<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1996.
Commission file number: 33-43537
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, Suite 100, Wayne,
Pennsylvania 19087
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 610-975-9533
FUTURE MEDICAL TECHNOLOGIES INTERNATIONAL, INC.
(Issuer's Former Name)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
(Title of Class)
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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be contain-
ed, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $10,352,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $14,232,452 as of March 26, 1997.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: as of March 26, 1997 was 11,602,920
shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registration Statement on Form S-1 and various exhibits thereto filed through
June 22, 1992 as part of Registration No. 33-43537.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
* The aggregate market value was determined by multiplying the number of
outstanding shares (excluding those held of record by officers, directors
and greater than five percent shareholders) by $3.375 per share, the last
sales price of the Registrant's common stock as of March 26, 1997, such
date being within 60 days prior to the date of filing.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Covalent Group, Inc. through its subsidiary Covalent Research Alliance
Corp., is a total research management organization which designs and manages
clinical trials in the drug and device development process and with associated
cost containment and quality of care components. The Company specializes in
cost effectiveness and outcomes studies for major customer groups such as
pharmaceutical companies, managed care organizations, insurers and employers.
The Company offers a full array of integrated services including study design,
clinical trial monitoring and management, data management, biostatistical
analysis and regulatory affairs services. The Company is structured to
deliver customized high quality solutions to its Fortune 500 and other clients.
Covalent utilizes its core expertise of clinical trials management to
provide high quality, medical outcomes and clinical research for its client
base. In addition, the Company's experience with more than 40 managed care
organizations facilitates designing and conducting clinical studies for its
pharmaceutical clients in a managed care environment, thereby, improving the
market potential for a drug manufacturer's product. To aid its pharmaceutical
and managed care customers in clinical trials and outcomes research projects,
Covalent also has developed a state-of-the-art interactive voice recognition
system called Virtual HouseCall, an automated system for collecting and
reporting subjective patient information. Through educational components, the
Company intends to influence patient behavior crucial to patient compliance with
prescription drug regimens and self-management of chronic diseases.
The Company was incorporated under the laws of the State of Nevada on
August 1, 1989 under the name of West End Ventures, Inc. ("West End"). West
End's only activity prior to the acquisition of its prior subsidiary, Future
Medical Technologies, Inc., a New Jersey corporation incorporated on September
28, 1989 ("FMT"), was the successful completion of its initial public offering
pursuant to a S-18 Registration Statement with the Securities and Exchange
Commission of Units on January 15, 1990. On January 26, 1990, West End acquired
100% of the outstanding securities of FMT. West End subsequently changed its
name to Future Medical Technologies International, Inc. The subsidiary's name
remained Future Medical Technologies, Inc. On May 26, 1994, the Company
effected a one for five reverse stock split. On February 22, 1995, the Company
effected a five for seven reverse stock split and completed the acquisition of
100% of the stock of Covalent Research Alliance Corporation ("CRA"), a
Pennsylvania corporation, in exchange for 7,200,000 shares of post split common
stock of FMTI.
On September 20, 1996, FMTI shareholders ratified the disposition of 100%
of the stock of FMT, as of July 31, 1996. At the same time, the shareholders
approved the change of the Company's name to Covalent Group, Inc. (the
"Company").
CRO Industry Overview
The CRO industry provides independent product development services for the
pharmaceutical and biotechnology industries. Generally, CROs derive substan-
tially all of their revenue from the research and development expenditures of
pharmaceutical and biotechnology companies. According to the Pharmaceutical
Researchers and Manufacturers of America, global pharmaceutical and
biotechnology industries spent an estimated $35 billion in 1995 on research and
development, of which the Company estimates $20 billion was spent on types of
services offered by the CRO industry. Of this amount, approximately $3 billion
was outsourced to CROs.
The Company believes that the following trends will lead to further growth
opportunities for CROs as pharmaceutical and biotechnology companies continue to
increase outsourcing of product development needs: (i) price pressure by managed
care organizations and pharmacy managers on pharmaceutical companies is forcing
drug manufacturers to consolidate and down-size, and look to less expensive
fixed cost alternatives than internal development, principally outsourcing to
variable cost CROs; (ii) pharmaceutical companies are seeking faster product
development times in order to maximize a new drug's patent and marketing
exclusivity; (iii) increasingly complex and stringent regulatory requirements
have increased the volume of data required for regulatory filings
and increased demands on data collection and analysis during the development
process; (iv) biotechnology companies are developing an increasing number of
new drugs that require regulatory approval and should continue to find CROs to
be a cost effective alternative to building an internal drug development
capability; and (v) the need for sophisticated data management is increasing to
expedite the drug development process.
The Company's only subsidiary CRA has positioned its clinical development
services to capitalize on these market trends. As an additional element of its
strategy, CRA believes that it differentiates itself from other CROs by
expertise in the design and execution of clinical studies which meet the
requirements of managed care and third party payors, thereby, enhancing the
marketability of clients' prescription drugs over their life cycle.
Business of the Company's Subsidiary
CRA provides a full range of CRO services specializing in clinical studies
that include various types of outcomes measurement. The Company provides
clinical trial management, data management, biostatistical analysis, medical
and regulatory services, health economics and outcomes research. The principal
categories of services offered are:
Clinical Trials
CRA utilizes over 70 full time and independent contractor personnel with
experience in the pharmaceutical, biotech and managed care industries that it
believes can support the needs of the most rigorous clinical trials or medical
outcomes studies. CRA has assembled an extensive network of clinical investiga-
tors, managed care organizations, and clinical research specialists, which it
uses to coordinate and conduct clinical research. CRAs clinical monitors are
strategically located throughout the country to reduce the cost of travel to
clinical or managed care sites. CRA's clinical trial services include project
coordination, regulatory document processing, monitoring services and
quality control review.
Data Management
CRA has automated the data management process associated with clinical
trials management through its use and customization of the industry standard
software from "BBN Software Products' Clintrial". Clintrial protocols are used
to assist in the collection, validations, and reporting of clinical
results for the Company's clients, the Food and Drug Administration (FDA), or
other regulatory agencies. CRA's data management professionals provide case
report form review and tracking; data entry; integrated clinical/statistical
reports; and manuscripts for publication.
Biostatistics
CRA also provides comprehensive clinical statistics support. CRA's
biostatisticians have extensive pharmaceutical/medical industry experience.
CRA's biostatistical services include clinical trials design; preparing
statistical analysis plans; representing clients at the FDA; and creating
statistical reports.
Medical and Regulatory Affairs Management
CRA's medical and regulatory group provides liaison services between its
clients and regulatory agencies in the preparation, review and submission of
Investigational New Drug (IND), New Drug Application (NDA), 510k, and PLA
documents. The Company's medical services include medical oversight of studies,
review and interpretation of adverse experiences, report writing and development
of study protocols. Regulatory services include strategy design, document
preparation and client consultation.
Quality Assurance and Compliance
CRA also provides field inspections that include investigator audits,
presubmission protocol compliance audits, Good Clinical Practice audits and
staff training.
Outcomes Research and Management
CRA provides its clients retrospective database studies, therapeutic
end-point determinations, cost effectiveness studies, drug utilization reviews,
drug utilization effectiveness reviews, and health status survey development
as well as patient drug compliance programs, patient education programs
and costs containment studies.
Wellness Measures
Wellness Measures is a division of CRA which provides a comprehensive set
of services which improve the health of individuals, insure proper utilization
of health care services, reduce health care costs, and improve morale and mental
acuity. Wellness Measures' assessment services allow its clients to make
informed decisions that benefit their companies, employees and their families.
Virtual HouseCall
Virtual HouseCall (VHC), as developed by CRA, is an interactive voice
recognition system that CRA believes excels in the type of data collection and
analysis required by healthcare industry segments focused on disease management.
Disease management is a comprehensive, integrated approach to care and
reimbursement with the goal of promoting maximum healthcare provider efficiency
and effectiveness. Data collection becomes key to continuing assessment of
diseasemanagement programs.
VHC is a telephone-based service that has been designed to reach millions
of patients in a personalized and supportive manner. VHC automates the admin-
istration of subjective quality of life surveys and pschosocial assessments,
provides patient access to disease specific educational and resource libraries,
and facilitates the publication of personalized reports through on-demand
printing services and faxes to healthcare providers and patients.
VHC intends to initially concentrate on five disease states that account
for 70% of managed care's patient expenditures. Virtually all managed care
organizations and many pharmaceutical companies are developing disease
management programs in the areas of asthma, diabetes, hypertension, depression
and congestive heart failure. CRA intends for VHC to play an important role
in disease management programs. Its content is modular and customizable, and
the computer platform and telephony systems are highly scalable.
CRA intends that VHC, as a research and patient education service, will be
sold on a transaction basis. This would allow for the greatest flexibility for
CRA's customers. Surveys could be administered once, while VHC-based patient
tracking, assessment, education could be provided as often as monthly. Per
transaction costs are calculated by type of service, length and frequency of
interaction, and the number of contracted patients.
Competition
The Company competes primarily against internal research departments of
pharmaceutical companies and other CROs. The CRO industry is highly fragmented
with several hundred small, limited services providers, and seven larger firms
with revenues in excess of $50 million each. The largest of which are:
Quintiles Transnational Corp.; Covance, Inc.; and Pharmaceutical Product
Development Inc. These and some other competitors have substantially greater
capital and technical resources than the Company.
Competitive factors that may influence a client's decision in choosing a
CRO includeprevious experience, references from existing clients, experience
with a particular type of project or area of clinical development, the quality
of timeliness of contract research, ability to recruit investigators and the
ability to provide a full range of services required by the client. The Company
believes it competes favorably in these respects.
Contractual Arrangements
Compensation for services are contracted at a fixed price, but may include
some variable components, and can cover a period of several months to several
years. A portion of the contract fee is typically paid when a clinical trial
is initiated and the contract provides for milestone payments throughout the
duration of the trial. Contracts can usually be terminated at any time by the
client, but are usually subject to termination fees. Contracts may be
terminated for a number of reasons including insufficient patient enrollment,
unexpected results in the clinical trial or a client's decision to terminate
development of a particular drug.
Backlog
The Company's backlog consists of anticipated revenue from contracts that
have been signed but not yet completed. Once a project commences, revenue is
recognized over the life of the contract, which is consistent with industry
practice.
As of December 31, 1996, the Company's backlog amounted to $8 million as
compared to less than $100,000 at December 31, 1995. Subsequent to December 31,
1996, the Company reported its backlog increased to $13 million. The Company
believes backlog at any given time is not necessarily a meaningful indicator of
future revenue. Clinical trials can be modified or terminated by the client
for any of the reasons mentioned above.
Potential Liability
The Company attempts to manage its liability risk through contractual
indemnification provisions with clients and investigators hired by the Company
on behalf of its clients and through insurance. The contractual indemnifications
generally do not protect the Company against certain of its own actions such as
negligence. The contractual arrangements are subject to negotiation with
clients and the terms and scope of such arrangements vary from client to client
and from trial to trial. Although most of the Company's clients are large
well-capitalized companies, the financial performance of these indemnities
is not secured. Therefore, the Company bears the risk that the indemnifying
party may not have the financial ability to fulfill its indemnification
obligations. The Company maintains professional liability insurance which
includes drug safety issues as well as data processing errors and omissions.
The Company could be materially and adversely affected if it were required to
pay damages or incur defense costs in connection with a claim that is beyond
the scope of a indemnity provision or beyond the level of insurance coverage
or where the indemnifying party does not fulfill its indemnification
obligations.
Employees
At December 31, 1996, the Company employed 20 full time personnel and a
minimum of 50 independent contractors on an as-needed basis. None of the
employees are represented by a labor union and the Company believes its
relations with employees and independent contractors are good.
ITEM 2. DESCRIPTION OF PROPERTY
The CRA subsidiary is leasing approximately 11,800 square feet of
administrative and corporate offices from an independent third party at One
Glenhardie Corporate Center, 1275 Drummers Lane, Wayne, Pennsylvania for a
period of five years at a rental of $20,325 per month. The Company is
subleasing such offices from CRA for its corporate offices at a nominal charge.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Shareholder's Meeting was held on September 20, 1996,
at which time five matters were submitted to the Company's stockholders for a
vote. The majority of the stockholders voted for the appointment of Baratz &
Associates, P.A., as the Company's independent auditors for fiscal year 1996,
adoption of the 1996 Stock Option Plan (2,000,000 shares), the election of the
following Directors: Bruce LaMont, John Whittle and William K. Robinson,
approval of the name change of the Company to Covalent Group, Inc. and approval
of the disposition of 100% of the stock of Future Medical Technologies, Inc. in
a sale to Medical Technologies, Inc.
PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted in the over-the-counter market on the
OTC Bulletin Board (previously under the trading symbol "FMTI" and after
September 21, 1996, under the symbol "CVGR"). The following table indicates
the high and low bid price ranges of the Common Stock in the over-the-counter
market during the period ending March 31, 1994 through March 31, 1997, for the
quarterly periods ended on the dates set forth.
<TABLE>
<CAPTION>
Quarterly Period Ended High Bid Low Bid
- - - ---------------------- -------- -------
<S> <C> <C>
1994
March 31 3/16 1/8
June 30 2 1/2 2 1/4
September 30* 1 1/2 1
December 31* 1 7/8
1995
March 31** 4 1/4 3 3/4
June 30** 4 3/4 4 1/4
September 30** 5 3/8 4 1/2
December 31** 5 3/8 4 7/8
1996
March 31** 5 1/4 4 5/8
June 30** 7 1/4 5
September 30** 7 3/8 4 3/8
December 31** 5 3 7/16
1997
March 26** 4 7/8 3 3/8
</TABLE>
* The following prices represent post reverse split of one share for five
shares adopted May 26, 1994.
** The following prices represent post reverse split of five shares for seven
shares adopted February 16, 1995.
The quotations set forth in the table above reflect interdealer prices,
without retail mark-up, mark-down or commission, and may not necessarily reflect
actual transactions. As of March 26, 1997 the high and low bid quotations for
the Company's Common stock were $3 3/8 and $3 3/8. As of March 26, 1997 there
were 615 holders of record of the Company's Common Stock, however, the Company
believes that there is at least an additional 1,200 shareholders in "street
name" who beneficially own the common stock of the Company in various brokerage
accounts.
The Registrant has never declared a dividend and does not plan to do so in
the near future.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
General
CRA 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.
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 at December 31, 1996 consists of anticipated revenue
from signed contracts in excess of $8,000,000. Subsequent to December 31, 1996,
the Company reported its backlog increased to $13 million. The Company believes
that its backlog as of any date is not necessarily a meaningful predictor of
future results.
Sale of Business
The Board of Directors concluded that the Company's subsidiary Future
Medical Technologies, Inc. (FMT) would require substantial funding of research
and development in order to fully develop its business. The Board decided that
additional funding was not in the best strategic interest of the Company. On
July 26, 1996, an agreement was reached, and subsequently ratified by the
Company's shareholders on September 20, 1996, to sell all of the stock of FMT
for $250,000. As additional consideration, the agreement provides for a
licensing fee ranging from 5% to 2.5% payable to the Company on any revenue of
certain FMT products over the next five years. In addition, the former officers
of FMT agreed to donate back to the Company 475,000 stock options which were
scheduled to expire on March 22, 2000 at an exercise price of $2.875 per share.
<PAGE>
The financial impact of this transaction resulted in a one time
nonrecurring loss of $328,000 which was charged to earnings in the third quarter
ended September 30, 1996.
Results of Operations
Fiscal year ended December 31, 1996 compared to fiscal year ended
December 31, 1995.
------------------------------------------------------------------
Revenues in 1996 were $10,352,000 compared to $1,492,000 for 1995. The
increase in revenues of $8,860,000 is directly related to the increase in the
number and size of clinical development studies.
Cost of revenues includes compensation and other expenses directly relating
to conducting clinical studies. These costs increased by $5,876,000 from
$455,000 to $6,331,000 for the years ended December 31, 1995 and 1996,
respectively. As a percentage of revenues, the cost of revenues increased
from 30% for the year ended December 31, 1995 to 61% for the year ended
December 31, 1996. The increase in the relative percent of costs to revenues
is due to the growth in the number, size and complexity of clinical studies.
Selling, general and administrative expenses include all administrative
personnel and business development, and all other expenses not directly
chargeable to a specific contract. Selling general and administrative
expenses for the year ended December 31, 1996 increased to 32% to $2,253,000
as compared to $1,713,000 for 1995. As a percentage of revenue, selling,
general and administrative expenses decreased from 115% to 22% for the years
ended December 31, 1995 and 1996, respectively. The increase in the level of
expenses from 1995 to 1996 is due to the general expansion of the business
and costs associated with building the necessary support infrastructure.
The decrease in selling, general and administrative expenses as a percentage
of revenues reflects the growth of clinical trial services from 1995 to 1996.
Research and development expense for the year ended December 31, 1996
amounted to $882,000 as compared to $180,000 for the prior period and relate
to costs associated with developing an interactive voice recognition systems.
Other income increased $80,000 from $13,000 for the year ended December
31, 1995 to $93,000 for the year ended December 31, 1996 due to additional
interest income.
As a result of the Company's net operation loss carry forward which
amounts to $310,000 for federal income tax purposes at December 31, 1996, the
Company did not provide for a federal tax liability for 1996. Accordingly, a
provision for federal income tax is not reflected in the Company's Consolidated
Statements of Operations. In 1996, the Company did account for a net deferred
tax asset and recognized a net current and deferred income tax benefit of
$34,000.
Net loss from discontinued operations for the year ended December 31, 1996
amounted to $104,000 (net of income tax benefit of $53,000) and relates to seven
months of operations of FMT. As reported above, the subsidiary was sold and
the Company incurred a one time charge to earnings of $328,000 resulting from
the sale.
Net income recognized for the year ended December 31, 1996 was $581,000 and
consisted of income from continuing operations of $1,013,000, net loss of
discontinued operations of $104,000 (net of tax) and a $328,000 loss on the
sale of FMT. The net loss realized in the preceding year was $1,036,000.
The increase in income was due to the factors described above.
Fiscal year ended December 31, 1995 compared to fiscal year ended
December 31, 1994
------------------------------------------------------------------
Revenues for the period ended December 31, 1995 of $1,492,000 reflect all
CRA post-merger business and exclude $285,000 of FMT revenue which are included
in the net loss from discontinued operations. Revenues for 1994 of $418,000
pertain only to FMT.
The costs of revenues for the period ended December 31, 1995 of $455,000
relate to CRA business and exclude $145,000 of FMT costs which are included in
the net loss from discontinued operations. In 1994, FMT's cost of revenue
amounted to $359,000.
General and administrative expenses for the period ended December 31, 1995
were $1,713,000 excluding $516,000 of FMT related expense, and reflect the
additional costs associated with the larger CRA organizational structure.
During 1995, the Company incurred initial research and development costs
relating to CRA's development of voice recognition software.
The net loss during the period ended December 31, 1995 was $1,036,000
compared to a net income of $271,000 for the year ended December 31, 1994.
The decrease in income of $1,307,000 was primarily due to increased general
and adminstrative costs of CRA, and a one time reversal of accrued salaries of
$841,000 relating to litigation with a former officer of the Company in 1994.
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 was $3,134,000 at
December 31, 1996 and $125,000 at December 31, 1995. The increase relates
directly to increased revenues from clinical development trials.
The Company's cash balance at December 31, 1996 was $922,000 as compared
to $299,000 at December 31, 1995. The increase in cash was primarily due to
equity financing. Proceeds from the sales of stock and options exercised
amounted to $1,935,000, and was used in part to finance the growth in working
capital.
The Company purchased $318,000 of equipment in 1996 as compared to
$209,000 in 1995. Purchases in 1996 were primarily for computers and office
equipment.
Management believes that the Company's operations and financial results
are not materially effected by inflation.
Based on the Company's current level of operations and expected
requirements, management believes the Company's cash and internally generated
funds will be sufficient to meet the Company's cash requirements for the next
year.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements are listed under Item 13 in this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Officers After the Acquisition of Covalent Research Alliance
Corp.
The following are the Officers and Directors of the Company.
<TABLE>
<CAPTION>
Name Age Position(s) Held with Company
- - - ---------------------- --- -----------------------------
<S> <C> <C>
Bruce LaMont 45 President, Chief Executive Officer, Director
Kenneth M. Borow, M.D. 48 Vice President of Operations, Chief Medical
Officer
David Weitz 46 Secretary, Treasurer
William K. Robinson 57 Chief Financial Officer, Director
John Whittle 61 Director
</TABLE>
Management Biographies
Brief biographies of the directors, officers and key personnel of the
company are set forth below. All directors hold office until the next annual
stockholders meeting or until their earlier resignation, retirement, removal,
disqualification, death or until their successors have been elected and
qualified. Vacancies in the existing Board are filled by majority vote of
the remaining directors. Officers of the Company serve at the will of the
Board of Directors.
Bruce LaMont, President, Chief Executive Officer and Director of the
Company. In 1993, Mr. LaMont founded Covalent Research Alliance Corp. and
still remains the President today. He has over 15 years experience in the
pharmaceutical industry. From 1980 to 1993, Mr. LaMont worked at Merck
Research Laboratories, Marketing and Clinical Development of Merck Human
Health Division, where he designed, coordinated and managed clinical trials
for NDA submission. He also coordinated projects with marketing, promoting,
advertising, legal, manufacturing and regulatory departments to ensure proper
achievement of study objectives and implemented clinical development database
providing a liaison capacity between marketing and clinical research and
development. Mr. LaMont received an Executive MBA and a Masters in
Pharmaceutics from Temple University and also holds a B.S. in Biology from
Villanova University. In addition, Mr. LaMont has extensive research experience
in Gastroenterology, Drug Metabolism, Neurosurgery, Obstretrics and Gynecology.
He has held research positions at both the University of Pennsylvania and the
Medical College of Pennsylvania.
Kenneth M. Borow, M.D., Vice President of Operations and Chief Medical
Officer joined the Company in January, 1997. For the previous four years, Dr.
Borow was Senior Director, Medical Research Associates Department, Merck
Research Laboratories where he directed clinical research operations for 163
different protocols, and developed a Merck-based contract group consisting of
field monitors, data coordinators and statisticians. Previously, he was a
Professor of Medicine and Pediatrics at the University of Chicago, and
originator of a worldwide clinical research program in cardiac function which
included investigative sites in the United States, United Kingdom, Norway,
Israel and South Africa. Dr. Borow graduated from the Temple Medical School
in 1974. Dr. Borow is a Harvard-trained Internist, Pediatrician, Adult
Cardiologist and Pediatric Cardiologist.
David Weitz, Secretary and Treasurer of the Company. In January, 1995,
Mr. Weitz was appointed the Chief Information Officer of Covalent Research
Alliance Corp. He is responsible for the planning, implementation, and use of
Information Technologies. Prior to January since 1985, he was the Manager of
Technical Support and Training for Merck Research Laboratories where he was
responsible for planning, implementing and operating a computer technical
support program and computer application training program for all divisional
employees located at 5 geographical locations.
William K. Robinson, Chief Financial Officer and Director joined the
Company in June, 1996. He has over 25 years of diverse healthcare management
experience, both domestic and international, in large corporate and emerging
company operations. From 1994 to June 1996, he was Vice President of Finance
for Scott Specialty Gases, Inc., a manufacturer of calibration and medical
gases. He was President and Chief Executive Officer of Tektagen, Inc., a
biopharmaceutical testing laboratory from 1991 to 1994. Previously, he was
employed by SmithKline Beckman for 17 years, where he held the top financial
positions in the U.S. Pharmaceuticals, Clinical Laboratories and Animal Health
Divisions.
John Whittle, Director. Mr. Whittle is Chairman, President, and Chief
Executive Officer of Farmers & Traders Life Insurance company located in
Syracuse, New York. Prior to joining Farmers & Traders in 1989, he held
senior management positions with Mutual of New York and served on the Boards
of several of their subsidiaries. Mr. Whittle received a Masters in Management
from The American College and also holds a B.S. in Insurance from Pennsylvania
State University. He is a chartered Life Underwriter (CLU).
ITEM 10. EXECUTIVE COMPENSATION
Cash Compensation
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the fiscal year ended December 31, 1996;
to the most highly compensated executive officers of the Company as a group.
There were no officers in the company who received more than $100,000, for
services rendered during the fiscal year ending December 31, 1996, except
Bruce LaMont, President. There were no bonuses declared or other short or
long-term compensation.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
COMPENSATION
- - - ---------------------------------------------------------------------------
Name and Principal Fiscal Other Annual Options
Position Year Salary Bonus Compensation Granted
- - - ------------------ ------ ------ ----- ------------ -------
<S> <C> <C> <C> <C> <C>
Bruce LaMont, President 1996 210,000 0 0 0
of the Company and 1995 240,000 0 0 0
CRA Subsidiary 12/31/94(1) N/A
1994 N/A
</TABLE>
1 For the transitional three month period ended December 31, 1994.
All executive officers of the Company are full-time employees of the
Company. There are no written employment agreements.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1997 certain information
with regard to beneficial ownership of outstanding shares of the Company's
Common Stock by (i) each person known by the Company to beneficially own five
percent or more of the outstanding shares of the Company's Common Stock,
(ii) each director and executive officer individually, and (iii) all executive
officers and directors of the Company as a group:
<TABLE>
Name and Address of Percentage of
Beneficial Owner (1) Shares Shares Issued
- - - ------------------------ ------------- -----------------
<S> <C> <C>
Bruce & Sally Joe LaMont 6,068,700 52.30%
853 Appaloosa Drive
Collegeville, PA 19426
William N. Levy 993,439(2) 8.56%
Suite 309, Plaza 1000
Voorhees, NJ 08043
David Weitz 211,000(3) 1.82%
704 Delaware Avenue
Lansdale, PA. 19446
Kenneth M. Borow, M.D. 68,200(4) .59%
407 Wyntrelea Drive
Bryn Mawr, PA 19010
John Whittle 24,558(5) .21%
960 James Street
Syracuse, NY 13201
William K. Robinson 20,000(6) .17%
1501 Wilson Lane
West Chester, PA 19380
--------- ------
All Executive Officers 6,392,458 55.09%
and Directors as
a Group (five persons)
________ ========= ======
</TABLE>
(1) Unless otherwise noted, the Company believes that all persons named in
the above table has sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.
(2) This individual may be deemed "parents" and/or "promoters" of the Company
under the rules and regulations of the Securities Act by virtue of their
efforts in the organization of the Company. Mr. Levy owns 747,725 shares in
his name and beneficially owns 200,000 shares that are in his wife's name,
Marlene L. Levy. Also included are 45,714 stock vested options exercisable
at $.875.
(3) David Weitz owns 1,000 shares of common stock as well as 210,000 options
to purchase common stock at $.01 per share, all of which are vested.
(4) Kenneth Borow, M.D. owns 18,200 shares of common stock as well as 250,000
options to purchase common stock at $3.875 per share, 50,000 of which are
vested.
(5) 10,000 of which are vested stock options for being an outside Director.
(6) William Robinson owns 20,000 options to purchase common stock at $5.375
per share, all of which are vested.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None for the fiscal year ended December 31, 1996.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report at the
pages indicated.
(1) Consolidated Financial Statements
Independent Auditors' Report F-1
Consolidated Balance Sheets - December 31, 1996
and 1995 F-2 - F3
Consolidated Statements of Operations -
December 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity
(Impairment) December 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flows -
December 31, 1996 and 1995 F-6
Notes to the Consolidated Financial Statements F-7 - F-11
(2) Consolidated Financial Statements Schedules
Schedules that are not included have been omitted because either they
are not required or are not applicable or because the required information
has been included elsewhere in the Consolidated Financial Statements or
the notes thereto.
(3) Exhibits
3.1 Certificate of Incorporation of Future Medical Technologies
International, Inc. (formerly West End Ventures, Inc.), a
Nevada corporation (the "Registrant").(1)
3.2 Bylaws of Future Medical Technologies International,
Inc.(1)
10.4 1996 Stock Option Plan (2)
_________________________
(1) Filed as an exhibit, to the Company's Registration Statement on Form S-1
(No. 33-43537) filed with the Securities & Exchange Commission on October 25,
1991, March 24, 1991 and June 22, 1992 and incorporated herein by reference.
(2) Incorporated by reference from Proxy Statement for 1996 Annual Meeting.
<PAGE>
COVALENT GROUP, INC.
YEARS ENDED DECEMBER 31, 1996 AND 1995
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-11
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Covalent Group, Inc.
One Glenhardie Corporate Center
1275 Drummers Lane
Wayne, PA 19087
We have audited the accompanying consolidated balance sheets of
Covalent Group, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders equity and cash flows
for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Covalent Group, Inc. as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
BARATZ & ASSOCIATES, P.A.
February 5, 1997
F-1
<PAGE>
COVALENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Assets
------
Current Assets
- - - --------------
Cash and cash equivalents $ 922,010 $ 298,583
Accounts receivable (Notes 2&4) 3,133,791 124,736
Note receivable, current (Notes 3&9) 25,000
Prepaid expenses 82,649 39,123
Net assets of discontinued
operations (Note 3) 389,654
Deferred income taxes (Notes 2&5) 96,363
----------- -----------
Total Current Assets 4,259,813 852,096
-------------------- ----------- -----------
Property and Equipment (Note 2)
- - - ----------------------
Equipment 616,971 389,943
Furniture and fixtures 110,522 56,300
----------- -----------
727,493 446,243
Less accumulated depreciation ( 203,699) ( 84,413)
----------- -----------
Net Property and Equipment 523,794 361,830
-------------------------- ----------- -----------
Other Assets
- - - ------------
Note receivable, less current
portion (Notes 3&9) 200,000
Deposits 6,538 5,038
Other 1,816 3,093
----------- -----------
Total Other Assets 208,354 8,131
------------------ ----------- -----------
Total Assets $ 4,991,961 $ 1,222,057
------------ =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements
F-2
<PAGE>
COVALENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Accounts payable $ 687,931 $ 24,828
Accrued liabilities 8,567 4,030
Advance billings (Note 2) 585,868
----------- -----------
Total Liabilities 1,282,366 28,858
----------------- ----------- -----------
Commitments (Note 6)
- - - -----------
Stockholders' Equity
- - - --------------------
Common stock, $.001 par value,
25,000,000 shares authorized,
11,602,715 and 10,767,984
issued and outstanding at
December 31, 1996 and 1995,
respectively 11,603 10,768
Additional paid-in capital 9,083,632 7,149,389
Unearned compensation ( 57,575)
Deficit (5,385,640) (5,909,383)
----------- -----------
Total Stockholders' Equity 3,709,595 1,193,199
-------------------------- ----------- -----------
Total Liabilities and
Stockholders' Equity $ 4,991,961 $ 1,222,057
---------------------- =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements
F-3
<PAGE>
COVALENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Revenues (Notes 2&7) $ 10,352,483 $ 1,491,867
- - - --------
Cost of Revenues 6,330,984 454,588
- - - ---------------- ------------ -----------
Gross Profit 4,021,499 1,037,279
- - - ------------ ------------ -----------
Operating Expenses
General and administrative (Notes 2&6) 2,252,697 1,713,495
Research and development (Note 2) 882,617 179,538
------------ -----------
Total Operating Expenses 3,135,314 1,893,033
------------------------ ------------ -----------
Income (Loss) from Operations 886,185 ( 855,754)
- - - ----------------------------- ------------ -----------
Other Income (Expense)
- - - ----------------------
Interest income 93,594 19,706
Miscellaneous expense ( 1,044) ( 6,265)
------------ -----------
Total Other Income
(Expense) 92,550 13,441
------------------ ------------ -----------
Income (Loss) From Continuing
Operations Before Income
Tax Benefit 978,735 ( 842,313)
- - - -----------------------------
Income tax benefit (Notes 2&5) 34,356
------------ -----------
Income (Loss) From Continuing
Operations 1,013,091 ( 842,313)
- - - ----------------------------- ------------ -----------
Discontinued Operations (Notes 3&9)
- - - -----------------------
Loss from operations (net of
income tax benefit of $53,440
in 1996 and $0 in 1995) ( 103,736) ( 357,442)
Gain from extinguishment of debt 163,677
Loss from disposition of subsidiary ( 328,037)
------------ -----------
Loss From Discontinued Operations ( 431,773) ( 193,765)
- - - --------------------------------- ------------ -----------
Net Income (Loss) $ 581,318 $(1,036,078)
- - - ----------------- ============ ===========
Net Income (Loss) Per Common
and Common Equivalent Share (Note 2)
- - - -----------------------------
Income (loss) from continuing
operations $ .09 $( .10)
Discontinued operations ( .04) ( .02)
------------ -----------
Net Income (Loss) $ .05 $( .12)
- - - ----------------- ============ ===========
Weighted Average Common
Shares Outstanding 11,579,316 8,813,800
- - - ----------------------- ============ ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements
F-4
<PAGE>
COVALENT GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Unearned
Shares Amount Capital Compensation Deficit Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 1,518,702 $ 1,519 $ 4,779,014 $( 57,575) $(4,873,305) $(150,347)
Reverse stock split
(5 for 7) ( 433,918) ( 435) 435
Acquisition
(Notes 2 & 9) 7,200,000 7,200 ( 7,200)
Acquisition
(Notes 2 & 9) ( 33,292) ( 33,292)
Common stock issued 2,463,200 2,464 2,390,452 2,392,916
Stock options exercised 20,000 20 19,980 20,000
Net loss for the year (1,036,078) (1,036,078)
----------- -------- ----------- --------- ----------- -----------
Balance,
December 31, 1995 10,767,984 10,768 7,149,389 ( 57,575) (5,909,383) 1,193,199
Reclassification of
unearned compensation 57,575 ( 57,575)
Common stock issued 720,231 720 1,830,872 1,831,592
Stock options exercised 114,500 115 103,371 103,486
Net income for the year 581,318 581,318
----------- -------- ----------- --------- ----------- -----------
Balance,
December 31, 1996 11,602,715 $ 11,603 $ 9,083,632 $ 0 $(5,385,640) $ 3,709,595
=========== ======== =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements
F-5
<PAGE>
COVALENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
- - - ------------------------------------
Net income (loss) for the year $ 581,319 $(1,036,078)
Adjustments to Reconcile Net
Income (Loss) to Net Cash Used In
Operating Activities
- - - -----------------------------------
Depreciation and amortization 142,443 105,655
Loss on disposition of subsidiary 328,037
Gain on extinguishment of debt ( 163,677)
Changes in Operating Assets
and Liabilities
- - - ---------------------------
Increase in accounts receivable (3,009,827) ( 76,592)
Decrease in note receivable 25,000
Increase in inventories ( 60,966) ( 59,377)
Increase in prepaid expenses ( 43,526) ( 28,906)
Increase in deferred income taxes ( 96,363)
Increase in deposits ( 1,500)
Increase (decrease) in accounts payable
and accrued liabilities 600,820 ( 731,879)
Decrease in accrued salaries 32,040
Increase in advance billings 585,868
----------- -----------
Net Cash Used In Operating Activities ( 948,695) (1,958,814)
- - - ------------------------------------- ----------- -----------
Cash Flows from Investing Activities
- - - ------------------------------------
Purchases of intangible assets ( 5,992) ( 18,832)
Purchases of equipment and furniture ( 318,660) ( 209,355)
Net change in assets of discontinued
operations ( 40,555)
----------- -----------
Net Cash Used In Investing Activities ( 365,207) ( 228,187)
- - - ------------------------------------- ----------- -----------
Cash Flows From Financing Activities
- - - ------------------------------------
Proceeds from sales of common stock
and option exercises 1,935,077 2,382,916
Payments of officers loans ( 26,349)
Debt reduction ( 5,000) ( 147,508)
Acquisition of CRA, net of cash acquired 265,404
----------- -----------
Net Cash Provided By Financing Activities 1,930,077 2,474,463
- - - ----------------------------------------- ----------- -----------
Net Increase in Cash 616,175 287,462
- - - --------------------
Cash at Beginning of Year 305,835 18,373
- - - ------------------------- ----------- -----------
Cash at End of Year $ 922,010 $ 305,835
- - - ------------------- =========== ===========
Supplemental Cash Flow Information (Note 9)
- - - ----------------------------------
</TABLE>
The accompanying notes are an integral
part of these financial statements
F-6
<PAGE>
COVALENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. Description of Business
Covalent Group, Inc. (the Company), formerly Future Medical Technologies
International, Inc. (FMTI), is a leading contractual research organization,
providing clinical research and development services to pharmaceutical,
biotechnology, medical service 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 subsidiaries. Intercompany transactions and balances have
been eliminated in consolidation.
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 represents revenue recognized in
excess of amounts billed. Advance billings represents 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. Depreciation
expense for the years ended December 31, 1996 and 1995 was $132,099 and
$95,567, respectively.
The accompanying notes are an integral
part of these financial statements
F-7
<PAGE>
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 ($882,617 in 1996; $179,538 in 1995)
are charged to operations when incurred.
Reclassification
Certain prior year balances have been reclassified to conform to current
year presentation.
Income Taxes
The Company uses Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109) in reporting deferred income taxes.
SFAS 109 requires a company to recognize deferred tax assets and liabilities
for the expected future income tax consequences of events that have been
recognized in the company's financial statements. Under this method, deferred
tax assets and liabilities are determined based on temporary differences
between the financial carrying amounts and the tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
temporary differences are expected to reverse.
Net Income (Loss) Per Common and Common Equivalent Share
Net income (loss) 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. The computation of fully
diluted net income (loss) per common and common equivalent share was
antidilutive in each of the periods presented.
Acquisition
On February 22, 1995, Covalent Research Alliance Corp. (CRA) was acquired
by the Company through the issuance of 7.2 million shares of FMTI stock which
were exchanged for all of the outstanding shares of CRA. The acquisition
qualified as a tax free reorganization and was accounted for as a pooling of
interests. Proforma results of the Company, assuming the acquisition occurred
at the beginning of the year, would not be materially different from the
actual results reported.
3. Discontinued Operations
On July 31, 1996, the Company sold all of the assets and liabilities of
FMT for $250,000 and certain royalty payments upon the sale of certain products
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
The accompanying notes are an integral
part of these financial statements
F-8
<PAGE>
balance sheets and statements of operations. Discontinued operations have
not been segregated in the consolidated statements of cash flows, therefore,
certain captions will not agree with the consolidated balance sheets and
statements of operations captions.
Sales associated with FMT were $158,620 and $284,669 for the seven months
ended July 31, 1996 and the year ended December 31, 1995. Related losses were
$157,176 and $193,765 for the same periods.
4. Accounts Receivable
Accounts receivable consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Billed $ 3,127,548
Unbilled 6,243
-----------
$ 3,133,791
===========
</TABLE>
No provisions for uncollectible accounts were made in 1996 and 1995; the
Company considered all receivable balances fully collectible due to historic
bad debt experience and the financial stability of prior and existing
customers.
5. Income Tax Benefit
Income taxes are based on reported results of operations; deferred income
taxes reflect the impact of temporary differences. Income tax benefit
consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Current
-------
State $( 8,567)
Deferred Benefit
----------------
Federal 35,155
State 7,768
--------
42,923
--------
$ 34,356
========
</TABLE>
The accompanying notes are an integral
part of these financial statements
F-9
<PAGE>
The Company had net operating losses in 1995; no provisions were made for
income taxes. At December 31, 1996, the Company had available federal and
state net operating loss carryforwards approximating $310,000 (federal) and
$91,000 (state). The carryforwards expire 2010 (federal) and 1997 (state).
Components of deferred income taxes at December 31, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Asset
------------------
Net operating loss carryforwards $ 113,965 $ 1,600,000
Less valuation allowance (1,600,000)
--------- -----------
Total Deferred Tax Asset 113,965 0
------------------------
Deferred Tax Liability
----------------------
Accumulated depreciation ( 17,602)
--------- -----------
Net Deferred Tax Asset $ 96,363 $ 0
========= ===========
</TABLE>
In 1995, a valuation allowance was provided for net operating loss
carryforwards which were estimated to expire before they were utilized.
In 1996, all net operating loss carryforwards are expected to be realized.
6. Commitments
The Company leases office facilities under a noncancellable operating
lease expiring in December 2001. Rent expense charged to operations was
$75,240 in 1996 and $82,286 in 1995. Future minimum annual rental commitments
under the noncancellable lease obligation are $243,901 annually through 2001.
7. Major Customer
For the years ended December 31, 1996 and 1995, one pharmaceutical
customer accounted for approximately $7,900,000 (76%) and $209,000 (14%)
of the Company's revenues, respectively. The 1996 sales to this customer
consisted of four separate clinical trials.
8. Stock and Employee Benefit Plans
Common Stock Options
The Company's 1996 stock incentive plan and 1995 employee stock option
plan provide for the granting of incentive and non-qualified stock options
The accompanying notes are an integral
part of these financial statements
F-10
<PAGE>
for the purchase of shares of common stock to directors, officers, employees
and consultants, depending upon the provisions of the plan. The Board of
Directors determine the option exercise price per share (market price),
vesting period and expiration date (generally up to five years). Stock
option transactions were as follows:
<TABLE>
<CAPTION>
Shares Under Option
-------------------
1996 1995
--------------------
<S> <C> <C>
Outstanding, beginning of year 2,212,374 416,624
Granted 604,500 1,815,750
Retired ( 676,896)
Gifted back to the Company ( 475,000)
Exercised (at $.875 to $1.20
per share in 1996; $1.00 per
share in 1995 ( 114,500) ( 20,000)
---------- ----------
Outstanding, end of year (at prices
ranging from $.03 to $6.125 per
share) 1,550,478 2,212,374
========== ==========
</TABLE>
401(k) Plan
The Company sponsors a 401(k) plan covering substantially all employees
after a specified period of service. Eligible employees may contribute up to
15% of their annual compensation to the plan. The Company does not match
employee contributions.
9. Supplemental Cash Flow Information
Noncash investing and financing activities for the year ended December 31,
1996 consisted of the sale of the assets and liabilities of FMT in
consideration for a $250,000 note receivable, of which $25,000 was received
in 1996. The transaction was recorded as follows:
<TABLE>
<S> <C>
Net assets sold $ 578,037
Proceeds from sale 250,000
---------
Loss on disposition $ 328,037
=========
</TABLE>
Noncash investing and financing activities for the year ended December 31,
1995 consisted of the acquisition of CRA through the issuance of stock. The
transaction was recorded as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 563,009
Liabilities assumed (596,301)
---------
$( 33,292)
=========
</TABLE>
During 1995, the Company issued it's common stock as repayment of a
$30,000 note payable.
The accompanying notes are an integral
part of these financial statements
F-11
<PAGE>
In accordance with Section 13 or 15(d) 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: 3/31/97 By: /s/Bruce LaMont
--------------------------------
Bruce LaMont, President, Chief
Executive Officer and Director
Dated: 3/31/97 By: /s/William K. Robinson
--------------------------------
William K. Robinson, Chief
Financial Officer and Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Dated: 3/31/97 By: /s/Bruce LaMont
--------------------------------
Bruce LaMont, President, Chief
Executive Officer and Director
Dated: 3/31/97 By: /s/William K. Robinson
--------------------------------
William K. Robinson, Chief
Financial Officer and Director
Dated: 3/31/97 By: /s/John Whittle
--------------------------------
John Whittle, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary information
extracted from the Consolidated Statements
of Operations and Consolidated Balance Sheets
of Covalent Group, Inc. and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000856569
<NAME> Covalent Group, Inc.
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> 12-MOS
<CASH> 922,010
<SECURITIES> 0
<RECEIVABLES> 3,133,791
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,259,813
<PP&E> 727,493
<DEPRECIATION> (203,699)
<TOTAL-ASSETS> 4,991,961
<CURRENT-LIABILITIES> 1,282,366
<BONDS> 0
0
0
<COMMON> 11,603
<OTHER-SE> 3,697,992
<TOTAL-LIABILITY-AND-EQUITY> 4,991,961
<SALES> 10,352,483
<TOTAL-REVENUES> 10,352,483
<CGS> 6,330,984
<TOTAL-COSTS> 3,135,314
<OTHER-EXPENSES> 1,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 978,735
<INCOME-TAX> (34,356)
<INCOME-CONTINUING> 1,013,091
<DISCONTINUED> (431,773)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 581,318
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
