has only recently
seen the first substantial revenues from sales of full-scale biological
degradation systems for the treatment of contaminated air and water. Although
great strides have been made in the commercialization of these systems,
additional 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 can not be predicted and
will vary depending on several factors, including the progress of development
and testing, funding from third parties, the level of enforcement of
environmental regulations by federal and state agencies, technological advances,
changing competitive conditions and determinations with respect to the
commercial potential of the Company's systems.
On April 10, 1997, the Company acquired Fluid Management, Inc. ("FMI"), a full-
service environmental consulting and engineering firm that is now operated as
the Company's Wisconsin Operations Group (the "Group"). Remediation services
and installation of traditional remediation systems are the Group's core
business and generate the greatest portion of the Group's revenues. Pursuant to
the Wisconsin Petroleum Environmental Cleanup Fund Act ("PECFA"), a program
funded by the State of Wisconsin for cleaning up underground storage tanks, the
Group's clients (or their lending banks) are entitled to seek reimbursement for
a majority of the remediation costs paid to the Group. The Wisconsin Department
of Commerce ("DCOM") reviews claims for reimbursement under PECFA to determine
the extent to which submitted claims will be reimbursed. Typically, the DCOM
review process is not completed until one to three years after the expense has
been incurred and paid by the Group's client (or its bank). This exposes the
client to the risk that remediation expenses it incurred and paid ultimately may
be disallowed for PECFA reimbursement by DCOM. The Group has historically
reimbursed its clients (or their lending banks) for the remediation costs for
services provided by the Group which ultimately were determined by DCOM to be
ineligible for reimbursement under PECFA. In certain instances, the Company has
written guarantees to banks or clients which, under certain conditions, could
obligate the Company to reimburse the bank for items disallowed under the
program. Since the Company acquired FMI, the
8
<PAGE>
Company has reimbursed its clients and their lending banks an aggregate of
$1,239,171. At September 30, 1999, the Company had $3,355,386 in reserves with
respect to potential ineligible claims related to approximately $55 million in
claims that had not yet been fully reviewed by DCOM. There can be no assurance
that the amount of such reserve, which was determined by management based on
historic reimbursement disallowance rates under the PECFA program, will be
adequate.
On April 17, 1998, the State of Wisconsin adopted new emergency rules
("Emergency Rules") with regard to PECFA which effectively reduced the expected
revenue per site that the Group can capture under the program for the
foreseeable future. The State of Wisconsin's stated intent for issuance of the
Emergency Rules was to reduce the amount of funds being paid for cleanup efforts
under the PECFA program. Until the issuance of the Emergency Rules, the
Wisconsin Department of Natural Resources ("DNR") determined the appropriate
remedial activity for each site under the program in every instance. Per the
Emergency Rules, DNR's authority extends only to sites where groundwater
contamination is evident. Where contamination of soil exists without groundwater
contamination, DCOM administers the remedial program with no DNR involvement.
Under the Emergency Rules, lower-cost natural attenuation is mandated unless
certain conditions exist which would indicate that active remediation is
necessary. This is a significant change, since natural attenuation was
previously not an approved option and virtually all sites were actively
remediated. Based upon the Company's experience, it is estimated that the
active remediation approach under PECFA resulted in revenues ranging from
$50,000 to $1,000,000 per site. Since the adoption of the Emergency Rules, the
Company's revenues from a typical site were reduced to approximately $40,000 to
$100,000. This regulatory event has resulted, and is expected to continue to
result, in a dramatic decrease in revenue, net income and cash flow from the
Group. The Company is not aware of any proposed or pending changes to the PECFA
program that would have a materially favorable impact on the business of the
Group.
As a result of this event, the Company reviewed the carrying value of the long-
lived assets associated with its acquisition of FMI and recorded a non-cash
charge of $21,670,028 in the second quarter of 1998 representing the impairment
of the goodwill. This charge is based on the amount by which the book value
exceeded the current estimated fair market value of the goodwill. The current
estimated fair market value was determined primarily using the anticipated cash
flows of the Group discounted at a rate commensurate with the risk involved.
The impairment charge fully eliminated the remaining carrying value of the
goodwill associated with the FMI acquisition.
Results of Operations
- ---------------------
Nine Months Ended September 30, 1999 Compared to
- ------------------------------------------------
Nine Months Ended September 30, 1998
- ------------------------------------
For the nine months ended September 30, 1999, the Company's total revenues
decreased 19% to $16,925,660 from $20,933,804 in the same period in 1998. The
net loss decreased to $1,142,847 from $23,710,618 in the same period of 1998,
while the basic and diluted net loss per share was $0.29 compared to $6.03 in
the same period in 1998. The 1998 net loss included the goodwill impairment
charge of $21,670,028, or approximately $5.51 per share.
Commercial revenues in 1999 decreased 22% to $14,693,415 from $18,956,699 in the
same period in 1998. The decreased commercial revenues are due primarily to
reduced revenue under the PECFA program related to the adoption of the Emergency
Rules in April 1998.
9
<PAGE>
Revenues from corporate research and development contracts increased in the
nine-month period ended September 30, 1999 by 13% to $2,232,245 from $1,977,105
in 1998. Revenues increased primarily due to the timing of work associated with
Phase II government projects that the Company is actively working on.
Total costs and expenses decreased to $18,157,892 in the nine-month period ended
September 30, 1999 from $44,770,553 in the same period in 1998. The 1998 costs
included the impairment charge of $21,670,028. Exclusive of the impairment
charge, total costs and expenses decreased 21% for the nine months ended
September 30, 1999 from the same period in 1998. The cost of commercial
operations decreased 20% to $12,327,911 during the first nine months of 1999
from $15,396,329 in the same period in 1998 due primarily to decreased revenue
levels. Research and development expenses increased 2% to $2,235,388 during the
first nine months of 1999 from $2,198,961 in the same period in 1998 due
primarily to the increased costs of supplies used to perform work under various
corporate and government research and development contracts. Marketing, general
and administrative expenses decreased 35% to $3,594,593 from $5,505,235 due
primarily to ongoing cost reduction programs, continuing headcount reductions,
purchasing efficiencies and the elimination of the amortization of goodwill
associated with the FMI acquisition. As discussed above, during the first nine
months 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 and that have negatively impacted the performance of the Wisconsin
Operations Group. As a result, the Company concluded that the goodwill related
to the FMI acquisition was impaired and was written off in the second quarter of
1998.
Interest income decreased 24% to $107,205 in the nine-month period ended
September 30, 1999 from $141,766 in 1998, due primarily to the decreased average
cash available for investment.
Three Months Ended September 30, 1999 Compared to
- -------------------------------------------------
Three Months Ended September 30, 1998
- -------------------------------------
For the three months ended September 30, 1999, the Company reported revenues of
$5,990,702, a decrease of 13% from $6,916,719 for the same period in 1998. The
Company experienced a net loss in the period of $207,837 as compared to a net
loss of $654,424 in the same period of 1998, while the basic and diluted net
loss per share was $0.05 as compared to $0.17 in the same period in 1998.
Third quarter 1999 commercial revenues decreased 17% to $5,267,455 from
$6,311,204 in the same period in 1998. The Company's commercial revenues
decreased primarily due to reduced revenues under the PECFA program related to
adoption of the Emergency Rules in April 1998.
Revenues from corporate and government research and development contracts
increased 19% to $723,247 from $605,515 in 1998. The increase is primarily due
to timing of work associated with Phase II government projects that the Company
is actively working on.
Total costs and expenses decreased 18% to $6,231,535 in the third quarter of
1999 from $7,608,097 in the same period in 1998. The cost of commercial
operations decreased 17% to $4,282,324 in the third quarter of 1999 from
$5,134,822 in the same period in 1998 due primarily to lower revenue levels.
Research and development expenses increased 6% to $775,243 in the third quarter
of 1999 from $729,124 in the same period in 1998 due primarily to the increased
costs of supplies used to perform work under various corporate and government
research and development contracts. Marketing, general and administrative
expenses decreased 33% to $1,173,968 in the third
10
<PAGE>
quarter of 1999 from $1,744,151 in the same period in 1998 due primarily to the
Company's continuing cost reduction efforts, headcount reductions and improved
purchasing efficiencies.
Interest income decreased 15% to $36,741 in the three-month period ended
September 30, 1999 due primarily to the decreased average cash available for
investment.
Liquidity and Capital Resources
- -------------------------------
The Company has funded its operations to date primarily through revenues from
commercial services, sales of biodegradation systems, public offerings and
private placements of equity securities, research and development agreements
with major industrial companies and research grants from government agencies.
At September 30, 1999, the Company had cash and cash equivalents of $3,820,092
and working capital of $4,879,118. Cash and cash equivalents increased $412,182
from December 31, 1998 to September 30, 1999 due primarily to cash provided by
operations of $534,256 offset by capital expenditures of $132,580.
From December 31, 1998 to September 30, 1999, accounts receivable decreased by
$1,101,985 primarily as a result of reduced revenues and improved collections.
In the same period, accounts payable decreased by $1,079,128 due to reduced
revenue levels and related subcontractor charges as well as shifts in the timing
of project expenses. Accrued expenses and other liabilities decreased by
$557,617 from December 31, 1998 to September 30, 1999 primarily due to the
payment in the first quarter of 1999 of certain deferred compensation related to
prior years, the payment of accrued severance and the timing of professional
fees. At September 30, 1999, the Company had $3,675,087 in reserve for claim
adjustments and warranties, $3,355,386 of which is available with respect to
potential PECFA claim adjustments related to approximately $55 million in
unsettled PECFA submittals and $319,701 of which is available with respect to
potential systems warranty claims and other contract issues.
It is anticipated that the Company's currently available cash, cash equivalents
and cash expected to be generated from operations will provide sufficient
operating capital for at least the next 18 to 24 months. The Company may seek
additional funds through equity or debt financing. However, there can be no
assurance that such additional funds will be available on terms favorable to the
Company, if at all.
Other Matters
- -------------
As of December 31, 1998, the Company had a net operating loss carry forward of
approximately $23,000,000 for federal income tax reporting purposes available to
offset future taxable income, if any, through 2018. 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 Year 2000 Issue - Readiness Disclosure
- ------------------------------------------
The Year 2000 issue is the result of computer systems and other equipment with
processors that identify a year with only two digits rather than four. If not
corrected, many computer applications and date sensitive equipment could fail or
create erroneous results before, during and after the Year 2000. The Company
utilizes information technology ("IT") systems such as computer networking
systems and non-IT devices such as building security equipment, that are subject
to potential failure due to the Year 2000 issue.
11
<PAGE>
The Company has developed and implemented a plan to achieve year 2000 readiness
(the "Y2K Program"). The Y2K Program is coordinated at the corporate level and
is implemented by individuals in the Company's offices throughout the country.
The Y2K Program has been implemented in the following phases: (1) identification
and assessment of all critical IT systems and non-IT devices requiring
modification or replacement; (2) remediation or replacement and testing of
modifications to critical items; (3) evaluation of third parties; and (4)
development of contingency and business continuity plans to mitigate the effect
of any system or equipment failure to the Company's operations arising from the
Year 2000 issue. Progress reports on the Y2K Program have been, and will
continue to be, presented regularly to the Company's senior management and
periodically to the Audit Committee of the Company's Board of Directors.
The Company has identified its computer network in each of its offices as the
Company's only significant IT systems. The Company has completed its assessment
of its computer network and has identified certain areas of non-compliance that
are being addressed by upgrading non-compliant operating software, network
capabilities and hardware. The network upgrade process was completed in June
1999. In addition, a standard compliance process is being used to certify that
all hardware and software being purchased for the Company's computer network is
Y2K compliant.
The Company has identified its telephone and communications systems in each of
its offices as its only significant non-IT system. The Company has completed
its assessment of its telephone and communications systems and has discovered
that the telephone systems in two of the Company's locations were non-compliant.
The Company intends to modify or, if necessary, replace such non-compliant
systems and expects to complete such modification or replacement by December
1999.
The Company's projects are predominantly labor oriented with little IT content
in what is provided to the Company's clients. With respect to completed
projects, the Company does not believe that the systems and equipment provided
to its customers (not considering any modification made to such systems and
equipment by these customers, for which the Company is not responsible) are
likely to fail as a result of the Year 2000 issue. With respect to current and
ongoing projects, the Company relies directly and indirectly on external systems
utilized by its suppliers and on equipment and materials provided by those
suppliers and used for the Company's business. In accordance with the Y2K
Program, the Company has established a procedure for reviewing Year 2000
compliance by its suppliers. As part of that process, the Company has
identified approximately 150 critical suppliers and is currently assessing the
level of compliance for each. In those limited circumstances where equipment
delivered to the Company or the Company's clients has some IT or non-IT
components with potential Y2K exposure, the Company requires its suppliers to
certify and guarantee Year 2000 compliance of their systems and equipment
provided. Given the number of suppliers utilized by the Company, compliance
assessment is ongoing. Although initial reviews indicate that Year 2000
compliance by the Company's suppliers should not have a material adverse affect
on the Company's operations, there can be no assurance that suppliers will
resolve all Year 2000 issues with their systems and equipment in a timely
manner.
The Company has identified certain of its customers that are expected to be
customers of the Company through the Year 2000. The Company is currently
assessing whether such customers are Y2K compliant and whether any non-
compliance by such customers would have an impact on the Company's business. No
such customer accounted for more than 10% of the Company's revenues in 1998 or
1997. The Company intends to assess the Y2K readiness of any major new customer
of the Company that is expected to be a customer of the Company through the Year
2000.
12
<PAGE>
The Company uses both internal and external resources in its Y2K Program. The
Company has estimated that to date it has spent less than $20,000, primarily on
software upgrades, on the Year 2000 issue. It anticipates spending an
additional $25,000 to $50,000 for additional software upgrades, hardware
modifications and administrative costs. The program will be funded out of
working capital and expensed as incurred. The Y2K Program has not affected any
other IT initiatives. This estimate was derived utilizing numerous assumptions,
including the assumption that the Company has already identified its most
significant Year 2000 issues and that the plans of its third party suppliers
will be fulfilled in a timely manner without cost to the Company. These costs
are the Company's best estimate given other ongoing systems initiatives.
However, there can be no guarantee that these assumptions are accurate, and
actual results could differ materially from those anticipated.
The Company is developing contingency plans that narrow the focus on specific
areas of significant concern and concentrate resources to address them. We
currently believe that the most reasonably likely worst case scenario is that
there will be some localized disruptions of systems that will affect individual
business processes, facilities, customers or suppliers for a short time rather
than systemic or long-term problems affecting our business operations as a
whole. Our contingency planning will continue to identify systems or other
aspects of our business or those of our suppliers that we believe would be most
likely to experience Year 2000 problems as well as those business operations in
which a localized disruption could have the potential for causing a wider
problem by interrupting the flow of materials or data to customers or to other
offices. Because there is uncertainty as to which activities may be affected
and the exact nature of the problem that may arise, our contingency planning
will focus on minimizing the scope and duration of any disruptions by having
sufficient personnel and other resources in place to permit a flexible, real-
time response to specific problems as they may arise at individual locations.
Some of the actions may include the development of plans for the allocation,
stockpiling or resourcing of components and materials that may be critical to
our projects in process at December 31, 1999. Specific contingency plans and
resources for permitting the necessary flexibility of response are expected to
be identified and put into place commencing in late 1999 as projects in process
may not be identified until that time.
The success of the Company's Y2K Program is subject to a variety of risks and
uncertainties, some of which are beyond the Company's control. Those risks and
uncertainties include, but are not limited to, availability of qualified
computer personnel, the Year 2000 readiness of third parties, the Year 2000
compliance of systems and equipment provided by suppliers and the affects of the
Year 2000 on the economy generally. No assurance can be given that the Company
will achieve Year 2000 readiness or that the non-compliance by third parties or
the affects of the Year 2000 on the economy generally will not have a material
adverse effect on the Company's results from operations, liquidity or financial
position. Further, there is the possibility that significant litigation may
occur due to business and equipment failures caused by the Year 2000 issue. It
is uncertain whether, or to what extent, the Company may be affected by such
litigation. The failure of the Company, its clients (including governmental
agencies), suppliers of computer systems and equipment, joint venture partners
and other third parties upon whom the Company relies, to achieve Year 2000
readiness could materially and adversely affect the Company's results from
operations, liquidity or financial position.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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: November 5, 1999 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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,820,092
<SECURITIES> 0
<RECEIVABLES> 5,884,967
<ALLOWANCES> (659,353)
<INVENTORY> 59,230
<CURRENT-ASSETS> 12,450,295
<PP&E> 5,569,398
<DEPRECIATION> (4,401,975)
<TOTAL-ASSETS> 14,947,119
<CURRENT-LIABILITIES> 7,571,177
<BONDS> 0
0
0
<COMMON> 39,759
<OTHER-SE> 7,336,183
<TOTAL-LIABILITY-AND-EQUITY> 14,947,119
<SALES> 0
<TOTAL-REVENUES> 16,925,660
<CGS> 0
<TOTAL-COSTS> 18,157,892
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,397
<INCOME-PRETAX> (1,142,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,142,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,142,847)
<EPS-BASIC> ($0.29)
<EPS-DILUTED> ($0.29)
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