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, 1997.
___ 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 33-43537
COVALENT GROUP, INC.
(Name of small business issuer in its charter)
Nevada 56-1668867
(State of other jurisdiction of (I.R.S. Employer Identification No.)
(incorporation or organization)
One Glenhardie Corporate Center, 1275 Drummers Lane, Wayne, PA 19087
(address of principal executive offices) (Zip Code)
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 July 31, 1997.
Common Stock, Par Value $.001 11,675,914
- ------------------------------ -----------
(Class) Outstanding
Transitional Small Business Disclosure Format (check one): Yes No X
FORM 10-QSB
COVALENT GROUP, INC.
INDEX
Page(s)
-------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Balance Sheet - June 30, 1997 (Unaudited) 2 & 3
Statements of Operations (Unaudited) - Six
Months Ended June 30, 1997 and 1996 4
Statements of Cash Flows (Unaudited) - Six
Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements
(Unaudited) 6 & 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 11
PART II. Other Information 12
Signature Page 13
FORM 10-QSB PART I - FINANCIAL INFORMATION
COVALENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(Unaudited)
Assets
Current Assets
- --------------
Cash $ 2,021,779
Accounts receivable 3,984,932
Note receivable, current 37,500
Costs and estimated earnings in
excess of billings on uncompleted
contracts 930,154
Prepaid expenses 217,538
Deferred income taxes 199,871
-----------
Total Current Assets 7,391,774
-------------------- -----------
Property and Equipment
- ----------------------
Equipment 738,810
Furniture and fixtures 172,165
Leasehold improvements 59,440
-----------
970,415
Less accumulated depreciation and
amortization ( 279,092)
-----------
Net Property and Equipment 691,323
-------------------------- -----------
Other Assets
- ------------
Note receivable, less current portion 187,500
Security deposit 6,538
Other asset 1,177
-----------
Total Other Assets 195,215
------------------ -----------
Total Assets $ 8,278,312
----------- ===========
See accompanying notes to financial statements.
FORM 10-QSB
COVALENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(Unaudited)
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
- -------------------
Accounts payable $ 3,034,994
Advance billings 1,467,763
-----------
Total Liabilities 4,502,757
----------------- -----------
Shareholders' Equity
- --------------------
Common stock, $.001 par value per
share, authorized 25,000,000 shares,
issued and outstanding 11,675,914
shares 11,676
Additional paid in capital 9,147,429
Deficit (5,383,550)
----------
Total Shareholders' Equity 3,775,555
-------------------------- ----------
Total Liabilities and
Shareholders' Equity $ 8,278,312
---------------------- ===========
See accompanying notes to financial statements.
FORM 10-QSB
COVALENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For Three Months For Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues $3,267,726 $2,228,969 $6,313,444 $3,936,151
- --------
Cost of Revenues 2,549,422 1,189,604 4,862,194 2,172,500
- ---------------- ---------- ---------- ---------- ----------
Gross Profit 718,304 1,039,365 1,451,250 1,763,651
- ------------
Operating Expenses
- ------------------
General and administrative 596,450 486,790 1,181,996 950,473
Research and development 255,399 176,146 420,970 297,294
---------- ---------- ---------- ----------
Total Operating Expenses 851,849 662,936 1,602,966 1,247,767
- ------------------------ ---------- ---------- ---------- ----------
Income (Loss) From Operations ( 133,545) 376,429 ( 151,716) 515,884
- ----------------------------- ---------- ---------- ---------- ----------
Other Income (Expense)
- ---------------------
Miscellaneous income 36,853 17,824 50,298 34,100
Miscellaneous expense ( 696) ( 996)
---------- ---------- ---------- ----------
Total Other Income (Expense) 36,853 17,128 50,298 33,104
- --------------------------- ---------- ---------- ---------- ----------
Income (Loss) From Continuing
Operations Before Income
Tax Benefit ( 96,692) 393,557 ( 101,418) 548,988
- ----------------------------
Income tax benefit 103,508
---------- ---------- ---------- ----------
Income (Loss) From
Continuing Operations ( 96,692) 393,557 2,090 548,988
- -----------------------
Discontinued Operations
- -----------------------
Loss from operations ( 89,742) ( 130,113)
---------- ---------- ---------- ----------
Net Income (Loss) $( 96,692) $ 303,815 $ 2,090 $ 418,875
- ---------------- =========== ========== ========== ==========
Net Income (Loss) Per Common
and Common Equivalent
Share $( .01)$ .03 $ .00 $ .04
- ---------------------------- =========== =========== ========== ===========
Weighted Average Common
Shares Outstanding 12,328,462 11,021,568 12,373,164 10,942,490
- ----------------------- ========== ========== ========== ==========
See accompanying notes to financial statements.
FORM 10-QSB
COVALENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1997 1996
---- ----
Cash Flows From Operating Activities
- ------------------------------------
Net income for the period $ 2,090 $ 418,875
Adjustments to Reconcile Net Income
To Net Cash Provided By Operating
Activities
- -----------------------------------
Depreciation and amortization 76,032 70,467
Changes In Operating Assets
and Liabilities
- ---------------------------
Increase in accounts receivable ( 851,141) ( 739,053)
Increase in other receivable ( 60,000)
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts ( 930,154)
(Increase) decrease in prepaid expenses ( 134,889) 25,744
Increase in deferred income taxes ( 103,508)
Increase in accounts payable 2,338,496 249,585
Increase in advance billings 881,895 751,220
---------- ----------
Net Cash Provided By Operating
Activities 1,278,821 716,838
- ------------------------------ ---------- ----------
Cash Flows From Investing Activities
- ------------------------------------
Purchases of equipment and furniture ( 242,922) ( 197,064)
Net change in assets of discontinued
operations ( 176,669)
---------- ----------
Net Cash Used In Investing Activities ( 242,922) ( 373,733)
- ------------------------------------- ---------- ----------
Cash Flows Provided By Financing Activities
- -------------------------------------------
Proceeds from sales of common stock
and option exercises 63,870 1,897,495
---------- ----------
Net Increase In Cash 1,099,769 2,240,600
- --------------------
Cash at Beginning of Period 922,010 298,583
- --------------------------- ---------- ----------
Cash at End of Period $ 2,021,779 $ 2,539,183
- --------------------- ---------- ----------
See accompanying notes to financial statements.
FORM 10-QSB
COVALENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business
-----------------------
Covalent Group, Inc. (the Company), formerly Future Medical
Technologies International, Inc., is a leading 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 six months ended June 30, 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 June 30, 1997 and the results of its operations and its
cash flows for the interim and cumulative 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, 1996.
Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results for the year ending December
31, 1997.
Revenue Recognition
Fixed price contract revenue is recognized using the percentage of
completion method based on the ratio of costs incurred to date to
estimated total costs at completion. 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. Unbilled accounts receivable, included in accounts
receivable, represent revenue recognized in excess of amounts
billed. Advance billings represent amounts billed in excess of
revenue recognized.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is
provided using a combination of straight line and accelerated
methods over the estimated useful lives of the assets. No material
differences would result if depreciation was provided under the
straight line method. Expenditures for maintenance and repairs are
charged against income as incurred. When assets are sold or
retired, the cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in income.
Research and Development
Research and development costs are charged to operations when
incurred.
Reclassification
Certain prior year balances have been reclassified to conform to
current year presentation.
Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is based on the
weighted average number of common and common equivalent shares
(stock options and warrants) outstanding in each period.
3. Discontinued Operations
-----------------------
On July 31, 1996, the Company sold all of the assets and
liabilities of Future Medical Technologies, Inc. (FMT) for $250,000
and certain royalty payments upon the sale of certain products for
up to five years. $25,000 of the selling price was received in
1996 and the remaining balance is due in annual installments of
$25,000 (1997), $50,000 (1998 and 1999) and $100,000 (2000).
Interest is charged at 7% per annum. FMT was accounted for as
discontinued operations and accordingly, assets, liabilities and
operations were segregated in the accompanying consolidated balance
sheet and statements of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information set forth and discussed below for the three months and
six months ended June 30, 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 Company's results of operations for a particular
quarter may not be indicative of results expected during the other
quarters or for the entire year.
GENERAL
Covalent Group, Inc. (the Company), and 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 consists of anticipated revenues from signed
contracts in excess of $11 million at June 30, 1997. The Company
believes that its backlog as of any date is not necessarily a meaningful
predictor of future results.
Three Month Period Ended June 30, 1997 Compared To The Three Month
Period Ended June 30, 1996.
- --------------------------------------------------------------------
Revenues for the three months ended June 30, 1997 increased 47% to
$3,268,000 as compared to $2,229,000 for the three month period ended
June 30, 1996. The increase of $1,039,000 is directly related to the
number and size of clinical development studies.
Cost of revenues includes compensation and other expenses directly
related to conducting clinical studies. These costs increased
$1,359,000 from $1,190,000 to $2,549,000 for the three month periods
ended June 30, 1996 and 1997, respectively. Cost of revenues as a
percentage of total revenues was 78% for the three months ended June 30,
1997 as compared to 53% for the same period last year. The increase in
relative percent is due to the type of clinical studies, the different
cost structures of the studies, and costs of increased personnel
necessary to support an expected greater volume of clinical trials.
General and administrative expenses include all administrative personnel
and business development, and all other support expenses not directly
related to specific contracts. General and administrative expenses for
the three month period ended June 30, 1997 amounted to $596,000 as
compared to $487,000 for the same period last year. The increase in the
level of expenses of $109,000 is due to the overall expansion of the
business and costs associated with building the necessary support
infrastructure. As a percentage of revenues, general and administrative
expenses decreased from 22% to 18% for the three month periods ended
June 30, 1996 and 1997, respectively. The decrease in expenses as a
percentage of revenues results from the growth of clinical trial
services.
Research and development expense for the three month period ended June
30, 1997 amounted to $255,000 as compared to $176,000 for the same
period last year and relates to costs associated with developing an
interactive voice recognition system. For the three months ended June
30, 1997, expense is net of $21,000 in reimbursed costs funded by a
client for a specific application.
Other income increased $20,000 from $17,000 for the three months ended
June 30, 1996 to $37,000 for the three months ended June 30, 1997. The
increase is a result of additional interest income.
Net loss from discontinued operations for the three month period ended
June 30, 1996 amounted to $90,000 and relates to three months of
operations of Future Medical Technologies, Inc., a subsidiary of the
Company, which was sold to a third party on July 26, 1996. All results
associated with this business have been reclassified to this line for
financial reporting purposes.
Net loss incurred by the Company for the three month period ended June
30, 1997 amounted to $97,000 as compared to net income of $304,000 for
the same period last year. The decrease was due to the above factors
including delays in beginning clinical projects and additional staffing
costs for these projects.
Six Month Period Ended June 30, 1997 Compared To The Six Month
Period Ended June 30, 1996.
- ---------------------------------------------------------------
Revenues for the six months ended June 30, 1997 increased 60% to
$6,313,000 as compared to $3,936,000 for the six month period ended June
30, 1996. The increase of $2,377,000 is directly related to the number
and size of clinical development studies.
Cost of revenues includes compensation and other expenses directly
related to conducting clinical studies. These costs increased
$2,689,000 from $2,173,000 to $4,862,000 for the six month periods ended
June 30, 1996 and 1997, respectively. Cost of revenues as a percentage
of total revenues was 77% for the six months ended June 30, 1997 as
compared to 55% for the same period last year. The increase in relative
percent is due to the type of clinical studies, the different cost
structures of the studies, and costs of increased personnel necessary to
support an expected greater volume of clinical trials.
General and administrative expenses include all administrative personnel
and business development, and all other support expenses not directly
related to specific contracts. General and administrative expenses for
the six month period ended June 30, 1997 amounted to $1,182,000 as
compared to $950,000 for the same period last year. The increase in the
level of expenses of $232,000 is due to the overall expansion of the
business and costs associated with building the necessary support
infrastructure. As a percentage of revenues, general and administrative
expenses decreased from 24% to 19% for the six month periods ended June
30, 1996 and 1997, respectively. The decrease in expenses as a
percentage of revenues results from the growth of clinical trial
services.
Research and development expense for the six month period ended June 30,
1997 amounted to $421,000 as compared to $297,000 for the same period
last year and relates to costs associated with developing an interactive
voice recognition system. For the six months ended June 30, 1997,
expense is net of $100,000 in reimbursed costs funded by a client for a
specific application.
Other income increased $17,000 from $33,000 for the six months ended
June 30, 1996 to $50,000 for the six months ended June 30, 1997. The
increase is a result of additional interest income.
Net loss from discontinued operations for the six month period ended
June 30, 1996 amounted to $130,000 and relates to six months of
operations of Future Medical Technologies, Inc. (FMT), a subsidiary of
the Company, which was sold to a third party on July 26, 1996. All
results associated with this business have been reclassified to this
line for financial reporting purposes.
The financial impact of this transaction resulted in a one time
nonrecurring loss of $328,000 which was charged to earnings in the
quarter ended September 30, 1996. In 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 disposition of FMT is deductible for tax purposes against future
net income. As a result, during the first quarter of 1997, the Company
incurred an additional deferred tax asset of $104,000. Management
anticipates the loss on disposition to be fully utilized.
Net income realized by the Company for the six month period ended June
30, 1997 amounted to $2,000 as compared to net income of $419,000 for
the same period last year. The decrease in income was due to the above
factors including delays in beginning clinical projects and additional
staffing costs for these projects.
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 including unbilled services to clients was $3,985,000 at June
30, 1997 as compared to $3,134,000 at December 31, 1996.
Cash and cash equivalents increased by $1,100,000 for the period ended
June 30, 1997 and was provided by operating activities, net of equipment
purchases of $243,000.
The Company has a line of credit with a commercial bank providing a
maximum credit facility of $1 million, and bears interest at a rate not
to exceed 1% point above the bank's prime rate. Borrowings outstanding
under the line are secured by substantially all of the assets of the
Company. No borrowings were outstanding under the line of credit at
June 30, 1997.
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 existing list of services as well
as developing new service products for clinical research and the
healthcare industry. The Company expects such activities will be funded
from existing cash and cash equivalents and cash flow from operations.
COVALENT GROUP, INC.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceeding:
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:
None.
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: 8/7/97 By:/s/Bruce LaMont
------------------------
Bruce LaMont, President
and Chief Executive Officer
Dated: 8/7/97 By:/s/William K. Robinson
------------------------
William K. Robinson, Chief
Financial Officer