<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, 1999.
|_| 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, 1999.
Common Stock, Par Value $.001 12,058,693
- ----------------------------- ----------
(Class) Outstanding
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
<PAGE>
FORM 10-QSB
COVALENT GROUP, INC.
INDEX
Page
----
PART I. Financial Information
Item 1. Consolidated Financial Statements
Balance Sheet - March 31, 1999 (Unaudited) 3
Statements of Operations - Three Months Ended
March 31, 1999 and 1998 (Unaudited) 5
Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 (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 14
Signature Page 15
2
<PAGE>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Covalent Group, Inc.
and Subsidiary
Consolidated Balance Sheet
March 31, 1999
(Unaudited)
Assets
Current Assets
Cash and cash equivalents $ 1,805,931
Restricted cash 1,001,525
Accounts receivable 2,704,263
Prepaid expenses and other 278,296
Costs and estimated earnings in excess of
related billings on uncompleted contracts 629,405
-----------
Total Current Assets 6,419,420
-----------
Property and Equipment
Equipment 1,316,534
Furniture and fixtures 260,661
Leasehold improvements 117,673
-----------
1,694,868
Less - Accumulated depreciation (667,320)
-----------
Net Property and Equipment 1,027,548
-----------
Deferred Income Taxes 275,571
-----------
Other Assets 50,790
-----------
Total Assets $ 7,773,329
===========
See accompanying notes to consolidated financial statements
3
<PAGE>
Covalent Group, Inc.
and Subsidiary
Consolidated Balance Sheet
March 31, 1999
(Unaudited)
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 1,539,060
Accrued expenses 73,988
Billings in excess of related costs and
estimated earnings on uncompleted contracts 809,475
Customer advances 1,744,557
-----------
Total Current Liabilities 4,167,080
-----------
Stockholders' Equity
Common stock, $.001 par value
25,000,000 shares authorized,
12,071,193 shares issued 12,071
Additional paid-in-capital 9,384,135
Accumulated deficit (5,730,266)
Unrealized loss on investment (9,375)
-----------
3,656,565
Less:
Treasury stock at cost, 12,500 shares (50,316)
-----------
Total Stockholders' Equity 3,606,249
-----------
Total Liabilities and Stockholders' Equity $ 7,773,329
===========
See accompanying notes to consolidated financial statements
4
<PAGE>
Covalent Group, Inc.
and Subsidiary
Consolidated Statements Of Operations
(Unaudited)
Three Months Ended
March 31,
---------
1999 1998
---- ----
Revenues $ 3,264,976 $ 2,239,607
Operating Expenses
Direct 1,892,503 1,854,226
Selling, general and administrative 839,490 817,722
------------ ------------
Total Operating Expenses 2,731,993 2,671,948
------------ ------------
Income (Loss) from Operations 532,983 (432,341)
Interest Income 14,317 29,961
------------ ------------
Income (Loss) before Income Taxes 547,300 (402,380)
Income Tax Provision (Benefit) 202,505 (136,694)
------------ ------------
Net Income (Loss) $ 344,795 $ (265,686)
============ ============
Net Income (Loss) per Common Share
Net Income (Loss) - Basic $ .03 $ (.02)
Net Income (Loss) - Diluted $ .03 $ (.02)
Weighted Average Common and Common
Equivalent Shares Outstanding
Basic 12,058,683 11,743,209
Diluted 12,519,140 11,743,209
See accompanying notes to consolidated financial statements.
5
<PAGE>
Covalent Group, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1999 1998
---- ----
<S> <C> <C>
Operating Activities:
Net income (loss) $ 344,795 $ (265,686)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Amortization and depreciation 67,317 61,719
Deferred income taxes 199,668 (136,823)
Changes In assets and liabilities
(Increase) decrease in -
Accounts receivable (169,980) 1,015,533
Restricted cash (1,525) --
Prepaid expenses and other 17,393 (83,795)
Costs and estimated earnings in excess
of related billings on uncompleted contracts (26,179) (153,537)
Other assets (1,000) (16,239)
Increase (decrease) in -
Accounts payable 476,496 (144,458)
Accrued expenses (221,464) (34,973)
Customer advances 744,557 --
Billings in excess of related costs and
estimated earnings on uncompleted contracts (480,495) (424,776)
----------- -----------
Net Cash Provided By (Used In) Operating Activities 949,583 (183,035)
----------- -----------
Investing Activities:
Purchases of property and equipment (352,608) (22,490)
----------- -----------
Net Cash Used In Investing Activities (352,608) (22,490)
----------- -----------
Net Increase (Decrease) In Cash and Cash Equivalents 596,975 (205,525)
Cash and Cash Equivalents, Beginning of Period 1,208,956 1,794,530
----------- -----------
Cash and Cash Equivalents, End of Period $ 1,805,931 $ 1,589,005
=========== ===========
</TABLE>
See accompanying notes to consolidated 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
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.
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.
Basis of Presentation
The financial statements for the three months ended March 31, 1999 and
1998 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, 1999 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,
1998.
Operating results for the three months ended March 31, 1999 may not
necessarily be indicative of the results for the year ending December 31,
1999.
7
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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.
Restricted Cash
The Company received an advance payment from one of its customers as part
of a long term contract, which includes a separate restricted cash account
to be utilized for payment of investigator fees. As of March 31, 1999,
this restricted cash amount was $1,001,525 and this amount is also
included in customer advances.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
Net Income (Loss) Per Common and Common Equivalent Share
Basic net income (loss) per common share was computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per common share for the
three months ended March 31, 1999 reflects the potential dilution from the
exercise of outstanding stock options and warrants into common stock.
Inclusion of shares of common stock potentially issuable upon the exercise
of stock options and warrants in calculating diluted net loss per common
share for the three months ended March 31, 1998, would have been
anti-dilutive, and therefore such shares were not included in the
calculation.
8
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The net income (loss) and 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,
---------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) used for basic and
diluted net income (loss) per common share $ 344,795 $ (265,686)
============ ============
Weighted average common shares
outstanding used for basic net
income (loss) per common share 12,058,693 11,743,209
Dilutive effect of common stock
options and warrants outstanding 460,447 --
------------ ------------
Weighted average common and
common equivalent shares
outstanding used for diluted net
income (loss) per common share 12,519,140 11,743,209
============ ============
</TABLE>
Comprehensive Income (Loss)
A reconciliation of comprehensive income (loss) in accordance with
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" is as follows:
Three Months Ended
March 31,
---------
1999 1998
---- ----
Net Income (Loss) $ 344,800 $(265,686)
Unrealized Loss on Investment (9,375) (108,671)
--------- ---------
Comprehensive Income (Loss) $ 335,425 $(374,357)
========= =========
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
9
<PAGE>
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, 1999 and 1998 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 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 $25 million at March 31, 1999. The Company believes
that its backlog as of any date is not necessarily a meaningful predictor of
future results.
10
<PAGE>
Three Months Ended March 31, 1999 Compared To Three Months Ended March 31, 1998.
Revenues for the three months ended March 31, 1999 increased 46% to $3,265,000
as compared to $2,240,000 for the three-month period ended March 31, 1998. The
increase of $1,025,000 is directly related to three additional major clinical
studies 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 increased by $39,000 from $1,854,000 to
$1,893,000 for the three months ended March 31, 1998 and 1999, respectively. The
increase of $39,000 results from additional expenses, of which approximately
$435,000 was primarily for additional personnel necessary to support the
increase in the number of clinical studies, offset by less fees paid to outside
investigator sites and other contractors. Direct expenses as a percentage of
total revenues were 58% for the three months ended March 31, 1999 as compared to
83% for the same period last year. The decrease in relative percent is due to
the fixed component of expenses being applied to an expanded revenue base and a
change in mix of revenues to certain higher margin contracts as compared with
the prior year period.
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, 1999 amounted
to $839,000 as compared to $818,000 for the same period last year. Included in
selling, general and administrative expenses for the three months ended March
31, 1998 and 1999 are IVR development and system maintenance expenses of
$115,000 and $6,000, respectively. The increase in the level of expenses,
excluding IVR related expenses for both periods, is due to costs associated with
supporting a larger infrastructure for the overall business. As a percentage of
revenues, selling, general and administrative expenses decreased from 37% to 26%
for the three months ended March 31, 1998 and 1999 respectively. The decrease in
expenses as a percentage of revenues results from the increase in clinical trial
revenues.
Interest income decreased $16,000 from $30,000 for the three months ended March
31, 1998 to $14,000 for the three months ended March 31, 1999.
The effective income tax rate for the three months ended March 31, 1999 was 37%
as compared to 34% for the three months ended March 31, 1998. The change in the
effective income tax rate is primarily due to the impact of certain non-tax
deductible expenses.
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
11
<PAGE>
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 $3,334,000 at March 31, 1999 and $3,138,000 at December 31, 1998.
The increase relates directly to the increase in revenues and the timing of
payments by clients.
The Company's cash and cash equivalents balance at March 31, 1999 was $1,806,000
as compared to $1,209,000 at December 31, 1998. The increase 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, 1999.
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.
Year 2000 Compliance
The Company is taking the required steps to make its existing systems Year 2000
compliant at a total estimated cost of $50,000; $25,000 of which has already
been incurred through March 31, 1999 and $25,000 of which is expected to be
incurred in fiscal 1999. The Company believes it is on schedule to complete its
remediation efforts by December 31, 1999. If such efforts are not completed
timely, the Year 2000 issue is not expected to have a material impact on the
clinical operations of the Company because all work currently being performed on
the Company's present clinical trials data management system is scheduled to be
completed by December 31, 1999. Furthermore, the Company in 1999 purchased a new
clinical trial data management system capable of handling large-scale projects
with greater flexibility, which is Year 2000 compliant.
The Company's efforts are focused on Year 2000 compliance in the following four
principal areas:
1. Application software, including operating systems and applications
for network servers, midranges and personal computers;
2. Network and communication software, including business offices and
field locations;
3. Computer equipment, including network servers, midranges and
personal computers; and
4. Telecommunications equipment, including telephone and voice mail.
These activities are intended to encompass all major categories of systems in
use by the Company, including sales, research and trial conduct operations and
human resources.
The general phases of the Year 2000 Project are: (1) Year 2000 methodology
training for key information technology personnel, (2) inventorying Year 2000
items, internally and externally; (3) assigning priorities to identified items;
(4) assessing the Year 2000 compliance of items determined to be material to the
Company; (5) remediating or replacing material items that are determined not to
be Year 2000 compliant; (6) testing material items; and (7) designing and
implementing contingency plans to the extent deemed necessary. The Company has
completed phases (1), (2), (3)
12
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and (4) and is presently conducting phases (5), (6) and (7). The Company's
computers, local area network servers, software, and digital phone system have
all been purchased within the last three years, and an inventory has been
conducted in order to identify those systems and software that may require Year
2000 remediation. Assessment and testing is ongoing as hardware or system
software is remediated, upgraded or replaced. In anticipation of its being Year
2000 compliant by December 31, 1999, the Company has no contingency plan. The
Company will monitor its Year 2000 compliance progress and adjust the
implementation of the phases and the necessity of contingency planning as it
deems appropriate.
In addition to making its own systems Year 2000 ready, the Company has and will
continue to survey its key suppliers and clients to determine the extent to
which the systems of such suppliers and clients are Year 2000 compliant and the
extent to which the Company could be affected by the failure of such third
parties to be Year 2000 compliant. Based upon the response to date, the Company
cannot presently estimate the impact of the failure of such third parties to be
Year 2000 compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations such as the Company's ability to properly conduct a particular trial
or otherwise provide necessary service to its clients. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000 readiness
of third-party suppliers and clients, the Company is unable to determine with
certainty at this time whether the consequences of Year 2000 failures will have
a material impact on the Company's overall results of operations, liquidity or
financial condition. However, the Year 2000 assessment being conducted by the
Company is expected to significantly reduce the Company's level of uncertainty
about the Year 2000 problem. Accordingly, at this time, the Company believes
that its exposure to the Year 2000 problem will be minimal.
13
<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
None.
14
<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 13, 1999 By: /s/ Bruce LaMont
------------ ------------------------------------
Bruce LaMont, President
and Chief Executive Officer
Dated: May 13, 1999 By: /s/ William K. Robinson
------------ ------------------------------------
William K. Robinson, Chief
Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,807,456
<SECURITIES> 0
<RECEIVABLES> 2,704,263
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,419,420
<PP&E> 1,694,868
<DEPRECIATION> 667,320
<TOTAL-ASSETS> 7,773,329
<CURRENT-LIABILITIES> 4,167,080
<BONDS> 0
0
0
<COMMON> 12,071
<OTHER-SE> 3,594,178
<TOTAL-LIABILITY-AND-EQUITY> 7,773,329
<SALES> 3,264,976
<TOTAL-REVENUES> 3,264,976
<CGS> 1,892,503
<TOTAL-COSTS> 1,892,503
<OTHER-EXPENSES> 825,173
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 547,300
<INCOME-TAX> 202,505
<INCOME-CONTINUING> 344,795
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 344,795
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
