10-Q 1 d10q.txt FORM 10-Q ENVIROGEN, INC. 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, 2002 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 July 31, 2002 was 4,032,985. 1 ENVIROGEN, INC. TABLE OF CONTENTS

2 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENVIROGEN, INC. CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements. 3 ENVIROGEN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 4 ENVIROGEN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Supplemental disclosures of non-cash investing and financing activities: The Company financed capital expenditures through a note payable amounting to $27,435 and a capital lease amounting to $50,930 in the first quarter of 2002. The accompanying notes are an integral part of these consolidated financial statements. 5 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 accounting principles generally accepted in the United States 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, 2001. Because the Company incurred net losses for the six months ended June 30, 2002 and 2001, both basic and diluted per share calculations are the same. The inclusion of additional shares assuming the exercise of options and stock credits would be antidilutive. There were options and other rights to purchase 854,792 and 690,621 shares of common stock outstanding at June 30, 2002 and 2001, respectively. 2. LITIGATION The Company is subject to claims and lawsuits in the ordinary course of its business. In the opinion of management, such claims are either adequately covered by insurance or, if not insured, will not individually or in the aggregate result in a material adverse effect on the Company's results of operations, cash flows or financial position. 3. INCOME TAXES In January 2001, under a program in place in the State of New Jersey, the Company sold a portion of its available New Jersey net operating loss tax benefits related to losses incurred in prior years. The net amount received by the Company was $210,790 and is presented as an income tax benefit on the statement of operations for the period ended June 30, 2001. 6 4. SEGMENT INFORMATION Information about reported segments for the three and six months ended June 30, 2002 and 2001 is as follows:

The following table presents the details of the "Other" segment for the three and six months ended June 30, 2002 and 2001:

7 5. IMPACT OF ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARD On January 1, 2002, the Company adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the provisions of SFAS 142, the cost of certain of the Company's indefinite-lived intangible assets are no longer subject to amortization, but instead are periodically reviewed for impairment. Upon adoption, the Company's earnings and financial position were not impacted by the required impairment tests. The 2002 annual amortization of goodwill that would have approximated $138,695, is no longer required. The following pro forma financial information assumes the adoption of SFAS 142 occurred at the beginning of the periods presented.

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, 2001. 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 that may cause results to differ materially from those set forth in these statements. In particular, unanticipated changes in the economic, competitive, governmental, technological, marketing or other factors identified herein or in the Company's other filings with the Securities and Exchange Commission could affect such results. General The Company has received most of its revenue from commercial remediation services and systems, which includes revenue attributable to traditional remediation services such as soil vapor extraction and air sparging as well as revenue attributable to advanced biological water treatment systems and biofilters. In addition, a portion of the Company's revenue to date has been derived from research funded largely by corporate and governmental sponsors to develop cost effective advanced biological treatment systems. Revenues from these advanced treatment technologies are still in the early stages of commercial development, and additional expenditures by the Company will be required for continued research and development and expanded marketing activities. The amount and timing of such expenditures cannot 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. Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Management believes the following represents its critical accounting policies. Revenue Recognition Revenue from certain contracts is recognized as services are provided and costs are incurred. For fixed-price contracts, revenue is recognized on the percentage-of-completion method, measured by the percentage of costs incurred over the estimated total costs for each contract. This method is used because management considers expended costs to be the best available measure of progress on these contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. If the Company does not accurately estimate the resources required or the scope of work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then future margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. 9 Reserves for Claim Adjustments and Warranties The Company reserves for potential amounts that it could repay to customers related to remediation performed by the Company under the State of Wisconsin Petroleum Environmental Cleanup Fund Act ("PECFA"). On each PECFA-related revenue dollar a reserve is established, which reduces the revenue recorded, to cover amounts that may be declared ineligible. The Wisconsin Department of Commerce ("DCOM") reviews claims for reimbursement under PECFA to determine the extent to which submitted claims will be reimbursed. The DCOM review process may not be completed until one to three years after the expense has been incurred and paid by the Company'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 Company has in a number of cases reimbursed its clients (or their lending banks) for the remediation costs for services provided by the Company which ultimately were determined by DCOM to be ineligible for reimbursement under PECFA. 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. The Company also provides for potential systems warranty claims and other contract issues. Estimated warranty reserves are related to specific projects and are provided for by charges to operations in the period in which the related revenue is recognized or at such time as a potential claim arises. If actual failure rates differ from the Company's estimates, revisions to the estimated warranty liability may be required. Results of Operations Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 For the six months ended June 30, 2002, the Company's total revenues decreased 13% to $8,565,880 from $9,874,020 in the same period in 2001. The net loss for the six-month period ended June 30, 2002 increased to $1,091,381 from $283,786 in the same period in 2001. The basic and diluted net loss per share was $0.27 for the first six months of 2002 compared to $0.07 in the same period in 2001. The Company's net loss in the first six months of 2002 increased from the same period in 2001 due primarily to decreased revenues in its commercial operations segment. In the first half of 2001, the Company recognized a benefit of $210,790 from the sale of a portion of its State of New Jersey net operating loss carryforwards under a state tax benefit program. Commercial revenues in the six months ended June 30, 2002 decreased 18% to $7,642,315 from $9,269,363 in the same period in 2001. The decreased commercial revenues are due primarily to a decline in revenues from commercial systems. A decline in revenues from remediation services was offset in part by favorable PECFA claims activity during the period, which resulted in a $400,000 improvement in reported revenue. Revenues from corporate research and development contracts increased in the six-month period ended June 30, 2002 by 53% to $923,565 from $604,657 in the same period in 2001. Revenues increased due to an increased number of government projects in process in 2002. Total costs and expenses decreased 7% to $9,668,428 in the six-month period ended June 30, 2002 from $10,429,371 in the same period in 2001. The cost of commercial operations decreased 11% to $6,384,782 during the first six months of 2002 from $7,201,461 in the same period in 2002 due primarily to an 18% decrease in corresponding revenue. As a result, the Company's gross profit margin for its commercial operations segment decreased from 22% for the six month period ended June 30, 2001 to 16% for the same period in 2002, which was due primarily to product mix and lower absorption of fixed costs. Research and development expenses increased 3% to $890,168 during the first six months of 2002 from $863,882 in the same period in 2002 due primarily to an increase in the corporate and government research and development projects in progress. Marketing, general and administrative expenses increased 1% to $2,393,478 from $2,364,028 due primarily to an increase in business development and marketing costs. 10 Interest income decreased 73% to $17,250 in the six-month period ended June 30, 2002 from $64,983 in 2001, due to the combination of decreased average cash available for investment and lower interest rates. Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 For the three months ended June 30, 2002, the Company's total revenues decreased 15% to $4,309,020 from $5,051,224 in the same period in 2001. The net loss for the current period increased to $400,518 from $117,726 in the second quarter of 2001. The basic and diluted net loss per share was $0.10 in the second quarter of 2002 as compared to $0.03 in the same period in 2001. The Company's net loss in the second quarter of 2002 increased from the same period in 2001 due primarily to decreased revenue in its commercial operations segment. Commercial revenues in the second quarter of 2002 decreased 16% to $3,951,686 from $4,714,852 in the same period in 2001. The decrease in commercial revenues was due to decreased revenue from commercial systems. A decline in revenue from remediation services was offset in part by favorable PECFA claims activity during the period which resulted in a $400,000 improvement in reported revenue. Revenues from corporate research and development contracts increased in the three-month period ended June 30, 2002 by 6% to $357,334 from $336,372 in 2001. Revenues increased due primarily to an increased number of government projects awarded in 2001 and in process during 2002. Total costs and expenses decreased 9% to $4,713,358 in the three-month period ended June 30, 2002 from $5,190,970 in the same period in 2001. The cost of commercial operations decreased 12% to $3,170,279 during the second quarter of 2002 from $3,594,427 in the same period in 2001 due primarily to lower revenues. The Company's gross profit margin for its commercial operations segment decreased to 20% for the three month period ended June 30, 2002 from 24% for the same period in 2001, which was due primarily to product mix and lower absorption of fixed costs. Research and development expenses decreased 6% to $388,558 during the second quarter of 2002 from $415,454 in the same period in 2001 due primarily to a decrease in labor costs. Marketing, general and administrative expenses decreased 2% to $1,154,521 from $1,181,024. Interest income decreased 71% to $7,185 in the three-month period ended June 30, 2002 from $24,689 in 2001, due to the combination of decreased average cash available for investment and lower interest rates. 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, 2002, the Company had cash and cash equivalents of $1,804,126 and working capital of $2,114,261. Cash and cash equivalents decreased $1,014,902 from December 31, 2001 to June 30, 2002 due primarily to cash used in operations of $854,326 and capital expenditures of $148,517. From December 31, 2001 to June 30, 2002, net accounts receivable decreased by $2,017,378 due primarily to lower revenues and the timing of billing as explained by the increase in unbilled revenue of $219,378. In the same period, accounts payable decreased by $929,530 due to reduced expense levels on lower revenues. At June 30, 2002, the Company had $2,477,479 in reserve for claim adjustments and warranties, $2,353,566 of which is available with respect to potential PECFA claim adjustments related to approximately $27 million in unsettled PECFA submittals and $123,913 of which is available with respect to potential warranty claims and other contract issues. The Company routinely evaluates these reserves based upon historical trends and ongoing activity. The amount of unsettled PECFA submittals declined from approximately $31 million at March 31, 2002 to 11 approximately $27 million at June 30, 2002. The corresponding reserve was reduced from $2,777,112 at March 31, 2002 to $2,353,566 at June 30, 2002. 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 twelve 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, 2001, the Company had a net operating loss carryforward of approximately $28 million for federal income tax reporting purposes available to offset future taxable income, if any, through 2021. 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 23, 2002, 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 3,461,054. At the meeting the following matters (not including ordinary procedural matters) were submitted to a vote of the stockholders, with the results indicated below: 1. Election of directors to serve until the 2003 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 ------- --- -------- William R. Cook 3,397,464 63,590 Dr. Robert W. Dunlap 3,397,464 63,590 Robert S. Hillas 3,397,464 63,590 Robert F. Johnston 3,397,464 63,590 Peter J. Neff 3,397,464 63,590 2. Ratification of independent auditors. The appointment of Ernst & Young LLP as the Company's independent auditors for 2002 was ratified. The tabulation of votes was as follows: For Against Abstentions --- ------- ----------- 3,301,469 110,250 49,335 3. Amendment of the Company's 2000 Incentive Stock Option and Non-Qualified Option Plan. The Plan was amended to increase the maximum number of shares of Common Stock for which options may be issued under the Plan from 350,000 to 700,000. The tabulation of votes was as follows: For Against Abstentions --- ------- ----------- 2,192,162 461,042 18,372 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 13 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 13, 2002 By: /s/ Robert S. Hillas -------------------- Robert S. Hillas President and Chief Executive Officer By: /s/ Mark J. Maten ----------------- Mark J. Maten Vice President, Finance and Chief Financial Officer 14

ENVIROGEN INC 10-Q