-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S1HoHJnjx0czJoJSZE8peqeawo2WUHSch7yqnomdMW2587LLjHZcu8RqVJmzxgRU q8epVGmmLIHh4xyEREgpNw== 0001036050-98-001294.txt : 19980810 0001036050-98-001294.hdr.sgml : 19980810 ACCESSION NUMBER: 0001036050-98-001294 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980807 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENVIROGEN INC CENTRAL INDEX KEY: 0000863815 STANDARD INDUSTRIAL CLASSIFICATION: HAZARDOUS WASTE MANAGEMENT [4955] IRS NUMBER: 222899415 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20404 FILM NUMBER: 98678985 BUSINESS ADDRESS: STREET 1: 4100 QUAKERBRIDGE RD STREET 2: PRINCETON RESEARCH CENTER CITY: LAWRENCEVILLE STATE: NJ ZIP: 08648 BUSINESS PHONE: 6099369300 MAIL ADDRESS: STREET 1: PRINCETON RESEARCH CENTER STREET 2: 4100 QUAKERBRIDGE RD CITY: LAWRENCEVILLE STATE: NJ ZIP: 08648 10-Q 1 FORM 10-Q 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 ENVIROGEN, INC. TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE ---- ITEM 1. FINANCIAL STATEMENTS 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
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENVIROGEN, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 1998 1997 ------------ ------------ 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 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 ENVIROGEN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 1998 1997 1998 1997 ----------- ------------ ------------ ------------ 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 =========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 ENVIROGEN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, --------------------------- 1998 1997 ----------- ------------ 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 =========== ============
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 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:
Three Months Ended June 30, Six Months Ended June 30, ---------------------------- -------------------------- 1998 1997 1998 1997 --------------- ----------- ------------ --------- 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) =========== =========== ============ ==========
6 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 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 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 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 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 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 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:
Nominee For Withheld ------- ---------- -------- 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
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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 4,088,381 0 6,643,412 (657,345) 203,702 15,224,645 5,282,929 (3,683,991) 18,802,873 7,238,292 0 0 0 238,551 11,318,069 18,802,873 0 14,017,085 0 37,162,456 0 0 12,662 (23,056,194) 0 (23,056,194) 0 0 0 (23,056,194) (0.98) (0.98)
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