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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 1997.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
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, SUITE 100, WAYNE,
PENNSYLVANIA 19087
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 610-975-9533
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 contained in this form, and no disclosure will be contained, 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. [_]
State issuer's revenues for its most recent fiscal year: $11,803,000
The aggregate market value of the common stock held by non-affiliates as of
March 16, 1998 was $14,534,000.
As of March 16, 1998 there were 11,743,209 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with the Securities and
Exchange Commission relative to the Company's 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES _____ NO X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Covalent Group, Inc. (the "Company") through its subsidiary Covalent
Research Alliance Corp. ("CRA"), 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.
CRA specializes in cost effectiveness and outcomes studies for major customer
groups such as pharmaceutical companies, managed care organizations, insurers
and employers. It offers a full array of integrated services including study
design, clinical trial monitoring and management, data management,
biostatistical analysis and regulatory affairs services. CRA is structured to
deliver customized high quality solutions to its Fortune 500 and other clients.
CRA utilizes its core expertise of clinical trials management to provide
high quality, medical outcomes and clinical research for its client base. In
addition, experience gained with more than 40 managed care organizations
facilitates designing and conducting clinical studies for 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, CRA 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 subsidiary, Future Medical
Technologies, Inc. ("FMT"), a New Jersey corporation incorporated on September
28, 1989 was the successful completion of its initial public offering 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. ("FMTI"). On May 26, 1994, FMTI 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 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, shareholders
approved the change of the parent organization's name from Future Medical
Technologies International, Inc. to Covalent Group, Inc.
CRO INDUSTRY OVERVIEW
The CRO industry provides independent product development services for the
pharmaceutical and biotechnology industries. Generally, CROs derive
substantially 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
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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, 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
The Company 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 80 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
investigators, 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
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results for 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
Product License Application ("PLA") documents. CRA'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
disease management programs.
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VHC is a telephone-based service that has been designed to reach large
numbers of patients in a personalized and supportive manner. VHC automates the
administration of subjective quality of life surveys and psychosocial
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 is concentrating 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 scaleable.
CRA has positioned VHC as a research and patient education service. This
allows for the greatest flexibility for CRA's customers. Surveys can be
administered once, while VHC-based patient tracking, assessment, education can
be provided as often as monthly. Per transaction costs are calculated by type
of service, length and frequency of interaction, and the number of contacted
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 include previous experience, references from existing clients, experience
with a particular type of project or area of clinical development, the quality
and 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 is 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.
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As of December 31, 1997, the Company's backlog amounted to approximately
$10 million as compared to approximately $8 million at December 31, 1996. 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
indemnitors 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 an indemnity provision or beyond the level of
insurance coverage or where the indemnifying party does not fulfill its
indemnification obligations.
EMPLOYEES
At December 31, 1997, the Company employed 30 full time personnel and
contracts with 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 leases 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 through December 2001 at a rental of $20,325 per month.
The Company subleases such offices from CRA for its corporate offices at a
nominal charge.
CRA leases 1815 square feet of office space at 1200 Scottsville Road,
Rochester, New York for $2,300 per month. The lease term expires in May 1998,
and the current agreement provides for renewal options.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted in the Nasdaq Small Cap Market
since December 16, 1997 and was previously 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 for each quarter within the
last two fiscal years.
<TABLE>
<CAPTION>
QUARTERLY PERIOD ENDED HIGH BID LOW BID
-------------------------------------------------------------
<S> <C> <C> <C>
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 31 5 3 3/8
June 30 5 13/16 3 1/4
September 30 5 15/16 4 1/4
December 31 4 7/16 3 5/8
</TABLE>
__________________
Over-the-counter 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 16, 1998 the high and low bid
quotations for the Company's Common stock were $4 1/16 and $2 1/8. As of March
16, 1998 there were 618 holders of record of the Company's Common Stock,
however, the Company believes that there is at least an additional 2,000
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CAUTIONARY STATEMENT
When used in this Report on Form 10-KSB and in other public statements,
both oral and written, by 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)
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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.
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.
Year 2000 Compliance
- --------------------
All research indicates that the Company's exposure to this problem will be
minimal. The Company's computers, local area network servers, software, and
digital phone system have all been purchased within the last three years, and an
inventory has been conducted in order to identify those systems and software
that may require a Year 2000 fix. The manufacturers of the Company's systems
have provided, or are on track to provide updates by the end of 1998.
The Company's central focus is on its commercial clinical trials data
management system. The manufacturer has indicated in writing that the system
has been "designed to operate before, during and after the year 2000 without
errors in representation occurring to any of the date data." The Company
expects a minor software upgrade to the system by July 1998 under its normal
licensing agreement with the manufacturer. The installation of the upgrade and
all recommended test suites will be implemented by the end of 1998.
The Company will complete its Year 2000 compliance program by the end of
1998 at minimal cost.
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Results of Operations
- ---------------------
Fiscal year ended December 31, 1997 compared to fiscal year ended December
--------------------------------------------------------------------------
31, 1996.
---------
Revenues in 1997 were $11,803,000 and represent services performed for 17
different clients compared to $10,352,000 in 1996 representing services for 11
different clients. In 1997 no single client accounted for more than 21% of
total revenues as compared to 1996 when one pharmaceutical customer accounted
for 76% of the Company's revenues.
Cost of revenues includes compensation and other expenses directly related
to conducting clinical studies. These costs increased by $1,891,000 from
$6,331,000 to $8,222,000 for the years ended December 31, 1996 and 1997,
respectively. As a percentage of revenues, the cost of revenues increased from
61% for the year ended December 31, 1996 to 70% for the year ended December 31,
1997. 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.
Selling, general and administrative expenses include all administrative
personnel and business development, and all other support expenses not directly
related to specific contracts. Selling, general and administrative expenses for
the year ended December 31, 1997 amounted to $2,563,000, as compared to
$2,254,000 for the same period last year. Expenses in both years amounted to
22% of revenues. The increase in the level of expenses of $309,000 is due to
the overall expansion of the business and costs associated with building the
necessary support infrastructure.
Research and development expenses for the year ended December 31, 1997
amounted to $1,052,000 or 9% of revenues, as compared to $883,000 or 9% of
revenues for the same period last year. These expenditures are directly related
to development of VHC, an interactive voice recognition system, whose platform
was essentially completed in 1997. Future development expenses are expected to
be limited to maintenance costs associated with the system.
Interest income increased $16,000 from $94,000 for the year ended December
31, 1996 to $110,000 for the year ended December 31, 1997.
The provision for income taxes amounted to $35,000 (before recording the
income tax benefit of $94,000 on the sale of FMT) for the year ended December
31, 1997 and is net of a federal tax credit applicable to qualified research
expenses and an adjustment to the income tax benefit of prior period net
operating loss. 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 income. As a result, during the first quarter of 1997,
the Company recorded an additional deferred tax asset of $94,000. Management
anticipates the loss on disposal to be fully utilized. As a result, the net
income tax benefit recorded for the year ended December 31, 1997 was $59,000.
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.
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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 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 VHC, an interactive voice recognition system.
Interest 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 an increase in
cash which was not needed for current operations.
As a result of the Company's net operating loss carry forward which
amounted 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 below, the subsidiary was sold and the
Company incurred a one time charge to earnings of $328,000 resulting from the
sale.
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 plus 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 with an exercise price of $2.875 per share which were
scheduled to expire on March 22, 2000.
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.
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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 and costs and estimated earnings in excess of related billings on
uncompleted contracts were $3,543,000 at December 31, 1997 and $3,134,000 at
December 31, 1996. The increase relates directly to the timing of payments by
clients and the increase in the number of clinical development trials.
The Company's cash and cash equivalents balance at December 31, 1997 was
$1,795,000 as compared to $922,000 at December 31, 1996. The increase in cash
was primarily due to operating results for the year including the above
mentioned increase in accounts receivable and the increase in accounts payable.
The Company purchased $335,000 of equipment in 1997 as compared to $325,000
in 1996. Purchases in 1997 were primarily for computers and office equipment.
The Company does not anticipate the need for significant capital expenditures in
1998.
The Company has a line of credit with a commercial bank providing a maximum
credit facility of $1 million which bears interest at a rate not to exceed 1%
point above the bank's prime rate. Borrowings outstanding under the credit line
are secured by substantially all of the assets of the Company. No borrowings
were outstanding under the credit line at December 31, 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 its existing services, and the development of new service products
for clinical research and the healthcare industry. The Company expects such
activities to be funded from existing cash and cash equivalents and cash flow
from operations.
Management believes that the Company's operations and financial results are
not materially affected by inflation.
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ITEM 7. FINANCIAL STATEMENTS
The Company's consolidated financial statements listed below are contained
herein beginning at page F-1:
(a) Consolidated Financial Statements
---------------------------------
Report of Independent Public Accountants F-1
Consolidated Balance Sheets - Years Ended F-3
December 31, 1997 and 1996
Consolidated Statements of Operations - Years Ended F-5
December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity - Years F-6
Ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended F-7
December 31, 1997 and 1996
Notes to Consolidated Financial Statements F-8
(b) Consolidated Financial Statements Schedules
-------------------------------------------
All schedules 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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE
See Item 13(b) of this Report.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following are the Executive Officers and Directors of the Company.
Name Age Position(s) Held with Company
- ---- --- -----------------------------
Bruce LaMont 46 President, Chief Executive Officer, Director
Kenneth M. Borow, M.D. 49 Vice President of Operations, Chief Medical
Officer
David Weitz 47 Secretary, Treasurer
William K. Robinson 58 Chief Financial Officer, Director
Ivan Rubin 58 Director
John Whittle 62 Director
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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 CRA. He has over 15 years experience in
the pharmaceutical industry. From 1980 to 1993, Mr. LaMont worked at Merck
Research Laboratories, where he was the Medical Program Liaison of Marketing and
Clinical Development of Merck Human Health Division, and where he designed,
coordinated and managed clinical trials for NDA submission. He also coordinated
projects with marketing, promotion, 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, Obstetrics 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 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 CRA. He is responsible for
the planning, implementation, and use of information technologies. Prior to
January 1995 and 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 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, and Chief Financial
Officer from 1990 to 1991. 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.
13
<PAGE>
Ivan Rubin, Director. Mr. Rubin a Director since August 1997. He is
----------
President of Beta Associates, a health information consulting firm. From 1994
to April 1996, Mr. Rubin was a principal of Corporate Outsourcing Group, a
health information consulting firm. From September 1993 to April 1994, Mr.
Rubin was an independent business consultant. Prior thereto, Mr. Rubin held
various positions at Merck & Co., the last being Vice President, Business
Planning, Development and Research. Mr. Rubin holds a B.A. from the University
of Buffalo and an M.B.A. from Hofstra University.
John Whittle, Director. Mr. Whittle has served as a Director since 1996.
------------
He is Chairman, President, and Chief Executive Officer of Farmers & Traders Life
Insurance Company 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).
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of copies of reports furnished to the Company
during the fiscal year ended December 31, 1997, the following persons filed the
number of late reports or failed to file reports representing the number of
transactions set forth after his name: Kenneth M. Borow, M.D. one transaction;
William K. Robinson two transactions; Ivan Rubin one report/one transaction;
John J. Whittle one transaction.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning Executive Compensation is incorporated herein by
reference to the similarly titled section in the Company's definitive proxy
materials for the Company's 1998 Annual Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning Security Ownership of Certain Beneficial Owners and
Management is incorporated herein by reference to the similarly titled section
in the Company's definitive proxy materials for the Company's 1998 Annual
Meeting of Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None for the fiscal year ended December 31, 1997.
14
<PAGE>
ITEM 13. EXHIBITS
(a) Exhibits
3.1 Certificate of Incorporation of Future Medical Technologies
International, Inc. (formerly West End Ventures, Inc.), a Nevada
corporation.(1)
3.2 Certificate of Amendment of Certificate of Incorporation.
3.3 Bylaws of Covalent Group, Inc.
10.1 1996 Stock Option Plan. (2)
10.2 1995 Stock Option Plan.
10.3 Lease between Dean Witter Realty Income Partnership II and
Covalent Group, Inc. dated November 14, 1996.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Baratz & Associates, P.A.
27 Financial Data Schedule (in electronic format only).
(b) Form 8-K
On December 31, 1997 the Company reported on Form 8-K stockholder
ratification to appoint the firm of Arthur Andersen LLP as its
independent auditors beginning January 1, 1998 to make an examination
of the accounts of the Company for the year ended December 31, 1997.
The Company had no disagreements with its previous independent
auditors, Baratz & Associates, P.A. on any matter of accounting
principles or practices, financial statement disclosure or auditing
scope or procedure.
_________________________
(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.
15
<PAGE>
COVALENT GROUP, INC.
--------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------
INDEX
-----
Page(s)
-------
CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------
Report of Independent Public Accountants F-1
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Covalent Group, Inc.:
We have audited the accompanying consolidated balance sheet of Covalent Group,
Inc. (a Nevada corporation) and subsidiary as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audit.
We conducted our audit 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 audit provides 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. and
subsidiary as of December 31, 1997, and the results of their operations and
their cash flows for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
March 6, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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 sheet of Covalent Group,
Inc. as of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit 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 audit provides 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 the results of its operations and its cash flows for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
Baratz and Associates, P.A.
Marlton, NJ
February 5, 1997
F-2
<PAGE>
COVALENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
------------
1997 1996
------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,794,530 $ 922,010
Accounts receivable 2,135,223 3,127,548
Prepaid expenses and other 170,934 107,649
Deferred income taxes - 96,363
Costs and estimated earnings in excess of
related billings on uncompleted contracts 1,407,933 6,243
------------- --------------
TOTAL CURRENT ASSETS 5,508,620 4,259,813
------------- --------------
PROPERTY AND EQUIPMENT
Equipment 814,230 616,971
Furniture and fixtures 186,905 110,522
Leasehold improvements 59,441 -
------------- --------------
1,060,576 727,493
Less - Accumulated depreciation (372,441) (203,699)
------------- --------------
NET PROPERTY AND EQUIPMENT 688,135 523,794
------------- --------------
DEFERRED INCOME TAXES 170,615 -
------------- --------------
OTHER ASSETS 249,211 208,354
------------- --------------
TOTAL ASSETS $6,616,581 $4,991,961
============= ==============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
COVALENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,803,057 $ 687,931
Accrued expenses 98,419 8,567
Billings in excess of related costs and
estimated earnings on uncompleted contracts 739,113 585,868
---------------- -----------------
TOTAL CURRENT LIABILITIES 2,640,589 1,282,366
---------------- -----------------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Common stock, $.001 par value per
share, 25,000,000 shares authorized,
11,755,709 and 11,602,715 shares issued respectively 11,756 11,603
Additional paid-in-capital 9,265,508 9,083,632
Accumulated deficit (5,250,956) (5,385,640)
---------------- -----------------
LESS:
Treasury Stock, at cost, 12,500 shares in 1997 (50,316) -
TOTAL STOCKHOLDERS' EQUITY 3,975,992 3,709,595
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,616,581 $ 4,991,961
================ =================
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
COVALENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
REVENUES $11,803,334 $10,352,483
COST OF REVENUES 8,222,217 6,330,984
-------------- --------------
GROSS PROFIT 3,581,117 4,021,499
-------------- --------------
OPERATING EXPENSES
Selling, general and administrative 2,563,172 2,253,741
Research and development 1,052,013 882,617
-------------- --------------
TOTAL OPERATING EXPENSES 3,615,185 3,136,358
-------------- --------------
INCOME (LOSS) FROM OPERATIONS (34,069) 885,141
INTEREST INCOME 109,893 93,594
-------------- --------------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 75,824 978,735
INCOME TAX PROVISION (BENEFIT) (58,860) (34,356)
-------------- --------------
INCOME FROM CONTINUING
OPERATIONS 134,684 1,013,091
DISCONTINUED OPERATIONS
Loss from operations - (103,736)
Loss on disposal - (328,037)
-------------- --------------
NET INCOME $ 134,684 $ 581,318
============== ==============
NET INCOME (LOSS) PER COMMON SHARE
Income from Continuing Operations - Basic $ .01 $ .09
Income from Continuing Operations - Diluted $ .01 $ .08
Discontinued Operations - Basic $ - $ .04
Discontinued Operations - Diluted $ - $ .03
Net Income - Basic $ .01 $ .05
Net Income - Diluted $ .01 $ .05
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
BASIC 11,659,890 11,304,545
DILUTED 12,398,172 12,001,660
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-5
<PAGE>
COVALENT GROUP, INC.
-----------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION> Additional
Common Stock Paid-In Unearned Accumulated
------------
Shares Amount Capital Compensation Deficit
----------- ----------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1996 10,767,984 $10,768 $ 7,149,389 $ (57,575) $(5,909,383)
Reclassification of unearned compensation - - - 57,575 (57,575)
Proceeds from sale of common stock 720,231 720 1,830,872 - -
Exercise of stock options 114,500 115 103,371 - -
Net income - - - - 581,318
-------------- ---------- -------------- -------------- ----------------
BALANCE,
DECEMBER 31, 1996 11,602,715 11,603 9,083,632 - (5,385,640)
Exercise of stock options 152,994 153 140,592 - -
Stock options granted to consultants - - 41,284 - -
Purchase of treasury stock - - - - -
Net income - - - - 134,684
-------------- ---------- -------------- -------------- ----------------
BALANCE,
DECEMBER 31, 1997 11,755,709 $11,756 $ 9,265,508 $ - $(5,250,956)
============== ========== ============== ============== ================
<CAPTION>
Treasury Stock
----------------
Shares Amount Total
------------- ----------- -----------
<S> <C> <C> <C>
BALANCE,
JANUARY 1, 1996 - $ - $ 1,193,199
Reclassification of unearned compensation - - -
Proceeds from sale of common stock - - 1,831,592
Exercise of stock options - - 103,486
Net income - - 581,318
------------- ---------- -----------
BALANCE,
DECEMBER 31, 1996 - - 3,709,595
- -
Exercise of stock options - - 140,745
Stock options granted to consultants - - 41,284
Purchase of treasury stock (12,500) (50,316) (50,316)
Net income - - 134,684
------------- ---------- -----------
BALANCE,
DECEMBER 31, 1997 (12,500) (50,316) $ 3,975,992
============= ========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-6
<PAGE>
COVALENT GROUP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 134,684 $ 581,319
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Amortization and depreciation 171,100 142,443
Stock options issued to consultants 41,284
Loss on disposal of subsidiary - 328,037
Deferred income taxes (74,252) (96,363)
Changes In assets and liabilities
(Increase) decrease in -
Accounts receivable 992,325 (3,002,812)
Prepaid expenses and other (8,285) (43,526)
Costs and estimated earnings in excess
of related billings on uncompleted contracts (1,401,690) (6,243)
Other assets (40,857) (223)
Increase (decrease) in -
Accounts payable 1,115,126 558,268
Accrued expenses 89,852 4,537
Billings in excess of related costs and
estimated earnings on uncompleted contracts 153,245 585,868
---------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,172,532 (948,695)
---------------- ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (335,441) (324,652)
Net change in assets of discontinued operations - (40,555)
---------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (335,441) (365,207)
---------------- ------------
FINANCING ACTIVITIES:
Proceeds from sale of stock, net - 1,831,592
Proceeds from exercise of stock options 85,745 103,485
Repayments on debt - (5,000)
Purchase of treasury stock (50,316) -
---------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 35,429 1,930,077
---------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 872,520 616,175
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 922,010 305,835
---------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,794,530 $ 922,010
================ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
F-7
<PAGE>
Covalent Group, Inc.
-------------------
And Subsidiary
--------------
Notes To Consolidated Financial Statements
------------------------------------------
1. DESCRIPTION OF BUSINESS:
-----------------------
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:
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. Intercompany transactions and balances
have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Revenue Recognition
-------------------
Fixed price contract revenue is recognized based on the status of the work
completed under the contract as of a given time based on the various tasks
required under the contract using the percentage of completion method.
Revenue from other contracts is recognized as services are provided.
Revenue related to contract modifications is recognized when realization is
assured and the amounts are reasonably determinable. Adjustments to
contract cost estimates are made in the periods in which the facts which
require the revisions become known. When the revised estimate indicates a
loss, such loss is provided for currently in its entirety. Costs and
estimated earnings in excess of related billings on uncompleted contracts
represents revenue recognized in excess of amounts billed. Billings in
excess of related costs and estimated earnings on uncompleted contracts
represents amounts billed in excess of revenue recognized.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-8
<PAGE>
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is provided using
the straight line method over the estimated useful lives of the assets which
range from 3 to 7 years for equipment and from 3 to 7 years for furniture
and fixtures. Depreciation expense for the years ended December 31, 1997 and
1996 was $171,100 and $132,099 respectively. Expenditures for maintenance
and repairs are charged to expense 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 Expenses
---------------------------------
Research and development expenses ($1,052,013 in 1997; $882,617 in 1996) are
charged to expense as incurred.
Income Taxes
------------
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109)
which requires the liability method of accounting for deferred income taxes.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities.
Deferred tax assets or liabilities at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to concentration
of credit risk are accounts receivable and the Company's customer base
principally comprises companies within the pharmaceutical industry. The
Company does not require collateral from its customers.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, costs and estimated earnings in excess of
related billings on uncompleted contracts, accounts payable and accrued
expenses and billings in excess of related costs and estimated earnings on
uncompleted contracts. The book values of cash and cash equivalents,
accounts receivable, costs and estimated earnings in excess of related
billings on uncompleted contracts, accounts payable, accrued expenses and
billings in excess of related costs and estimated earnings on uncompleted
contracts are considered to be representative of their respective fair
values.
Net Income (Loss) Per Common and Common Equivalent Share
--------------------------------------------------------
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" (SFAS No. 128) as of December 31, 1997. In accordance
with SFAS No. 128, prior period earnings per share amounts have been
restated to conform with SFAS No. 128. SFAS No. 128 requires basic earnings
per share which is computed by dividing reported earnings available to
common shareholders by the weighted average shares outstanding and diluted
earnings per share which reflects the dilutive effect of common stock
equivalents such as stock options and warrants.
F-9
<PAGE>
The weighted average common and common equivalent shares outstanding for
purposes of calculating net income (loss) per common share are computed as
follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Weighted average common shares
outstanding used for basic net income
(loss) per common share 11,659,890 11,304,545
Dilutive effect of common stock
options and warrants outstanding 738,282 697,115
------------ -------------
Weighted average common and
common equivalent shares outstanding used for diluted
net income (loss) per common share 12,398,172 12,001,660
============ =============
</TABLE>
New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounts Standards Board issued Statement of
Financial Accounting Standards No. 130 " Reporting Comprehensive Income"
(SFAS No. 130). SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income in a set of financial statements.
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions generated from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Management
believes that the adoption of SFAS No. 130 will not have a material impact
on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 " Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 applies
to all public companies and is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 requires that business segment financial
information be reported in the financial statements utilizing the management
approach. The management approach is defined as the manner in which
management organizes the segments within the enterprise for making operating
decisions and assessing performance. Management believes the adoption of
SFAS No. 131 will not have a material impact on the financial statements.
Supplemental Cash Flow Information
----------------------------------
Noncash investing and financing activities for the year ended December 31,
1996 consisted of the sale of all of the outstanding common stock of a
former subsidiary, Future Medical Technologies, Inc. (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>
Cash paid during the years ended December 31, 1997 and 1996 for income taxes
were approximately $8,000 and $10,000 respectively.
F-10
<PAGE>
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to current
year presentation.
3. DISCONTINUED OPERATIONS:
-----------------------
On July 31, 1996, the Company sold all of the outstanding common stock of
FMT for $250,000 and certain royalty payments due on the sale of certain
products for up to five years. The selling price was payable in 1996 for
$25,000 and the remaining balance was due in annual installments of $25,000
(1997), $50,000 (1998 and 1999) and $100,000 (2000). Interest was 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 sheets and statements of operations. As
permitted under SFAS No. 95, discontinued operations have not been
segregated in the 1996 consolidated statement of cash flows, therefore,
certain captions will not agree with the consolidated balance sheet and
statement of operations captions.
Sales associated with FMT were $158,620 for the seven months ended July 31,
1996. Related losses were $157,176 for the same period.
In 1997 the Company did not receive the scheduled payments on the note due
from the purchaser of FMT, ABS Group, Inc. (ABS). On December 31, 1997, the
Company agreed to exchange the note of $225,000 and related accrued interest
of $13,000 for 300,000 shares of common stock of ABS, which are subject to
certain restrictions. ABS is a public company, however trading of its common
shares is very limited. The common shares received have been recorded at an
amount equal to the carrying value of the note, including accrued interest,
which management believes approximates fair value. This amount has been
included in other long-term assets as of December 31, 1997.
4. ACCOUNTS RECEIVABLE:
--------------------
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---- ----
<S> <C> <C>
Billed $1,985,223 $3,127,548
Unbilled 150,000 -
-------------- -----------------
$2,135,223 $3,127,548
============== =================
</TABLE>
No provisions for uncollectible accounts were made in 1997 and 1996; the
Company considered all receivable balances fully collectible due to historic
bad debt experience and the financial stability of prior and existing
customers.
5. LINE OF CREDIT:
--------------
During 1997, the Company obtained a demand line of credit facility with a
bank. Maximum borrowings under the facility are the lessor of $1,000,000 or
75% of eligible accounts receivable, as defined, and bear interest at the
bank's prime rate plus 1.0%. There were no outstanding borrowings under
this facility during 1997.
F-11
<PAGE>
6. STOCKHOLDERS' EQUITY:
--------------------
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 for
the purchase of shares of common stock to directors, officers, employees and
consultants, as defined under the provisions of the plans. The Board of
Directors determines the option exercise price per share, vesting period and
expiration date (generally up to five years).
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Range of Exercise
Exercise Prices Price Per
Number of Shares Per Share Share
------------------ ------------------- --------------
<S> <C> <C> <C>
Options outstanding at December 31, 1995 2,212,374 $.03 -$ 5.25 $2.54
Granted 354,500 3.88 - 6.13 4.15
Exercised (114,500) .88 - 5.00 1.06
Retired (426,896) 2.88 - 5.00 3.32
Gifted to Company (475,000) 2.88 - 2.88 2.88
------------------
Options outstanding at December 31, 1996 1,550,478 .03 - 6.13 2.67
Granted 747,000 3.77 - 4.94 4.16
Exercised (152,994) .88 - 1.00 .92
Canceled (17,500) 3.94 - 4.63 4.28
------------------
Options outstanding at December 31, 1997 2,126,984 $.03 - $6.13 $3.31
==================
Exercisable Options outstanding at:
December 31, 1996 1,377,853 $.03 - $6.13 $2.47
December 31, 1997 1,354,859 .03 - 6.13 2.79
</TABLE>
The following table summarizes information regarding stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Average Average Weighted
Number Remaining Exercise Number Average
Range of Exercise Outstanding At Contractual Life Price per Exercisable at Exercise
Prices 12/31/97 in Years Share 12/31/97 Price
- ----------------- --------------- ---------------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.03 210,000 2.0 $0.03 210,000 $0.03
$ 0.88 103,984 .7 $0.88 103,984 $0.88
$ 1.00 79,000 2.7 $1.00 79,000 $1.00
$2.88 - $ 4.19 1,429,500 3.9 $3.66 726,000 $3.26
$4.38 - $ 6.13 304,500 3.2 $5.13 235,875 $5.27
</TABLE>
F-12
<PAGE>
As of December 31, 1997, there were 1,354,859 options vested and
exercisable and 675,000 stock options available for grant under the
Company's stock option plans.
The Company applies Accounting Principals Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and the related interpretations in
accounting for its stock option plans. The disclosure requirements of
statement of Financial Accounting Standards No. 123 "Accounting for Stock
Based Compensation" (SFAS No. 123) were adopted by the Company in 1997. Had
compensation cost for options granted during 1995 through 1997 under the
stock options plan been determined based upon the fair value of the options
at the date of grant, as prescribed by SFAS No. 123, the Company's pro
forma net income and pro forma net income per share would have been reduced
to the following amounts:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
Net income $ 134,684 $581,318
Pro forma net income (loss) (133,493) 469,306
Basic income per share 0.01 0.05
Pro forma basic net income (loss) per share (0.01) 0.04
Diluted net income per share 0.01 0.05
Pro forma diluted net income (loss) per share (0.01) 0.04
</TABLE>
The weighted average fair value of each stock options granted during the
years ended December 31, 1997 and 1996 was $1.86 and $1.89 respectively. As
of December 31, 1997, the weighted average remaining contractual life of
each stock option outstanding was 3.4 years. The weighted average remaining
contractual life of each stock option granted during the years ended
December 31, 1997 and 1996 was 4.7 and 4.9 years, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black - Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Risk - free interest rate 5.8% - 6.6% 6.0% - 6.8%
Expected dividend yield - -
Expected life 5 years 5 years
Expected volatility 40.0% 40.0%
</TABLE>
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro forma effects of
reported net income for future years.
During 1997, the Company granted 25,000 stock options to an independent
consultant for which the Company recorded consulting expense based upon the
difference between the value of the stock options under the provisions of
SFAS No. 123 and the exercise price per share on the date of grant.
Common Stock Warrants
---------------------
During 1996, the Company issued 250,000 common stock warrants with an
exercise price of $2.75 per share to an investment banking firm in
connection with an offering of common stock. The warrants were vested on
the grant date.
F-13
<PAGE>
7. CUSTOMER INFORMATION:
--------------------
The following table summarizes significant customers with revenues in
excess of 10% of total revenues (as a percentage of total revenues):
<TABLE>
<CAPTION>
Years Ended
December 31,
Customer 1997 1996
-------- ---------- ---------
<S> <C> <C>
A 21% 76%
B 20% *
C 19% *
D 14% *
</TABLE>
*Revenues were less than 10% of total revenues.
The above revenue amounts consist of separate clinical trials ranging from
two to five.
8. INCOME TAXES
------------
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Current:
Federal $ - $ -
State 15,392 8,567
-------------- --------------
15,392 8,567
-------------- --------------
Deferred:
Federal (64,252) (35,155)
State (10,000) (7,768)
-------------- --------------
(74,252) (42,923)
-------------- --------------
$ (58,860) $ (34,356)
============== ==============
</TABLE>
Income tax expense differs from the amount currently payable because
certain expenses, primarily depreciation and accruals, are reported in
different periods for financial reporting and income tax purposes.
The federal statutory income tax rate is reconciled to the effective income
tax rate as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Federal statutory rate 34.0 % 34.0%
State income taxes, net of federal benefit 6.6 6.6
Prior period net operating loss (124.2) (37.1)
Other 6.0 -
============= ==============
(77.6)% 3.5%
============= ==============
</TABLE>
F-14
<PAGE>
The components of the net current and long-term deferred tax assets and
liabilities, measured under SFAS No. 109, are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets -
Net operating loss carryforwards $220,684 $113,965
-------------- --------------
Deferred tax liability-
Depreciation (50,069) (17,602)
-------------- --------------
Net deferred tax asset $170,615 $ 96,363
-------------- --------------
</TABLE>
9. EMPLOYEE BENEFIT 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.
10. LEASE COMMITMENTS:
-----------------
The Company leases office facilities and other equipment under
noncancellable operating leases expiring through December 2001. Rent
expense charged to operations was $289,308 in 1997 and $75,240 in 1996.
Future minimum annual rental commitments under the noncancellable lease
obligations are $281,290 in 1998, $257,836 in 1999, $245,413 in 2000, and
$245,413 in 2001.
F-15
<PAGE>
SIGNATURES
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: 3/30/98
-----------------
By: /s/Bruce LaMont
--------------------------------
Bruce LaMont, President, Chief
Executive 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: 3/30/98 By: /s/Bruce LaMont
------- -------------------------------
Bruce LaMont, President, Chief
Executive Officer and Director
Dated: 3/30/98 By: /s/William K. Robinson
------- -------------------------------
William K. Robinson, Chief Financial
Officer and Director
Dated: 3/30/98 By: /s/Ivan Rubin
------- -------------------------------
Ivan Rubin, Director
Dated: 3/30/98 By: /s/John Whittle
------- -------------------------------
John Whittle, Director
<PAGE>
ITEM 13. EXHIBITS
(a) Exhibits
3.2 Certificate of Amendment of Certificate of Incorporation.
3.3 Bylaws of Covalent Group, Inc.
10.2 1995 Stock Option Plan.
10.3 Lease between Dean Witter Realty Income Partnership II and Covalent
Group, Inc. dated November 14, 1996.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Baratz & Associates, P.A.
(b) Form 8-K
On December 31, 1997 the Company reported on Form 8-K stockholder
ratification to appoint the firm of Arthur Andersen LLP as its independent
auditors beginning January 1, 1998 to make an examination of the accounts
of the Company for the year ended December 31, 1997. The Company had no
disagreements with its previous independent auditors, Baratz & Associates,
P.A. on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
FUTURE MEDICAL TECHNOLOGIES INTERNATIONAL, INC.
Bruce LaMont and David Weitz certify as follows:
1. That they are the President and Secretary, respectively, of FUTURE
MEDICAL TECHNOLOGIES INTERNATIONAL, INC., a Nevada Corporation.
2. That by unanimous consent of the Board of Directors September 20,
1996, the following resolution was adopted.
"RESOLVED, that the Articles of Incorporation dated
September 28, 1989 and filed with the Secretary of
State on September 28, 1989 and the Amendment to the
Articles of Incorporation dated April 15, 1990 and
filed with the Secretary of State on May 8, 1990
be, and hereby are amended as follows:
That the name of the corporation is Covalent Group, Inc."
3. That paragraph FIRST of said Articles of Incorporation is hereby
amended to read as follows:
The name of the corporation is Covalent Group, Inc.
4. That the members of said corporation have adopted said amendment by
written consent on or about the 20th day of September, 1996. That the wording
of the amended Articles, as set forth in the members' resolution, is the same as
that set forth in the Director's resolution in paragraph Two (2) above. That
the number of shares voted affirmative for the adoption of said resolution is 7,
948, 824, and that the total number of shares entitled to vote on or consent to
said amendment is 11,542,403.
DATED this 20th day of September, 1996.
SIGNED: /s/ BRUCE LAMONT
----------------------------
BRUCE LAMONT, President
SIGNED: /s/ DAVID WEITZ
----------------------------
DAVID WEITZ, Secretary
<PAGE>
STATE OF NEW JERSEY :
: SS.
COUNTY OF CAMDEN :
ON THIS 20th day of September, 1996, personally appeared before me, a
Notary Public, Bruce LaMont and David Weitz, who acknowledged that they are the
President and Secretary respectively of Future Medical Technologies
International, Inc., and that they executed the foregoing Certificate of
Amendment.
/s/ Claire S. Beaverson
-------------------------------
NOTARY PUBLIC
<PAGE>
BY LAWS
OF
COVALENT GROUP, INC.
ARTICLE I
IDENTIFICATION
Section 1. Principal and Registered Office.
-------------------------------
The principal office of the Corporation shall be located at 1275 Drummers Lane,
Suite 100, Wayne, PA. 19087
The address of either the principal or registered office may be may be changed
by the Board of Directors.
Section 2. Other Offices.
-------------
The Corporation may have such other offices, either within or without the State
of Nevada, as the Board of Directors may designate or as the business affairs of
the Corporation may require from time to time.
ARTICLE II
MEETINGS OF THE SHAREHOLDERS
Section 1. Place of meetings.
-----------------
All meetings of shareholders shall be held at the principal office of the
Corporation, or at such other place, either within or without the State of
Nevada, as shall be designated in the notice of the meeting agreed upon by a
majority of the shareholders entitled to vote thereat.
Section 2. Annual Meetings.
---------------
The annual meeting of the shareholders shall be held at the principal office of
the Corporation on the first Tuesday in March of each year, if not a legal
holiday, for the purpose of electing directors of the Corporation and for the
transaction of such other business as may be properly brought before the
meeting.
Section 3. Substitute Annual Meeting.
-------------------------
If the annual meeting shall not be held on the day designated by the by-laws, a
substitute annual meeting may be called in accordance with the provisions of
Section at of this Article. A meeting so called shall be designated and treated
for all purposes as the annual meeting.
<PAGE>
Section 4. Special Meetings.
----------------
Special meetings of the shareholders may be called at any time by the President,
Secretary, or Board of Directors of the Corporation, or by any shareholder
pursuant to the written request of the holder of not less than one-tenth of all
the shares entitled to vote at the meeting.
Section 5. Notice of Meeting.
-----------------
Written or printed notice stating the time and place of the meeting shall be
delivered not less than ten or more than fifty days before the date of any
shareholders' meeting, either personally or by mail, by or at the direction of
the President, the Secretary or other person calling the meeting, to each
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail
addressed to the shareholder at his address as it appears on the record of
shareholders of the Corporation, with postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall specifically state
the purpose or purposes for which the meeting is called; but, in the case of an
annual or substitute annual meeting, the notice of meeting need not specifically
state the business to be transacted thereat unless such a statement is required
by the provisions of the State of Nevada.
When a meeting is adjourned for thirty days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting. When a meeting is
adjourned for less than thirty days in any one adjournment, it is necessary to
give any notice of the adjourned meeting other than by announcement at the
meeting at which the adjournment is taken.
Section 6. Voting Lists.
------------
At least ten days before each meeting of shareholders the Secretary of the
Corporation shall prepare an alphabetical list of the shareholders entitled to
vote at such meeting or any adjournment thereof, with the address of and number
of shares held by each, which list shall be kept on file at the registered
office of the Corporation for a period of ten days prior to such meeting, and
shall be subject to inspection by any shareholder at any time during the usual
business hours. The list shall be produced and kept open at the time and place
of the meeting and shall be subject to inspection by any shareholder during the
whole time of the meeting.
Section 7. Quorum.
------
A majority of the outstanding shares of the Corporation entitled to vote,
represented in person or by proxy, shall constitute a quorum at a meeting of
shareholders.
2
<PAGE>
The shareholders at a meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding be withdrawal of enough shareholders
to leave less than a quorum.
In the absence of a quorum at the opening of any moving of shareholders, such
meeting be adjourned from time to time by a vote of the majority of the shares
voting on the motion to adjourn; and at any adjourned meeting at which a quorum
is present, any business may be transacted which might have been transacted at
the original meeting.
Section 8. Proxies.
-------
Shares may be voted either in by person by one of more agents authorized by a
written proxy executed by the shareholder or by his duly authorized attorney-in-
fact.
A proxy is not valid after the expiration of eleven months from the date of its
execution, unless the person executing it specifies therein the length of time
for which it is to continue in force, or limits its use to a particular meeting,
but no proxy shall be valid after ten years from the date of its execution.
Section 9. Voting of Shares.
----------------
Each outstanding share entitled to vote shall be entitled to one vote on each
matter submitted to a vote at a meeting of shareholders.
Except in the election of directors, the vote of a majority of the shares voted
on any matter at a meeting of shareholders at which a quorum is present shall be
the act of the shareholders on that matter, unless the vote of a greater number
is required by law or by the character or by-laws of this corporation.
Shares of its own stock owned by the Corporation, directly or indirectly;
through a subsidiary, corporation or otherwise, or bid directly or indirectly in
a fiduciary capacity by it or by a subsidiary corporation, shall not be in
determining the total number of outstanding shares at a given time.
Section 10. Cumulative Voting.
-----------------
No Shareholder shall have the right of Cumulative Voting unless required by law.
Section 11. Informal Action by Shareholders
-------------------------------
Any action which may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all of the persons who would be
entitled to vote upon such action at a meeting, and filed with the Secretary of
the Corporation to be kept as part of he corporate records.
3
<PAGE>
Section 12. Indemnification.
---------------
COVALENT GROUP, INC. hereby adopts a resolution to indemnify the officers and
directors of the corporation from and against any liability which might be
asserted against them for actions taken while serving in their respective
capacities on behalf of the corporation or at its request. The corporation will
indemnify and hold harmless all officers and directors from and against
liability and litigation expense, including reasonable attorneys fees, arising
out of their status as such of their activities in any of their capacities as
officers or directors. No indemnification is clearly in conflict with the best
interests of the corporation.
It is further resolved that the Corporation shall indemnify and hold harmless
all of its officers and directors for claims made or liabilities asserted prior
to the adoption of this resolution and for that purpose and to that extent, this
resolution is ratified, authorized, and approved by the Shareholders of this
corporation.
In accordance with this resolution, the corporation may advance expenses in
defending any civil or criminal action prior to its final disposition if the
Shareholders authorize it in a particular case and if the person for whose
benefit such expenses are paid shall agree to repay the corporation unless it
shall be ultimately determined that he is entitled to be indemnified by the
corporation.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers.
--------------
The business and affairs of the Corporation shall be managed by its Board of
Directors.
Section 2. Number, Term and Qualifications.
-------------------------------
The number of directors of the Corporation shall be not less than that required
by law nor more than that which allowed by law.
The Directors shall be elected at the annual or adjourned annual meeting of the
shareholders (except as herein otherwise provided for the filling of vacancies)
and each director shall hold office until his death, resignation, retirement,
removal, disqualification, or his successor shall have been elected and
qualified.
Directors need not be residents of the State of Nevada or shareholders of the
Corporation.
4
<PAGE>
Section 3. Removal.
-------
Any director may be removed at any time with or without cause by a vote of the
shareholders holding a majority of the outstanding shares entitled to vote at an
election of directors.
Section 4. Vacancies.
---------
Any vacancy occurring in the Board of Directors may be filled by the affirmative
vote of a majority of the remaining directors even though less than a quorum or
by the sole remaining director.
Any vacancy created by an increase in the authorized number of directors shall
be filled only by election at an annual meeting or at a special meeting of
shareholders called for that purpose.
Any director elected to fill a vacancy shall be elected for the unexpired term
of his predecessor in office. At a special meeting of shareholders the
shareholders may elect a director to fill any vacancy not filled by the
directors.
Section 5. Chairman of the Board.
---------------------
There may be a Chairman of the Board of Directors elected by the directors from
their number at any meeting of the Board. The Chairman shall preside at all
meetings of the Board of Directors and perform such other duties as may be
directed by the Board.
Section 6. Compensation.
------------
The Board of Directors may compensate Directors for their services as such and
may provide for the payment of all expenses incurred by directors in attending
regular and special meetings of the Board.
ARTICLE IV
MEETINGS OF DIRECTORS
Section 1. Regular Meetings.
----------------
A regular meeting of the Board of Directors shall be held immediately after, and
at the same place as, the annual meeting of shareholders. In addition, the
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Nevada, for the holding of additional regular meetings.
Section 2. Special Meetings.
----------------
Special Meetings of the Board of Directors may be called by or at the request of
the
5
<PAGE>
President or any two directors. Such meetings may be held either within or
without the State of Nevada.
Section 3. Notice of Meetings.
------------------
Regular meetings of the Board of Directors may be held without notice.
The person or persons calling a special meeting of the Board of Directors shall,
at least three days before the meeting, give notice thereof by any usual means
of communication which notice need specify the purpose for which the meeting is
called and during normal business hours.
Section 4. Waiver of Attendance.
--------------------
Attendance by a director at a meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened.
Section 5. Quorum.
------
A majority of the number of directors fixed by these by-laws shall constitute a
quorum for the transaction of business at any meeting of the Board of Directors.
Section 6. Manner of Acting.
----------------
Except for otherwise provided in these by-laws, the act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.
Section 7. Presumption of Assent.
----------------------
A director of the corporation who is present at a meeting of the Board of
Directors at which action on any corporate matter is taken shall presumed to
have assented to the action taken unless his contrary vote is recorded or his
dissent is otherwise entered in the minutes of the meeting or unless he shall
his written dissent to such action with the person acting as the secretary of
the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary immediately after be adjournment of the
meeting. Such right to dissent shall not apply to a director who voted in favor
of such action.
Section 8. Informal Action by Directors.
----------------------------
Action taken by a majority of the directors without a meeting is nevertheless
Board action if written consent to the action in question is signed by all
directors and filed with the minutes of the proceedings of the Board, whether
done before or after the action so taken.
6
<PAGE>
ARTICLE V
EXECUTIVE COMMITTEE
Section 1. Creation.
--------
The Board of Directors, by resolution adopted by a majority of the number of
directors fixed by these by-laws, may designate two or more directors to
constitute an Executive Committee, which committee, to the extent provided in
such resolution, shall have and may exercise all of the authority of the Board
of Directors in the management of the Corporation.
Section 2. Vacancy.
-------
Any vacancy occurring in an Executive Committee shall be filled by a majority of
the number of directors fixed by these by-laws at a regular or special making of
the Board of Directors.
Section 3. Removal.
-------
Any member of an Executive Committee may be removed at any time with or without
cause by a majority of the number of directors fixed by these by-laws.
Section 4. Minutes.
-------
The Executive Committee shall keep regular minutes of its proceeding are report
same to the Board when required.
Section 5. Responsibility of Directors.
---------------------------
The designation of Executive Committee and the delegation thereto of authority
shall not operate to relieve the Board of Directors, or any member thereof of
any responsibility or liability imposed upon it or him by law.
If action taken by an Executive Committee is not thereafter formally considered
by the Board, a director may dissent from such action by filling his written
objection with the Secretary with reasonable promptness after learning of such
action.
ARTICLE VI
OFFICES
Section 1. Officers of the Corporation.
---------------------------
The officers of the Corporation shall consist of a CEO, President, a Secretary,
a Treasurer and such Vice-Presidents, Assistant Secretaries, and Assistant
Treasures as the Board of
7
<PAGE>
Directors may from time to time elect. In addition, the Board of Directors may
from time to time elect a Chairman of the Executive Committee. Any two or more
offices may be held by the same person, but no officer may act in more than one
capacity where action of two or more Officers is required.
Section 2. Election and Term.
-----------------
The officers Corporation shall be elected by the Board of Directors and each
officer shall hold office until the death, resignation, retirement, removal,
disqualification or his successor shall have been elected and qualified.
Section 3. Compensation of Officers.
------------------------
The compensation of all officers of the Corporation shall be fixed by the Board
of Directors and no officer shall serve the Corporation in any other capacity
and receive compensation therefore unless such additional compensation be
authorized by the Board of Directors.
Section 4. Removal of Officers and Agents.
------------------------------
Any officer or agent elected or appointed by the Board of Directors may be
removed by the Board with or without prejudice to the contract rights, if any,
of the person so removed.
Section 5. Bonds.
-----
The Board of Directors may by resolution require any officer, agent, or employee
of the Corporation to give bond to the Corporation, with sufficient sureties
conditioned on the faithful performance of the duties of his respective office
or position, and to comply with such other conditions as may from time to time
be required by the Board of Directors.
Section 6. President.
---------
The president shall be the principal executive officer of the Corporation and,
subject to the control all of the business and affairs of the Corporation.
He shall, when present, preside at all meetings of the shareholders. He shall
sign, with the Secretary, or any other proper officer of the Corporation
thereunto authorized by the Board of Directors, certificates for shares of the
Corporation, any deeds, mortgages, bonds, contracts, or other instruments which
the Board of Directors has authorized to be executed except in the cases where
the signing and execution thereof shall be expressly delegated by the Board of
Directors or by these by-laws to some other officer or agent of the Corporation,
or shall be required by law to be otherwise signed or executed; and in general
shall perform all duties incident to the office of President and such other
duties as may be prescribed by the Board of Directors from time to time.
8
<PAGE>
Section 7. Vice Presidents.
---------------
In the absence of the President or in the event of his death, inability or
refusal to act, the Vice Presidents in the order of their length of service as
Vice-Presidents, unless otherwise determined by the Board of Directors, shall
perform the duties of the President, and when so acting shall have all the
powers of and be subject to all the restrictions upon the President. Any Vice-
President may sign, with the Secretary or an Assistant Secretary, certificates
for shares of the Corporation; and shall perform such other duties as from time
to time may be assigned to him by the President or Board of Directors.
Section 8. Secretary.
---------
The Secretary shall: (a) keep the minutes of the meetings of shareholders, of
the Board of Directors and of all Executive Committees in one or more books
provided for that purpose; (b) we that all notices are duly given in accordance
with the provisions of these by-laws or as required by law; (c) be custodian of
the corporate records and of the seal of the Corporation and see that the seal
of the Corporation is affixed to all documents the execution of which on behalf
of the Corporation under its seal is duly authorized; (d) keep a register of the
post office address of each shareholder; (e) sign with the President or a Vice-
President, certificates for shares of the Corporation, the issuance of which
shall have been authorized by resolution of the Board of Directors; (f) have
general charge of the stock transfer books of the Corporation; and (g) in
general perform all duties incident to the office of Secretary and such other
duties as from time to time may be assigned to him by the President or the Board
of Directors.
The Secretary shall keep, or cause to be kept in the State of Nevada at the
Corporation's principal place of business, and in the State of Nevada at the
Corporation's Registered Office, a record of the Corporation's shareholders,
giving the names and addresses of all shareholders and the number and class of
shares held by each.
Section 9. Assistant Secretaries.
---------------------
In the absence of the Secretary or in the event of his death, inability or
refusal to act, the Assistant Secretaries in the order of their length of
service as Assistant Secretaries, unless otherwise determined by the Board of
Directors, shall perform the duties of the Secretary, and when so acting shall
have all the powers of and be subject to all the restrictions upon the
Secretary. They shall perform such other duties as may be assigned to them by
the Secretary, by the President, or by the Board of Directors.
Any Assistant Secretary may sign, with the President, certificates for shares of
he Corporation.
9
<PAGE>
Section 10. Treasurer.
---------
The Treasurer shall: (a) have charge and custody of and be responsible for all
funds and securities of the Corporation; receive and give receipts for monies
due and payable to the Corporation from any source whatsoever, and deposit all
such monies in the name of the Corporation in such depositories as shall be
selected in accordance with the Provisions of Article VII, Section 4, of these
By-laws; and (b) in general perform all of the duties as from time to time may
be assigned to him by the President or by the Board of Directors, or by these
By-laws.
The Treasurer shall prepare, or cause to be prepared, a true statement of the
Corporation's assets and liabilities as of the close of each fiscal year, all in
reasonable detail, which statement shall be made and filed at the Corporation's
registered office or principal place of business in the Commonwealth of
Pennsylvania within four months after the end of such fiscal year and thereat
kept available for a period of at least ten years. Such statement shall
include, when applicable, a statement of the then current conversion ratio of
any outstanding securities and a statement of the number of shares covered by
any outstanding options and the price at which the options are exercisable.
Section 11. Assistant Treasurers.
--------------------
In the absence of the Treasurer or in the event of his death, inability or
refusal to act, the Assistant Treasurers in the order of their length of service
as Assistant Treasurer, unless otherwise determined by the Board of Directors,
shall perform the duties of the Treasurer, and when so acting shall have all the
powers of and be subject to all the restrictions of the Treasurer. They shall
perform such other duties as may be assigned to them by the Treasurer, the
President, or by the Board of Directors.
Section 12. Chairman of the Board.
---------------------
The Chairman of the Board, who shall be chosen from among the Directors, shall
preside at all meetings of the Board of Directors if present, and shall, in
general, perform all duties incident to the office of the Chairman of the Board
and such other duties as from time to time may be assigned to him by the Board
of Directors.
Section 13. Chairman of the Executive Committee.
-----------------------------------
The Chairman of the Executive Committee, who shall be chosen by and from among
the Directors, shall have general supervision and direction over the business
and affairs of the Corporation, subject, however to the control of the Board of
Directors and the Executive Committee. He shall, in general, perform all duties
incident to the office of the Chairman of the Executive Committee and such other
duties as from time to time may be assigned to him by the Board of Directors or
the Executive Committee.
10
<PAGE>
ARTICLE VII
CONTRACT, LOANS, CHECKS, AND DEPOSITS
Section 1. Contracts.
---------
The Board of Directors may authorize any officer or officers, agent or agents,
to enter into any contract or execute and deliver any instrument in the name of
and on behalf of the Corporation, and such authority may be general or confined
to the specific instances.
Section 2. Loans.
-----
No loans shall be contracted on behalf of the Corporation and no evidence of
indebtedness shall be issued in its name unless authorized by a resolution of
the Board of Directors. Such authority shall be general or confined to specific
instances.
Section 3. Checks and Drafts.
-----------------
All checks, drafts, or other orders for be payment of money, issued in the name
of the Corporation, shall be signed by such officer or officers, agent or agents
of the Corporation and in such manner shall from time to time be determined by
resolution of the Board of Directors.
Section 4. Deposits.
--------
All funds of the Corporation not otherwise employed shall be deposited from time
to time to the credit of the Corporation in such depositories as the Board of
Directors may select.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for shares.
-----------------------
Certificates representing shares of the Corporation shall be in such form as
shall be determined by the Board of Directors. The Corporation shall issue and
deliver to each shareholder certificates representing all fully paid shares
owned by him. Certificates shall be signed by the President or Vice-President
and by the Secretary or Assistant Treasurer. All certificates for shares shall
be consecutively numbered or otherwise identified. The name and address of the
person to whom the shares represented thereby are issued, with the number and
class of shares and the date of issue, shall be entered an the stock transfer
books of the Corporation.
Section 2. Transfer of shares.
------------------
Transfer of shares of the Corporation shall be made only on the stock transfer
books of the Corporation by the holder of the record thereof or by his legal
representative, who shall furnish proper evidence of authority to transfer, or
by his attorney thereunto authorized by power of attorney duly executed or filed
with the Secretary, and on surrender for cancellation of the Certificate for
such shares.
11
<PAGE>
Section 3. Lost Certificate.
----------------
The Board of Directors may direct a new certificate to be issued in place of any
certificate theretofore issued by the Corporation claimed to have been lost or
destroyed, upon receipt of an affidavit of such fact from the person claiming
the certificate of stock to have been lost or destroyed. When authorizing such
issue of a new certificate; the Board of Directors shall require that the owner
of such lost or destroyed certificate, or his legal representative, give the
Corporation a bond in such sum as the Board may direct as indemnity against any
claim that may be made against the Corporation with respect to the certificate
claimed to have been lost or destroyed, except where the Board of Directors by
resolution finds that in the judgment of the Directors the circumstances justify
omission of a bond.
Section 4. Closing Transfer Books and Fixing Record Date.
---------------------------------------------
For the purpose of determining shareholders entitled to notice of or to vote at
any meeting of shareholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors may provide that the stock
transfer books shall be closed for the purpose of determining shareholders
entitled to notice of or to vote at a meeting of shareholders, such books shall
be closed for at least ten days immediately preceding such meeting.
In lieu of closing the stock transfer books, the Board of Directors may fix in
advance a date as the record date for any such determination of shareholders,
such record date in any case not to be more than fifty days and, in case of a
meeting of shareholders, not less than ten days immediately preceding the date
on which the particular action, requiring such determination of shareholders, is
to be taken.
If the stock transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a dividend, the
date on will notice of a meeting is mailed or the date on which the resolution
of the Board of Directors declaring such dividend is adopted as the case may be,
shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof except where the determination has been made
through the closing of the stock transfer books and the stated period of closing
has expired.
Section 5. Holder of the Record.
--------------------
The Corporation may treat as absolute owners of shares the person in whose name
the shares stand on records on its books just as if that person had full
competency, capacity, and authority to exercise all rights of ownership
irrespective of any knowledge or notice
12
<PAGE>
to the contrary or any description indicting a representative, pledge, or other
fiduciary relation or any reference to any other instrument or to the rights of
any other person appearing upon to record or upon the share certificate except
that any person furnishing to the Corporation proof of his appointment as a
fiduciary shall be treated as if he were a holder of record of its shares.
Section 6. Treasury Shares.
---------------
Treasury shares of the Corporation shall consist of such shares as have been
issued and thereafter acquired but not canceled by the Corporation. Treasury
shares shall not carry voting or dividend rights.
ARTICLE IX
GENERAL PROVISIONS
Section 1. Dividends.
---------
The Board of Directors may from time to time declare, and the Corporation may
pay, dividends on its outstanding shares in cash, property, or its own shares
pursuant to law and subject to the provisions of its Charter.
Section 2. Seal.
----
The corporation seal of the Corporation shall consist of a concentric circle
between which, is the name of the Corporation and in the center of which is
inscribed SEAL; and such seal, as impressed on the margin hereof, is adopted as
the corporate Seal of the Corporation.
Section 3. Waiver of Notice.
----------------
Whenever any notice is required to be given to any shareholder or Director by
law, by the Charter or by these By-laws, a waiver thereof in writing signed by
the person or persons entitled to such notice whether before or after the time
stated therein, shall be equivalent to the giving of such notice.
Section 4. Fiscal Year.
-----------
The fiscal year of the Corporation shall be fixed by the Board of Directors, and
shall be a calendar year unless otherwise designated.
Section 5. Amendments.
----------
Except as otherwise provided herein, these By-laws may be adopted by the
affirmative vote of a majority of the Directors then holding office at any
regular or special meeting of the Board of Directors.
13
<PAGE>
The Board of Directors shall have no power to adopt a By-law: (1) requiring more
than a majority of the voting shares for a quorum at a meeting of shareholders
or more than a majority of the votes cast to constitute action by the
shareholders, except where higher percentages are required by law; (2) providing
for the management of the Corporation otherwise than by the Board of Directors
or its Executive Committee; (3) increasing or decreasing the number of
Directors: (4) classifying and staggering the election of Directors.
No By-law adopted or amended by the shareholders shall be altered or repealed by
the Board of Directors.
This the 31st day of January, 1998.
14
<PAGE>
FUTURE MEDICAL TECHNOLOGIES INTERNATIONAL, INC.
1995 STOCK OPTION PLAN
1. PURPOSE. The purpose of the Future Medical Technologies
-------
International, Inc. 1995 Stock Option Plan (the "Plan") is to further the
interests of Future Medical Technologies International, Inc. (the "Company") and
its Subsidiaries by strengthening the desire of employees to continue their
employment with the Company and its Subsidiaries and by inducing individuals to
become employees of the Company and its Subsidiaries through stock options to be
granted hereunder. Options granted under the Plan are options intended to
qualify as non-qualified style options.
2. DEFINITIONS. Whenever used herein, the following terms shall
-----------
have the following meanings, respectively:
(a) "Act" means the U.S. Securities Act of 1933, as amended.
(b) "Affiliated Corporation" means any Parent or Subsidiary.
(c) "Board" or "Board of Directors" shall mean the Board of
Directors of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Common Stock" or "Common Shares" means the common stock,
$.001 par value, of the Company or in the event that the outstanding Common
Shares are hereafter changed into or exchanged for different shares of
securities of the Company, such other shares or securities.
(f) "Committee" shall mean the Stock Option or Compensation
Committee appointed by the Board of Directors, or if no committee has been
appointed reference to "Committee" shall be deemed to refer to the Board of
Directors.
(g) "Company" shall mean Future Medical Technologies
International, Inc., a Nevada corporation.
(h) "Disinterested Person" shall have the meaning set forth in
Rule 16b-3(c)(2)(i) promulgated by the Securities and Exchange commission
pursuant to the Securities Exchange Act of 1934, as amended, or any amendments
or succession to Rule 16b 3(c)(2)(i).
(i) "Employee " means any person or entity that renders bona fide
services to the Company, including, without limitations, (i) a person employed
by the Company
<PAGE>
or an Affiliate Corporation in a key capacity; (ii) an officer or director of
the Company or Affiliate Corporation; (iii) a person or company engaged by the
Company or an Affiliate Corporation as a consultant or advisor; or (iv) a
lawyer, law firm, accountant or accounting firm, engaged by the Company or an
Affiliated Corporation.
(j) "Fair Market Value Per Share" of the Company's Common Stock
shall mean if the Company's Common Stock is publicly held and actively traded on
an established market the mean between the highest and lowest quoted selling
prices of the Common Stock on the date of the grant of the Option. If there were
no sales on the date of the grant of an option, the Fair Market Value Per Share:
shall be determined by the Committee. In either case, Fair Market Value Per
Share shall be determined without regard to any restrictions other than a
restriction which by its terms will never lapse.
(k) "Option" shall mean a Non-Qualified option for one share of
Common Stock.
(l) "Optionee" shall mean any Employee who has been granted an
option to purchase shares of Common Stock under the Plan.
(m) "Parent Corporation" shall mean a parent corporation of the
Company as defined in Section 424(e) of the Code.
(n) "Permanent Disability" shall mean termination of employment
with the Company or any Subsidiary Corporation or Parent Corporation with the
consent of the Company or such Subsidiary Corporation or Parent Corporation by
reason of permanent and total disability with the meaning of Section 22(e)(3) of
the Code.
(o) "Plan" shall mean the Future Medical Technologies
International, Inc. 1995 Stock Option Plan.
(p) "Subsidiary" means a corporation more than 50% of whose total
combined capital stock of all classes is held by the Company or by another
corporation qualifying as a Subsidiary within this definition.
3. ADMINISTRATION.
--------------
(a) The Plan shall be administered either (i) by the Board, with
the majority of the Board acting at any time consisting of Disinterested
Persons, or (ii) in the discretion of the Board, by a Committee of at least two
persons appointed by the Board, each of whom shall be directors of the Company,
and all of such members being Disinterested Persons; provided, however, that if
a majority of the Board does not consist of Disinterested Persons, the Board
shall appoint a Committee consisting of Disinterested Persons. Notwithstanding
the provisions of the immediately preceding sentence, the requirement for
disinterested Persons in
-2-
<PAGE>
such sentence shall not apply to any Options granted prior to the registration
of the Common Stock under Section 12 of the Securities Exchange Act of 1934, as
amended, and after such registration, such requirement shall only apply for the
grant of Options to individuals subject to Section 16(a) of such Act. The Board
may from time to time appoint members of the Committee in substitution for or in
addition to members previously appointed and may fill vacancies.
(b) Any action of the Committee with respect to the
administration of the Plan shall be taken by majority vote or by written consent
of a majority of its members.
(c) The Committee or the Board shall have the authority to
construe and interpret the plan, to define otherwise undefined terms used
herein, to determine die time or times an option may be exercised and the number
of shares which may be exercised at any one time, to prescribe, amend and
rescind rules and regulations relating to the Plan, and to make all other
determinations necessary or advisable for the administration of the Plan. All
powers granted herein to the Committee may also be exercised by me Board. All
determinations and interpretations made by the Committee shall be conclusive and
binding, on all Employees and on their guardians, local representatives and
beneficiaries.
(d) The Company will indemnify and hold harmless the members of
the Board of Directors and the Committee from and against any and all
liabilities costs mad expenses incurred by such persons as a result of any act,
or omission to act, in connection with the performance of such persons' duties,
responsibilities and obligations under the Plan, other than Such liabilities,
costs and expenses as may result from the gross negligence, bad faith, willful
misconduct and/or criminal acts of such persons.
(e) The Company will provide financial information to the
Optionees on the same basis as the Company provides such information to its
stockholders.
4. NUMBER OF SHARES SUBJECT TO PLAN. The stock to be offered under
--------------------------------
the Plan shall consist of up to 800,000 shares of the Company's Common Stock.
If any Option granted hereunder shall expire or terminate for any reason without
having been exercised in full, the unpurchased shares subject thereto shall
again be available for purposes of this Plan.
5. ELIGIBILITY AND PARTICIPATION. All Employees, as defined in
-----------------------------
Section 2(i) hereof, and Consultants in connection with either Non-Qualified
options, shall be eligible to receive the respective category of Options,
subject to the Committee's right to select the particular Employees who are to
receive the Options. The Committee shall determine the Employees and
Consultants to whom Options shall be granted, the time or times at which such
options shall be granted and the number of shares to be subject to each Option.
An Employee who has been granted an Option may, if he is otherwise eligible, be
granted an additional option or Options if the Committee shall so determine.
-3-
<PAGE>
6. PURCHASE PRICE.
--------------
The purchase price of each share covered by each option shall be the
bid price at the time of grant of the option. However, such purchase price may
include value for services.
7. DURATION OF OPTIONS. The date of expiration of the Option and
-------------------
all rights thereunder shall be five years from the date of the grant of the
Option by the Board or the Committee.
8. EXERCISE OF OPTIONS.
-------------------
(a) An Option shall be exercisable in installments or otherwise
upon such terms as the Committee shall in its discretion determine at the time
the option is granted.
(b) No Option will be exercisable (and any attempted exercise
will be deemed null and void) if such exercise would create a right of recovery
for "short-swing profits" under Section 16(b) of the Securities Exchange Act of
1934, as amended.
9. METHOD OF EXERCISE.
------------------
(a) To the extent that the right to purchase shares has accrued,
Options may be exercised from time to time by giving written notice to the
Company stating the number of shares with respect to which the Option is being
exercised, accompanied by payment in full, by cash or by certified or cashier's
check payable to the order of the Company or the equivalent thereof acceptable
to the Company, of the purchase price for the number of shuts being purchased
and, if applicable, any federal, state or local withholding and employment taxes
required to be paid in accordance with the provisions hereof. The Company shall
issue a separate certificate or certificates with respect to each option
exercised by an Optionee.
(b) In the Committee's discretion, payment of the purchase price
for the shares with respect to which the option is being exercised, but not of
the amount of any withholding and employment taxes, may be made in whole or in
part with shares of Common Stock of the Company. If payment is made with shares
of Common Stock, the Optionee, or other person entitled to exercise the option,
shall deliver to the Company certificates representing the number of shares of
Common Stock in payment for the shares being purchased, duly endorsed for
transfer to the Company. If requested by the Committee, prior to the acceptance
of such certificates in payment for such shares, the Optionee, or any other
person entitled to exercise the Option, shall supply the Committee with a
written representation and warranty that he has good and marketable title to the
shares represented by the certificates, free and clear of all liens and
encumbrances. The value of the shares of Common Stock tendered in payment for
the shares being purchased shall be their Fair Market Value Per Share on the
date of die exercise of die option.
-4-
<PAGE>
(c) Notwithstanding the foregoing, the Company shall have the
right to postpone the time of delivery of the shares for such period as may be
required for it to comply, with reasonable diligence, with any applicable
listing requirements of any national securities exchange or any federal, state
or local law. If an Optionee, or other person entitled to exercise an option,
fails to accept delivery of or fails to pay for all or any portion of the shares
covered by the notice of exercise, upon tender of delivery thereof, the
Committee shall have the right to terminate his Option with respect to such
shares.
10. NON-TRANSFERABILITY OF OPTIONS. No Option granted under the Plan
------------------------------
shall be assignable or transferable by the Optionee, either voluntarily or by
operation of law, otherwise than by will or the laws of descent and
distribution, and shall be exercisable during his lifetime only by him. Upon
any attempted transfer of an Option contrary to the provisions hereof, the
Committee may, at its discretion, elect to terminate the Option.
11. CONTINUANCE OF EMPLOYMENT. Nothing contained in the Plan or any
-------------------------
option granted under the Plan shall confer upon any Optionee any rights with
respect to the continuation of his employment by the Company or any Subsidiary
Corporation or Parent Corporation or interfere in any way with the right of the
Company or any Subsidiary Corporation or Parent Corporation at any time to
terminate such employment or to increase or decrease the compensation of the
Optionee from the rate in existence at the time of the grant of an option or
interfere with the right of the Company to create another option plan.
12. TERMINATION OF EMPLOYMENT OTHER THAN BY DEATH OR PERMANENT
------------------------------------------------ ---------
DISABILITY. Except as the Committee may determine otherwise:
- ----------
(a) If an Optionee ceases to be an Employee for any reason other
than his death or Permanent Disability, any options granted to him under the
Plan shall terminate three (3) months from the date on which such optionee
terminates his employment. During such three (3) month period, the optionee may
exercise any option granted to him but only to the extent such option was
exercisable on the date of termination of his employment and did not, in the
interim, expire or otherwise become terminated as provided herein.
(b) Termination of employment other than by death or Permanent
Disability for purposes hereof shall be deemed to take place upon the earliest
to occur of the following: (i) the Optionee's retirement under the normal
retirement policies of the Company or any Parent Corporation or Subsidiary
Corporation; (ii) the date of the Optionee's retirement with the approval of the
Company or any Parent Corporation or any Subsidiary Corporation because of
disability other than Permanent Disability; (iii) the date an Optionee receives
notice or advice that his employment is terminated; or (iv) the date an Optionee
ceases to render his services to the Company or any Parent Corporation or
Subsidiary Corporation for any reason other than death, Permanent Disability or
reasons included in (i) through (iii) inclusive of this Section 12(b), except
that absences for temporary illness, emergencies and vacations or leaves of
absence
-5-
<PAGE>
approved in writing by the Company or any Parent Corporation or Subsidiary
Corporation shall rot be treated as a termination of employment until the 91st
day after the absence begins or, if later, for so long as the Optionee's right
to reemployment with the Company or its Parent Corporation or Subsidiary
Corporation is guaranteed by statute or contract. The fact that the Optionee may
receive payment from the Company or any Parent Corporation or Subsidiary
Corporation after termination for vacation pay, for services rendered prior to
termination, for salary in lieu of notice, or for other benefits shall not
affect the termination date.
13. DEATH OR PERMANENT DISABILITY OF OPTIONEE. Except as the
-----------------------------------------
Committee may determine otherwise with respect to any Non-Qualified options
granted hereunder, if any Optionee shall die at a time when he is employed by
the Company or any Parent Corporation or Subsidiary corporation or if the
Optionee shall cease to be an Employee by reason of Permanent Disability, any
Options granted to him under this Plan shall terminate one year after the date
of his death or termination of employment due to Permanent Disability unless by
its terms it shall expire before such date or otherwise terminate as provided
herein, and shall only be exercisable to the extent that it would have been
exercisable on the date of his death or his retirement due to Permanent
Disability. In the case of death, the Option may be exercised by the person or
persons to whom the Optionee's rights under the option shall pass by will or by
the laws of descent and distribution.
14. STOCK PURCHASE NOT FOR DISTRIBUTION. If requested by the
-----------------------------------
Committee an Optionee shall, by accepting the grant of an Option under the Plan,
represent and agree, for himself and his transferees by will or the laws of
descent and distribution, that all shares of stock purchased upon exercise of
the option will be received and held without a view to distribution except as
may be permitted by the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder. After each notice of exercise of any
portion of an Option, if requested by the Committee, the person entitled to
exercise the Option must agree in writing that the shares of stock are being
acquired in good faith without a view to distribution.
Notwithstanding any other provision hereof, the Company shall not
be obligated to issue any shares unless it is advised by counsel that it may do
so without violation of applicable federal and state securities laws and the
Company may require shares to bear a legend and may take other steps reasonably
necessary to comply with applicable laws and to limit transfer.
15. PRIVILEGES OF STOCK OWNERSHIP. No persons entitled to exercise
-----------------------------
any option granted under the Plan shall have any of the rights or privileges of
a stockholder of the Company with respect to any shares of Common Stock issuable
upon exercise of such option until such person has become the holder of record
of such shares. No adjustment shall be made for dividends or distributions of
rights in respect of such shares if the record date is prior to the date on
which such person becomes the holder of record, except as provided in Section 16
hereof.
-6-
<PAGE>
16. ADJUSTMENTS.
-----------
(a) If the number of outstanding shuts of Common Stock of the
Company are increased or decreased, or if such shares ant exchanged for a
different number or kind of shares or securities of the Company through
reorganization, merger, recapitalization, reclassification, stock dividend,
stock split, combination of shares, or other similar transaction, the aggregate
number of shares of Common Stock subject to the Plan as provided in Section 4
hereof and the shares of Common Stock subject to issued and outstanding Options
under the Plan shall be appropriately and proportionately adjusted by the
Committee. Any such adjustment in the outstanding options shall be made without
change in the aggregate purchase price applicable to the unexercised portion of
the Option but with an appropriate adjustment in the price for each share or
other unit of any security covered by the option.
(b) Notwithstanding the provisions of subsection (a) of this
Section, upon the dissolution or liquidation of the Company or the
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or the sale of substantially all of the assets of the Company or more than
eighty percent (80%) of the then outstanding stock of the Company to another
corporation or entity, the Plan and each outstanding Option shall terminate;
provided, however, that: (i) each Option for which no option has been tendered
by the surviving or acquiring corporation or any parent thereof in accordance
with all of the terms and provisions of (ii) immediately below, shall become
fully exercisable subject to the provisions of Section 8(c) hereof, thirty days
before the effective date of such dissolution, liquidation, merger,
consolidation in which the Company is not the surviving corporation, or sale of
assets or stock; or (ii) in its sole and absolute discretion, the surviving or
acquiring corporation or any parent thereof may, but shall not be obligated to,
tender to any Optionee holding an Option, an option or options to purchase
shares of the surviving corporation or acquiring corporation or any parent
thereof, and such new option or options shall contain such terms and provisions
as shall be required substantially to preserve the rights and benefits of any
Option then outstanding under this Plan.
(c) Adjustments under this Section shall be made by the
Committee, whose determination as to what adjustments shall be made, and the
extent thereof, shall be final, binding and conclusive. No fractional shares of
stock shall be issued under the Plan or in connection with any such adjustment.
17. AMENDMENT AND TERMINATION.
-------------------------
(a) The Board of Directors of the Company may from time to time,
with respect to any shares at the time not subject to Options, suspend or
terminate the Plan or amend or revise the terms of the Plan; provided that any
amendment to the Plan shall be approved by the stockholders of the Company if
the amendment would (i) materially increase the benefits accruing to
participants under the Plan; (ii) increase the number of shares of Common
-7-
<PAGE>
Stock which may be issued under the Plan, except as permitted under the
provisions of Section 16 hereof; or (iii) materially modify the requirements as
to eligibility for participation in the Plan.
(b) No amendment, suspension or termination of the Plan shall,
without the consent of the Optionee, alter or impair any rights or obligations
under any Option theretofore granted to such Optionee under the Plan.
18. EFFECTIVE DATE OF PLAN. This Plan shall become effective upon
----------------------
adoption by the Board of Directors of the Company and approval by the Company's
stockholders; provided, however, that prior to approval of the Plan by the
-------- -------
Company's stockholders, but after adoption by the Board of Directors, Options
may be granted under the Plan subject to obtaining the stockholders' approval of
the adoption of the Plan. Notwithstanding the foregoing, stockholders' approval
must occur no later than twelve (12) months after the date of adoption of the
Plan by the Board of Directors.
19. TERM OF THE PLAN. No option shall be granted pursuant to the
----------------
Plan after ten (10) years from the earlier of the date of adoption of the Plan
by the Board of Directors of the Company or the date of approval of the Plan by
the Company's stockholders.
-8-
<PAGE>
SECOND AMENDMENT TO LEASE
-------------------------
This Second Amendment to Lease (the "Agreement"), made this 14th day of
November, 1996 by and between Dean Witter Realty Income Partnership II, L.P.,
located at c/o Dean Witter Realty, Inc. Two World Trade Center, 64th Floor, New
York, NY 10048, hereafter called "Landlord", and Covalent Research Alliance
Corp., a corporation organized and existing under the law of Pennsylvania,
hereinafter called "Tenant".
WITNESSETH THAT:
---------------
WHEREAS, Landlord and Tenant entered into an Agreement of Lease dated
September 9, 1994, as amended March 25, 1996, providing for the leasing of
office space at One Glenhardie Corporate Center 1275 Drummers Lane, Wayne, PA
19087; and
WHEREAS, Landlord and Tenant desire to amend said Lease;
NOW, THEREFORE, in consideration of the agreements of each other, Landlord
and Tenant agree that effective upon the earlier of December 1, 1996 or Tenant's
occupancy of the first floor space as indicated on Revised Exhibit "A" (the
"Effective Date"), said Lease shall be and the same is hereby amended as
follows:
2. Demise.
------
Landlord does hereby lease and demise to Tenant and Tenant does hereby
hire and take from Landlord, for the term and subject to the provisions hereof,
the space (hereinafter, together with all fixtures, equipment, improvements,
installations and appurtenances which at the commence of or during the term of
this Lease are thereto attached, referred to as the "Premises") shown cross-
hatched on the floor plan (the "Floor Plan") attached hereto as Revised Exhibit
"A", on the first floor of the building (hereinafter referred to as the
"Building") known as occupying or to occupy the parcel of land bounded as
described on Exhibit "B" attached hereto (the "Land"), The Building and Land are
sometimes collectively referred to in this Lease as the "Property".
3. Term.
----
(a) This demise shall be for the term (hereinafter referred to as "the
Term") beginning on the Effective Date as defined above and ending, without the
necessity of notice from either party to the other, five (5) years and one (1)
month from and after the Effective Date if the Effective Date shall be the first
day of a month, if the Effective Date shall be other than the first day of the
month, then from and after the first day of the month next following the
Effective Date. Tenant shall vacate the space now occupied by Tenant on the
second floor of the Building
<PAGE>
on the Effective Date. If Tenant fails to vacate such space on the Effective
Date, Tenant shall pay Landlord as Additional Rent an amount equal to Two
Hundred Eight Dollars for each day after the Effective Date that Tenant occupies
the former premises on the second floor through December 31, 1996 and Four
Hundred Fifteen Dollars for each day after January 1, 1997 that Tenant occupies
the former premises on the second floor.
(b) Is hereby deleted.
(c) Landlord estimates, but does not warrant, that the Premises will
be provided on or about November 5, 1996.
(d) Is hereby deleted.
(e) When the Effective Date is established, Landlord and Tenant shall
promptly execute and acknowledge a memorandum of the Effective Date and the date
of expiration of the Term.
(f) Shall remain as currently defined.
4. Fixed Rent; Tenant Energy Costs; Annual Operating Costs; Lease Taxes.
--------------------------------------------------------------------
(a) Tenant shall pay to the Landlord as rent under this Lease the
aggregate of: (i) Fixed Rent (as defined in Article 4 (b) of this Lease;) (ii)
Tenant's share of Tenant Energy Costs (as defined in Article 4 (d) of this
Lease); (iii) Tenant's proportionate share of increases in Annual Operating
Costs (as defined in Articles 4 (c) and 4 (e) of this Lease) over Base Operating
Costs (as defined in Article 4 (e) (i) (C) of this Lease); and (iv) all other
sums payable by Tenant to Landlord pursuant to the provisions of this Lease.
(b) Fixed Rent.
----------
(i) The minimum fixed annual rent shall be the sum of Two
Hundred Forty Three Thousand Nine Hundred Dollars and Eighty Four Cents
($243,900.84) lawful money of the United States of America, subject to increase
as set forth in Article 4 (b) (ii) of this Lease, payable in equal monthly
installments in advance and without demand, notice, set-off or deduction in the
sum of Twenty Thousand Three Hundred Twenty Five Dollars and Seven Cents
($20,325.07) on the first day of each and every month during the Term (the
"Fixed Rent"). Notwithstanding anything to the contrary above, Tenant shall not
pay rent for the first month of the Term.
(ii) - (iv) Shall remain as currently defined.
(c) Tenant's Proportionate Share. As used in this Lease, "the square
----------------------------
foot area of the Premises" shall be deemed to be Eleven Thousand Seven Hundred
Twenty Six (11,726) square feet, "the total square foot area of the Building"
shall be deemed to be sixty-three
-2-
<PAGE>
thousand eighty-one (63,081) square feet and "Tenant's proportionate share"
shall refer to the percentage relationship between the foregoing, namely 18.59%.
(d) Shall remain as currently defined.
(e) Annual Operating Costs.
----------------------
(i) (A) - (B) shall remain as currently defined.
(C) The term "Base Operating Costs" shall mean the sum
of the actual 1997 Annual Operating Costs.
(ii) Shall remain as currently defined.
(iii) Shall remain as currently defined.
The remaining terms of this section of the Lease shall remain as currently
defined.
8. Improvement of the Premises.
---------------------------
Sections (a) through (f) shall remain as currently defined in the
Lease.
(g) Standard Tenant Work; Special Tenant Work.
-----------------------------------------
Landlord agrees to provide the Premises in its "as-is" condition. All
work to be performed by Landlord shall be "Special Tenant Work". All Special
Tenant Work shall be furnished, installed and performed by Landlord, utilizing a
general contractor or construction manager ("Landlord's Contractor") selected by
Landlord (which may be an affiliate of Landlord or a partner in Landlord or an
affiliate of a partner in Landlord) for and on behalf of Tenant at Tenant's sole
expense, based on "Landlord's Cost". "Landlord's Cost" shall be deemed to mean
Landlord's out-of-pocket contract or purchase price for materials, labor and
services (including, without limit, any reasonable contractor's fee for the
contractor's overhead and profit and charges for cutting, patching, cleaning up
and removal of waste and debris), plus architects; and engineers' fees, plus the
product obtained by multiplying (i) the sum of all of the foregoing less FIfty
Eight Thousand SIx Hundred Thirty Dollars ($58,630.00) by (ii) ten percent (10%)
added for Landlord's expenses and profit. Notwithstanding anything to the
contrary above, Landlord shall provide an allowance equal to Fifty Eight
Thousand Six Hundred Thirty Dollars ($58,630.00) to be used toward construction
of the Premises. Any unused portion of the foregoing allowance may be credited
against Fixed Rent.
31. Name of Building; Titles; Construction; Exhibits; Brokers. The
---------------------------------------------------------
BUilding may be designated and known by any name Landlord may choose and such
name may be changed from time to time at Landlord's sole discretion. The Titles
appearing in connection with various sections of this Agreements are for
convenience only. They are not intended to indicate all of the
-3-
<PAGE>
subject matter in the text and they are not to be used in interpreting this
LEase nor for any other purpose in the event of any controversy. As used herein
(i) the term "person" shall be deemed to mean a natural person, a trustee, a
corporation, a partnership and any other form of legal entity; (ii) all
references in the singular or plural number shall be deemed to have been made,
respectively, in the plural or singular number as well. Each and every document
or other writing which is referred to herein as being attached hereto or is
otherwise designated herein as an exhibit hereto is hereby made a part hereof.
This Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania. Tenant represents and warrants that it did not deal with any
broker, finder or other intermediary to whom a fee or commission is or will
become payable in connection with this Lease except Geis Realty Group, Inc. and
Mahoney Realty Group.
32. Security Deposit.
----------------
(a) Tenant, concurrently with the execution of this Lease, shall be
obligated to deposit with Landlord the sum of Fifteen Thousand Seven Hundred
Eighty Seven Dollars and Forty Nine Cents ($15,787.49) which will be added to
the Four Thousand Five Hundred Thirty Seven Dollars and Fifty Eight Cents
concurrently held by Landlord as security deposit, bringing the total security
deposit held by landlord to Twenty Thousand Three Hundred Twenty Five Dollars
and Seven Cents ($20,325.07), which sum shall be retained by Landlord without
interest and not in trust or in a separate account as security for the payment
by Tenant of the rent herein agreed to be paid and for the faithful performance
of the covenants contained in this Lease. If at any time Tenant shall be in
default under any of the provisions of this Lease, Landlord shall be entitled,
at its sole discretion to apply such security deposit (i) to payment of (A) any
rent for the payment of which Tenant shall be in default as aforesaid, (B) any
expense incurred by Landlord in curing any such default, and/or (C) any other
sums due to landlord in connection with such default or the curing thereof,
including, without limitation, any damages incurred by Landlord by reason of
such default; or (ii) to retain the same in liquidation of all or part of the
damages suffered by Landlord by reason of such default. Any portion of such
deposit which shall not be utilized for any such purpose shall be returned to
Tenant following expiration of this Lease and surrender of the entire Premises
to Landlord.
(b) - (c) Shall remain as currently defined.
Article 37. is hereby deleted and replaced with the following:
37. Option to Extend. Tenant shall have the right to be exercised as
----------------
hereinafter provided, to renew this Lease for one (1) additional term (the
"Extension Term") of five (5) years, commencing on the day following the then
expiration date, upon the following terms and conditions:
a. Tenant's right to renew is subject to the requirement that at the
same time of the exercise of the option and at the time of the commencement of
the Extension Term, Tenant
-4-
<PAGE>
shall not then be in default under any of the terms and conditions of this Lease
beyond the expiration of any applicable notice and/or cure periods.
b. The renewal shall be upon the same terms and conditions as are in
effect immediately prior to the expiration of the current Term, except that:
(i) during the Extended Term, effective as of the commencement
thereof, the Base Year for Operating Expenses shall be changed to the calendar
year in which the Extended Term commences ("New Base Year for Operating
Expenses");
(ii) the Base Rent during each Extended Term, effective as of
the commencement thereof, shall be as follows: an amount equal to the
"Prevailing Market Rental Rate" (as hereinafter defined) for leases for
comparable space in the Glenhardie Corporate Center, as of the date which is six
(6) months prior to the commencement of such Extended Term plus the amount of
the New Base Year for Operating Expenses.
(iii) Landlord shall provide the Premises in "as-is" condition.
c. There shall be no further privilege of renewal beyond the
Extension Term expressly set forth above.
d. Tenant may exercise its renewal option only by giving written
notice to Landlord, at least nine (9) months prior to the expiration of the then
current term, of the exercise of its renewal right (the "Notice"), which shall
then be binding on both Landlord and Tenant.
e. "Prevailing Market Rental Rate" shall mean the annual rental rate
per rentable square foot less Operating Costs included in such rental rate then
being paid under leases, including both original lease transactions and those
resulting from renewals, in the Glenhardie Corporate Center in space comparable
to the Premises.
The Prevailing Market Rental Rate shall be determined as follows:
(i) On or before the day which is thirty (30) days following
Landlord's receipt of the Notice, Landlord shall notify Tenant in writing of
Landlord's determination as to the Prevailing Market Rental Rate and the Base
Rent which Landlord proposes to charge during such Extension Term. If Tenant
either (A) notifies Landlord in writing within thirty (30) days after the date
of Landlord's notice that Tenant agrees to the Base Rent proposed by Landlord or
(B) fails to object in writing to such proposed Base Rent within such thirty
(30) day period, then the Base Rent proposed by Landlord shall be final and
conclusive. If Tenant shall object in writing to the proposed Base Rent, then
Landlord and Tenant shall endeavor to reach agreement on fair rental value
within the thirty (30) day period succeeding Tenant's notice of objection.
If Landlord shall fail to provide such written notice of the Prevailing
Market Rent, then Tenant shall not be released from it's commitment to extend
the Term of the Lease, but shall
-5-
<PAGE>
request in writing from Landlord the Prevailing Market Rate, which Landlord
shall provide within thirty (30) days from the receipt of Tenant's request.
(ii) If pursuant to subparagraph (i), Tenant and Landlord cannot
agree on the Prevailing Market Rental Rate shall be determined in accordance
with subparagraph (iii) below.
(iii) If pursuant to subparagraph (i) the parties cannot reach
agreement within the such thirty (30) day period, then "Prevailing Market Rental
Rate" shall be determined by arbitration as follows:
Arbitration held under this Lease shall be before one disinterested arbitrator
selected by the parties, provided, however, that if the parties cannot agree
upon the selection of an arbitrator within 10 business days following notice by
a party requesting arbitration, then the dispute shall be submitted to three
arbitrators designated in accordance with the rules of the American Arbitration
Association then in effect in Montgomery County, Pennsylvania. The arbitration
shall be conducted in accordance with the rules of the American Arbitration
Association, except the Federal Rules of Evidence and Procedure, including but
not limited to, discovery rights, shall prevail.
c. The Prevailing Market Rental Rate shall be determined by the
arbitrators. Any costs of arbitration shall be paid equally by the parties
within 30 days after issuance of the arbitrators' decision.
d. Neither Landlord nor Tenant shall have the right to appeal the
decision of the arbitrators.
All capitalized terms in this Amendment will have the meaning set forth in the
Lease, except as specifically amended hereby.
All other lease terms and conditions shall remain in full force and effect,
unmodified.
IN WITNESS WHEREOF, Landlord and Tenant have executed this instrument by
proper person thereunto duly authorized so to do on the day and year first
written above.
-6-
<PAGE>
Landlord:
--------
Dean Witter Realty Income Partnership II, L.P.,
A Delaware limited partnership
By: Dean Witter Realty Income Properties II, Inc., a
Delaware corporation
its Managing General Partner,
By: /s/ E. Davisson Hardman, Jr.
------------------------------------
E. Davisson Hardman, Jr.
President
Witness: /s/ Robert B. Austin
-------------------------------
Robert B. Austin
Vice President
Tenant:
------
By: Covalent Research Alliance Corp.,
a Pennsylvania Corporation
By: /s/ Bruce LaMont
------------------------------------
President
Bruce LaMont
Attest: /s/ David Weitz
--------------------------------
-7-
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Covalent Research Alliance Corp., a Pennsylvania Corporation, is the only
subsidiary of the Registrant.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB, into the Company's previously filed Form
S-8 Registration Statement File No. 33-95602.
Arthur Andersen LLP
Philadelphia, Pa.,
March 30, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB, into the Company's previously filed Form
S-8 Registration Statement File No. 33-95602.
Baratz & Associates, P.A.
Marlton, NJ
March 30, 1998
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