<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, 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 March 31, 2000.
Common Stock, Par Value $.001 12,165,227
- ----------------------------- ----------
(Class) Outstanding
Transitional Small Business Disclosure Format (check one): Yes ___ No X
---
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. Financial Statements
Balance Sheet - March 31, 2000 (Unaudited) 3
Statements of Operations - Three Months Ended
March 31, 2000 and 1999 (Unaudited) 5
Statements of Cash Flows - Three Months
Ended March 31, 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 12
Signature Page 13
</TABLE>
2
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Part I. Financial Information
Item 1. Financial Statements
Covalent Group, Inc.
Balance Sheet
March 31, 2000
(Unaudited)
Assets
Current Assets
Cash and cash equivalents $ 1,056,074
Restricted cash 541,504
Accounts receivable 939,160
Prepaid expenses and other 329,394
Costs and estimated earnings in excess of
related billings on uncompleted contracts 5,253,543
--------------
Total Current Assets 8,119,675
--------------
Property and Equipment
Equipment 1,644,547
Furniture and fixtures 281,462
Leasehold improvements 120,862
--------------
2,046,871
Less - Accumulated depreciation (1,065,576)
--------------
Net Property and Equipment 981,295
--------------
Other Assets 40,507
--------------
Total Assets $ 9,141,477
==============
See accompanying notes to financial statements
3
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Covalent Group, Inc.
Balance Sheet
March 31, 2000
(Unaudited)
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 1,530,811
Accrued expenses 439,073
Billings in excess of related costs and
estimated earnings on uncompleted contracts 451,405
Customer advances 1,056,042
-------------
Total Current Liabilities 3,477,331
-------------
Stockholders' Equity
Common stock, $.001 par value,
25,000,000 shares authorized,
12,177,727 shares issued 12,178
Additional paid-in-capital 9,749,525
Accumulated deficit (4,047,241)
-------------
5,714,462
Less:
Treasury stock at cost, 12,500 shares (50,316)
-------------
Total Stockholders' Equity 5,664,146
-------------
Total Liabilities and Stockholders' Equity $ 9,141,477
=============
See accompanying notes to financial statements
4
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Covalent Group, Inc.
Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------
2000 1999
---- ----
<S> <C> <C>
Revenues $ 3,673,672 $ 3,264,976
Operating Expenses
Direct 1,964,421 1,892,503
Selling, general and administrative 788,648 839,490
----------------- -----------------
Total Operating Expenses 2,753,069 2,731,993
----------------- -----------------
Income from Operations 920,603 532,983
Interest Income 15,197 14,317
----------------- -----------------
Income before Income Taxes 935,800 547,300
Income Tax Provision 346,246 202,505
----------------- -----------------
Net Income $ 589,554 $ 344,795
================= =================
Net Income per Common Share
Net Income - Basic $ .05 $ .03
Net Income - Diluted $ .05 $ .03
Weighted Average Common and Common
Equivalent Shares Outstanding
Basic 12,124,516 12,058,683
Diluted 13,010,582 12,519,140
</TABLE>
See accompanying notes to financial statements.
5
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Covalent Group, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
----------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 589,554 $ 344,795
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization and depreciation 104,673 67,317
Decrease deferred income taxes - 199,668
Changes in assets and liabilities
(Increase) decrease in -
Accounts receivable 1,887,159 (169,980)
Restricted cash 155,546 (1,525)
Prepaid expenses and other (197,683) 17,393
Costs and estimated earnings in excess
of related billings on uncompleted contracts (1,838,613) (26,179)
Other assets - (1,000)
Increase (decrease) in -
Accounts payable (511,608) 476,496
Accrued expenses 65,188 (221,464)
Billings in excess of related costs and
estimated earnings on uncompleted contracts 128,834 (480,495)
Customer advances (189,654) 744,557
-------------- ----------------
Net Cash Provided By Operating Activities 193,396 949,583
-------------- ----------------
Investing Activities:
Purchases of property and equipment (12,841) (352,608)
-------------- ----------------
Net Cash Used In Investing Activities (12,841) (352,608)
-------------- ----------------
Cash Flows Provided By Financing Activities
Proceeds from exercise of stock options 238,597 -
Tax benefit from exercise of stock options 78,394 -
-------------- ----------------
Net Cash Provided By Financing Activities 316,991 -
-------------- ----------------
Net Increase (Decrease) In Cash and Cash Equivalents 497,546 596,975
Cash and Cash Equivalents, Beginning of Period 558,528 1,208,956
-------------- ----------------
Cash and Cash Equivalents, End of Period $ 1,056,074 $1,805,931
============== ================
</TABLE>
See accompanying notes to financial statements
6
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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 months ended March 31, 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 March 31, 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 three months ended March 31, 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 March 31, 2000,
this restricted cash amount was $541,504 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
March 31,
---------
2000 1999
----------- -----------
<S> <C> <C>
Net income used for basic and diluted
net income per common share $ 589,554 $ 344,795
=============== ===============
Weighted average common shares outstanding
used for basic net income per common share 12,124,516 12,058,693
Dilutive effect of common stock
options and warrants outstanding 886,066 460,447
--------------- ---------------
Weighted average common and common
equivalent shares outstanding used for
diluted net income per common share 13,010,582 12,519,140
=============== ===============
</TABLE>
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
March 31,
---------
<S> <C> <C>
2000 1999
-------- --------
Net Income $589,554 $344,795
Unrealized Loss on Investment - (9,375)
--------------- --------------
Comprehensive Income $589,554 $335,420
=============== ==============
</TABLE>
8
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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, 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.
9
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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 $28 million at March 31, 2000. The Company believes that its
backlog as of any date is not necessarily a meaningful predictor of future
results.
Three Months Ended March 31, 2000 Compared To Three Months Ended March 31, 1999
- -------------------------------------------------------------------------------
Revenues for the three months ended March 31, 2000 increased 13% to $3,674,000
as compared to $3,265,000 for the three month period ended March 31, 1999. The
increase of $409,000 results from the increase in the number of clinical
development projects being worked on 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 expenses increased by $71,000 from
$1,893,000 to $1,964,000 for the three months ended March 31, 1999 and 2000,
respectively. The increase in expenses results principally from increases in
employee benefit costs. Direct expenses as a percentage of revenues were 53%
for the three months ended March 31, 2000 as compared to 58% 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 March 31, 2000
amounted to $789,000 or 21% of revenues, as compared to $839,000 or 26% of
revenues for the same period last year. The net decrease of $50,000 or 6%
reflects increased efficiencies resulting from consolidation within the
Company's operating structure, offset by an increase in depreciation expense of
$38,000 attributable to an additional data management system acquired in the
second quarter of 1999.
Interest income increased $1,000 from $14,000 for the three months ended March
31, 1999, to $15,000 for the three months ended March 31, 2000.
The effective income tax rate for the three months ended March 31, 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
10
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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
$1,887,000 to $939,000 at March 31, 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 $1,839,000 to $5,254,000 at March
31, 2000. This increase was attributable to seven 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 March 31, 2000 was $1,056,000
as compared to $559,000 at December 31, 1999. The increase in cash was
primarily due to operating results for the three months ended March 31, 2000 and
the proceeds from exercise of stock options.
The Company purchased $13,000 of equipment in the three months ended March 31,
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. No
borrowings were outstanding under the credit line at March 31, 2000.
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.
11
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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
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
The Company filed a Form 8-K on January 26, 2000 announcing
that Covalent Partners, LLC completed the purchase of the
remaining 4,765,500 shares of common stock of Covalent
Group, Inc. held by Bruce LaMont, subject to an Option
Agreement dated November 1, 1999.
12
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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: May 12, 2000 By: /s/Kenneth M. Borow, M.D.
------------------ -----------------------------------
Kenneth M. Borow, M.D.
Chief Executive Officer
Dated May 12, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,597,578
<SECURITIES> 0
<RECEIVABLES> 939,160
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,119,675
<PP&E> 2,046,871
<DEPRECIATION> 1,065,576
<TOTAL-ASSETS> 9,146,477
<CURRENT-LIABILITIES> 3,477,331
<BONDS> 0
0
0
<COMMON> 12,178
<OTHER-SE> 5,651,968
<TOTAL-LIABILITY-AND-EQUITY> 9,141,477
<SALES> 3,673,672
<TOTAL-REVENUES> 3,673,672
<CGS> 1,964,421
<TOTAL-COSTS> 1,964,421
<OTHER-EXPENSES> 773,451
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 935,800
<INCOME-TAX> 346,246
<INCOME-CONTINUING> 589,554
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 589,554
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
