<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 JUNE 30, 2000.
____ 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 August 1, 2000.
Common Stock, Par Value $.001 12,174,577
----------------------------- ----------
(Class) Outstanding
Transitional Small Business Disclosure Format (check one): Yes___ No X
---
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FORM 10-QSB
COVALENT GROUP, INC.
INDEX
Page
----
PART I. Financial Information
Item 1. Financial Statements
Balance Sheet - June 30, 2000 (Unaudited) 3
Statements of Operations - Three Months and Six Months
Ended June 30, 2000 and 1999 (Unaudited) 5
Statements of Cash Flows - Six Months
Ended June 30, 2000 and 1999 (Unaudited) 6
Notes to Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information 13
Signature Page 15
2
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Part I. Financial Information
ITEM 1. Financial Statements
Covalent Group, Inc.
Balance Sheet
June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Assets
<S> <C>
Current Assets
Cash and cash equivalents $ 77,879
Restricted cash 318,178
Accounts receivable 969,380
Prepaid expenses and other 278,269
Costs and estimated earnings in excess of
related billings on uncompleted contracts 7,270,257
-----------
Total Current Assets 8,913,963
-----------
Property and Equipment
Equipment 1,662,005
Furniture and fixtures 281,462
Leasehold improvements 120,864
-----------
2,064,331
Less - Accumulated depreciation (1,157,326)
-----------
Net Property and Equipment 907,005
-----------
Other Assets 53,694
-----------
Total Assets $ 9,874,662
===========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
Covalent Group, Inc.
Balance Sheet
June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C>
Current Liabilities
Accounts payable $1,817,735
Accrued expenses 607,347
Line of credit 225,000
Billings in excess of related costs and
estimated earnings on uncompleted contracts 467,996
Customer advances 554,624
---------
Total Current Liabilities 3,672,702
---------
Stockholders' Equity
Common stock, $.001 par value,
25,000,000 shares authorized,
12,186,977 shares issued 12,187
Additional paid-in-capital 9,823,844
Accumulated deficit (3,583,755)
---------
6,252,276
Less:
Treasury stock at cost, 12,500 shares (50,316)
---------
Total Stockholders' Equity 6,201,960
----------
Total Liabilities and Stockholders' Equity $9,874,662
==========
</TABLE>
See accompanying notes to financial statements
4
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Covalent Group, Inc.
Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 3,465,831 $ 4,197,470 $ 7,139,503 $ 7,462,446
Operating Expenses
Direct 1,815,816 2,596,232 3,780,237 4,488,735
Selling, general and administrative 918,273 953,839 1,706,921 1,793,329
----------- ----------- ----------- -----------
Total Operating Expenses 2,734,089 3,550,071 5,487,158 6,282,064
----------- ----------- ----------- -----------
Income from Operations 731,742 647,399 1,652,345 1,180,382
Interest Income, Net 3,528 33,642 18,725 47,959
----------- ----------- ----------- -----------
Income before Income Taxes 735,270 681,041 1,671,070 1,228,341
Income Tax Provision 271,784 251,982 618,030 454,487
----------- ----------- ----------- -----------
Net Income $ 463,486 $ 429,059 $ 1,053,040 $ 773,854
=========== =========== =========== ===========
Net Income per Common Share
Net Income - Basic $ .04 $ .04 $ .09 $ .06
Net Income - Diluted $ .04 $ .03 $ .08 $ .06
Weighted Average Common and Common
Equivalent Shares Outstanding
Basic 12,168,512 12,058,693 12,146,945 12,058,693
Diluted 13,154,840 12,435,498 13,042,560 12,474,737
</TABLE>
See accompanying notes to financial statements
5
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Covalent Group, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Operating Activities:
Net income $ 1,053,040 $ 773,854
Adjustments to reconcile net income to
net cash (used in) provided by operating activities
Amortization and depreciation 196,423 140,278
Decrease deferred income taxes - 336,000
Changes in assets and liabilities
(Increase) decrease in -
Accounts receivable 1,856,939 663,499
Restricted cash 378,872 331,213
Prepaid expenses and other (146,558) 77,036
Costs and estimated earnings in excess
of related billings on uncompleted contracts (3,855,327) (164,731)
Other assets (13,187) (10,500)
Increase (decrease) in -
Accounts payable (224,684) 1,016,303
Accrued expenses 233,462 (164,415)
Billings in excess of related costs and
estimated earnings on uncompleted contracts (691,072) 259,079
Customer advances 145,425 (780,151)
------------- ------------
Net Cash (Used In) Provided By Operating Activities (1,066,667) 2,477,465
------------- ------------
Investing Activities:
Purchases of property and equipment (30,301) (640,717)
------------- ------------
Net Cash Used In Investing Activities (30,301) (640,717)
------------- ------------
Financing Activities:
Proceeds from line of credit 225,000 -
Proceeds from issuance of stock, net 391,319 -
------------- ------------
Net Cash Provided By Financing Activities 616,319 -
------------- ------------
Net (Decrease) Increase In Cash and Cash Equivalents (480,649) 1,836,748
------------- ------------
Cash and Cash Equivalents, Beginning of Period 558,528 1,208,956
------------- ------------
Cash and Cash Equivalents, End of Period $ 77,879 $3,045,704
============= ============
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
FORM 10-QSB
Covalent Group, Inc.
Notes To 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.
Basis of Presentation
---------------------
The financial statements for the three and six months ended June 30, 2000
and 1999 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 June 30, 2000 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, 1999.
Operating results for the six months ended June 30, 2000 may not
necessarily be indicative of the results for the year ending December 31,
2000.
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
7
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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 June 30, 2000, this
restricted cash amount was $318,178 and this amount is also included in
customer advances.
Net Income Per Common and Common Equivalent Share
-------------------------------------------------
Basic net income per common share was computed by dividing net income by
the weighted average number of shares of common stock outstanding during
the period. Diluted net income per common share reflects the potential
dilution from the exercise of outstanding stock options and warrants into
common stock.
The net income and weighted average common and common equivalent shares
outstanding for purposes of calculating net income per common share are
computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income used for basic
and diluted net income
per common share $ 463,486 $ 429,059 $ 1,053,040 $ 773,854
=========== =========== =========== ===========
Weighted average common shares
outstanding used for basic net
income per common share 12,168,512 12,058,693 12,146,945 12,058,693
Dilutive effect of common stock
options and warrants outstanding 986,328 376,805 895,615 416,044
----------- ----------- ----------- -----------
Weighted average common and
common equivalent shares
outstanding used for diluted net
income per common share 13,154,840 12,435,498 13,042,560 12,474,737
=========== =========== =========== ===========
</TABLE>
8
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Comprehensive Income
---------------------
A reconciliation of comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" is
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $463,486 $429,059 $1,053,040 $773,854
Unrealized Loss on Investment - (9,375) - (9,375)
-------- -------- ---------- --------
Comprehensive Income $463,486 $419,684 $1,053,040 $764,479
======== ======== ========== ========
</TABLE>
3. RELATED PARTY TRANSACTION
-------------------------
The Company recorded revenues of $30,000 and $355,000 for the three months
and six months ended June 30, 2000, respectively, under the terms of a
consulting agreement with SpeedTrials.com, Inc. A significant shareholder
of the Company's common stock is a principal shareholder in
SpeedTrials.com, Inc. The total contract for consulting services is in the
amount of $1,000,000 and the revenues are being recognized over the
consulting period as services are performed through December 2000.
4. LINE OF CREDIT
--------------
As of June 30, 2000, the Company has outstanding borrowings of $225,000
under a revolving credit facility with a commercial bank. The maximum
available borrowings under the facility are $1,000,000 and outstanding
borrowings bear interest at the bank's prime rate plus 1%. The bank credit
facility has no stated maturity date; however, borrowings are due on
demand.
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.
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The information set forth and discussed below for the three and six months ended
June 30, 2000 and 1999 is derived from the 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 adjustments) 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, 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 $26 million at June 30, 2000. The Company believes that its
backlog as of any date is not necessarily a meaningful predictor of future
results.
Three Months Ended June 30, 2000 Compared To Three Months Ended June 30, 1999
-----------------------------------------------------------------------------
Revenues for the three months ended June 30, 2000 decreased 17% to $3,466,000 as
compared to $4,197,000 for the three month period ended June 30, 1999. Although
there was one additional clinical trial in progress during the period ended June
30, 2000, revenue decreased by $731,000 as compared to June 30, 1999 due to a
significant short term project that was completed entirely in 1999.
10
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Direct expenses include compensation and other expenses directly related to
conducting clinical studies. These expenses decreased by $780,000 from
$2,596,000 to $1,816,000 for the three months ended June 30, 1999 and 2000,
respectively. The decrease in expenses results principally from decreased
payments to subcontractors. Direct expenses as a percentage of revenues were
52% for the three months ended June 30, 2000 as compared to 62% for the same
period last year. The decrease in relative percent is due to the different cost
structures of the clinical studies being conducted and is based on different
types of services requested by the Company's clients.
Selling, general and administrative expenses include all administrative and
business development personnel, and all other support expenses. Selling,
general and administrative expenses for the three months ended June 30, 2000
amounted to $918,000 or 26% of revenues, as compared to $954,000 or 23% of
revenues for the same period last year. The net decrease of $36,000 reflects
increased efficiencies resulting from consolidation within the Company's
operating structure.
Interest income, net decreased $30,000 from $34,000 for the three months ended
June 30, 1999, to $4,000 for the three months ended June 30, 2000.
The effective income tax rate for the three months ended June 30, 2000 and 1999
was consistent at 37%.
Six Months Ended June 30, 2000 Compared To Six Months Ended June 30, 1999
-------------------------------------------------------------------------
Revenues for the six months ended June 30, 2000 decreased 4% to $7,140,000 as
compared to $7,462,000 for the six month period ended June 30, 1999. Although
one additional clinical trial was in progress during the six months ended June
30, 2000, revenue decreased by $322,000 as compared to the same period last year
due to a significant short term project that was completed entirely in 1999.
Direct expenses include compensation and other expenses directly related to
conducting clinical studies. These expenses decreased by $709,000 from
$4,489,000 to $3,780,000 for the six months ended June 30, 1999 and 2000,
respectively. The decrease in expenses results principally from decreased
payments to subcontractors. Direct expenses as a percentage of revenues were
53% for the six months ended June 30, 2000 as compared to 60% for the same
period last year. The decrease in relative percent is due to the different cost
structures of the clinical studies being conducted and is based on different
types of services requested by the Company's clients.
Selling, general and administrative expenses include all administrative and
business development personnel, and all other support expenses. Selling,
general and administrative expenses for the six months ended June 30, 2000
amounted to $1,707,000 or 24% of revenues, as compared to $1,793,000 or 24% of
revenues for the same period last year. The net decrease of $86,000 reflects
increased efficiencies resulting from consolidation within the Company's
operating structure, offset by an increase in depreciation expense of $56,000
attributable to an additional data management system acquired in the second
quarter of 1999.
11
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Interest income, net decreased $29,000 from $48,000 for the six months ended
June 30, 1999 to $19,000 for the six months ended June 30, 2000.
The effective income tax rate for the six months ended June 30, 2000 and 1999
was consistent at 37%.
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. Compared
to December 31, 1999, accounts receivable decreased $1,857,000 to $969,000 at
June 30, 2000 primarily due to the timing of progress payments for clinical
trials. Costs and estimated earnings in excess of related billings on
uncompleted contracts increased $3,855,000 to $7,270,000 at June 30, 2000. This
increase was attributable to twelve clinical trials, for which revenues have
been recognized in excess of progress billings made to date on those contracts.
The Company's cash and cash equivalents balance at June 30, 2000 was $78,000 as
compared to $559,000 at December 31, 1999. The decrease in cash was primarily
due to the significant increase in costs and estimated earning in excess of
related billings on uncompleted contracts.
The Company purchased $30,000 of equipment in the six months ended June 30,
2000. The Company anticipates the need for capital expenditures during the
remainder of 2000 for computer equipment will be $150,000.
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
percentage point above the bank's prime rate. Borrowings outstanding under the
credit line are secured by substantially all of the assets of the Company.
Borrowings outstanding under the credit line at June 30, 2000 were $225,000.
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 service products
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.
Management believes that the Company's operations and financial results are not
materially affected by inflation.
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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
On June 22, 2000, the Company held its Annual Meeting of Stockholders
during which the stockholders:
(1) Elected five nominees to serve as directors with terms continuing
until the next Annual Meeting of Stockholders in 2001. The votes
cast were as follows:
For Withheld
---------- --------
Kenneth M. Borow, M.D. 11,380,702 25,503
Anthony Cerami, Ph.D. 11,380,702 25,503
Donald Holdsworth 11,380,688 25,517
William K. Robinson 11,380,702 25,503
Stephen Sallan, M.D. 11,380,702 25,503
(2) Amended the 1996 Stock Incentive Plan to increase the number of
common stock shares reserved for issuance from 2,500,000 to
3,000,000. The votes cast were as follows:
For Against Abstain
--- ------- -------
11,255,772 133,816 16,667
(3) Ratified the appointment of the firm of Arthur Andersen LLP as
independent auditors to examine the accounts of the Company for
the year ending December 31, 2000. The votes cast were as
follows:
For Against Abstain
--- ------- -------
11,375,722 14,525 16,667
13
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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
14
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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: August 11, 2000 By: /s/ Kenneth M. Borow, M.D.
---------------- ------------------------------------
Kenneth M. Borow, M.D.
Chief Executive Officer
Dated August 11, 2000 By: /s/ William K. Robinson
----------------- ------------------------------------
William K. Robinson
Chief Financial Officer
15
