<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.
--------------
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________.
COMMISSION FILE NUMBER: 0-21145
COVALENT GROUP, INC.
(Name of small business issuer in its charter)
NEVADA 56-1668867
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE GLENHARDIE CORPORATE CENTER, 1275 DRUMMERS LANE
WAYNE, PENNSYLVANIA 19087
(address of principal executive offices)
Issuer's telephone number: 610-975-9533
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ___
---
State the number of shares outstanding of each of the issuer's classes of common
equity as of April 30, 1998.
Common Stock, Par Value $.001 11,743,209
- ----------------------------- ----------
(Class) Outstanding
Transitional Small Business Disclosure Format (check one): Yes ___ No X
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1
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FORM 10-QSB
COVALENT GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. Financial Information
Item 1. Consolidated Financial Statements
Balance Sheet - March 31, 1998 (Unaudited) 3
Statements of Operations - Three Months Ended
March 31, 1998 and 1997 (Unaudited) 5
Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information 12
Signature Page 13
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
COVALENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,589,005
Accounts receivable 1,119,690
Prepaid expenses and other 254,729
Costs and estimated earnings in excess of
related billings on uncompleted contracts 1,561,470
---------------
TOTAL CURRENT ASSETS 4,524,894
---------------
PROPERTY AND EQUIPMENT
Equipment 826,477
Furniture and fixtures 197,148
Leasehold improvements 59,441
---------------
1,083,066
Less - Accumulated depreciation (434,160)
---------------
NET PROPERTY AND EQUIPMENT 648,906
---------------
DEFERRED INCOME TAXES 307,438
---------------
OTHER ASSETS 265,450
---------------
TOTAL ASSETS $5,746,688
===============
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
COVALENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(Unaudited)
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,658,599
Accrued expenses 63,446
Billings in excess of related costs and
estimated earnings on uncompleted contracts 314,337
----------------
TOTAL CURRENT LIABILITIES 2,036,382
----------------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value
25,000,000 shares, authorized
11,755,709 shares issued 11,756
Additional paid-in-capital 9,265,508
Accumulated deficit (5,516,642)
----------------
3,760,622
LESS:
Treasury stock at cost, 12,500 shares (50,316)
----------------
TOTAL STOCKHOLDERS' EQUITY 3,710,306
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,746,688
================
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
COVALENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
REVENUES $ 2,239,607 $ 3,045,718
OPERATING EXPENSES
Direct 1,854,226 2,312,772
Selling, general and administrative 817,722 751,117
---------------- ----------------
TOTAL OPERATING EXPENSES 2,671,948 3,063,889
---------------- ----------------
LOSS FROM OPERATIONS (432,341) (18,171)
INTEREST INCOME 29,961 13,445
---------------- ----------------
LOSS FROM OPERATIONS BEFORE INCOME (402,380) (4,726)
TAX BENEFIT
INCOME TAX BENEFIT (136,694) (103,508)
---------------- ----------------
NET INCOME (LOSS) $ (265,686) $ 98,782
================ ================
NET INCOME (LOSS) PER COMMON SHARE
Net Income (Loss) - Basic $ (.02) $ .01
Net Income (Loss) - Diluted $ (.02) $ .01
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic 11,743,209 11,602,715
Diluted 11,743,209 12,246,893
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
COVALENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (265,686) 98,782
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities
Amortization and depreciation 61,719 35,406
Deferred income taxes (136,823) (103,508)
Changes In assets and liabilities
(Increase) decrease in -
Accounts receivable 1,015,533 (75,361)
Prepaid expenses and other (83,795) (163,386)
Costs and estimated earnings in excess
of related billings on uncompleted contracts (153,537) (191,805)
Other assets (16,239) 319
Increase (decrease) in -
Accounts payable (144,458) 1,070,535
Accrued expenses (34,973) 7,057
Billings in excess of related costs and
estimated earnings on uncompleted contracts (424,776) (316,091)
--------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (183,035) 361,948
--------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment (22,490) (78,668)
--------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (22,490) (78,668)
--------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (205,525) 283,280
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,794,530 922,010
--------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,589,005 $1,205,290
=============== =============
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
FORM 10-QSB
Covalent Group, Inc.
And Subsidiary
Notes To Consolidated Financial Statements
(Unaudited)
1. DESCRIPTION OF BUSINESS
-----------------------
Covalent Group, Inc. (the "Company"), is a contractual research
organization, providing clinical research and development services to
pharmaceutical, biotechnology, medical services and managed care
organizations. The Company initiates, designs and monitors clinical
trials, manages and analyzes clinical data and offers other related
services and products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles 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 date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. Intercompany transactions and balances
have been eliminated in consolidation.
Basis of Presentation
---------------------
The financial statements for the three months ended March 31, 1998 and 1997
have been prepared without audit and, in the opinion of management, reflect
all adjustments necessary (consisting only of normal recurring adjustments)
to present fairly the Company's financial position at March 31, 1998 and
the results of its operations and its cash flows for the interim periods
presented. Such financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1997.
Operating results for the three months ended March 31, 1998 may not
necessarily be indicative of the results for the year ending December 31,
1998.
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Revenue Recognition
-------------------
Fixed price contract revenue is recognized based on the status of the work
completed under the contract as of a given time using the percentage of
completion method. Revenue from other contracts is recognized as services
are provided. Revenue related to contract modifications is recognized when
realization is assured and the amounts are reasonably determinable.
Adjustments to contract cost estimates are made in the periods in which the
facts which require the revisions become known. When the revised estimate
indicates a loss, such loss is provided for currently in its entirety.
Costs and estimated earnings in excess of related billings on uncompleted
contracts represent revenue recognized in excess of amounts billed.
Billings in excess of related costs and estimated earnings on uncompleted
contracts represent amounts billed in excess of revenue recognized.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to the
current year presentation.
Net Income (Loss) Per Common and Common Equivalent Share
--------------------------------------------------------
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" (SFAS No. 128) as of December 31, 1997. In accordance
with SFAS No. 128, prior period earnings per share amount have been
restated to conform with SFAS No. 128. SFAS No. 128 requires basic
earnings per share which is computed by dividing reported earnings
available to common shareholders by the weighted average shares outstanding
and diluted earnings per share which reflects the dilutive effect of common
stock equivalents such as stock options and warrants, unless the inclusion
of these items would be anti dilutive.
The weighted average common and common equivalent shares outstanding for
purposes of calculating net income (loss) per common share are computed as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Weighted average common shares
outstanding used for basic net income
(loss) per common share 11,743,209 11,602,715
Dilutive effect of common stock
options and warrants outstanding - 644,178
----------- -----------
Weighted average common and
common equivalent shares
outstanding used for diluted net
income (loss) per common share 11,743,209 12,246,893
=========== ===========
</TABLE>
New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 " Reporting Comprehensive Income"
(SFAS No. 130).
8
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SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a set of financial statements. Comprehensive income
is defined as the change in net assets of a business enterprise during a
period from transactions generated from non-owner sources. It includes all
changes in equity during a period except those resulting from investments
by owners and distributions to owners. The Company adopted SFAS No. 130 as
of March 31, 1998 and the adoption had no impact on the Company's financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in this Report on form 10-QSB and in other public statements, both
oral and written, by Covalent Group, Inc. (the "Company") and Company Officers,
the words "estimate," "project," "intend," "believe," "anticipate" and similar
expressions are intended to identify forward-looking statements regarding events
and financial trends that may affect the Company's future operating results and
financial position. Such statements are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially. Such factors include, among others: (i) the Company's success in
attracting new business; (ii) the size, duration and timing of clinical trials;
(iii) the termination, delay or cancellation of clinical trials; (iv) the
intense competition in the industry in which the Company competes; (v) the
Company's ability to obtain financing on satisfactory terms; (vi) the
sensitivity of the Company's business to general economic conditions; and (vii)
other economic, competitive, governmental and technological factors affecting
the Company's operations, markets, products, services and prices. The Company
undertakes no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events.
The Information set forth and discussed below for the three months ended March
31, 1998 and 1997 is derived from the Consolidated Financial Statements included
elsewhere herein. The financial information set forth and discussed below is
unaudited but, in the opinion of management, reflects all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
such information. The results of operations of the Company for a particular
quarter may not be indicative of results expected during the other quarters or
for the entire year.
GENERAL
- -------
The Company, through its wholly owned subsidiary Covalent Research Alliance
Corp., is a research management organization that designs, coordinates and
monitors clinical trials in drug development for some of the world's leading
pharmaceutical firms. in addition, using advanced technologies, the Company
works extensively in managed care, medical outcomes research and health
management programs that focus on compliance and provider/patient behavior
modification. Revenue is derived principally from the identification,
placement, monitoring and management of clinical development studies in the
traditional pharmaceutical, as well as managed care environment.
The Company's quarterly results can fluctuate as a result of a number of
factors, including the Company's success in attracting new business, the size
and duration of the clinical trials, the timing of client decisions to conduct
new clinical trials or possible cancellation or delays of ongoing trials, and
other factors, many of which are beyond the company's control. Clinical
research service contracts generally have terms ranging from several months to
several years. A portion of the
9
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contract fee is generally payable upon execution of the contract, with the
balance payable in installments over the life of the contract. Revenue and
related cost of revenue are recognized as specific contract terms are fulfilled
under the percentage of completion method.
Contracts generally may be terminated by clients with or without cause.
Clinical trials may be terminated or delayed for several reasons, including
unexpected results or adverse patient reactions to the drug, inadequate patient
enrollment or investigator recruitment, manufacturing problems resulting in
shortages of the drug or decisions by the client to de-emphasize or terminate a
particular trial or development efforts on a particular drug. Depending on the
size of the trial in question, a client's decision to terminate or delay a trial
in which the Company participates could have a materially adverse effect on the
Company's backlog, future revenue and profitability.
The Company's backlog, which consists of anticipated revenues from signed
contracts, is in excess of $8 million at March 31, 1998. The Company believes
that its backlog as of any date is not necessarily a meaningful predictor of
future results.
Three Months Ended March 31, 1998 Compared To Three Months Ended March 31, 1997.
- --------------------------------------------------------------------------------
Revenues for the three months ended March 31, 1998 decreased 26% to $2,240,000
as compared to $3,046,000 for the three month period ended March 31, 1997. The
decrease of $806,000 is directly related to one less major clinical study being
conducted in the most recent quarter as compared to the same quarter last year.
Direct expenses include compensation and other expenses directly related to
conducting clinical studies. These costs decreased by $459,000 from $2,313,000
to $1,854,000 for the three months ended March 31, 1997 and 1998, respectively.
The decrease in expenses results from fewer fees being paid to investigator
sites. Direct expenses as a percentage of total revenues were 83% for the three
months ended March 31, 1998 as compared to 76% for the same period last year.
The increase in relative percent is due to the fixed cost component of personnel
necessary to support an expected greater number of clinical studies.
Selling, general and administrative expenses include all administrative and
business development personnel, and all other support expenses not directly
related to specific contracts. Also included are expenses associated with the
development of an interactive voice recognition system ("IVR") the platform
development of which was essentially completed in January 1998. Selling,
general and administrative expenses for the three months ended March 31, 1998
amounted to $818,000 as compared to $751,000 for the same period last year.
Included in selling, general and administrative expenses for the three months
ended March 31, 1997 and 1998 are IVR development and system maintenance
expenses of $166,000 and $115,000, respectively. The increase in the level of
expenses, excluding IVR related expenses for both periods, is due to costs
associated with building the necessary support infrastructure for the overall
business. As a percentage of revenues, selling, general and administrative
expenses increased from 25% to 37% for the three months ended March 31, 1997 and
1998 respectively. The increase in expenses as a percentage of revenues results
from the decrease in clinical trial revenues.
Interest income increased $17,000 from $13,000 for the three months ended March
31, 1997 to $30,000 for the three months ended March 31, 1998.
10
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Income tax benefit for the three months ended March 31, 1998 amounted to
$137,000 or 34% of the operating loss for the period. Management expects the
tax benefit to be fully utilized.
In 1996 the Company sold all of the stock of a subsidiary, Future Medical
Technologies, Inc. ("FMT"). In the three months ended March 31, 1997 the
Company reached agreement with the purchaser to treat the sale of FMT as an
asset sale under Internal Revenue Code Section 338 (h)(10). Accordingly, the
loss on the sale is deductible for tax purposes against future income, and, as a
result, the Company recorded a deferred tax asset of $94,000. Management
anticipates the loss on disposal to be fully utilized.
Liquidity and Capital Resources
- -------------------------------
The Company's contracts usually require a portion of the contract amount to be
paid at the time the contract is initiated. Additional payments are generally
made upon completion of negotiated performance requirements throughout the life
of the contract. Cash receipts do not necessarily correspond to costs incurred
and revenue recognized (revenue recognition is based on the percentage of
completion accounting method). The Company typically receives a low volume of
large-dollar receipts. As a result, the number of days outstanding in accounts
receivable will fluctuate due to the timing and size of cash receipts. Accounts
receivable and costs and estimated earnings in excess of related billings on
uncompleted contracts were $2,681,000 at March 31, 1998 and $3,543,000 at
December 31, 1997. The decrease relates directly to the reduction in revenues
and the timing of payments by clients.
The Company's cash and cash equivalents balance at March 31, 1998 was
$1,589,000 as compared to $1,795,000 at December 31, 1997. The decrease in cash
was primarily due to normal operations.
The Company has a line of credit with a commercial bank providing a maximum
credit facility of $1 million which bears interest at a rate not to exceed 1%
point above the bank's prime rate. Borrowings outstanding under the credit line
are secured by substantially all of the assets of the Company. No borrowings
were outstanding under the credit line at March 31, 1998.
The Company's principal cash needs on both a short and long-term basis are
for the funding of its operations, and capital expenditure requirements. The
Company expects to continue expanding its operations through internal growth,
expansion of its existing services, and the development of new services for
clinical research and the healthcare industry. The Company expects such
activities to be funded from existing cash and cash equivalents and cash flow
from operations.
11
<PAGE>
FORM 10-QSB
COVALENT GROUP, INC.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (in electronic format only)
(b) Reports on Form 8-K
On January 8, 1998 the Company filed Form 8-K reporting
stockholder ratification to appoint the firm of Arthur
Andersen LLP as its independent auditors beginning January 1,
1998 to make an examination of the accounts of the Company
for the year ended December 31, 1997. The Company had no
disagreements with its previous independent auditors, Baratz
& Associates, P.A. on any matter of accounting principles or
practices, financial statement disclosure or auditing scope
or procedure.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COVALENT GROUP, INC.
Dated: May 14, 1998 By: /s/Bruce LaMont
------------ -----------------------------
Bruce LaMont, President
and Chief Executive Officer
Dated: May 14, 1998 By: /s/William K. Robinson
------------ -----------------------------
William K. Robinson, Chief
Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,589,005
<SECURITIES> 0
<RECEIVABLES> 1,119,690
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,524,894
<PP&E> 1,083,066
<DEPRECIATION> 434,160
<TOTAL-ASSETS> 5,746,688
<CURRENT-LIABILITIES> 2,036,382
<BONDS> 0
0
0
<COMMON> 11,756
<OTHER-SE> 3,698,550
<TOTAL-LIABILITY-AND-EQUITY> 5,746,688
<SALES> 2,239,607
<TOTAL-REVENUES> 2,239,607
<CGS> 1,854,226
<TOTAL-COSTS> 1,854,226
<OTHER-EXPENSES> 787,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (402,380)
<INCOME-TAX> (136,694)
<INCOME-CONTINUING> (265,686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (265,686)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
