<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, 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 June 30, 1999 was 3,965,951.
- --------------------------------------------------------------------------------
1
<PAGE>
ENVIROGEN, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 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 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURE PAGE 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENVIROGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,368,174 $ 3,407,910
Accounts receivable, net 6,053,957 6,327,599
Unbilled revenue 3,351,805 4,028,183
Inventory 144,392 185,553
Prepaid expenses and other current assets 521,350 681,683
------------ ------------
Total current assets 13,439,678 14,630,928
Property and equipment, net 1,284,276 1,478,003
Restricted cash 309,300
Investment in and advances to joint venture 101,266 101,336
Intangible assets, net 1,055,891 1,183,024
Other assets 227,786 243,288
------------ ------------
Total assets $ 16,108,897 $ 17,945,879
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 3,035,484 $ 3,441,114
Accrued expenses and other liabilities 714,793 1,121,917
Reserve for claim adjustments and warranties 3,583,363 4,150,133
Deferred revenue 1,238,921 759,060
Current portion of capital lease obligations 7,603 7,222
------------ ------------
Total current liabilities 8,580,164 9,479,446
Capital lease obligations, net of current portion 1,954 4,644
------------ ------------
Total liabilities 8,582,118 9,484,090
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock 39,759 39,759
Additional paid-in capital 59,671,189 59,671,189
Accumulated deficit (52,178,219) (51,243,209)
Less: Treasury stock, at cost (5,950) (5,950)
------------ ------------
Total stockholders' equity 7,526,779 8,461,789
Total liabilities and stockholders' equity $ 16,108,897 $ 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 Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
1999 1998 1999 1998
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues:
Commercial operations $ 5,045,446 $ 6,835,569 $ 9,425,960 $ 12,645,495
Research and development services 822,388 657,070 1,508,998 1,371,590
----------- ------------- ----------- -------------
Total revenues 5,867,834 7,492,639 10,934,958 14,017,085
----------- ------------- ----------- -------------
Cost of commercial operations 4,267,967 5,845,269 8,045,587 10,261,507
Research and development costs 764,453 749,337 1,460,145 1,469,837
Marketing, general and administrative expenses 1,182,985 1,775,251 2,420,625 3,761,084
Impairment of long-lived assets 21,670,028 21,670,028
----------- ------------- ----------- -------------
Total costs and expenses 6,215,405 30,039,885 11,926,357 37,162,456
----------- ------------- ----------- -------------
Other income (expense):
Interest income 33,438 46,981 70,464 98,428
Interest expense (3,281) (5,719) (5,930) (12,662)
Equity in income (loss) of joint venture (1,599) 5,614 (70) 3,411
Other, net 50 (8,075)
----------- ------------- ----------- -------------
Other income, net 28,608 46,876 56,389 89,177
----------- ------------- ----------- -------------
Net loss ($318,963) ($22,500,370) ($935,010) ($23,056,194)
=========== ============= =========== =============
Basic and diluted net loss per share ($0.08) ($5.70) ($0.24) ($5.88)
=========== ============= =========== =============
Weighted average number of shares of
Common Stock used in computing basic
and diluted net loss per share 3,965,951 3,945,084 3,965,951 3,918,255
=========== ============= =========== =============
</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>
Six Months Ended
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($935,010) ($23,056,194)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 406,416 830,328
Provision for claim adjustments and warranties 256,931 344,635
Provision for doubtful accounts 147,465 84,142
Equity in loss (income) of joint venture 70 (3,411)
Impairment of long-lived assets 21,670,028
Other 8,075
Changes in operating assets and liabilities:
Accounts receivable 126,177 906,952
Unbilled revenue 676,378 (105,432)
Inventory 41,161 45,010
Prepaid expenses and other current assets 160,333 (109,450)
Restricted cash 309,300
Other assets 15,502 (6,040)
Accounts payable (405,630) (778,843)
Accrued expenses and other liabilities (407,124) (554,150)
Reserve for claim adjustments and warranties (823,701) (442,705)
Deferred revenue 479,861 (47,715)
----------- -----------
Net cash provided by (used in) operating activities 56,204 (1,222,845)
----------- -----------
Cash flows from investing activities:
Capital expenditures (97,051) (163,265)
Proceeds from sale of property and equipment 3,420
----------- -----------
Net cash used in investing activities (93,631) (163,265)
----------- -----------
Cash flows from financing activities:
Capital lease principal repayments (2,309) (9,727)
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 (2,309) 610,833
----------- -----------
Net decrease in cash and cash equivalents (39,736) (775,277)
Cash and cash equivalents at beginning of period 3,407,910 4,863,658
----------- -----------
Cash and cash equivalents at end of period $3,368,174 $4,088,381
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $13,251 $23,319
=========== ===========
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 six months ended June 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 508,837 and 719,740 shares of common stock outstanding at
June 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 six months ended June 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 June 30,
1999
----
Revenues $ 5,045,446 $ 822,388 - $ 5,867,834
Segment profit (loss) 777,479 57,935 (1,154,377) (318,963)
1998
----
Revenues $ 6,835,569 $ 657,070 - $ 7,492,639
Segment profit (loss) 990,300 (92,267) (23,398,403) (22,500,370)
Six Months Ended June 30,
1999
----
Revenues $ 9,425,960 $1,508,998 - $ 10,934,958
Segment profit (loss) 1,380,373 48,853 (2,364,236) (935,010)
1998
----
Revenues $12,645,495 $1,371,590 - $ 14,017,085
Segment profit (loss) 2,383,988 (98,247) (25,341,935) (23,056,194)
</TABLE>
The following table presents the details of the "Other" segment for the three
and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
1999 1998 1999 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Marketing, general and
administrative expenses ($1,182,985) ($ 1,775,251) ($ 2,420,625) ($ 3,761,084)
Impairment of long-lived
assets - (21,670,028) - (21,670,028)
Interest income 33,438 46,981 70,464 98,428
Interest expense (3,281) (5,719) (5,930) (12,662)
Equity in income (loss) of
joint venture (1,599) 5,614 (70) 3,411
Other, net 50 - (8,075) -
----------- ------------ ------------ ------------
($1,154,377) ($23,398,403) ($ 2,364,236) ($25,341,935)
=========== ============ ============ ============
</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
8
<PAGE>
ineligible for reimbursement under PECFA. In certain instances, the Company has
written guarantees to banks which, under certain conditions, could obligate the
Company to reimburse the bank for items disallowed under the program. Since the
Company acquired FMI, the Company has reimbursed its clients and their lending
banks an aggregate of $1,221,321. At June 30, 1999, the Company had $3,302,208
in reserves with respect to potential ineligible claims related to approximately
$54 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
- ---------------------
Six Months Ended June 30, 1999 Compared to
- ------------------------------------------
Six Months Ended June 30, 1998
- ------------------------------
For the six months ended June 30, 1999, the Company's total revenues decreased
22% to $10,934,958, as compared to $14,017,085 in the same period in 1998. The
net loss was $935,010, as compared to $23,056,194, while the basic and diluted
net loss per share was $0.24 as compared to $5.88 in the same period in 1998.
In the first six months of 1998, the Company recorded a non-cash impairment
charge of $21,670,028, or approximately $5.49 per share.
9
<PAGE>
Commercial revenues in 1999 decreased 25% to $9,425,960 from $12,645,495 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.
Revenues from corporate and government research and development contracts
increased in 1999 by 10% to $1,508,998 from $1,371,590 in 1998. Revenues
increased primarily due to the timing of work associated with the Phase II
government projects that the Company is actively working on.
For the six-month period ended June 30, 1999, total costs and expenses decreased
to $11,926,357 from $37,162,456 in the same period in 1998. The 1998 costs
included the impairment charge of $21,670,028. The cost of commercial
operations decreased 22% to $8,045,587 from $10,261,507 due to the decreased
revenue levels. Research and development expenses decreased 1% to $1,460,145
from $1,469,837 due primarily to decreased expenditures on internally funded
research efforts offset partially by the increased costs of supplies used to
perform work under various corporate and government research and development
contracts. Marketing, general and administrative expenses decreased 36% to
$2,420,625 from $3,761,084 due primarily to continuing headcount reductions,
purchasing efficiencies due to better economies of scale following the
integration of FMI, the elimination of the amortization of goodwill associated
with the FMI acquisition and ongoing cost reduction programs. As discussed
above, during the six months ended June 30, 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 Company's Wisconsin Operations Group. As a result, the
Company concluded that the goodwill related to the Company's Wisconsin
Operations Group was impaired and the goodwill was written-off.
Interest income decreased 28% to $70,464 in the six-month period ended June 30,
1999 from $98,428 in the same period in 1998, due to decreased cash available
for investment.
Three Months Ended June 30, 1999 Compared to
- --------------------------------------------
Three Months Ended June 30, 1998
- --------------------------------
For the three months ended June 30, 1999, revenues decreased 22% to $5,867,834
from $7,492,639 in the same period in 1998. The net loss in the period
decreased to $318,963 from $22,500,370, while the basic and diluted net loss per
share was $0.08 as compared to $5.70 in the same period in 1998. In the second
quarter of 1998, the Company recorded a non-cash impairment charge of
$21,670,028, or approximately $5.49 per share.
Commercial revenues decreased 26% to $5,045,446 in the second quarter of 1999
from $6,835,569 in the same period in 1998. The decreased commercial revenues
are due primarily to reduced revenues under the PECFA program related to the
adoption of the Emergency Rules in April 1998.
Revenues from corporate research and development contracts increased 25% to
$822,388 from $657,070 in the same period in 1998, primarily due to the timing
of work associated with the Phase II government projects that the Company is
actively working on.
Total costs and expenses decreased 79% to $6,215,405 in the second quarter of
1999 from $30,039,885 in the same period in 1998. The 1998 costs included the
impairment charge of $21,670,028. The cost of commercial operations decreased
27% to $4,267,967 from $5,845,269 due to the decreased revenue levels.
10
<PAGE>
Research and development expenses increased 2% to $764,453 from $749,337 due
primarily to the increase in research and development revenue from third parties
and government agencies offset partially by reduced levels of internal research
and development expenditures. Marketing, general and administrative expenses
decreased 33% to $1,182,985 from $1,775,251 due primarily to headcount
reductions, purchasing efficiencies due to better economies of scale following
the integration of FMI and ongoing cost reduction programs.
Liquidity and Capital Resources
- -------------------------------
The Company has funded its operations to date primarily through revenues from
commercial operations, research grants from government agencies, research and
development agreements with major industrial companies and public offerings and
private placements of equity securities. At June 30, 1999, the Company had cash
and cash equivalents of $3,368,174 and working capital of $4,859,514. Cash and
cash equivalents decreased $39,736 from December 31, 1998 to June 30, 1999
primarily as a result of capital expenditures of $93,631 offset by cash provided
by operations of $56,204
From December 31, 1998 to June 30, 1999, accounts receivable decreased by
$273,642 and accounts payable decreased by $405,630 primarily due to the reduced
revenue levels and related subcontractor charges as well as shifts in the timing
of project expenses in the second quarter of 1999 as compared to the last
quarter of 1998. Accrued expenses and other liabilities decreased by $407,124
from December 31, 1998 to June 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 June
30, 1999, the Company had $3,583,363 in reserve for claim adjustments and
warranties, $3,302,208 of which is attributable to potential PECFA claim
adjustments related to approximately $54 million in unsettled PECFA submittals
and $281,155 of which is attributable to potential systems warranty claims and
other contract issues.
It is anticipated that the Company's currently available cash and 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 carryforward 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 September
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
12
<PAGE>
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.
The Company uses both internal and external resources in its Y2K Program. The
Company has estimated that to date it has spent less than $15,000, primarily on
software upgrades, on the Year 2000 issue. It anticipates spending an additional
$50,000 to $100,000 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 re-sourcing 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 13, 1999, and in
connection therewith proxies were solicited by management pursuant to Regulation
14A under the Securities Exchange Act of 1934. The total number of outstanding
shares of Common Stock entitled to vote at the meeting was 2,946,159. 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 2000 Annual Meeting. The
-------------------------------------------------------------
following persons, all of whom were management's nominees, were elected.
There was no solicitation in opposition to such nominees. The tabulation of
votes was as follows:
Nominee For Withheld
------- --- --------
Robert F. Hendrickson 2,936,611 9,548
Robert S. Hillas 2,936,611 9,548
Robert F. Johnston 2,936,611 9,548
Nicholas J. Lowcock 2,936,602 9,557
Robert C. Miller 2,936,611 9,548
Peter J. Neff 2,936,602 9,557
William C. Smith 2,922,393 23,766
2. Approval of Deferred Fee Plan for Non-Employee Directors. The Envirogen,
--------------------------------------------------------
Inc. Deferred Fee Plan for Non-Employee Directors was approved. The
tabulation of votes was as follows:
For Against Abstentions
--- ------- -----------
2,892,251 34,684 19,224
3. Ratification of independent auditors. The appointment of Ernst & Young LLP
------------------------------------
as the Company's independent auditors was ratified. The tabulation of votes
was as follows:
For Against Abstentions
--- ------- -----------
2,938,859 5,066 2,234
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 7, 1999, the Company filed a Current Report on Form 8-K dated
March 31, 1999, reporting that it had dismissed PricewaterhouseCoopers LLP
as its independent accountants and replaced such firm with Ernst & Young
LLP, effective March 31, 1999. On April 12, 1999, the Company filed an
amendment to this Current Report which included a letter of
PricewaterhouseCoopers LLP acknowledging their review of, and agreement
with, the Company's disclosure in the Current Report.
15
<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 9, 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
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,368,174
<SECURITIES> 0
<RECEIVABLES> 6,696,923
<ALLOWANCES> (642,966)
<INVENTORY> 144,392
<CURRENT-ASSETS> 13,439,678
<PP&E> 5,576,979
<DEPRECIATION> (4,292,703)
<TOTAL-ASSETS> 16,108,897
<CURRENT-LIABILITIES> 8,580,164
<BONDS> 0
0
0
<COMMON> 39,759
<OTHER-SE> 7,487,020
<TOTAL-LIABILITY-AND-EQUITY> 16,108,897
<SALES> 0
<TOTAL-REVENUES> 10,934,958
<CGS> 0
<TOTAL-COSTS> 11,926,357
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,930
<INCOME-PRETAX> (935,010)
<INCOME-TAX> 0
<INCOME-CONTINUING> (935,010)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (935,010)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
