UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[ X ] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
[No Fee Required] for the fiscal year ended DECEMBER 31, 1997
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _________ to __________
Commission File No. 0-19892
IBAH, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1670189
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
FOUR VALLEY SQUARE, 512 TOWNSHIP LINE ROAD, BLUE BELL, PENNSYLVANIA 19422
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 283-0770
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on March 9, 1998 was approximately $65,000,000 For purposes of
making this declaration only, the Registrant has defined affiliates as including
all directors.
The number of outstanding shares of the Registrant's Common Stock, par
value $.01 per share, on March 9, 1998 was 23,537,149.
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PART 1
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ITEM 1. BUSINESS.
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IBAH, Inc. - Company Overview
- -----------------------------
IBAH, Inc. ("IBAH" or the "Company") is a worldwide leader in providing
comprehensive product development services to client companies in the
pharmaceutical, biotechnology, medical device, and diagnostics industries. IBAH
is a contract research organization ("CRO") which offers services for all stages
of drug development.
As of March 30, 1998, IBAH entered into a definitive Agreement and Plan of
Merger (the "Merger Agreement") with Omnicare, Inc. ("Omnicare") under which
Omnicare will acquire IBAH in a stock-for-stock merger (the "Merger"). In the
Merger, each outstanding IBAH common share will be converted into $5.75 market
value of Omnicare common shares, subject to the terms of the Merger Agreement
including, among other things, obtaining the approval of the IBAH stockholders
and certain regulatory authorities. Omnicare expects to issue approximately
$169 million in Omnicare stock. The Merger is expected to be consummated in the
third quarter of 1998.
The Company provides its services through two primary operating divisions, the
U.S. and International Clinical Services Divisions (together defined as the
"Clinical Services Division") and IBAH Pharmaceutics Services (the
"Pharmaceutics Services Division"). As of December 31, 1997, the Company had a
worldwide staff of 908 full-time equivalents. On May 5, 1997, the Company
expanded its operations in Australia by acquiring Pharmaco Pty., Ltd. ("PPL"),
one of the leading CROs in Australia. The Company's existing office in
Australia has been integrated with the PPL offices.
The Company generates its revenues by providing services on a contractual
basis to its clients. All of the Company's services are designed to help client
companies accelerate products from discovery through development and
commercialization faster and more cost-effectively.
The Clinical Services Division, the core of IBAH, is a full-service
------------------------------
international CRO that began operations in 1985. This division's primary
services are the design of product development programs, design and conduct of
clinical trials, clinical data management and biostatistical analysis, writing
reports of study findings, quality assurance consulting, health economics
analysis and post-marketing studies, and regulatory dossier filings.
This division earns its revenues by providing services on a contractual basis
to its clients. The division's worldwide staff is located in offices in the
U.S., Australia, Belgium, Denmark, Eastern Europe (hubbed in the Czech
Republic), Finland, France, Germany, the Netherlands, Spain, Sweden, Switzerland
and the United Kingdom. Through a joint venture with a Russian company, this
division also operates an office located in Russia.
Since its inception, the Company, through this division, has prepared 48 New
Drug Applications ("NDAs"), including one of the largest ever filed.
The Pharmaceutics Services Division provides traditional product formulation
-----------------------------------
services, manufacturing process development, manufacture of drugs and placebos
for clinical trials, pilot plant manufacturing, analytical methods development,
analytical testing, and clinical trials drug packaging and distribution. The
division's services also include shelf life stability testing, process
validation, and analysis of other chemical and physical properties required in
regulatory submissions.
This division began in October 1993 and currently operates, in part, from a
20,000 square foot Good Manufacturing Practice ("cGMP") manufacturing facility
with full pilot plant capabilities. To accommodate rapid growth, the division
is also in the process of phasing into a lease for a 124,000 square foot
facility in the same area as its cGMP facility. Phase I of the build-out, for
40,000 square feet dedicated to packaging, stability testing, warehouse and
administration space was completed in July 1997. Phase II for 40,000 square
feet of analytical space is planned to be completed in 1998. The remaining
44,000 square feet is expected to be placed in service in 1999.
3
Company History
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IBAH was originally Affinity Biotech, Inc., a New Jersey corporation (the "New
Jersey Corporation"), which was incorporated in January 1990. In April 1992,
the New Jersey Corporation was merged into Affinity Biotech, Inc., a Delaware
corporation ("Affinity"), which was incorporated in February 1992. In April
1992, Affinity completed its initial public offering of common stock.
On April 27, 1994, Bio-Pharm Clinical Services, Inc. ("Bio-Pharm"), a CRO, and
Affinity, a drug delivery and technology corporation, merged (the "Affinity
Merger") and simultaneous with the Affinity Merger, Affinity changed its name to
IBAH. Since the Merger resulted in the former Bio-Pharm shareholders having a
majority ownership of IBAH, the Affinity Merger was accounted for as an
acquisition of Affinity by Bio-Pharm.
Bio-Pharm was founded in December, 1985 by Geraldine A. Henwood, President of
Bio-Pharm from 1985 through April 1994, and President and Chief Executive
Officer of IBAH since April 1994.
In 1991, Bio-Pharm opened its first European operation based in Frankfurt,
Germany. Subsequently, an office was opened in Australia in 1993. In January
1994, Bio-Pharm purchased European Pharmaceutical Investigation Consultants
Limited ("EPIC"), a CRO headquartered in the United Kingdom with an office in
Switzerland. The EPIC acquisition was a major expansion step allowing the
Company to serve the United Kingdom and strengthen its position throughout
Europe. Since the EPIC acquisition, the Company has opened foreign offices in
Australia, France, Netherlands, Belgium, Finland, Spain, Denmark, Sweden and the
Czech Republic. Through a joint venture with a Russian company, IBAH also
operates an office located in Russia.
On July 28, 1995, the Company sold its Drug Delivery Services Division, the
part of Affinity which offered proprietary drug delivery services, to a
management group from that division.
On August 11, 1995, IBAH completed a private placement of convertible
preferred stock and warrants for a total investment in the Company of $7
million.
On April 19, 1996, the Company completed a public offering of 3,000,000 shares
of common stock of the Company to selected institutional investors, netting the
Company $18 million.
On July 18, 1996, IBAH acquired Resource Biometrics, Inc. ("RBI") based in the
San Francisco, California area. RBI was a provider of software products and
data services to the pharmaceutical, biotechnology, and medical device
industries. In June 1997, the Company closed the software commercialization
unit of RBI to focus its efforts on the contract services portion of its
business.
On October 1, 1996, IBAH acquired The Hardardt Group ("THG"), located in
northern New Jersey. THG provided clinical trials management and clinical
monitoring services to the pharmaceutical and biotechnology industries,
predominantly in the United States. The THG operation has been completely
integrated into the U.S. Clinical Services Division. This acquisition added
critical mass to the Company, enhancing its ability to obtain and perform large
clinical trials.
On May 5, 1997, the Company acquired Pharmaco Pty., Ltd. ("PPL"), an
Australian CRO based in Sydney. PPL provided clinical trial, regulatory, data
management and health economics services in Australia and New Zealand. At the
time of the acquisition, PPL was integrated into the Company's existing
Australian operations.
As of March 30, 1998, IBAH entered into the Merger Agreement with Omnicare
under which Omnicare will acquire IBAH in the Merger. In the Merger, each
outstanding IBAH common share will be converted into $5.75 market value of
Omnicare common shares, subject to the terms of the Merger Agreement including,
among other things, obtaining the approval of the IBAH stockholders and certain
regulatory authorities. Omnicare expects to issue approximately $169 million in
Omnicare stock. The Merger is expected to be consummated in the third quarter
of 1998.
Industry Background and Trends
- ------------------------------
New pharmaceutical, biotechnology, medical device and diagnostic products
generally must undergo extensive testing to demonstrate their safety and
effectiveness in order to obtain regulatory approval for commercialization.
Companies seeking such approval are responsible for performing and analyzing the
results of multi-phase clinical trials that typically span two to five years and
involve hundreds to thousands of human
4
participants. Historically, clinical trials were performed almost exclusively by
in-house personnel of the companies that owned the products under development.
For over a decade, there has been a growing trend for companies developing new
products to outsource certain activities by contracting with CROs for the
performance of clinical trials and related activities in the development and
approval process.
IBAH believes, based on its experience and reports from industry analysts,
that the following industry trends have increased and will continue to increase
the market for CRO services:
- - Pharmaceutical and biotechnology research and development expenditures
continue to increase. From 1996 to 1997, research and development spending for
major pharmaceutical companies and the outsourcing of this spending continued to
increase. Worldwide research and development expenditures were estimated at
approximately $38 billion for 1997. Increased emphasis on the development of
effective treatments for chronic disorders and life threatening, acute
conditions, such as stroke and infectious diseases, is contributing to this
trend. Requirements from regulatory agencies to conduct longer, more complex
trials to demonstrate effectiveness and potential long-term effects are also
factors in this spending growth.
- - Cost containment pressures continue to escalate as a result of various
influences, including efforts by governments and managed care organizations to
control prices, increased competition from generic drugs, and more stringent
regulatory requirements. As pharmaceutical companies continue experiencing
pressure on profit margins and attempt to hasten new product introductions
worldwide, they are increasingly outsourcing to take advantage of CROs'
expertise, speed, and global reach.
- - Maturation of the biotechnology industry has substantially increased the
number of biotechnology drugs in clinical development. Rather than build the
infrastructure necessary to handle the clinical development stages, many
biotechnology companies are choosing to outsource all or part of their
development work to CROs.
- - Emphasis on globalization has led pharmaceutical and biotechnology companies
to pursue product development simultaneously in multiple countries and conduct
programs which simultaneously satisfy the requirements of multiple regulatory
agencies. In addition, since 1992, guidelines for the conduct of clinical
research within Europe require more stringent standards. The emphasis on
globalization combined with escalating complexity of clinical trials has
increased manpower and resource requirements for these trials, which in turn has
resulted in an increase in the use of CRO services.
The Drug Development Process
- ----------------------------
Before a drug may be marketed, it must undergo extensive testing and
regulatory review to determine its safety and effectiveness. The following is a
brief description of the stages of U.S. and worldwide drug development. As a
full-service CRO, IBAH offers comprehensive services in every phase of this
process:
Regulatory Affairs - Full-service CROs, such as IBAH, offer regulatory affairs
------------------
services which assist clients with the design of regulatory strategy and span
the development process from formulation development to preclinical and clinical
trials through regulatory filings, e.g., NDAs, Biological License Applications
("BLA"), and EU-multistate ("CPMP") or National filings. CROs also assist in
the actual preparation of filing and communications with the regulatory
agencies. These services are critical to every phase of the development process
and to a timely, successful completion of any product development project.
Preclinical Testing - The initial stage in the drug development process is
--------------------
preclinical research. In this stage, the drug is tested in vitro (test tube)
and in animals, generally over one to three years. Safety studies, including
toxicology, are a major portion of this phase along with metabolism, kinetics,
and clinical pathology.
Phase I - Phase I trials are conducted in healthy volunteers, typically 24-36
--------
per study, to develop basic safety data relating to toxicity, metabolism,
absorption and other pharmacological actions. In order to establish
5
safe dosage ranges, single and multiple dose tolerance tests are conducted.
Phase I generally lasts from six months to one year.
Phase II - Phase II trials are conducted on small numbers of subjects,
--------
typically 100 to 200 patients, who suffer from the drug's targeted disease or
condition. Phase II trials last an average of six months to two years and
provide the first evidence of clinical efficacy (effectiveness) at different
doses, as well as additional safety data. These trials may include dose ranging
studies to establish optimal dosages wherein the drugs are usually tested
against a placebo or a currently marketed drug.
Phase III - Phase III trials are conducted on a significantly larger patient
---------
population, from hundreds to thousands of patients, who suffer from the targeted
disease. Conducted at numerous investigational sites including hospitals and
clinics, these trials are designed to establish safety and efficacy for the
optimal dosing regimen of the drug under study, as well as the reproducibility
of results across many study sites. During Phase III, which generally lasts
from one to three years, the new drug is compared with a placebo or with one or
more drugs with established safety and efficacy profiles in the same therapeutic
category.
Phase IV - As a condition of granting marketing approval, the Food and Drug
--------
Administration ("FDA") or other global regulatory agencies may require a client
to conduct additional clinical trials or post-approval trials of the product,
monitor long-term risks and benefits, study different dosage levels, or evaluate
different safety and efficacy parameters in target patient populations. Clients
also pursue Phase IV trials to enhance product profiles with new claims to gain
comparative marketing information or for health economics and outcomes research.
These trials generally last one to four years.
Regulatory Application - The regulatory filing which is submitted to a
----------------------
regulatory agency, such as the FDA, is a comprehensive filing that averages over
100,000 pages. It includes manufacturing and animal testing data as well as
clinical trial data.
Regulatory Reviews - FDA reviews of filings in the U.S. can last from several
------------------
months to several years, while European regulatory review generally lasts 10-18
months in most countries. Regulatory approval is required prior to
commercialization of a drug. The FDA has been under increasing scrutiny and
pressure to shorten its approval process and has accelerated this process by
granting expedited approval of lifesaving drugs or drugs for conditions where
there is no current treatment.
Pharmaceutics Services - In parallel with the phases described above, the
----------------------
product dose form development process involves formulation development,
including placebo and active drug, clinical manufacturing and process
development for commercial manufacturing, the development of analytical
methodology, execution of a high number of analytical tests, as well as
stability testing. These services are also being outsourced more extensively as
companies increase their efforts to cut costs and time from the development
process.
IBAH's Services
- ---------------
IBAH's services cover all phases of the drug development process. Available
services include formulation development, analytical methodology and stability
testing, preclinical through clinical trials, data management and biostatistical
services, quality assurance consulting, pharmacoeconomic studies, and regulatory
filings.
Preclinical Services
IBAH offers a full range of preclinical testing services through an alliance
with the Laboratory of Pharmacology and Toxicology ("LPT"), a well-established,
experienced, preclinical organization headquartered in Hamburg, Germany. These
services include toxicology, carcinogenicity, mutagenicity, reproduction, and
pathology studies.
6
Clinical Program Management
IBAH provides a broad range of services related to the design and management
of clinical programs. These activities include program design strategy to meet
regulatory requirements and commercial objectives. Specifically, IBAH is focused
from the outset on speed to market at an efficient cost. Before beginning
clinical trials, IBAH assists clients in developing specific attributes or
design of the program to ensure that key product profile objectives are
incorporated into the program's design.
Once a clinical program has been designed, implementation of clinical studies
includes establishing study sites and monitoring the conduct of the studies.
IBAH recruits qualified investigators to carry out the trials in compliance with
applicable regulations and protocols designed for the specific trial. Clinical
monitoring includes regular visits to clinical trial sites by IBAH's clinical
research associates. The monitoring process focuses heavily on quality control
to assure the accuracy and reliability of the data collected and compliance with
all applicable requirements.
The Clinical Services Division's international project management team offers
experience in over 35 therapeutic areas and utilizes a Worldwide Operations
Database to track study progress.
Data Management, Analysis and Reporting
Critical to the success of any clinical trial is the assembly, analysis and
reporting of data collected. IBAH's cross-disciplinary teams -- skilled in data
management, biostatistics, computer programming, clinical writing, and
regulatory affairs -- utilize current data processing equipment and commercial
and proprietary software that enable the Company to process, analyze and present
vast amounts of data. The field data collected at the study sites is assembled
into a database and verified for accuracy of input. The information collected
is then analyzed and its statistical significance ascertained.
Considerable effort is directed toward the goal of having error-free data in
regulatory filings. This effort increases reliability of results and minimizes
delays in the approval process.
IBAH's expertise is applied to create formats, graphics and presentations to
meet regulatory requirements and other client needs. Experienced writers work
with other members of IBAH's staff to prepare comprehensive interpretive reports
on the test results. Proprietary software programs are designed for the
client's use so that the database can be supplemented, reorganized and accessed
by the client for its own purposes or as requested by the reviewing regulatory
agency. The Company also offers a Windows-based Remote Data Entry system which
provides flexibility, security and efficiency in managing data generated in
clinical studies.
Preparation of NDAs and comparable foreign regulatory filings is a major
undertaking involving complex analyses and presentation of voluminous amounts of
data. The time required for review by the FDA or comparable agencies in other
countries often depends on the manner in which the data is analyzed, organized,
and presented in the application. A well prepared filing increases the
likelihood for achieving a faster review.
IBAH has the experience and the resources to assist clients in preparing
regulatory filings and in responding to inquiries by the reviewing agency. The
regulatory review process normally involves frequent communication between the
applicant and the reviewing staff which IBAH can facilitate. IBAH believes that
its assistance in the preparation of filings and the completion of the approval
process has resulted on occasion in a significant reduction in the time that
would have been required for the clients to prepare the filing and complete the
review process using only internal staff and facilities.
Regulatory Affairs
Since Bio-Pharm's inception in 1985, the Company has assisted in the
preparation of 48 NDAs, including one of the largest ever filed.
7
IBAH provides regulatory consulting services to clients at all stages of the
product development process, often beginning before the client has made the
initial filing for permission to begin human testing. Consulting engagements
focus on such topics as the development plan, protocol design and overall
strategy to meet regulatory requirements. In consulting engagements, as in many
other types of services, IBAH's personnel work closely with the client's staff
to complement the client's expertise and capabilities.
Increasingly, clients desire approvals in multiple countries. In such cases,
IBAH provides global regulatory affairs advice concerning the requirements in
each jurisdiction where an application will be made.
IBAH also consults with clients about manufacturing issues related to
regulatory approvals. The principal focus of such consultation is usually
compliance with regulatory requirements, including cGMP, product testing and
accountability.
Clients may enter into multiple contracts at different stages in the
development process. Sometimes IBAH's initial contract in connection with a new
product covers only consulting services. However, successful consulting
projects may lead to contracts for substantial additional services at later
stages of the development process.
Pharmaceutics Services
A fully equipped cGMP facility, specifically designed to carry out clinical
supplies manufacturing and formulation services, along with an experienced
clinical supply team, allows for efficient production of high quality supplies.
The Company also provides a full range of formulations services. These
services include formulation development, analytical methods development,
validation and testing, and stability storage and testing.
Complex logistics are required to package, distribute and account for the
large quantities of study drug supplies used in a clinical trial, especially for
double-blind studies. For example, IBAH often receives bulk quantities of a
study drug and is engaged to render pharmaceutical handling services, or to
label, package and distribute a study drug in individual patient packs,
sometimes in refrigerated form. In addition, the Company also has the
capability to encapsulate solid dosage forms for blinded clinical trials and
prepare matching placebos.
Independent Quality Assurance
IBAH has an extensive worldwide staff of experienced quality assurance
professionals. These professionals offer a full range of quality assurance
consulting at all stages of drug development. The services include auditing for
compliance with cGMP, Good Clinical Practices ("GCP") and Good Laboratory
Practices ("GLP") standards. The Company also assists clients with pre-
regulatory inspections, process assessments with a focus on compliance and
efficiency, development of Standard Operating Procedures ("SOPs") and compliance
education.
Clients and Marketing
- ---------------------
IBAH serves a broad range of clients, including most of the major
multinational pharmaceutical and many of the major biotechnology companies as
well as smaller companies in the pharmaceutical and biotechnology industries.
Medical devices and diagnostics increasingly are becoming subject to FDA
approval, and manufacturers of such products have been, and currently are, a
part of IBAH's clientele. IBAH strives to develop close ties with its clients
and has experienced a high degree of repeat business after a relationship is
established.
Over the last three years, two of IBAH's clients accounted for 10% or more of
its revenues in any given year. In 1997, no individual client accounted for
more than 10% of net service revenues. In 1996, one client accounted for 20.4%;
and in 1995, two clients accounted for 14.9% and 10.2% respectively. These two
clients are
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multinational pharmaceutical companies with annual revenues in the billions of
dollars. For further detail, see Notes 2 and 19 of the Notes to Consolidated
Financial Statements.
Historically, IBAH attracted new clients due to its reputation for speed and
quality, recommendations from established clients and the personal efforts of
its executives. These sources of attracting business remain. IBAH also relies
on and utilizes business development professionals in the Company's worldwide
locations to obtain new business.
Marketing efforts also include advertising through direct mail, professional
journals and trade publications; exhibiting at industry meetings; distributing
newsletters to industry professionals; and speaking engagements and publications
by key employees.
Contractual Arrangements
- ------------------------
Substantially all of the Company's revenues are earned by performing services
under contracts from various pharmaceutical, biotechnology, medical device and
diagnostics companies. Compensation for services is arranged on a combination of
fixed and variable costs. When the costs are variable, the unit price for a
particular task is fixed but the volume of such tasks is not. Typically,
projects have a budget that assumes a number of units for each task, but the
client retains the right to alter the scope of the project as it develops.
Generally, client contracts can be cancelled at any time for a variety of
reasons.
Substantially all revenues are earned by performing services under contracts
from various pharmaceutical, biotechnology, medical device and diagnostics
companies, based on contract terms. Most of the Company's contracts provide for
services to be performed on a units of service basis. These contracts
specifically identify the units of service and unit pricing. Under these
contracts, revenue is generally recognized upon the completion of units of
service, unless the unit of service is performed over an extended period of
time. For extended units of service, revenue is recognized based on labor hours
expended as a percentage of total labor hours expected to be expended. From time
to time, the Company is also a party to time-and-materials and fixed-price
contracts. For time-and-materials contracts, revenue is recognized at
contractual hourly rates and for fixed-price contracts revenue is recognized
using a method similar to that used for extended units of service. The Company's
contracts provide for price renegotiations upon scope of work changes. The
Company recognizes revenue related to these scope changes when the underlying
services are performed and realization is assured. In the event of contract
termination, contracts require payment for services rendered through the date of
termination. In a number of cases, clients are required to make termination
payments in addition to payments for services already rendered. Any anticipated
losses resulting from contract performance are charged to earnings in the period
identified. Billings and payments are specified in each contract. Revenue
recognized in excess of billings is classified as unbilled receivables, while
billings in excess of revenue are classified as deferred revenue.
Competition
- -----------
IBAH competes against other full-service CROs. The CRO industry is highly
fragmented, with a number of full-service CROs and many small, limited-service
providers, some of which serve only local markets. IBAH believes that it has
among the largest CRO staffs in the European market. International business
accounted for approximately 28% of the Company's 1997 CRO net revenue.
Clients choose a CRO based on several factors. These factors include
reputation, references from existing clients, the client's relationship with the
CRO, the CRO's experience with the particular type of project and/or therapeutic
area of clinical development, the CRO's ability to add value to the client's
development plan, the CRO's financial stability and the CRO's ability to provide
the full range of services required by the client. IBAH believes that it
competes favorably in these respects. While the fee structure is an important
consideration in the selection of a CRO, IBAH believes more important factors in
its business growth have been its experience, reputation and capability to
render a broad range of services worldwide in a timely and professional manner.
The Company believes it is price-competitive with the largest, full-service
CROs.
For many potential contracts, the client's threshold question is whether to
perform specific tasks internally or outsource them to a CRO. Various economic,
philosophic, cultural and organizational factors affect the decision to use a
CRO. IBAH believes that the trend toward greater outsourcing to CROs will
continue worldwide.
Foreign Currency
- ----------------
The Company contracts with clients in various foreign currencies and typically
conducts its actual work with clients in multiple countries for each major
contract. Such activities can give rise to potential gains or losses on
specific transactions between countries where the work is conducted, which to
date have not been material. As
9
the Company continues to grow internationally there will be a currency risk,
either favorable or unfavorable, when translating foreign results into U.S.
dollars. However, since the Company's service contracts are based in local
currency, typically in the country where the client contracts the work, there is
additional currency exposure either favorably or unfavorable within the
International Clinical Services Division in the form of transaction gains or
losses between currencies. For these types of transactions, the Company may
consider foreign currency hedging as a mechanism to protect exposures in a given
currency as they relate to foreign or U.S. dollar currency.
Potential Liability and Insurance
- ---------------------------------
To manage its potential liability, IBAH purchases insurance and seeks
indemnity provisions in its contracts with clients and, in some cases, with
investigators with whom it contracts on behalf of clients. The contractual
indemnities generally do not protect IBAH against certain of its own actions
such as those involving its negligence or misconduct. These indemnities are
subject to negotiation with individual clients and investigators, and their
terms and scope vary. While most of the Company's clients are large, well-
capitalized companies, the financial performance of these indemnities generally
is not secured. Therefore, IBAH bears the risk that an indemnifying party may
not have the financial ability to fulfill its obligations. In some
circumstances, IBAH indemnifies and holds harmless clients and investigators
against liabilities incurred by them due to IBAH's actions or inactions. The
Company currently maintains professional liability insurance which covers all
areas worldwide where IBAH does business. IBAH could be materially and
adversely affected if it were required to pay damages or incur defense costs in
connection with an indemnity claim against it or in connection with a claim that
is outside the scope of an indemnity in IBAH's favor, or beyond the level of
insurance coverage, or where an applicable indemnity in its favor is not
performed in accordance with its terms.
Each investigator retained by IBAH on behalf of a client must agree to
exercise independent medical judgment to serve the patient's interests and
medical needs, consistent with the patient's informed consent to participate in
the study. In some instances, this undertaking may obligate the investigator to
remove a patient from the study. IBAH does not assume the responsibility to make
medical determinations on patient management.
IBAH believes that the risk of liability from patients in clinical trials is
mitigated by various regulatory requirements, including the role of Ethics
Committees and Institutional Review Boards ("IRBs"), independent committees that
include both medical and non-medical personnel and the need to obtain each
patient's informed consent. The FDA, for example, requires clinical trials to
be reviewed and approved by an IRB. An IRB and an Ethics Committee are
obligated, among other duties, to protect the interests of patients enrolled in
a trial.
Employees
- ---------
As of December 31, 1997, IBAH had 908 full-time equivalents, most of whom were
employed on a full-time basis. IBAH's staff includes many experts with advanced
training in a wide variety of disciplines, including approximately 31 medical
doctors and 19 people holding Ph.D. degrees in the life sciences, biostatistics,
or other related fields. IBAH conducts its own training program for its
clinical research associates. The training includes both in-house activities
and supervised field training. Most of the executives and senior managers had
significant experience with pharmaceutical or biotechnology companies before
joining IBAH.
Forward-Looking Information
- ---------------------------
Any statements made herein that relate to future plans, events or
performance, are "forward-looking statements." All such statements involve
risks and uncertainties that could cause actual results to differ materially
from those anticipated. Factors that might cause such a difference include, but
are not limited to, those relating to conducting operations in a competitive
environment; loss or delay of large contracts for regulatory or other reasons;
acquisition activities (including uncertainties associated with, among other
things, projecting the synergies to be gained by the 1996 and 1997
acquisitions); competition or consolidation within the pharmaceutical industry;
10
ability to increase sales or revenue growth at or above market rates;
fluctuations in foreign currency; the degree of success in attracting and
obtaining new business; and the continued improvement of the performance of the
International Clinical Services Division.
ITEM 2. PROPERTIES.
- ------ ----------
IBAH's principal offices and facilities, which occupy approximately 92,000
square feet of space in Blue Bell, Pennsylvania, are leased for a term expiring
in 2000. The Clinical Services Division also has leases covering approximately
27,000 square feet of space near Frankfurt, Germany, approximately 24,000 square
feet (a small portion of which is subject to a long-term lease) in Chippenham,
England, and smaller offices in or near Basel, Switzerland; Paris, France;
Espoo, Finland; Maastricht, the Netherlands; Brussels, Belgium; Sydney,
Australia; Prague, the Czech Republic; Barcelona, Spain; Copenhagen, Denmark;
Durham, North Carolina; San Francisco, California; Chicago, Illinois;
Minneapolis, Minnesota; and Chester, New Jersey. IBAH considers its current
space to be adequate for its operations. Its leases generally reflect market
rates in their respective geographic areas.
The Pharmaceutics Services Division is headquartered in suburban Philadelphia,
where it leases approximately 20,000 square feet of office and laboratory space
pursuant to a five-year noncancelable operating lease that expires in December
1998. The lease contains three two-year options which may be exercised at the
Company's discretion. It is expected that the Company will exercise the first
such option to continue the lease through December 2000.
In addition, to accommodate rapid growth, the Pharmaceutics Services Division
is in the process of phasing into a lease for a 124,000 square foot facility in
the same area as its existing facility. Phase I of the build-out of the new
facility, for 40,000 square feet dedicated to packaging, stability testing,
warehouse and administration space, was completed in July 1997. Phase II for
40,000 square feet of analytical space, is planned to be completed in July
1998. The remaining 44,000 square feet is expected to be placed in service in
1999.
ITEM 3. LEGAL PROCEEDINGS.
- ------ -----------------
The Company is involved in various legal proceedings in the ordinary course of
its business, which are not anticipated to have a material adverse effect on the
Company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
- ------ --------------------------------------------------
None.
11
Item 4(a). DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------- --------------------------------------------------
Set forth below is information concerning directors and executive officers
of the Company.
Name Age Position
- ----------------------------------------- --- -------------------------------
Ernst-Gunter Afting, Ph.D., M.D. 55 Director
Victor J. Bauer, Ph.D. 62 Director
Edwin A. Bescherer, Jr. 64 Director
Mark K. Brunhofer 32 Corporate Controller
Winston J. Churchill, J.D. 57 Chairman of the Board and
Director
John H. Dillon, II 55 Executive Vice President,
Worldwide Corporate Development
Martyn D. Greenacre 56 Director
Geraldine A. Henwood 45 Chief Executive Officer and
Director
David Jackson, M.D. 51 Executive Vice President,
Global Corporate Research and
Development
Sidney Jevons, Ph.D. 55 Chairman, U.K., Executive Vice
President, International
Development and Director
Cornelius H. Lansing, II 40 Chief Financial Officer
Sandra Panem, Ph.D. 51 Director
John Santoro 42 President, Pharmaceutics
Services
Richard L. Sherman, J.D. 51 Director
Leonard F. Stigliano 50 President, U.S. CRO
Rudi Weekers 42 President, International CRO
12
Certain Biographical and Other Information
------------------------------------------
Regarding Directors and Executive Officers of the Company
---------------------------------------------------------
Dr. Afting has served as a director since June 1996. From 1995 to the
present, Dr. Afting has been president of GSF - National Research Center for
Environmental health - in Munich, one of the largest governmental research
centers in Germany. He is a member of the advisory committee "Science,
Technology and Innovation (section biotechnology)" to the German Chancellor
Kohl. Dr. Afting has also served as a Professor and Member of the Medical
Faculty at the University of Gottingen from 1978 to the present. From 1993 to
1995, Dr. Afting was President and Chief Executive Officer of Roussel UCLAF in
Paris, France, a subsidiary of Hoechst AG, Frankfurt, Germany. Dr. Afting held
various positions within Hoechst AG from 1988 to 1993, including Head of
Pharmaceutical Division and Chairman of Divisional Board, and Head of Worldwide
Pharmaceutical Research and Member of Divisional Pharma Board. Dr. Afting
received an M.D. and Ph.D. in Chemistry from the University of
Freiburg/Breisgau. Dr. Afting is a member of the Board of Directors of Medigen;
Sequenome; and Titan Pharmaceuticals, Inc.
Dr. Bauer has served as a director since the Affinity Merger in April 1994.
Since February 1997, Dr. Bauer has been employed by Titan Pharmaceuticals, Inc.,
where he currently serves as Executive Director, Corporate Development. Before
he assumed his role at Titan, Dr. Bauer had been a self-employed consultant to
companies in the pharmaceutical and biotechnology industries since December
1992. Prior to that time, Dr. Bauer was with Hoechst-Roussel Pharmaceuticals
Inc. for 20 years, where he served as President from 1988 through 1992. Dr.
Bauer is a member of the Board of Directors of Titan Pharmaceuticals, Inc.,
Theracell, Inc., and AMDG, Inc. Dr. Bauer is a Trustee of the New Jersey
Symphony Orchestra, serving as Vice-Chairman of its Board. Dr. Bauer received a
Ph.D. in Organic Chemistry from the University of Wisconsin.
Mr. Bescherer has served as a Director since March 1996. He spent 17 years
at the Dun & Bradstreet Corporation ("D&B") where he was the Chief Financial
Officer for 14 years, including the last eight years as an Executive Vice
President. Prior to joining D&B, Mr. Bescherer spent 23 years at General
Electric in a variety of senior finance and management roles.
Mr. Brunhofer has been the Corporate Controller of IBAH since December 1995
serving as the Principal Accounting Officer as well from June 1996 to the
present. From the Affinity Merger in April 1994 through December 1995, Mr.
Brunhofer held the position of U.S. Controller of IBAH. From April 1993 through
the Affinity Merger, he was the Controller of Bio-Pharm Clinical Services, Inc.
From 1987 through 1993, he progressed from Staff Accountant, then Senior
Accountant to Audit Manager in the Philadelphia office of Arthur Andersen LLP.
Mr. Brunhofer is a certified public accountant.
Mr. Churchill has served as Chairman of the Company from its inception in
January 1990. He has been President of Churchill Investment Partners, Inc., a
private investment firm, since 1989. From 1984 to 1989, Mr. Churchill was a
general partner of Bradford Associates, a private investment firm in Princeton,
New Jersey. Prior to that time, he practiced law at the Philadelphia firm of
Saul, Ewing, Remick & Saul for 16 years and was a member of that firm's
Executive Committee. Mr. Churchill received an M.A. in Economics from Oxford
University, where he studied on a Rhodes scholarship, and a J.D. from Yale Law
School. Mr. Churchill is also Chairman of the Board of Directors of Central
Sprinkler Corporation; a Director of Geotek Communications, Inc.; and a director
of CinemaStar Luxury Theaters, Inc.
Mr. Dillon has served as Executive Vice President, Worldwide Corporate
Development since January 1997 and from June 1995 through December 1996 he
served as Executive Vice President, Worldwide Business Development. From June
1994 to June 1995 he served as Senior Vice President, Corporate Development.
Immediately prior to joining IBAH, Mr. Dillon served as CEO of Research Data
Corporation ("RDC"), a company providing data management and software
development services for the pharmaceutical industry. Mr. Dillon also served as
Senior Vice President, Corporate Development for RDC from 1991-1992. Prior to
joining RDC, Mr. Dillon was employed for 22 years at SmithKline Beecham
Corporation and its predecessors, most recently as Vice President, Worldwide
Business Development for the Pharmaceutical Division. Mr. Dillon received an
M.B.A. from the Wharton School at the University of Pennsylvania.
13
Mr. Greenacre has served as a Director since the Affinity Merger in April
1994 and has been President and Chief Executive Officer of Delsys Pharmaceutical
Corp., a pharmaceutical formulation development and manufacturing company, since
June 1997. Prior to his current position, Mr. Greenacre was President and Chief
Executive Officer of Zynaxis, Inc., a therapeutics research firm, beginning in
March 1993. From 1989 through 1992, Mr. Greenacre was Chairman - Europe
Pharmaceuticals of SmithKline Beecham plc. Health Care. Mr. Greenacre serves on
the Board of Directors of Cephalon, Inc.; Delsys Pharmaceutical Corp.; Creative
Biomolecules, Inc.; and Genset, Inc.
Ms. Henwood has served as a director since July 1992 and has been the
President and Chief Executive Officer of IBAH since the Affinity Merger in April
1994. She was the founder, Chairman of the Board, Chief Executive Officer and
President of Bio-Pharm from its inception in 1985 until the date of the Affinity
Merger. Prior to founding Bio-Pharm, Ms. Henwood held a variety of management
positions with predecessors of SmithKline Beecham Corporation. Ms. Henwood is a
member of the Board of Directors of Immulogic Pharmaceutical Corporation.
Dr. Jackson has served as Executive Vice President, Global Research and
Development since January 1998. Prior to his current position, Dr. Jackson
served as President of the U.S. CRO since September 1996. From the date of the
Affinity Merger until he assumed the position of President, Dr. Jackson served
as the Chief Medical Officer of the Company. For a brief period before the
Affinity Merger he was President and Chief Executive Officer of Affinity. From
1988 to 1994, Dr. Jackson held the position of Vice President of Clinical
Research with Janssen Research Foundation.
Dr. Jevons has served as a Director since the Affinity Merger in April 1994.
Since the acquisition of EPIC by Bio-Pharm and the subsequent Affinity Merger,
Dr. Jevons has served the Company as President of European operations, Managing
Director, U.K. Operations, and, as of April 1996, Chairman, U.K. and Executive
Vice-President of International Development. Prior to that time, Dr. Jevons was
the Managing Director of EPIC, which he co-founded in 1989. From 1985 until
1989, he held senior management positions, including Chief Operations Officer,
at a Major International CRO, Institute of Clinical Pharmacology. Prior to that
time, he held senior positions in both Research and Product Development with
Pfizer, Inc. of the U.K. Dr. Jevons has a Ph.D. in biochemistry from the
University of Liverpool.
Mr. Lansing has served as Chief Financial Officer since joining the Company
in May 1997. Prior to joining IBAH, Mr. Lansing served as the Vice President of
Operations and Audit Services of ACNielsen, Inc. (a company previously operated
as a division of D&B) from January 1996 to May 1997. Prior to holding this
position, Mr. Lansing held various financial management positions with D&B from
July 1989 to January 1996, including serving as Vice President and Chief
Financial Officer for the Europe, Middle East and Africa business of its
ACNielsen division, and serving the team that spun D&B into three separate
publicly traded entities.
Dr. Panem has served as a director since July 1995. She is currently
President of Vector Fund Management, L.P., the asset management affiliate of
Vector Securities International, Inc., specializing in the emerging life
sciences and health care industries. Prior to joining Vector Fund Management in
1994, Dr. Panem served as Vice President and Portfolio Manager for the
Oppenheimer Global Biotech Fund. Prior to Oppenheimer, Dr. Panem was Vice
President at Salomon Brothers Venture Capital. She received a B.S. in
biochemistry and a Ph.D. in microbiology from the University of Chicago. Dr.
Panem serves as a director of Martek Biosciences Corp.; Synaptic Pharmaceutical
Inc.; and Healthtech Services Corp.
Mr. Santoro has been responsible for the Pharmaceutics Division of IBAH
since April 1994 and currently holds the position of President, IBAH
Pharmaceutics Services, Inc. Prior to the Affinity Merger, Mr. Santoro was Vice
President of Bio-Pharm Clinical Services. In that position he was responsible
for data management and computer systems. From 1976 to 1987, he held various
consulting positions with a number of Fortune 500 companies related to data
management and computer systems.
Mr. Sherman has served as a director since 1993. He is the founding
principal of QED Technologies, a business consulting group founded in November
1992. He is also a principal of CIP Capital Management, Inc., the general
partner of CIP Capital, L.P., a private investment fund. From 1976 through
June, 1989, Mr. Sherman held several positions with SmithKline Beecham
Corporation and its predecessors, including Deputy General Counsel.
14
Before founding QED, Mr. Sherman was a partner with the firm of Pepper, Hamilton
& Scheetz, where his practice focused on international and domestic commercial
transactions, technology transfer and business counseling, with particular
expertise in pharmaceuticals, medical devices, biotechnology and other
healthcare technologies. Mr. Sherman is member of the Board Of Directors of
Sparta Pharmaceuticals, Inc.
Mr. Stigliano has served as President of the U.S. CRO since January 1998.
From May 1997 through December 1997, Mr. Stigliano held the position of Chief
Operating Officer of IBAH. From June 1995, when he joined the Company, through
May 1997, Mr. Stigliano served as IBAH's Chief Financial Officer. From 1991
until the time he joined the Company, Mr. Stigliano had been Chief Financial
Officer of Chemex Pharmaceuticals, Inc., a pharmaceutical development company
specializing in dermatology research. Prior to that time, Mr. Stigliano spent
nine years with Technicon Instruments Corporation, Inc., a diagnostic company
which developed and marketed blood analyzers for clinical laboratories where he
held several positions including Senior Vice President, Finance & Business
Development and President, North America.
Mr. Weekers has served as President of the International Clinical Services
Division since June 1997. From 1985 to 1997, Mr. Weekers held various financial
and management positions within Abbott Diagnostics. Most recently, beginning in
July 1995, Mr. Weekers held the position of Director, Eastern Europe, Middle
East and Africa for Abbott Diagnostika. Prior to holding that position, Mr.
Weekers served as Country Manager, Belgium, Abbott Diagnostic Division from 1993
to 1995.
15
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
The Company's Common Stock is traded in the NASDAQ National Market under the
symbol "IBAH." On March 9, 1998, the closing quotation for the Common Stock was
$3.5625. As of March 9, 1998, there were approximately 318 holders of record of
the Company's Common Stock and the Company estimates there were approximately
1,800 beneficial stockholders.
The following table sets forth the high and low bid quotations of the
Company's Common Stock in the over-the-counter market by quarter for 1996 and
1997, as reported by NASDAQ. These prices reflect inter-dealer quotation,
without retail mark-up, mark-downs or other fees or commissions, and may not
necessarily represent actual transactions.
BID QUOTATIONS
- -----------------------------------------------------------------------
1996 HIGH LOW
- ---- ---- ---
FIRST QUARTER 7 5 1/2
SECOND QUARTER 8 5/8 6 1/4
THIRD QUARTER 8 5 1/2
FOURTH QUARTER 8 1/4 5 3/4
1997
- ----
FIRST QUARTER 8 1/8 6
SECOND QUARTER 6 1/8 3 3/8
THIRD QUARTER 5 1/8 3
FOURTH QUARTER 4 11/16 2 7/8
The Company has never declared or paid a cash dividend on its Common Stock
and has no present plans to pay cash dividends to its stockholders. For the
foreseeable future the Company intends to retain all of its earnings for use in
its business. The declaration of any future dividends by IBAH is within the
discretion of its Board of Directors and will be dependent on the earnings,
financial condition and capital requirements of IBAH as well as any other
factors deemed relevant by its Board of Directors.
16
ITEM 6. SELECTED FINANCIAL DATA.
- ------ -----------------------
IBAH, INC.
----------
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Year Ended December 31,
--------------------------------------------------------------
1993 1994(1) 1995 1996(2) 1997(3)
---------- ---------- ---------- ---------- ----------
Statement of Operation Data:
Revenues $ 25,584 $ 50,132 $ 56,985 $ 82,573 $ 131,821
Less-Reimbursed Costs 7,799 16,512 14,119 20,453 43,770
---------- ---------- ---------- ---------- ----------
Net revenues 17,785 33,620 42,866 62,120 88,051
Operating expenses 19,042 53,503(4) 45,768 61,166(4) 86,510(5)
---------- ---------- ---------- ---------- ----------
Operating income (loss) (1,257) (19,883) (2,902) 954 1,541
Interest income (expense), net (263) (86) (111) 475 199
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes (1,520) (19,969) (3,013) 1,429 1,740
Income taxes - - - 60 983
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations (1,520) (19,969) (3,013) 1,369 757
Loss from discontinued operations (6) - (1,245) (1,546) (389) (2,154)
---------- ---------- ---------- ---------- ----------
Net income (loss) (1,520) (21,214) (4,559) 980 (1,397)
Deemed dividend on preferred stock (7) - - (2,712) - -
---------- ---------- ---------- ---------- ----------
Net income (loss) to common stockholders $ (1,520) $ (21,214) $ (7,271) $ 980 $ (1,397)
========== ========== ========== ========== ==========
Income (loss) per common share--Basic (8)
Continuing Operations $ (0.15) $ (1.66) $ (0.40) $ 0.08 $ 0.03
Discontinued Operations - (0.10) (0.11) (0.03) (0.09)
---------- ---------- ---------- ---------- ----------
Income (loss) per common share--Basic $ (0.15) $ (1.76) $ (0.51) $ 0.05 $ (0.06)
========== ========== ========== ========== ==========
Income (loss) per common share--Diluted (8)
Continuing Operations $ (0.15) $ (1.66) $ (0.40) $ 0.05 $ 0.03
Discontinued Operations - (0.10) (0.11) (0.01) (0.08)
---------- ---------- ---------- ---------- ----------
Income (loss) per common share--Diluted $ (0.15) $ (1.76) $ (0.51) $ 0.04 $ (0.05)
========== ========== ========== ========== ==========
Year Ended December 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Cash, cash equivalents and investments $ 2,027 $ 4,357 $ 8,321 $ 20,823 $ 10,821
Working capital 1,985 2,122 4,640 9,206 8,509
Total assets 11,863 30,572 39,525 92,126 102,936
Long-term debt(9) 4,582 4,098 3,503 3,261 8,983
Retained earnings (accumulated deficit)(4,5) (1,064) (21,214) (25,773) (24,793) (26,061)
Stockholders' equity (deficit) (924) 8,882 11,473 49,556 50,110
The Company has paid no cash dividends since its inception.
(1) Includes, for the year ended December 31, 1994, the acquisition of EPIC
which closed on January 4, 1994, and the merger with Affinity Biotech,
Inc., which took place on April 27, 1994.
(2) Includes, for the year ended December 31, 1996, the acquisition of RBI
which closed on July 18, 1996, and the acquisition of THG which closed on
October 1, 1996.
(3) Includes for the year ended December 31, 1997, the merger of PPL which
closed on May 5, 1997.
(4) Includes a non-recurring charge of $18.3 million for acquired research and
development in connection with the Affinity merger in 1994 and $510,000 of
acquired research and development in connection with the RBI acquisition in
1996.
(5) Includes non-recurring charges of $1,208,000 for the restructuring of the
International Clinical Services Division and $176,000 for merger costs
associated with the PPL transaction.
(6) Represents the divestiture of the Drug Delivery Services Division in 1994
and 1995 and the closure of the RBI software commercialization unit in 1996
and 1997. See Notes 6 and 7 of the Notes to Consolidated Financial
Statements.
(7) Restated to give effect to the change in accounting for its convertible
preferred stock having a beneficial conversion feature, of which $2,712,000
was recorded analogous to a deemed dividend. See Note 5 of the Notes to
Consolidated Financial Statements.
(8) See Note 2 of the Notes to Consolidated Financial Statements.
(9) Includes both current and long-term portions.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
Overview
- --------
The Company began operations in December 1985, through its predecessor, Bio-
Pharm Clinical Services, Inc. ("Bio-Pharm"), and has achieved its growth through
internal development and acquisitions.
As of March 30, 1998, IBAH entered into a definitive Agreement and Plan of
Merger (the "Merger Agreement") with Omnicare, Inc. ("Omnicare") under which
Omnicare will acquire IBAH in a stock-for-stock merger (the "Merger").
In the Merger, each outstanding IBAH common share will be converted into
$5.75 market value of Omnicare common shares, subject to the terms of the Merger
Agreement including, among other things, obtaining the approval of the IBAH
stockholders and certain regulatory authorities. Omnicare expects to issue
approximately $169 million in Omnicare stock. The transaction is structured as
a tax-free pooling of interests and, excluding transaction-related expenses, is
expected to be accretive to Omnicare's earnings per share in 1998.
In connection with the execution of the Merger Agreement, Omnicare and IBAH
entered into a Stock Option Agreement dated as of March 30, 1998 (the "Stock
Option Agreement") under which IBAH has granted Omnicare an option to purchase
up to 4,685,315 newly issued IBAH common shares (approximately 19.9% of the
outstanding IBAH common shares as of March 30, 1998) at $5.75 per share if
certain triggering events occur.
In addition, in connection with the Merger Agreement, certain holders of
IBAH common shares and IBAH preferred shares entered into Voting Agreements
dated as of March 30, 1998 (the "Voting Agreements") pursuant to which they have
agreed with Omnicare, subject to certain exceptions, to vote such holders' IBAH
stock in favor of the adoption of the Merger Agreement and approval of the
Merger, to vote against any contrary transaction, to grant to Omnicare an
irrevocable proxy to vote such IBAH stock and not to dispose of such IBAH stock.
IBAH preferred shares are entitled to vote on an as-converted basis with IBAH
common shares (giving the holders who agreed with Omnicare to vote in favor of
the Merger approximately 24.3% of the outstanding IBAH voting stock as of March
30, 1998). Additionally, the remaining holders of IBAH preferred shares have
agreed that they will not consent to or otherwise facilitate any transaction
that is inconsistent with the Merger, but are not otherwise restricted from
disposing of any IBAH stock held by them prior to stockholder vote on the Merger
to the extent such disposition is in accordance with applicable securities laws.
The IBAH preferred shares held by such holders represented approximately 4.6% of
the outstanding IBAH voting stock as of March 30, 1998.
The Company expects the Merger to be consummated, as contemplated by the
Merger Agreement, in the third quarter of 1998.
The Clinical Services Division, the core of IBAH, is a full-service contract
research organization ("CRO"), made up of the U.S. Clinical Services division
(the "U.S. CRO") and the International Clinical Services Division (the
"International CRO"). The Clinical Services Division serves the pharmaceutical,
biotechnology, medical device and diagnostics industries in accelerating the
development and commercialization of new products worldwide. This division's
primary services are the design of product development programs, managing pre-
clinical studies, design and conduct of clinical trials, clinical data
management and biostatistical analysis, writing reports of study findings,
quality assurance consulting, health economics analysis and post-marketing
studies, and regulatory affairs.
The Clinical Services Division began operations in December 1985 and derives
its revenues by providing services on a contractual basis to its clients. The
division's worldwide staff is based in offices in the U.S., Australia, Belgium,
the Czech Republic, Denmark, Finland, France, Germany, the Netherlands, Spain,
Sweden, Switzerland, and the United Kingdom. Through a joint venture with a
Russian company, IBAH also operates an office located in Russia. With its
current operations in Europe, the Company is positioned to service all of
Western and Eastern Europe, including Russia. Additional locations will be
evaluated based on client needs.
Overall, the Company has grown its international business over the past
several years. In 1997, the International CRO accounted for approximately 28%
of worldwide CRO net revenues. While the growth of its international
organization has taken significant management and financial resources, the
Company believes that global capabilities are required in order to obtain future
growth prospects in the CRO industry. Accordingly, the ability to perform
clinical trials and ancillary services on a global basis is a strategic focus of
the Company.
In October 1996, the Company acquired The Hardardt Group ("THG"), a CRO
focusing on clinical trials management and clinical monitoring. THG, which has
been fully integrated into the Clinical Services Division, added critical mass
and trials management talent to the Company, enhancing its ability to obtain and
perform large clinical trials. In July 1996, the Company acquired Resource
Biometrics, Inc. ("RBI"), a provider of data management services and software
products to the pharmaceutical and biotechnology industries. In June 1997, the
Company closed the software commercialization unit of RBI, deciding to
concentrate on expanding the contract services portion of that business. RBI has
been integrated into the Clinical Services Division.
In May 1997, the Company completed the acquisition of one of the leading
Australian CROs, Pharmaco Pty., Ltd. ("PPL"). the Company has integrated PPL's
operations with those of its previously existing Australian operations, adding
depth and strength to IBAH's Australian and Pacific Rim capabilities.
The Company's Pharmaceutics Services Division was acquired through the merger
with Affinity Biotech, Inc. In April 1994, and provides traditional product
formulation and analytical, stability and other manufacturing related services
(the manufacture of trial drugs and clinical trials packaging, among others) to
the same market as the Clinical Services Division. This division performs
process development for manufacturing, manufacture of dose forms for clinical
trials, testing of dose forms for shelf life stability and conformance with
product specifications and other chemical and physical properties required in
drug development and registration.
The Pharmaceutics Services Division operates from manufacturing and office
facilities located in suburban Philadelphia. The Company believes the demand
for this division's services will continue to grow as more companies look to
out-source pharmaceutical services. To accommodate this rapid growth, the
Company is currently proceeding with the second of three phases of build-out of
a 124,000 square foot facility. The Company expects to complete the build-out
of this facility during 1999.
18
The Company contracts with clients in various foreign currencies and
typically conducts its actual work with clients in a number of different
countries for each major contract. Such activities can give rise to potential
gains or losses on specific transactions between countries where the work is
conducted, which to date, have not been material. The International CRO's
operations give rise to a currency risk, either favorable or unfavorable, when
translating results into U.S. dollars. However, since the Company's service
contracts are based in local currency, typically in the country where the client
contracts the work, there is additional currency exposure either favorable or
unfavorable within the International CRO in the form of transaction gains or
losses between currencies. For these types of transactions, the Company may
consider foreign currency hedging as a mechanism to protect exposures in a given
currency as they relate to foreign or U.S. dollar currency.
RESULTS OF OPERATIONS
- ---------------------
Year ended December 31, 1997 as compared to December 31, 1996
IBAH, Inc.
Consolidated Statements of Operations For the Year Ended
(amounts in thousands) December 31,
--------------------------------------------------------
1996 1997
-------------------------- -------------------------
Revenues $ 82,573 132.9% $ 131,821 149.7%
Less- Reimbursed costs 20,453 32.9% 43,770 49.7%
-------- -------- --------- -------
Net revenues 62,120 100.0% 88,051 100.0%
Operating expenses:
Direct 30,786 49.6% 48,106 54.6%
Selling, general and administrative 29,870 48.1% 37,020 42.0%
Restructuring costs - -% 1,208 1.4%
Merger costs - -% 176 0.2%
Acquired research and development 510 0.8% - -%
-------- -------- --------- -------
Operating income 954 1.5% 1,541 1.8%
Interest income, net of interest expense 475 0.8% 199 0.2%
-------- -------- --------- -------
Income from continuing operatings before taxes 1,429 2.3% 1,740 2.0%
Income taxes 60 0.1% 983 1.1%
-------- -------- --------- -------
Income from continuing operations 1,369 2.2% 757 0.9%
Loss from discontinued operations (389) (0.6%) (2,154) (2.4%)
-------- -------- --------- -------
Net income (loss) $ 980 1.6% $ (1,397) (1.6%)
======== ======== ========= =======
Revenue is generally recognized upon the completion of units of service,
unless the unit of service is performed over an extended period of time. For
extended units of service, revenue is recognized based on labor hours expended
as a percentage of total labor hours expected to be expended. For clinical
studies, the CRO typically contracts on behalf of its clients with third party
independent investigators, usually physicians, and with other third party
providers of laboratory services or other specialized services. These costs are
passed through to clients, and in accordance with the Company's policy are
included in total revenues, but not in its net revenues.
19
Total revenues in 1997 were $131,821,000, an increase of 59.6% over 1996
results. Net revenues were $88,051,000 for the year ended 1997, an increase of
41.7% over the comparable 1996 period. The larger rate of growth of total
revenues than that for net revenues is indicative of increases in reimbursed
costs. The Company's mix of contracts with significant reimbursed costs will
fluctuate, based on the size, type and duration of the trial. Excluding
acquisitions, internal revenue growth was 33.1%, while net revenue growth was
20.0%. The increase in net revenues was principally due to the growth of the
U.S. CRO's business (an increase of 59.8%, although net revenue in the U.S. CRO
grew by 20.9% excluding the effect of the THG and RBI acquisitions); continued
significant growth in the Pharmaceutics Services Division (an increase of
72.9%); and marginal growth in the International CRO (an increase of 2.4%). The
increase in net revenues from year to year reflects the continued growth in
outsourcing of CRO services by pharmaceutical and biotechnology companies,
improvement in the Company's sales and marketing function and the benefit of the
THG acquisition.
Direct expenses were $48,106,000, or 54.6% of net revenues, in 1997 as
compared to 49.6% of net revenues in 1996. Direct expenses increased by 56.3%
in 1997 over 1996. Excluding acquisitions, direct expenses increased 33.3%.
The increase in direct expenses as a percentage of net revenues results
primarily from two factors. First, the U.S. CRO has experienced a change in
revenue mix with the addition of the THG acquisition, and related integration
issues such as management structure, training and systems. Second, in the
International CRO, productivity was negatively impacted by the timing of revenue
growth. The Pharmaceutics Services Division also contributed to the increase in
direct costs as a percentage of net revenues as its initial phase of facility
expansion required bringing on direct expense slightly ahead of revenue. The
Company expects direct expenses as a percent of net revenues to decline in 1998.
Direct expenses are classified as those expenses that are directly related to
revenue producing departments.
Selling, general and administrative expenses were $37,020,000, or 42.0% of
net revenues, as compared to 48.1% in 1996. Selling, general and administrative
expenses increased by 23.9% over the comparable period for 1996. Excluding
acquisitions, selling, general and administrative expenses increased 10.5%.
Increased amortization of goodwill for business acquisitions accounted for 3.3%
of the 1997 increase. Total depreciation and amortization expenses included in
this figure were $4,658,000 in 1997, as compared to $2,968,000 in 1996. The
improvement in the ratio of selling, general and administrative expenses as a
percentage of net revenues was due to leveraging these expenses over a larger
business volume.
In June 1997, the Company implemented a restructuring plan for the
International CRO. Substantially, all of the termination benefits and lease-
related charges for this plan will be paid by the end of 1998. The Company has
recorded a one-time restructuring charge of $1,208,000, consisting primarily of
termination benefits for 14 employees and an accrual for lease-related charges.
As of December 31, 1997, 12 of these employees have been terminated and $296,000
of termination benefits have been paid. In addition, lease-related costs of
$111,000 have been paid.
In May 1997, the Company incurred $176,000 of costs associated with the
acquisition of PPL. As this transaction was accounted for as a pooling-of-
interests, all transaction related costs have been charged directly to the
Company's consolidated statement of operations.
Acquired research and development expense in 1996 was $510,000. This non-
cash charge was directly related to the acquisition of RBI, accounted for as a
purchase transaction. This charge represents the portion of the RBI purchase
price allocated to in-process software research and development.
Operating income was $1,541,000, a $587,000 (or 61.5%) improvement over
1996. Excluding all non-recurring charges for restructuring costs, merger costs
and acquired research and development, operating income was $2,925,000, a
$1,461,000 (or 99.8%) improvement over 1996. The substantial improvement in
operating results was principally due to the continued improvement in the U.S.
CRO and the Pharmaceutics Services Division, offset by additional losses in the
International CRO.
Interest income, net of interest expense, was $199,000 in 1997, as compared
to $475,000 in 1996. The decline in net interest income is principally due to a
decrease in cash and investments on hand during the year.
20
Also contributing to the decline in net interest income is increased interest
expense related to borrowings under a new $7,000,000 term loan to finance the
initial phase of expansion in the Pharmaceutics Services Division.
Income taxes were $983,000 in 1997, compared to $60,000 in 1996. These
taxes relate primarily to state income taxes due from profitable operations in
the U.S. The increase in taxes is due to improved performance in the U.S. in
1997. There were no federal income taxes in 1997 or 1996 as the Company had
sufficient net operating loss carryforwards to offset any federal taxes due on
U.S. profits.
Loss from discontinued operations was $2,154,000 in 1997, compared to
$389,000 in 1996. The loss on discontinued operations relates to the closure of
RBI's software commercialization unit; all operating results of this business
unit have been reclassified from continuing operations to discontinued
operations. The increase in the loss in 1997 is primarily due to the loss on
disposal of this business unit totaling $1,547,000.
Excluding the losses from discontinued operations and the non-recurring
charges for restructuring costs, merger costs and acquired research and
development, net income for 1997 was $2,141,000, or $0.08 per share on a diluted
basis, as compared to $1,879,000, or also $0.08 per share on a diluted basis in
1996. Without these exclusions, net loss for 1997 was $1,397,000, or $0.05 per
share on a diluted basis, as compared to net income of $980,000, or $0.04 per
share on a diluted basis in 1996.
Divisional Statements of Operations
Comparison of 1996 and 1997 Results
(amounts in thousands)
U.S. CRO (1) International CRO (2) Pharmaceutics Consolidated
------------------ -------------------- ------------------ ------------------
1996 1997 1996 1997 1996 1997 1996 1997
------- ------- --------- -------- ------- -------- -------- --------
Net Revenues $35,224 $56,278 $20,895 $21,396 $ 6,001 $10,377 $62,120 $88,051
Operating Expenses:
Direct expenses 16,685 29,462 10,686 12,544 3,415 6,100 30,786 48,106
SG&A 14,981 19,964 12,897 14,086 1,992 2,970 29,870 37,020
Restructuring costs - - - 1,208 - - - 1,208
Merger costs - 95 - 81 - - - 176
Acquired R&D 510 - - - - - 510 -
------- ------- ------- ------- ------- ------- ------- -------
Operating Income
(Loss) $ 3,048 $ 6,757 $(2,688) $(6,523) $ 594 $ 1,307 $ 954 $ 1,541
======= ======= ======= ======= ======= ======= ======== =======
The information presented in the above table does not purport to be indicative
of future results of operations.
(1) Includes the operating results of RBI since the July 18, 1996 acquisition
date and that of THG since the October 1, 1996 acquisition date. Excludes
the discontinued operations of the software commercialization unit of RBI.
(2) Includes the operating results of PPL since the May 5, 1997 acquisition
date.
Net revenues for the U.S. CRO were $56,278,000 in 1997, an increase of
59.8% over 1996. Internal growth in 1997 over 1996 was 20.9% (excluding the THG
and RBI acquisitions whose results are included only since acquisition). The
U.S. CRO experienced a change in revenue mix with the addition of the THG
acquisition, and related integration issues such as management structure,
training and systems. Indirect expenses improved as a percent of net revenue due
to the leveraging effect of incremental increases in revenue volume. As a
result, operating income, excluding the one-time RBI acquired research and
development charge and the PPL merger costs, improved to $6,852,000, an
improvement of $3,294,000, or 92.6%, over 1996.
21
Net revenues of the International CRO were $21,396,000 in 1997, an increase
of 2.4% over 1996 results. The slight increase in net revenues in 1997 is a
result of a strong second half of the year. The second half improvement was due
to revenues earned under a major project re-initiated in March 1997, strong new
business sales and a restructuring of the operations. Net revenues in the first
half of 1997 were negatively impacted by the major project that was placed on
hold in 1996 and by a sequentially declining backlog. Results started to
improve after the major project was re-initiated in March 1997 and a concerted
business development effort improved the level of backlog. In June 1997, the
Company implemented a restructuring plan to reduce indirect costs in this
division by reducing administrative personnel and consolidating office space.
Productivity, both from a direct and indirect expense perspective, was
negatively impacted during the first half of 1997 as staff had been recruited
and dedicated to the major project. The improvements during the second half of
1997 were not sufficient to show an improvement for whole-year 1997 over 1996.
As a result, operating loss excluding restructuring costs and merger costs
increased from $2,688,000 in 1996 to $5,234,000 in 1997. Operating losses
excluding one-time charges during the first half of 1997 were $3,221,000,
improving to $2,013,000 for the second half of the year.
The Pharmaceutics Services Division's net revenues were $10,377,000 in
1997, an increase of 72.9% over 1996. This improvement resulted from the
continued demand for outsourcing of these services. The division was able to
accommodate the revenue growth by completing the initial phase of expansion into
its new facility during 1997. In July, 1997, the first 40,000 square feet of
laboratory and office space were occupied. During 1997, direct expenses as a
percent of net revenue increased to 58.8% from 56.9% in 1996. This increase is
a direct result of the increased costs related to the new facility. Indirect
costs were leveraged across the expanding revenue base. Therefore, indirect
costs were reduced from 33.2% of net revenues in 1996, to 28.6% in 1997. As a
result, the division's 1997 operating income increased 120% from 1996 to
$1,307,000.
22
Year ended December 31, 1996 as compared to December 31, 1995
IBAH, Inc.
Consolidated Statements of Operations For the Year Ended
(amounts in thousands) December 31,
----------------------------------------------
1995 1996
--------------------- --------------------
Revenues $ 56,985 132.9% $ 82,573 132.9%
Less-Reimbursed costs 14,119 32.9% 20,453 32.9%
---------- --------- --------- ---------
Net revenues 42,866 100.0% 62,120 100.0%
Operating expenses:
Direct 23,847 55.6% 30,786 49.6%
Selling, general and administrative 21,921 51.1% 29,870 48.1%
Acquired research and development - -% 510 0.8%
---------- --------- --------- ---------
Operating income (loss) (2,902) (6.8%) 954 1.5%
Interest income (expense), net (111) (0.3%) 475 0.8%
---------- --------- --------- ---------
Income (loss) from continuing operations before taxes (3,013) (7.0%) 1,429 2.3%
Income taxes - -% 60 0.1%
---------- --------- --------- ---------
Income (loss from continuing operations (3,013) (7.0%) 1,369 2.2%
Loss from discontinued operations (1,546) (3.6%) (389) (0.6%)
---------- --------- --------- ---------
Net income (loss) $ (4,559) (10.6%) $ 980 1.6%
========== ========= ========= =========
Total revenues in 1996 were $82,573,000, an increase of 44.9% over 1995
results. Net revenues were $62,120,000 for the year ended 1996, an increase of
44.9% over the comparable 1995 period, the rate of growth being identical to
that of total revenues. Excluding acquisitions, internal revenue growth was
34.6%, while net revenue growth was 33.9%. The increase in net revenues was
principally due to the growth of the U.S. CRO's business (an increase of 50.5%,
although without the THG and RBI acquisitions the increase was 30.2%); dramatic
growth in the business of the Pharmaceutics Services Division (an increase of
131%); and growth in the International CRO (an increase of 24.1%). The increase
in net revenues from year to year reflects the continued growth in outsourcing
of CRO services by pharmaceutical and biotechnology companies as well as the
benefit of the THG and, to a lesser extent, the RBI acquisitions.
Direct expenses were $30,786,000, or 49.6% of net revenues in 1996, as
compared to 55.6% of net revenues in 1995. As a result, direct expenses
increased by 29.1% in 1996 over 1995. Excluding acquisitions, direct expenses
increased 19.5%. The improvement in the ratio of direct expenses was made in
all operating units, but principally in the Pharmaceutics Services Division,
where additional volume increased the utilization of capacity in this division,
improving margins.
Selling, general and administrative expenses were $29,870,000, or 48.1% of
net revenues, as compared to a 1995 ratio of selling, general and administrative
expenses to net revenues of 51.1%. Accordingly, selling, general and
administrative expenses increased by 36.3% over 1995. Excluding acquisitions,
selling, general and administrative expenses increased 26.0%. The amortization
of goodwill for the THG and RBI acquisitions accounted for 1.6% of the 1996
increase. Total depreciation and amortization expenses included in this figure
were $2,968,000 in 1996, as compared to $2,003,000 in 1995. The improvement in
the ratio of selling, general and administrative expenses as a percentage of net
revenues was principally due to spreading these expenses over a larger business
volume.
23
Acquired research and development expense in 1996 was $510,000, versus no
equivalent expense in 1995. This non-cash charge incurred in 1996 was directly
related to the acquisition of RBI, accounted for as a purchase transaction.
This charge represents the portion of the RBI purchase price allocated to in-
process software research and development.
In 1996, the Company, for the first time since being a public company,
reported consolidated operating profit of $954,000 ($1,464,000 from continuing
operations if the acquired research from the acquisition of RBI is excluded), as
compared to an operating loss from continuing operations of $2,902,000 in 1995.
The substantial improvement in operating results was principally due to the
continued improvement in operating results for the U.S. CRO as well as the
maturation of the Pharmaceutics Services Division from a loss in 1995 to a
profit in 1996. Operating results from continuing operations improved once
again by quarter during 1996 as follows: first quarter-operating loss of
$242,000; second quarter-operating profit of $14,000; third quarter-operating
profit of $564,000 (excluding the $510,000 RBI acquired research and development
charge); and fourth quarter-operating profit of $1,128,000.
Interest income, net of interest expense, was $475,000 in 1996, as compared
to net interest expense of $111,000 in 1995. The improvement from a net
interest expense to a net interest income position from 1995 to 1996 was
principally due to the improvement in operating results from a loss in 1995 to a
profit in 1996, and the successful completion of a public equity offering in
April, 1996 which netted the Company $18 million. The net cash improvement due
to the public offering was partially offset in October 1996 by the $14 million
cash portion of the THG acquisition.
Loss from discontinued operations was $389,000 in 1996, compared to
$1,546,000 in 1995. The loss on discontinued operations in 1996 relates to the
closure of the RBI software commercialization unit, while that in 1995 relates
to the Drug Delivery Services Division that was divested in July 1995. All
operating results of these business units have been reclassified from continuing
operations to discontinued operations. The decrease in the loss in 1996 is
primarily because the 1995 amount includes the loss on disposal of the business
unit totaling $819,000.
Income taxes were $60,000 in 1996 and were related to state income taxes
due from profitable operations in the U.S. There were no federal income taxes
in 1996, as the Company had sufficient net operating loss carryforwards to
offset any federal taxes due on U.S. profits.
Net income for 1996 was $980,000, or $0.04 per share on a diluted basis, as
compared to a loss in 1995 of $4,559,000, or $0.32 per share on a diluted basis.
Excluding the losses from discontinued operations and the non-recurring charge
for acquired research and development, net income for 1996 was $1,879,000, or
$0.08 per share on a diluted basis, as compared to a loss of $3,013,000, or
$0.21 per share on a diluted basis in 1995.
24
Divisional Statements of Operations
Comparison of 1995 and 1996 Results
(amounts in thousands)
U.S. CRO (1) International CRO Pharmaceutics Consolidated
------------------ ------------------ ------------------ ------------------
1995 1996 1995 1996 1995 1996 1995 1996
------- ------- -------- ------- ------- -------- -------- --------
Net Revenues $23,428 $35,224 $16,844 $20,895 $ 2,594 $ 6,001 $42,866 $62,120
Operating Expenses:
Direct expenses 11,794 16,685 9,088 10,686 2,965 3,415 23,847 30,786
SG&A 10,721 14,981 10,192 12,897 1,008 1,992 21,921 29,870
Acquired R&D - 510 - - - - - 510
------- ------- ------- ------- ------- ------- ------- -------
Operating Income
(Loss) $ 913 $ 3,048 $(2,436) $(2,688) $(1,379) $ 594 $(2,902) $ 954
======= ======= ======= ======= ======= ======= =======- =======
The information presented in the above table does not purport to be indicative
of future results of operations.
(1) Includes the operating results of RBI since the July 18, 1996 acquisition
date and that of THG since the October 1, 1996 acquisition date. Excludes
the discontinued operations of the software commercialization unit of RBI
and the Drug Delivery business.
Net revenues for the U.S. CRO were $35,224,000 in 1996, an increase of
50.4% over 1995. Internal growth in 1996 over 1995 was 30.2% (excluding the THG
and RBI acquisitions whose results are included only since acquisition). Both
direct and indirect expenses improved as a percentage of net revenue due to
operational efficiencies, the completion of a major project, and the leveraging
effect of incremental increases in revenue volume. As a result, operating
income (excluding the one-time RBI acquired research and development charge)
improved to 10.1% of net revenues, an improvement of 290% over 1995.
Net revenues for the International CRO were $20,895,000 in 1996, an
increase of 24.1% over 1995 results. While revenue volume increased, the
operating loss of $2,688,000 of this division was essentially the same year over
year. The performance in 1996 was negatively impacted by the Company's largest
project being placed on hold during the middle of 1996. This hold status was
due to certain regulatory issues surrounding the drug and out of the control of
the Company. As a result, the Company was not able to earn significant revenues
from this project in the second half of 1996, while staff had been recruited and
dedicated to this project. In early January 1997 the project was taken off hold
status and the Company commenced work on this project in late first quarter of
1997.
The Pharmaceutics Services Division net revenues were $6,001,000 in 1996,
an increase of 131% over 1995. This improvement resulted from the continued
demand for outsourcing of these services and the fact that 1995 was the first
full year of operation. By utilizing more of its facility's capacity, the
division was able to record operating profit of $594,000, or 9.9% of net
revenues in 1996, as compared to an operating loss of $1,379,000 in 1995.
Year 2000 Compliance
The Year 2000 issue refers to the problems resulting from many existing computer
software programs and operating systems that use only two digits rather than
four to define the applicable year in a date field. The Company is in the
process of addressing the impact of the Year 2000 issue on the conduct of its
business, and has been implementing a plan to address potential exposure in this
area, which it expects will continue into 1999. Certain new software
applications to address Year 2000 compliance have been installed or are in the
implementation stage in the Company's information systems. In addition, the
Company is reviewing equipment with vendors and conducting internal tests on
critical equipment. The Company anticipates that it will repair or largely
replace non-compliant equipment before year-end 1998. The Company is contacting
government agencies, financial
25
institutions, vendors and other service providers to determine their Year 2000
compliance programs and is seeking certification from all providers indicating
their completion of Year 2000 programs. The Company believes that it is
addressing all of the areas critical to its ability to conduct business in the
future without interruption due to the Year 2000 issues. Company personnel is
spending significant time installing compliant software, but in most instances,
such replacement or remediation would have been implemented even without the
need to address Year 2000 issues, due to the improved functionality of the
compliant applications. The Company is also using its internal resources in
other areas to carry out its Year 2000 program, and does not anticipate any
other significant costs related to these activities.
VALUATION ALLOWANCE
- -------------------
As indicated in Note 11 to the Financial Statements, the Company's deferred tax
assets include $4,855,000 attributable to loss carryforwards. Approximately $2.7
million of the deferred tax asset for net operating loss carryforwards at
December 31, 1997 relates to foreign operations, with the remainder related to
U.S. operations. A valuation allowance has been provided against the foreign net
operating loss carryforwards as these operations have incurred losses since
inception. The majority of the U.S. net operating loss carryforwards deferred
tax asset of $1.1 million relates to deductions generated by the exercise of
non-qualified stock options. The tax benefit of these deductions will be
recorded directly to additional paid-in-capital when realized, and, therefore,
will have no effect on operating results. A valuation allowance has also been
recorded against the remaining net operating loss carryforwards relating to U.S.
operations. Though the U.S. operations were profitable in 1996 and 1997, these
operations were unprofitable in 1993, 1994 and 1995. In addition, as of December
31, 1997, the Company considered its overall financial resources and other
factors which could affect future results. These factors included, but were not
limited to the risks associated with customer contract terminations or delays,
particularly with respect to three large projects, which have certain atypical
attributes. In management's view, these projects could have a substantial effect
(potentially as much as $8 million of operating income) in 1998 dependent upon
certain customer decisions. Given the lack of an established history of U.S.
profitability and the uncertainty of future operating results, the Company
believes that the weight of evidence available at December 31, 1997 indicates it
is more likely than not these carryforwards will not be realized. Additional
factors concerning trends and uncertainties are discussed at the end of the
Management Discussion and Analysis of Financial Condition and Results of
Operations section.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of December 31, 1997, the Company had cash and short-term investments of
$10.8 million, as compared to $20.8 million as of December 31, 1996. The
decrease in cash and short-term investments represents $9.8 million of investing
activities and $7.2 million used in the operations of the business offset by
increased cash of $7.4 million from financing activities. The investing
activities primarily represent the build-out of the Pharmaceutics Services
Division facility and the enhancement of the Company's information technology
infrastructure. These investments have been financed by a new bank term loan
facility (see below) and existing cash balances. Although cash flow from
operating activities has decreased $7.2 million, working capital has only
declined $700,000, from $9.2 million as of December 31, 1996, to $8.5 million at
December 31, 1997. The decline in cash but not working capital is a result of
the timing of cash items in the normal course of business.
During 1997, the Company added a $7 million term loan facility and renewed
its existing $5 million credit facility. The $7 million loan comprises four
term loans, bearing interest at 7.90% to 8.05%, with terms of 36 to 60 months.
As of December 31, 1997, the balance outstanding under these new loans was
$6,737,000. The Company used the term loan proceeds to finance new leasehold
improvements and new capital equipment for the Pharmaceutics Services Division
and to enhance the Company's information technology infrastructure. As of
December 31, 1997, the balance outstanding under the previously existing credit
facility was $938,000.
The Company anticipates capital expenditures of approximately $8 million in
1998. These expenditures relate primarily to the next phase of expansion at
the Pharmaceutics Services Division and continued investment in the Company's
technology infrastructure. In January 1998, the Company received a commitment
from its bank for a $5 million loan to finance the Pharmaceutics Services
Division's expansion. This loan will bear interest at 7.5% and will be
repayable in 47 equal monthly installments beginning six months after the first
draw under the loan.
Although the Company does not believe that it requires financing for
working capital purposes, it may seek additional cash infusions for expansion of
operations, for strategic acquisitions or for competitive purposes. Based on
the foregoing and other factors, and while there can be no assurance that
external financing will be available on terms acceptable to the Company, the
Company believes that it has, or has access to, adequate working capital to meet
its strategic objectives and fund its operations for the foreseeable future.
Any statements made herein that relate to future plans, events or
performance, are "forward-looking statements." All such statements involve
risks and uncertainties that could cause actual results to differ materially
from those anticipated. Factors that might cause such a difference include, but
are not limited to, those relating to conducting operations in a competitive
environment; loss or delay of large contracts for regulatory or other reasons;
acquisition activities (including uncertainties associated with, among other
things, projecting the synergies to be gained by the 1996 and 1997
acquisitions); competition or consolidation within the pharmaceutical industry;
ability to increase sales or revenue growth at or above market rates;
fluctuations in foreign currency; the degree of success in attracting and
obtaining new business; and the continued improvement of the performance of the
International CRO.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------ -------------------------------------------
The audited consolidated financial statements of the Company appear
beginning on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
None.
27
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------- --------------------------------------------------
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors held six meetings during 1997. None of the
directors attended fewer than 75% of the meetings of the Board of Directors.
During 1997, none of the directors attended fewer than 75% of the meetings of
any committee of which he or she was a member which were held during the period
in which he or she was a member.
The Board of Directors has standing Executive, Audit/Compliance and
Compensation Committees. The Board of Directors does not have a standing
nominating committee, this function being performed on an ad hoc basis by the
Board of Directors as a whole. The Executive Committee consists of Mr.
Churchill, Chairman, Ms. Henwood, Dr. Panem and Mr. Bescherer and, to the extent
permitted under Delaware law, exercises all of the power and authority of the
Board of Directors in the management of the business and affairs of the Company
between meetings of the Board. The Executive Committee held meetings by
telephone or in person approximately once a month during 1997. The
Audit/Compliance Committee consists of Mr. Bescherer, Chairman, Mr. Greenacre
and Dr. Bauer. This committee reviews and makes inquiries, as it deems
appropriate, with respect to the scope and results of the audit by the Company's
independent auditors, the adequacy of the Company's system of internal
accounting controls and procedures and the internal controls with respect to
compliance with laws. This Committee held three meetings in 1997. The
Compensation Committee consists of Dr. Panem, Chair, Dr. Bauer and Mr.
Greenacre. This committee administers the Company's stock option plans and
reviews and approves the remuneration of executive officers and significant
employees of the Company. The Compensation Committee held four meetings in
1997.
Except as described below, directors are not compensated for their services
as directors. Directors are reimbursed for their travel expenses in attending
meetings. In addition, during the period 1995 through 1997, on the date of each
annual meeting at which directors of any class are elected or re-elected, each
non-employee director received options to acquire 10,000 shares of Common Stock
under the 1994 Non-Employee Director Stock Option Plan (the "Director Plan").
The exercise price per share is equal to the fair market value of the Common
Stock as determined in accordance with the terms of the Director Plan. All
options granted under the Director Plan will be exercisable 20% per year
beginning with the first anniversary of the date of grant. All options expire
ten years from the date of grant. In addition to the above and to take into
account the travel from Europe, Dr. Afting received $15,000 of compensation for
his service as a director in 1997.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers,
directors and persons who own more than 10% of the Company's outstanding Common
Stock to file reports of ownership and changes in ownership with the Commission.
Officers, directors and such stockholders are required by regulations under the
Exchange Act to furnish the Company with copies of all forms they file under
Section 16(a). Due to an administrative oversight, Mr. Santoro did not file a
Form 4 reflecting a sale of 10,000 shares in February 1997. This sale was
reported by Mr. Santoro on a Form 5 filed in February 1998. Also due to an
oversight, Mr. Weekers did not file a form reflecting 3,500 shares purchased by
his wife on May 20, 1997, prior to beginning his tenure with the Company, or
2,600 shares purchased by his wife on September 5, 1997.
Certain information regarding Directors and Executive Officers of the
Company is set forth in Item 4(a) of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
- ------- ----------------------
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for the Company's
Chief Executive Officer and the other four most highly compensated executive
officers of the Company (the "Named Executive Officers") for services in all
capacities to the Company or its subsidiaries for the fiscal year ended December
31, 1997 and the total compensation earned by such individual for the Company's
prior two fiscal years. The Company's business is conducted primarily through
its two primary operating divisions, the Clinical Services Division and the
Pharmaceutics Services Division.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
SECURITIES
NAME AND ANNUAL COMPENSATION UNDERLYING ALL OTHER
------------------------------
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION
------------------ ---- ------ ----- ----------- ------------
Geraldine A. Henwood 1997 $267,706 $25,000 32,500 $2,243/(1)/(2)/
----
Chief Executive Officer 1996 249,184 --- 20,000 150/(1)/
----
1995 250,000 --- 25,000 150/(1)/
----
David Jackson, M.D. 1997 259,992 31,200 57,500/(3)/ --- - (1)/
----
Executive Vice President, 1996 248,179 7,500 80,000 150/(1)/
----
Global Corporate Research and 1995 230,459 2,500 --- 150/(1)/
Development ----
Sidney Jevons, Ph.D. 1997 231,119 2,460 6,250 69,347/(5)/
----
Chairman, UK (4) 1996 227,958 3,270 7,500 65,227/(5)/
----
1995 196,875 --- --- 47,250/(5)/
----
John L. Santoro 1997 185,455 20,000 57,500/(3)/ 2,138/(1)/(2)/
----
President, Pharmaceutics 1996 176,901 4,500 12,500 450/(1)/
Services ----
1995 165,000 5,000 --- 450/(1)/
----
Leonard F. Stigliano 1997 222,604 25,000 57,500/(3)/ 2,850/(1)/(2)/
----
President, U.S. CRO 1996 176,144 20,000 30,000 56,170/(6)/
----
1995 86,154 --- 150,000 ---
----
(1) These amounts consist of the Company's contributions to the officer's
account under the 401(k) Plan for its U.S. employees.
(2) The Company contributed to the 401(k) Plan in the form of IBAH stock. The
stock is valued at the average of the close bid and close ask on the date
prior to the contribution. These stock contributions vest 25% a year
based upon the length of service of the officer.
(3) If the Merger with Omnicare is consummated, an option to purchase 50,000
shares of the Company's common stock included in this amount will be
cancelled immediately prior to the Merger.
(4) Dr. Jevons' salary and bonus were calculated in British Pounds Sterling
using the average $/(Pounds Sterling) exchange rate for each year.
(5) These amounts consist of the Company's contribution to the officer's
account under the Company's Defined Contribution Plan in the U.K.
(6) This amount consists of a $450 contribution to the officer's account under
the Company's 401(k) Plan and $55,720 of relocation costs.
The following table sets forth certain information concerning grants of
stock options made during the year ended December 31, 1997 to the Named
Executive Officers.
OPTION GRANTS IN THE LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (10 YEARS) (1)
--------------------------
OPTIONS EMPLOYEES PRICE EXPIRATION
NAME GRANTED IN FISCAL YEAR ($/SHARE) DATE 0% 5% 10%
- ---- ------- --------------- --------- ---- -- -- ---
Geraldine A. Henwood 7,500 0.5% 3.8750 06/16/07 $0 $ 18,277 $ 46,318
25,000 1.7% 3.7813 12/08/07 0 59,451 150,660
David Jackson, M.D. 7,500 0.5% 3.8750 06/16/07 0 18,277 46,318
50,000/(2)/ 3.3% 3.7813 12/08/07 0 118,902 301,321
Sidney Jevons, Ph.D. 6,250 0.4% 3.8750 06/16/07 0 15,231 38,598
John L. Santoro 7,500 0.5% 3.8750 06/16/07 0 18,277 46,318
50,000/(2)/ 3.3% 3.7813 12/08/07 0 118,902 301,321
Leonard F. Stigliano 7,500 0.5% 3.8750 06/16/07 0 18,277 46,318
50,000/(2)/ 3.3% 3.7813 12/08/07 0 118,902 301,321
(1) The dollar amounts under these columns are the result of calculations at
0%, 5% and 10% rates set by the Securities and Exchange Commission (the
"Commission") and, therefore, are not intended to forecast possible future
appreciation of the price of the Common Stock. The Company did not use an
alternative formula for a grant date valuation, an approach which would
state gains at present, and therefore lower value. The Company is not aware
of any formula that will determine with reasonable accuracy a present value
based on future unknown or volatile factors.
(2) If the Merger with Omnicare is consummated, this option will be cancelled
immediately prior to the Merger.
The table below sets forth certain information regarding the number and
value of unexercised options held by the Named Executive Officers of the Company
at December 31, 1997. No options were exercised by the Named Executive Officers
during the fiscal year ended December 31, 1997.
AGGREGATED FISCAL YEAR-END OPTION VALUES
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Geraldine A. Henwood 38,000 54,500 $ 13,125 $ 8,750
David Jackson, M.D. 45,210 126,800/(2)/ 3,684 2,450
Sidney Jevons, Ph.D. 9,010 14,750 5,259 3,500
John L. Santoro 454,919 69,000/(2)/ 1,616,648 3,500
Leonard F. Stigliano 70,010 167,500/(2)/ 93,766 140,625
(1) Based on the closing price of the Common Stock on the NASDAQ National
Market on that date, $3.75, net of the exercise price.
(2) If the Merger with Omnicare is consummated, an option to purchase 50,000
shares of the Company's common stock included in this amount will be
cancelled immediately prior to the Merger. These 50,000 options are not in-
the-money as of December 31, 1997.
EMPLOYMENT ARRANGEMENTS
Geraldine A. Henwood, the Company's Chief Executive Officer, currently has
no employment agreement with the Company. However, under the terms of the Merger
Agreement with Omnicare, Ms. Henwood is expected to enter into an employment
agreement with the Company as of the date of closing of the Omnicare
transaction. It is expected that the agreement will be for a term of five years
and entitle Ms. Henwood to an annual base salary of $290,000, with a right to
annual increases. Ms. Henwood would also be entitled to receive bonus and
options as applicable under the Company's policies and plans. In addition, Ms.
Henwood is expected to enter into a Non-Competition Agreement pursuant to which
she will agree not to compete with the Company through another CRO or a Site
Management Organization for a fifteen year period after the termination of the
employment agreement.
On May 14, 1997, the Company entered into an employment agreement with
Cornelius H. Lansing, II, Chief Financial Officer of the Company. Under the
agreement, Mr. Lansing is entitled to an annual base salary of $170,000, a one
time stock option grant of 100,000 shares, granted at the then current market
price of $3.875 and vesting at 20% per year and bonus and options as applicable
under the Company's policies and plans. For fiscal year 1998 Mr. Lansing is
eligible for a bonus of up to 25% of his base salary upon achievement of certain
profit, revenue and performance objectives. If the agreement is terminated
without cause or due to a change in control, Mr. Lansing is entitled to receive
his base salary as severance for one year after termination.
On June 1, 1997 the Company entered into an employment agreement with Rudi
Weekers, President International CRO. Under the agreement, Mr. Weekers is
entitled to an annual base salary of DM 428,408, a one time stock option grant
of 75,000 shares granted at the then current market price of $3.875 and vesting
at 20% per year and to receive bonus and options as applicable under the
Company's policies and plans. For fiscal year 1998 Mr. Weekers is eligible for
a bonus of up to 25% of his base salary upon achievement of certain profit,
revenue and performance objectives. If this agreement is terminated without
cause by the Company, Mr. Weekers is entitled to receive his base salary through
the end of the calendar quarter of the termination notice plus an additional six
months. It is expected that this agreement will be terminated and a new
agreement entered into or the current agreement amended upon the closing of the
transaction with Omnicare to reflect a specified term and an additional non-
compete agreement.
On May 25, 1995 the Company entered into an employment agreement with
Leonard F. Stigliano. Under the agreement, Mr. Stigliano is entitled to an
annual base salary of $160,000 and has been eligible for merit increases each
year on the anniversary date of his employment. The agreement awarded Mr.
Stigliano options to purchase 150,000 shares of Common Stock at $2.1875 per
share. He is entitled to severance benefits of up to one year of his base
salary, reduced by payments received from a subsequent employer, if the Company
terminates the employment without cause and due to management changes, merger,
acquisition or incompatibility. It is expected that this agreement will be
terminated and a new agreement entered into or the current agreement amended
upon the closing of the transaction with Omnicare to reflect a specified term
and an additional non-compete agreement.
On September 11, 1996, the Company entered into an employment agreement
with David Jackson, M.D., President of the Company's U.S. CRO. Under the
agreement, Dr. Jackson is entitled to a base salary of $260,000 and is eligible
for merit increases on the anniversary date of the agreement. He is also
eligible for the standard bonus and option grants of the Company for an employee
at Dr. Jackson's level. Dr. Jackson is entitled to severance benefits of up to
one year of his base salary if the Company terminates the agreement without
cause.
On January 4, 1994, Bio-Pharm entered into a service agreement with Dr.
Sidney Jevons covering his employment from December 31, 1993 through December
31, 1996. Pursuant to the agreement, Dr. Jevons served as the President of the
Company's European operations and later, as Managing Director of the Company's
U.K. Operations. As of April 1, 1996, this agreement was amended to extend the
term of the agreement to March 31, 1999, to change Dr. Jevons' position with
the Company to Chairman, U.K. and Executive Vice President of International
Development and to increase his annual salary to (Pounds Sterling)138,000
($227,000 based on exchange rates on March 31, 1997). Dr. Jevons is also
eligible for the standard bonus and benefit plans of the Company and to
receive his base salary as severance for six months after termination without
cause. Additionally, the Company will contribute 30% of Dr. Jevons' base
salary to a retirement plan in the U.K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------- --------------------------------------------------------------
SECURITY OWNERSHIP
The following table sets forth certain information as of April 1, 1998, as
supplied to the Company, regarding the beneficial ownership of the Common Stock
by all persons known to the Company who own more than 5% of the outstanding
shares of the Company's Common Stock or the Series A Preferred Stock, each
director of the Company and each executive officer named in the Summary
Compensation Table included elsewhere herein and all executive officers and
directors as a group. Unless otherwise indicated, based upon information
provided to the Company by the directors, executive officers and principal
stockholders, the persons named in the table below have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
NUMBER OF
SHARE PERCENT
BENEFICIALLY BENEFICIALLY
NAME OWNED OWNED
- ---- --------- ---------
GREATER THAN 5% STOCKHOLDERS
Omnicare, Inc. (1) 4,685,315 19.9%
Geraldine A. Henwood (2) 3,086,113 13.1%
Thomas F. Henwood (3) 3,086,113 13.1%
Vector Later-Stage Equity Fund, L.P. (4) 2,143,904 8.3%
Sandra Panem, Ph.D. (5) 2,143,904 8.3%
Winston J. Churchill (6) 1,690,667 7.2%
H&Q Investment Funds (7) 1,557,096 6.3%
Dimensional Fund Advisors, Inc. (8) 1,338,300 5.7%
State of Wisconsin Investment Board (9) 1,335,300 5.7%
T. Rowe Price New Horizons Fund, Inc. (10) 1,285,140 5.2%
OTHER DIRECTORS
Ernst-Gunter Afting, Ph.D., M.D. (11) 2,000 *
Victor J. Bauer, Ph.D. (12) 13,000 *
Edwin A. Bescherer, Jr. (13) 11,000 *
Martyn D. Greenacre (11) 9,000 *
Sidney Jevons, Ph.D. (14) 549,409 2.3%
Richard L. Sherman, Esq. (15) 697,371 3.0%
OTHER NAMED EXECUTIVE OFFICERS
David Jackson, M.D. (16) 45,996 *
John L. Santoro (17) 829,804 3.5%
Leonard F. Stigliano (18) 73,672 *
All directors and executive officers
as group (16 persons)(19) 9,205,900 34.8%
__________________
* Indicates less than 1%.
(1) In connection with the execution of the Merger Agreement between IBAH and
Omnicare an option to purchase up to 4,685,315 at $5.75 was granted to
Omnicare. This option is exercisable if certain triggering events occur.
The address of this option holder is 50 East Rivercenter Boulevard,
Covington, KY 41011.
(2) Includes 378,055 shares owned of record by Ms. Henwood's husband and 38,000
shares subject to exercisable options. Ms. Henwood disclaims beneficial
ownership of the shares owned by her husband. The address of this
stockholder is c/o IBAH, Inc., Four Valley Square, 512 Township Line Road,
Blue Bell, PA 19422.
(3) Includes 2,670,058 shares owned of record by Mr. Henwood's wife and 38,000
shares subject to options exercisable by Ms. Henwood. Mr. Henwood
disclaims beneficial ownership of the shares owned by his wife and those
that are subject to options. The address of this stockholder is 6 Jorrocks
Lane, Malvern, PA 19355.
(4) Includes 356,984 shares of Series A Preferred Stock, convertible into
1,070,952 shares of Common Stock, 1,070,952 shares subject to exercisable
warrants and 2,000 shares subject to options exercisable by Dr. Panem. The
address of this stockholder is 1751 Lake Cook Road, Suite 350, Deerfield,
IL 60015. See also footnote 5. Vector Securities International, Inc., an
affiliate of Vector Later-Stage Equity Fund, L.P. (the "Later-Stage Fund"),
is the owner of 40,000 warrants to purchase Common Stock of the Company.
The Later-Stage Fund disclaims beneficial ownership of these securities.
(5) Consists entirely of shares and warrants owned beneficially and of record
by the Later-Stage Fund. Includes 356,984 shares of Series A Preferred
Stock, convertible into 1,070,952 shares of Common Stock, 1,070,952 shares
subject to exercisable warrants and 2,000 shares subject to exercisable
options. Dr. Panem is the President of Vector Fund Management, L.P., the
General Partner of the Later-Stage Fund, and may be deemed to have voting
and investment power with respect to such shares. Dr. Panem disclaims
beneficial ownership of such shares. See also footnote 4.
(6) Includes 120,219 shares owned of record by Mr. Churchill's Retirement Plan;
449,327 shares that Mr. Churchill and his wife own as tenants by the
entireties; 35,000 shares owned by Mrs. Churchill as custodian for Mr.
Churchill's son; 159,750 shares owned by a trust for the benefit of Mr.
Churchill's son; 82,000 shares subject to exercisable options by Mr.
Churchill; 171,000 shares owned by Mr. Churchill's charitable foundation,
The Churchill Foundation; and 673,371 shares owned of record by Mr.
Churchill's affiliate, CIP Capital, L.P. The address of this stockholder
is c/o Churchill Investment Partners, 20 Valley Stream Parkway, Suite 265,
Malvern, PA 19355.
(7) Consists of two affiliated investment funds; H&Q Healthcare Investors,
which owns two-thirds of the amount stated and H&Q Life Sciences Investors,
which owns the balance. The amount shown includes 535,473 shares subject
to exercisable warrants and 178,491 shares of Series A Preferred Stock,
convertible into 535,473 shares of Common Stock. The address of these
stockholders is 50 Rowes Wharf, Boston, MA 02110.
(8) The address of this stockholder is 1299 Ocean Avenue, 11/th/ Floor, Santa
Monica, California 90401.
(9) The address of this stockholder is 121 E. Wilson Street, Madison, WI
53707.
(10) The address of this stockholder is 100 East Pratt Street, Baltimore, MD
21202. The amount shown includes 642,570 shares subject to exercisable
warrants and 214,190 shares of Series A Preferred Stock, convertible into
642,570 shares of Common Stock.
(11) Amount represents shares subject to exercisable options.
(12) Includes 4,000 shares owned by Dr. Bauer and his wife as tenants in common
and 9,000 shares subject to exercisable options.
(13) Includes 9,000 shares and 2,000 shares subject to exercisable options.
(14) Includes 540,399 shares and 9,010 shares subject to exercisable options.
(15) Amount represents 24,000 shares subject to exercisable options and 673,371
shares owned of record by Mr. Sherman's affiliate, CIP Capital, L.P.
(16) Includes 786 shares and 45,210 shares subject to exercisable options.
(17) Includes 374,885 shares and 454,919 shares subject to exercisable options.
(18) Includes 3,662 shares, of which 1,662 shares are 50% vested in the
Company's 401(k) Savings and Investment Plan and 70,010 shares subject to
exercisable options.
(19) Includes 788,205 shares subject to exercisable options, 1,070,952 shares
subject to exercisable warrants and 356,984 shares of Series A Preferred
Stock, convertible into 1,070,952 shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- ----------------------------------------------
None.
28
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ------- -----------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------
The financial statements and financial statement information required by this
Item as well as the report of Independent Public Accountants are included on
pages F-1 through F-24 of this Report. All other schedules have been omitted
because they are inapplicable, not required, or the information is included
elsewhere in the financial statements or notes thereto.
REPORTS ON FORM 8-K
- -------------------
During 1997 the Company filed one report on Form 8-K, dated May 15, 1997, to
report on the acquisition of Pharmaco Pty., Ltd. No reports on Form 8-K were
filed during the fourth quarter of 1997.
On April 2, 1998 the Company filed a report on Form 8-K to report on the
Merger Agreement with Omnicare, Inc.
EXHIBITS
- --------
The following is a list of exhibits. Where so indicated, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated in
parentheses.
EXHIBIT
- -------
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger, dated March 30, 1998, by and among the
Registrant, Omnicare, Inc. and Impala Acquisition Corp. (Exhibit
2.1)(12)
3.1 Certificate of Incorporation, as amended (Exhibit 3.1)(10)
3.2* Bylaws, as amended.
3.3 Amended Certificate of Designation of Rights and Preferences of
Series A Convertible Preferred Stock. (Exhibit 3.3)(8)
10.1 Registration Rights Agreement, dated February 23, 1993, among Bio-
Pharm Clinical Services, Inc. ("Bio-Pharm") and certain
stockholders. (Exhibit 10.23)(1)
10.2 Subscription Confirmation, dated December 11, 1990, among Affinity
Biotech, Inc. ("Affinity") and Winston J. Churchill, Norman E.
Jackson, Philip L. Rice, M.D., Carl Sorenson and Walter C. Wojack.
(Exhibit 10.2)(2)
10.3 Registration Rights Agreement, dated as of February 21, 1992, among
Affinity and Winston J. Churchill and Barbara Churchill, Norman E.
Jackson, Philip L. Rice, M.D., Carl Sorenson and Walter C. Wojack.
(Exhibit 10.3)(2)
10.4+ 1992 Incentive Stock Plan. (Exhibit 10.10)(2)
10.5+ 1993 Incentive Stock Plan. (Exhibit 10.1)(3)
10.6+ 1994 Incentive Stock Plan. (Appendix D)(4)
29
10.7+ Employment Agreement, dated October 1, 1996, between the Registrant
and Sherrin Baky. (Exhibit 10.8)(10)
10.8+ Employment Agreement, dated June 1, 1997, between the Registrant and
Rudi Weekers. (Exhibit 10.2)(11)
10.9+ Employment Agreement, dated May 14, 1997, between the Registrant and
Cornelius H. Lansing, II. (Exhibit 10.1)(11)
10.10+ Employment Agreement, dated May 25, 1995, between the Registrant and
Leonard F. Stigliano. (Exhibit 10.9)(8)
10.11 Lease Agreement, dated May 16, 1994, between Objektgesellschaft GbR
and Bio-Pharm Clinical Services, GmbH (in German with English
summary). (Exhibit 10.12)(6)
10.12* Amended and Restated Loan and Security Agreement, dated August 27,
1997, among the Registrant, The Hardardt Group, Inc. and CoreStates
Bank, N.A.
10.13* Letter, dated September 26, 1997, between the Registrant and
CoreStates Bank, N.A.
10.14 Lease Agreement, dated June 21, 1990, between Bio-Pharm and Four
Valley Square Associates. (Exhibit 10.27)(1)
10.15 Lease Agreement, dated December 15, 1993, between Bio-Pharm and
Valley Square Associates. (Exhibits 10.28 and 10.29)(1)
10.16+ Employee Stock Purchase Plan. (Exhibit 10.18)(5)
10.17+ 1994 Non-Employee Directors Stock Option Plan. (Exhibit 10.19)(5)
10.18 Sublease and Lease Agreement, dated August 19, 1993, among Affinity,
International Envelope Company and Summit Investment Corporation.
(Exhibit 10.2)(3)
10.19 Lease Agreement, dated October 26, 1993, and effective as of
December 1, 1993, between Affinity Pharmaceutics, Inc. and Rhone-
Poulenc Rorer Pharmaceuticals Inc. (Exhibit 10.3)(3)
10.20 Asset Purchase Agreement, dated July 28, 1995, between the
Registrant and LDS Technologies, Inc. (Exhibit 10.4)(7)
10.21 Warrant for the purchase of shares of Common Stock issued March 15,
1996 to Vector Securities International, Inc. (Exhibit 10.26)(8)
10.22 Preferred Stock and Warrant Purchase Agreement, dated August 10,
1995, among the Registrant and certain purchasers of Series A
Convertible Preferred Stock of the Registrant. (Exhibit 10.27)(8)
10.23 Form of Warrant issued by the Registrant to the purchasers pursuant
to the Preferred Stock and Warrant Purchase Agreement, dated August
10, 1995. (Exhibit 10.28)(8)
10.24+ Release and Settlement Agreement, dated February 28, 1997, between
the Registrant and Judith L. Hardardt. (Exhibit 10.23)(10)
10.25+ 1997 Equity Compensation Plan. (Exhibit 10.24)(10)
30
10.26 Agreement and Plan of Merger, dated October 1, 1996, by and between
the Registrant, IBAH Acquisition Company and the stockholders of
HGB, Inc. (9)
10.27 Lease Agreement, dated December 3, 1996, between 525 Virginia Drive
Associates L.P. and Bio-Pharm Pharmaceutics Services, Inc. (Exhibit
10.27)(10)
10.28 Stock Purchase Agreement, dated February 28, 1997, among the
Registrant, Catapult Pty. Ltd., Phillip Altman and Juanita Altman.
(Exhibit 10.28)(10)
10.29 Registration Rights Agreement, dated February 28, 1997, by and
between the Registrant and Catapult Pty., Ltd. (Exhibit 10.29)(10)
10.30 Agreement and Plan of Merger, dated July 18,1996, by and among the
Registrant, IBAH Acquisition Company and Resource Biometrics, Inc.
(Exhibit 10.30)(10)
21.1* Subsidiaries of the Registrant.
23.1* Consent of Arthur Andersen LLP.
27.1* 1997 Financial Data Schedule.
27.2* 1996 Financial Data Schedule.
_______________________
+ Compensation plans and arrangements for executives and others.
* Filed herewith.
(1) Filed as an Exhibit to Affinity's Registration Statement on Form S-4
(File No. 33-74274) filed with the Securities and Exchange Commission
("SEC") on January 20, 1994.
(2) Filed as an Exhibit to Affinity's Registration Statement on Form S-1
(File No. 33-46027) initially filed with the SEC on March 4, 1992.
(3) Filed as an Exhibit to Affinity's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1993.
(4) Filed as Appendix D to the Joint Proxy Statement/Prospectus included
in Affinity's Registration Statement on Form S-4 (File No. 33-74274)
filed with the SEC on January 20, 1994.
(5) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.
(6) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K/A
for the year ended December 31, 1994.
(7) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1995.
(8) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
(9) Filed as an Exhibit to the Registrant's Report on Form 8-K dated
October 1, 1996.
31
(10) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996.
(11) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1997.
(12) Filed as an Exhibit to the Registrant's Quarterly Report on Form 8-K dated
April 2, 1998.
32
IBAH, INC. AND SUBSIDIARIES
Consolidated Financial Statements
Comprising Item 8 of the
Annual Report on Form 10-K to the
Securities and Exchange Commission
YEAR ENDED DECEMBER 31, 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants F - 2
Consolidated Balance Sheets F - 3
Consolidated Statements of Operations F - 4
Consolidated Statements of Stockholders' Equity F - 5
Consolidated Statements of Cash Flows F - 6
Notes to Consolidated Financial Statements F - 7
Consolidated Financial Statement Schedules
The Consolidated Financial Statement Schedules have been omitted as the
information is not required, is immaterial or is presented elsewhere in the
Consolidated Financial Statements or Notes thereto.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To IBAH, Inc.:
We have audited the accompanying consolidated balance sheets of IBAH, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IBAH, Inc. and subsidiaries as
of December 31, 1996 and 1997, and the results of their operations and their
cash flow for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As explained in Note 5 to the Consolidated Financial Statements, the Company has
given retroactive effect to the change in accounting for its convertible
security with a beneficial conversion feature.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
February 5, 1998 (except with respect
to the matter discussed in Note 20
as to which the date is March 30, 1998).
F-2
IBAH, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS DECEMBER 31,
----- -------------------------------
1996 1997
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 15,588,000 $ 6,491,000
Short-term investments 5,235,000 4,330,000
Accounts receivable, net 27,614,000 42,850,000
Prepaid expenses and other 868,000 1,287,000
------------- ------------
Total current assets 49,305,000 54,958,000
PROPERTY AND EQUIPMENT, net 7,799,000 14,045,000
GOODWILL, net 34,571,000 33,587,000
OTHER ASSETS 451,000 346,000
------------- ------------
$ 92,126,000 $102,936,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,376,000 $ 3,122,000
Accounts payable 3,497,000 4,477,000
Accrued compensation and related costs 6,095,000 4,420,000
Other accrued expenses 3,734,000 6,051,000
Payable to independent investigators 2,585,000 7,638,000
Deferred revenue 22,812,000 20,741,000
------------- ------------
Total current liabilities 40,099,000 46,449,000
------------- ------------
DEFERRED RENT 586,000 516,000
------------- ------------
LONG-TERM DEBT 1,885,000 5,861,000
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 2,000,000
shares authorized, 749,665 shares issued
and outstanding as of December 31, 1996
and December 31, 1997 7,000 7,000
Common stock, $.01 par value, 50,000,000
shares authorized, 22,023,846 shares
issued and outstanding as of December 31,
1996 and 23,385,122 shares issued and
outstanding as of December 31, 1997 220,000 234,000
Additional paid-in capital 73,889,000 76,035,000
Accumulated deficit (24,793,000) (26,061,000)
Cumulative translation adjustment 233,000 (105,000)
------------- ------------
Total stockholders' equity 49,556,000 50,110,000
------------- ------------
$ 92,126,000 $102,936,000
============= ============
The accompanying notes are an integral part of these statements.
F-3
IBAH, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Year Ended
December 31,
----------------------------------------------
1995 1996 1997
-------------- -------------- --------------
REVENUES $ 56,985,000 $ 82,573,000 $ 131,821,000
Less-Reimbursed costs 14,119,000 20,453,000 43,770,000
-------------- -------------- --------------
Net revenues 42,866,000 62,120,000 88,051,000
-------------- -------------- --------------
OPERATING EXPENSES
Direct 23,847,000 30,786,000 48,106,000
Selling,general and administrative 21,921,000 29,870,000 37,020,000
Restructuring costs - - 1,208,000
Merger costs - - 176,000
Acquired research and development - 510,000 -
-------------- -------------- --------------
Total operating expenses 45,768,000 61,166,000 86,510,000
-------------- -------------- --------------
Operating income (loss) (2,902,000) 954,000 1,541,000
INTEREST INCOME 234,000 796,000 616,000
INTEREST EXPENSE (345,000) (321,000) (417,000)
-------------- -------------- --------------
Income (loss) from continuing operations
before income taxes (3,013,000) 1,429,000 1,740,000
INCOME TAXES - 60,000 983,000
-------------- -------------- --------------
Income (loss) from continuing operations (3,013,000) 1,369,000 757,000
LOSS FROM DISCONTINUED OPERATIONS, including
loss on disposal of $819,000 in 1995 and $1,547,000 in 1997 (1,546,000) (389,000) (2,154,000)
-------------- -------------- --------------
NET INCOME (LOSS) (4,559,000) 980,000 (1,397,000)
DEEMED DIVIDEND ON PREFERRED STOCK (NOTE 5) (2,712,000) - -
-------------- -------------- --------------
NET INCOME (LOSS) TO COMMON STOCKHOLDERS $ (7,271,000) $ 980,000 $ (1,397,000)
============== ============== ==============
NET INCOME (LOSS) PER COMMON SHARE-BASIC
CONTINUING OPERATIONS $ (0.40) $ 0.08 $ 0.03
DISCONTINUED OPERATIONS (0.11) (0.03) (0.09)
-------------- -------------- --------------
$ (0.51) $ 0.05 $ (0.06)
============== ============== ==============
COMMON SHARES OUTSTANDING-BASIC 14,276,000 18,145,000 22,954,000
============== ============== ==============
NET INCOME (LOSS) PER COMMON SHARE--DILUTED
CONTINUING OPERATION $ (0.40) $ 0.05 $ 0.03
DISCONTINUED OPERATIONS (0.11) (0.01) (0.08)
-------------- -------------- --------------
$ (0.51) $ 0.04 $ (0.05)
============== ============== ==============
COMMON SHARES OUTSTANDING--DILUTED 14,276,000 25,006,000 28,200,000
============== ============== ==============
The accompanying notes are an integral part of these statements.
F-4
IBAH, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Preferred Stock Common Stock
-------------------------- -------------------------
Shares Amount Shares Amount
------------ ------------ ------------ -----------
BALANCE, JANUARY 1, 1995 - $ - 14,236,904 $ 142,000
Sale of convertible preferred stock, net of
expenses 999,554 10,000 - -
Deemed dividend on preferred stock (Note 5) - - - -
Issuance of common stock for stock option
exercises and Employee Stock Purchase Plan
purchases - - 154,358 2,000
Translation adjustments - - - -
Net loss - - - -
------------ ------------ ------------ -----------
BALANCE, DECEMBER 31, 1995 999,554 10,000 14,391,262 144,000
Public offering of common stock, net of
expenses - - 3,000,000 30,000
Issuance of common stock in conjunction with
the Resource Biometrics, Inc. acquisition - - 350,000 4,000
Issuance of common stock in conjunction with
the HGB, Inc. acquisition - - 2,719,999 27,000
Conversions of preferred stock into common
stock (249,889) (3,000) 749,667 7,000
Issuance of common stock for warrant exercises - - 297,223 3,000
Issuance of common stock for stock option
exercises and Employee Stock Purchase Plan
purchases - - 515,695 5,000
Translation adjustments - - - -
Net income - - - -
------------ ------------ ------------ -----------
BALANCE, DECEMBER 31, 1996 749,665 7,000 22,023,846 220,000
Issuance of common stock in conjunction with
the Pharmaco Pty. Ltd. merger - - 575,000 6,000
Issuance of common stock in conjunction with
the Outcomes Research Corp. acquisition - - 29,629 -
Issuance of common stock for warrant exercises - - 601,458 6,000
Issuance of common stock for stock option
exercises, employer savings plan matching
contribution and Employee Stock Purchase
Plan purchases - - 155,189 2,000
Translation adjustments - - - -
Net loss - - - -
------------ ------------ ------------ -----------
BALANCE DECEMBER 31, 1997 749,665 $ 7,000 23,385,122 $ 234,000
============ ============ ============ ===========
Retained
Additional Earnings Cumulative Total
Paid-in (Accumulated Translation Stockholders'
Capital Deficit) Adjustments Equity
------------ ------------ ------------ -----------
BALANCE, JANUARY 1, 1995 $ 29,850,000 $(21,214,000) $ 104,000 $ 8,882,000
Sale of convertible preferred stock, net of
expenses 6,925,000 - - 6,935,000
Deemed dividend on preferred stock (Note 5) - - - -
Issuance of common stock for stock option
exercises and Employee Stock Purchase Plan
purchases 195,000 - - 197,000
Translation adjustments - - 18,000 18,000
Net loss - (4,559,000) - (4,559,000)
------------ ------------ ------------ -----------
BALANCE, DECEMBER 31, 1995 36,970,000 (25,773,000) 122,000 11,473,000
Public offering of common stock, net of
expenses 17,981,000 - - 18,011,000
Issuance of common stock in conjunction with
the Resource Biometrics, Inc. acquisition 2,285,000 - - 2,289,000
Issuance of common stock in conjunction with
the HGB, Inc. acquisition 15,411,000 - - 15,438,000
Conversions of preferred stock into common
stock (4,000) - - -
Issuance of common stock for warrant exercises 764,000 - - 767,000
Issuance of common stock for stock option
exercises and Employee Stock Purchase Plan
purchases 482,000 - - 487,000
Translation adjustments - - 111,000 111,000
Net income - 980,000 - 980,000
------------ ------------ ------------ -----------
BALANCE, DECEMBER 31, 1996 73,889,000 (24,793,000) 233,000 49,556,000
Issuance of common stock in conjunction with
the Pharmaco Pty. Ltd. merger (6,000) 129,000 - 129,000
Issuance of common stock in conjunction with
the Outcomes Research Corp. acquisition 200,000 - 200,000
Issuance of common stock for warrant exercises 1,493,000 - - 1,499,000
Issuance of common stock for stock option
exercises, employer savings plan matching
contribution and Employee Stock Purchase
Plan purchases 459,000 - - 461,000
Translation adjustments - - (338,000) (338,000)
Net loss - (1,397,000) - (1,397,000)
------------ ------------ ------------ -----------
BALANCE DECEMBER 31, 1997 $76,035,000 $(26,061,000) $ (105,000) $50,110,000
============ ============ ============ ===========
The accompanying notes are an integral part of these statements.
F-5
IBAH, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Year Ended
December 31,
------------------------------------------------
1995 1996 1997
------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,559,000) $ 980,000 $ (1,397,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Acquired research and development - 510,000 -
Depreciation and amortization 2,003,000 2,968,000 4,658,000
Deferred rent 149,000 (101,000) (70,000)
Discontinued operations 1,546,000 389,000 2,154,000
Deferred taxes - (49,000) 45,000
Changes in assets and liabilities-
(Increase) decrease in-
Accounts receivable (5,512,000) (2,971,000) (16,347,000)
Prepaid expenses and other (46,000) 27,000 (389,000)
Increase (decrease) in-
Accounts payable and accrued expenses 2,586,000 2,252,000 (39,000)
Payables to independent investigators (2,428,000) 1,536,000 5,134,000
Deferred revenue 5,805,000 3,816,000 (951,000)
----------- ----------- -----------
Net cash provided by (used in) operating activitie (456,000) 9,357,000 (7,202,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption (purchases) of short-term investments 808,000 (4,411,000) 905,000
Purchases of property and equipment (1,907,000) (2,646,000) (9,229,000)
Proceeds from sale of discontinued operations 50,000 - -
Net cash paid in business acquisitions - (11,962,000) (109,000)
Net investing activity of discontinued operations (33,000) - (22,000)
Other (88,000) 207,000 (397,000)
----------- ----------- -----------
Net cash used in investing activities (1,170,000) (18,812,000) (8,852,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of expenses 185,000 19,265,000 1,960,000
Proceeds from sale of preferred stock, net of expenses 6,947,000 - -
Proceeds from issuance of debt, net of expenses - - 7,029,000
Payments on long-term debt (919,000) (1,620,000) (1,581,000)
Net financing activity of discontinued operations (6,000) - -
----------- ----------- -----------
Net cash provided by financing activities 6,207,000 17,645,000 7,408,000
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 191,000 (166,000) (451,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,772,000 8,024,000 (9,097,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,792,000 7,564,000 15,588,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,564,000 $ 15,588,000 $ 6,491,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 339,000 $ 325,000 $ 397,000
=========== =========== ===========
Income taxes paid $ - $ - $ 623,000
=========== =========== ===========
Equipment acquired under capital lease obligations $ 292,000 $ 769,000 $ 327,000
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-6
IBAH, INC. AND SUBSIDIARIES
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BACKGROUND
----------
IBAH, Inc. ("IBAH" or the "Company") provides a comprehensive range of product
development services worldwide for clients in the pharmaceutical, biotechnology,
medical device and diagnostics industries. The Company's principal activity is
to help its clients meet the complex regulatory requirements that must be
satisfied before a new product may be commercially marketed. The Company offers
clients access to extensive regulatory affairs and clinical development services
on an international scale through its Clinical Services Division. The Company
also provides pharmaceutical manufacturing and stability testing services
through its Pharmaceutics Services Division.
The Company was formed on April 27, 1994 as the result of a merger (the
"Affinity Merger") between Affinity Biotech, Inc. ("Affinity"), a drug delivery
and technology company, and Bio-Pharm Clinical Services, Inc. ("Bio-Pharm"), a
contract research organization. Simultaneous with the Affinity Merger, Affinity
changed its name to IBAH. Since the Affinity Merger resulted in the former Bio-
Pharm shareholders having a majority ownership of the merged entity, the
Affinity Merger was accounted for as a purchase transaction with Bio-Pharm
treated as the acquiror.
As of March 30, 1998, IBAH entered into a definitive Agreement and Plan of
Merger (the "Merger Agreement") with Omnicare, Inc. ("Omnicare") under which
Omnicare will acquire IBAH in a stock-for-stock merger (the "Merger") (see Note
20).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
The accompanying financial statements include the accounts of IBAH, Inc., and
its subsidiaries. All material intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions 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 reporting period. Actual results could differ materially
from these estimates and assumptions.
Restatement
Reference is made to Note 5 regarding the 1995 Financial Statement restatement
to correct the accounting presentation of a deemed dividend.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
F-7
Translation of Foreign Financial Statements
Assets and liabilities of the Company's foreign operations are translated at the
year-end rate of exchange, and the income statements are translated at the
average rate of exchange for the year. Gains or losses from translating foreign
currency financial statements are accumulated in a separate component of
stockholders' equity.
Cash, Cash Equivalents And Investments
The Company considers all highly liquid investments purchased with remaining
maturities of three months or less to be cash equivalents.
Investments are held at market value and at December 31, 1996 and 1997 were
classified as short-term. Cash, cash equivalents and investments consisted of
the following:
December 31,
-------------------------------
1996 1997
------------- -------------
CASH AND CASH EQUIVALENTS
Money market funds and demand
accounts $ 5,447,000 $ 3,485,000
U.S. government securities 6,313,000 846,000
Repurchase agreement 2,092,000 2,061,000
Commercial paper 1,736,000 99,000
------------- -------------
15,588,000 6,491,000
------------- -------------
INVESTMENTS:
U.S. government securities 3,497,000 2,850,000
Commercial paper 1,738,000 728,000
Corporate bond - 502,000
Bank certificate of deposit - 250,000
------------- -------------
5,235,000 4,330,000
------------- -------------
$ 20,823,000 $ 10,821,000
============= =============
The 1997 repurchase agreement matured on January 2, 1998 and was secured by U.S.
government securities. The short-term investments outstanding on December 31,
1997 all mature in 1998.
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," effective
January 1, 1994. This statement requires the Company to classify its investment
securities as: (1) held to maturity, (2) available for sale or (3) held for
trading purposes. At December 31, 1996 and 1997, all of the Company's short-
term investments are classified as available for sale, therefore any unrealized
holding gains or losses should be presented in a separate component of
stockholders' equity. At December 31, 1996 and 1997, there were no significant
unrealized holding gains or losses.
F-8
Supplemental Information Regarding Non-Cash Investing And Financing Activities
The following table presents the non-cash assets and liabilities that were
consolidated as a result of the acquisitions and mergers described in Note 3:
1996 1997
----------------- -----------------
Non-cash (assets) liabilities:
Short term investments $ (64,000) $ -
Accounts receivable (4,207,000) (241,000)
Prepaid expenses (78,000) (80,000)
Property and equipment (327,000) (35,000)
Goodwill (32,096,000) (350,000)
Other assets (369,000) (31,000)
Accounts payable 1,045,000 4,000
Accrued expenses 2,262,000 295,000
Deferred revenue and advances by clients 4,190,000 -
Long-term debt 465,000 -
----------------- -----------------
Net non-cash assets consolidated (29,179,000) (438,000)
Issuance of common stock 17,727,000 329,000
Acquired research and development (510,000) -
----------------- -----------------
Net cash paid in business acquisitions $ (11,962,000) $ (109,000)
================= =================
Accounts And Unbilled Receivables
The Company considers accounts and unbilled receivables as reported to be
collectible and realizable. As of December 31, 1996 and 1997, the allowance for
doubtful accounts was $524,000 and $611,000, respectively. Approximately
$400,000, $190,000 and $390,000 of write-offs were charged to this allowance
which was offset by approximately $200,000, $360,000 and $477,000 charged to
current year earnings in 1995, 1996 and 1997, respectively. If accounts or
unbilled receivables become uncollectible, the Company's policy is to charge
these write-offs against this allowance. The Company continually reviews the
realizability of its receivables and charges current period earnings for the
amount deemed unrealizable.
Property And Equipment
Property and equipment are carried at cost. Improvements and betterments are
capitalized, and maintenance and repairs are charged to expense as incurred.
The Company provides depreciation and amortization using principally the
straight-line method for financial reporting purposes using the following
estimated lives:
Computer equipment and software 3 - 5 years
Equipment 5 - 7 years
Furniture and fixtures 5 years
Leasehold improvements Remaining term of lease
The Company's assets are reviewed for impairment whenever events or
circumstances have occurred that indicate that the remaining useful lives of the
assets should be revised or that the remaining balance of such assets may not be
recoverable based upon expectations of future undiscounted cash flows. No such
revisions were required as of December 31, 1997.
F-9
Goodwill
Goodwill, representing the excess of cost over the net tangible and identifiable
intangible assets of acquired businesses (see Note 3), is stated at cost and is
amortized over an estimated life of principally 25 years. As of December 31,
1996 and 1997, the accumulated amortization of goodwill was $845,000 and
$2,382,000, respectively. The Company continues to evaluate whether later
events and circumstances have occurred that indicate the remaining estimated
useful life might warrant revision or that the remaining balance of goodwill may
not be recoverable. When the Company concludes it is necessary to evaluate
goodwill for impairment, the Company will use an estimate of related
undiscounted cash flows as the basis to determine whether impairment has
occurred. If such a determination indicates an impairment loss has occurred,
the Company will utilize the valuation method, which measures fair value based
on the best information available in the circumstances. The Company believes
that there has been no impairment of goodwill as of December 31, 1997.
Revenue Recognition And Concentration of Credit Risk
Substantially all revenues are earned by performing services under contracts
from various pharmaceutical, biotechnology, medical device and diagnostics
companies, based on contract terms. Most of the Company's contracts provide for
services to be performed on a units of service basis. These contracts
specifically identify the units of service and unit pricing. Under these
contracts, revenue is generally recognized upon the completion of units of
service, unless the unit of service is performed over an extended period of
time. For extended units of service, revenue is recognized based on labor hours
expended as a percentage of total labor hours expected to be expended. From time
to time, the Company is also a party to time-and-materials and fixed-price
contracts. For time-and-materials contracts, revenue is recognized at
contractual hourly rates and for fixed-price contracts revenue is recognized
using a method similar to that used for extended units of service. The Company's
contracts provide for price renegotiations upon scope of work changes. The
Company recognizes revenue related to these scope changes when the underlying
services are performed and realization is assured. In the event of contract
termination, contracts require payment for services rendered through the date of
termination. In a number of cases, clients are required to make termination
payments in addition to payments for services already rendered. Any anticipated
losses resulting from contract performance are charged to earnings in the period
identified. Billings and payments are specified in each contract. Revenue
recognized in excess of billings is classified as unbilled receivables, while
billings in excess of revenue are classified as deferred revenue.
Over the last three years, two clients of the Clinical Services Division and six
clients of the Pharmaceutics Services Division accounted for 10% or more of the
respective division's net revenues in any given year. One client accounted for
15.4% and 22.6% of the Clinical Services Division's net revenues in 1995 and
1996, respectively. A second client accounted for 10.5% of this division's net
revenues in 1995. One client accounted for 23.6% and 10.2% of the Pharmaceutics
Services Division's net revenues in 1995 and 1996, respectively. A second
client accounted for 11.3% and 21.2% of this division's net revenues in 1995 and
1996, respectively. A third Pharmaceutics Services Division client accounted
for 12.6% of its net revenue in 1996, while three additional clients accounted
for 12.2%, 11.1% and 11.0% of its net revenues in 1997.
The concentration of credit risk is limited to trade accounts receivables and is
subject to the financial and industry conditions of the Company's clients. The
Company does not require collateral or other securities to support client
receivables.
Expense Recognition
A portion of expenses is incurred under contracts with investigators. These
contracts call for the investigators to perform certain procedures or tests on a
specified number of patients. Expenses are recognized based upon the status of
the work completed as of a given time as a percentage of the total procedures
required under the contract. Included in reimbursed costs in the accompanying
consolidated statements of operations are principally the contracted
investigators' costs. Billings and payments are specified in the contract.
F-10
Income Taxes
On January 1, 1994, upon terminating its S Corporation status, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," ("SFAS 109") retroactively to inception. This statement requires
the use of the liability method in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities, and are
measured using enacted tax rates that are expected to be in effect when the
differences reverse. The adoption of SFAS 109 had no material impact on the
Company's financial statements.
Net Income (Loss) per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," effective the year ended December 31, 1997. This
statement requires the disclosure of both basic and diluted earnings per share
as well as the retroactive restatement of prior years' per share disclosures.
The following tables reconcile the numerator and denominator of the basic and
diluted net income (loss) per share computations for continuing operations:
Year Ended December 31, 1995 Year Ended December 31, 1996
----------------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- ---------- ----------- -------------- ----------
Income (Loss) per Share--Basic:
Income (loss)- available to
common stockholders after
deemed dividend $ (5,725,000) 14,276,000 $ (0.40) $ 1,369,000 18,145,000 $ 0.08
========= =========
Efect of Dilutive Securities:
Convertible Preferred Stock - - - 2,338,000
Options - - - 2,095,000
Warrants - - - 2,428,000
------------- ------------- ---------- ----------- -------------- ----------
Income (Loss) per Share--Diluted:
Income (loss) available to
common stockholders after
deemed dividend + assumed
conversions $ (5,725,000) 14,276,000 $ (0.40) $ 1,369,000 25,006,000 $ 0.05
============== ========== ========= ============ =========== =========
Year Ended December 31, 1997
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
Income (Loss) per Share--Basic:
Income (loss)- available to
common stockholders $ 757,000 22,954,000 $ 0.03
=========
Efect of Dilutive Securities:
Convertible Preferred Stock - 2,249,000
Options - 1,459,000
Warrants - 1,538,000
------------- -------------
Income (Loss) per Share--Diluted:
Income (loss) available to
common stockholders +
assumed conversions $ 757,000 28,200,000 $ 0.03
============== ========== =========
F-11
Options and warrants to purchase 4,750,000, 91,000 and 824,000 shares of the
Company's common stock at weighted average exercise prices of $2.03, $7.56 and
$6.52 per share were outstanding during 1995, 1996 and 1997, respectively, but
were not included in the computation of diluted net income (loss) per share
because they are antidilutive. Also not included in 1995 were 2,998,662 shares
of the Company's common stock issuable upon the conversion of preferred stock
due to antidilution. Of the options and warrants not included in the 1997
earnings per share computation, 777,000 shares are still outstanding at December
31, 1997 and have a weighted average life of approximately eight years before
they expire.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
and SFAS 131 are effective for fiscal years beginning after December 15, 1997.
Therefore, the Company will adopt these standards on January 1, 1998. The
Company does not anticipate the adoption of SFAS 130 or SFAS 131 to result in
any substantive changes in its disclosures.
3. MERGERS AND ACQUISITIONS
------------------------
Acquisition of Resource Biometrics, Inc. ("RBI")
On July 18, 1996, the Company purchased all of the outstanding shares of stock
of RBI for 350,000 shares of the Company's common stock. At the time of
acquisition, RBI was a provider of both software products and data services to
the pharmaceutical, biotechnology and medical device industries. During 1997,
the Company closed the RBI software commercialization unit (see Note 6). This
acquisition was recorded using the purchase method of accounting. The total
purchase price of $2,463,000, including transaction costs of $174,000, was
allocated to the fair value of the assets acquired and liabilities assumed. The
$2,718,000 excess of purchase price over book value on the acquisition date was
allocated based on an independent appraisal as follows: (1) $510,000 to
acquired research and development, which is charged to the statement of
operations as a non-recurring item; (2) $160,000 to software technology being
amortized over 5 years; and (3) $2,048,000 to goodwill being amortized over 20
years.
Acquisition of HGB, Inc., Doing Business as The Hardardt Group ("THG")
On October 1, 1996, the Company purchased all of the outstanding shares of stock
of THG for $14 million in cash and 2,719,999 shares of the Company's common
stock. THG is a provider of clinical trial management and clinical monitoring
services to the pharmaceutical, biotechnology and medical device industries.
THG provides these services predominantly in the U.S. This acquisition was
recorded under the purchase method of accounting. The total purchase price of
$31,210,000, including estimated transaction costs of $1,772,000, has been
allocated to the fair value of assets acquired and liabilities assumed. The
book value of THG's assets and liabilities approximates their fair value. The
$30,251,000 excess of purchase price over book value on the acquisition date was
allocated to goodwill. Goodwill is being amortized on a straight-line basis
over 25 years, based on an independent appraisal obtained by the Company.
F-12
Merger With Pharmaco Pty. Ltd. ("PPL")
On May 5, 1997, the Company acquired all of the outstanding shares of stock of
PPL in exchange for 575,000 shares of the Company's common stock. PPL is a
provider of clinical trial, regulatory, data management and health economics
services in Australia and New Zealand. PPL has been integrated with the
Company's existing Australian operations. This acquisition was accounted for as
a pooling-of-interests transaction. This transaction is not material to the
Company's financial results taken as a whole, and as such, prior period
financial statements have not been retroactively restated in conformity with
Accounting Principles Board Opinion No. 16, "Business Combinations." The
results of operations of PPL have been included in the consolidated operating
results from the effective date of the merger. The $176,000 of costs associated
with this merger have been charged to earnings as a separate component of
operating income.
Acquisition of Outcomes Research Corporation ("ORC")
On January 13, 1997, the Company acquired the business of ORC for 29,629 shares
of the Company's common stock and $150,000 in cash. ORC is a U.S. based health
economics consulting business. This acquisition has been recorded under the
purchase method of accounting and is immaterial to the Company's financial
statements taken as a whole.
The table below summarizes the unaudited pro forma combined results of
operations for the years ended December 31, 1995 and 1996. This table does not
include the merger with PPL or the acquisition of ORC due to materiality.
However, the table assumes that the acquisitions of RBI and THG and the closure
of the RBI software commercialization unit (see Note 6) and the divestiture of
the Drug Delivery Services Division (see Note 7) had occurred on January 1,
1995.
Year Ended December 31,
------------------------------
1996 1997
-------------- --------------
Revenues $ 74,380,000 $ 99,112,000
Net Revenues 57,902,000 73,430,000
Operating Income (Loss) (2,042,000) 2,617,000
Net Income (Loss) (3,549,000) 2,115,000
Net Income (Loss) Per Share-Basic (0.20) 0.10
Net Income (Loss Per Share-Diluted (0.20) 0.08
The above pro forma information excludes the $510,000 one-time charge to
earnings for acquired research and development related to the RBI acquisition in
1996. The pro forma information also excludes the 1995 operating loss of the
Drug Delivery Services Division of $1,546,000 and the operating losses of the
RBI software commercialization unit of $348,000 in 1995 and $554,000 in 1996 due
to the Company's decision to discontinue or to close these operations. The
shares used in computing pro forma net loss per share assumes that the
acquisitions of RBI and THG had occurred on January 1, 1995.
F-13
4. 1996 PUBLIC OFFERING OF COMMON STOCK
------------------------------------
On April 19, 1996, the Company completed a public offering of 3,000,000 shares
of its common stock, par value $.01 per share, at an issuance price of $6.50 per
share, for a total of $19.5 million. The net proceeds to the Company, after all
issuance expenses, were $18,011,000. These shares were sold to selected
institutional investors.
5. 1995 PRIVATE EQUITY PLACEMENT
-----------------------------
On August 11, 1995, the Company completed a private equity placement (the "1995
Private Equity Placement") of 999,554 shares of convertible preferred stock, par
value $.01 per share, at a purchase price of $7.003125, per share for a total of
$6,935,000, net of transaction costs. Each share of convertible preferred stock
is convertible into three shares of common stock. Each share of convertible
preferred stock is entitled to three detachable and transferable warrants to
purchase shares of common stock for $2.33 per share on or before August 11,
2000. In addition, each share of convertible preferred stock is entitled to the
voting equivalent of three shares of common stock. The Company allocated
$5,174,000 of the net proceeds to preferred stock and $1,761,000 to warrants
based upon their relative estimated fair values. The fair value of the warrants
was based upon the Black-Scholes Method which utilizes the following
assumptions: dividend yield of 0%, expected volatility of 40%, risk-free
interest rate of 6.46% and an expected warrant life of 3 years. The convertible
preferred stock may be converted at the Company's option after August 11, 1998,
provided that the common stock has a trading price equal to or greater than $10
per share. On October 10, 1995, the Company filed a registration statement on
Form S-3 with the Securities and Exchange Commission for the common stock
underlying the convertible preferred stock and warrants. The registration of
these securities was declared effective on October 31, 1995. In the event the
Company sells or issues additional shares of common stock, warrants or other
rights to purchase stock, stockholders of convertible preferred stock are
entitled to certain anti-dilution protection. The holders of the convertible
preferred stock are entitled to one seat on the Company's Board of Directors,
which was filled in August 1995.
The 1995 results of operations have been restated to give effect to the
accounting treatment announced by the Staff of the Securities and Exchange
Commission at the March 13, 1997 meeting of the Emerging Issues Task Force
relative to the 1995 Private Equity Placement. Under this accounting treatment,
the beneficial conversion discount was recorded in the restated 1995 financial
statements as a deemed dividend, since the convertible preferred stock was
immediately convertible into common stock. The effect of this restatement was to
increase the 1995 net loss to common stockholders' equity by approximately $2.7
million. This restatement has no effect on total stockholders' equity or cash
flows of the Company.
In 1996, 249,889 shares of the convertible preferred stock were converted into
749,667 shares of common stock. As of December 31, 1995 and 1996, all of the
2,998,662 immediately exercisable warrants issued in this transaction were
outstanding. As of December 31, 1997, 2,784,471 of these warrants were
outstanding after 214,191 warrants were exercised in 1997. Subsequent to
December 31, 1997, an additional 214,191 warrants were exercised.
6. CLOSURE OF RBI SOFTWARE COMMERCIALIZATION UNIT
--------------------------------------------------
On June 30, 1997, the Company closed the software commercialization unit of RBI.
Accordingly, all operating results of this unit have been reclassified from
continuing operations to discontinued operations. This unit recorded a net loss
of $389,000 for 1996 and $607,000 for the six months ended June 30, 1997. In
addition, a loss on the disposal of this unit of $1,547,000 has been reflected
in the 1997 consolidated statement of operations. The Company did not record an
income tax benefit on the loss from discontinued operations as the realization
of a corresponding deferred tax asset is uncertain. At the time of the
acquisition of RBI, approximately 25% of the purchase price was allocated to the
software commercialization unit. The majority of the purchase price allocation
was to the service portion of this business, which has given the Company a
viable and active CRO presence on the West Coast. The loss on disposal is
comprised mainly of severance, software asset write-offs, contract completion
costs and future rent related to abandoned office space. The remaining
liabilities related to the loss on disposal at December 31, 1997 are $417,000
and are included in accrued compensation and related costs and other accrued
expenses on the accompanying consolidated balance sheet.
F-14
7. DIVESTITURE OF DRUG DELIVERY SERVICES DIVISION
----------------------------------------------
On July 28, 1995, the Company entered into an agreement to sell its Drug
Delivery Services Division, effective July 1, 1995, to a management group from
that division. The Drug Delivery Services Division had recorded a net loss of
$727,000 for the six months ended June 30, 1995. In addition, a loss on
disposal of the division of $819,000, including accruals for severance payments
and future liabilities, has been reflected in the consolidated statement of
operations for 1995. The operating losses of the Drug Delivery Services
Division have been retroactively restated as losses from discontinued operations
in the accompanying consolidated statements of operations. The Drug Delivery
Services Division was a significant portion of Affinity Biotech, Inc. (see Note
1).
8. INTERNATIONAL RESTRUCTURING
---------------------------
In June 1997, the company implemented a restructuring plan for the International
CRO. The Company has recorded a one-time restructuring charge of $1,208,000,
consisting primarily of termination benefits for 14 employees and an accrual for
lease-related charges. As of December 31, 1997, 12 employees have been
terminated and $296,000 of termination benefits have been paid. In addition,
lease-related costs of $111,000 have been paid. Substantially all of the
termination benefits and lease-related charges will be paid by the end of 1998.
9. ACCOUNTS RECEIVABLE
-------------------
December 31,
------------------------------
1996 1997
-------------- --------------
Trade:
Billed $ 17,548,000 $ 23,547,000
Unbilled 10,590,000 19,914,000
Allowance for doubtful accounts (524,000) (611,000)
-------------- --------------
$ 27,614,000 $ 42,850,000
============== ==============
10. PROPERTY AND EQUIPMENT
----------------------
December 31,
------------------------------
1996 1997
-------------- --------------
Computer equipment and software
Equipment (see Note 13) $ 6,051,000 $ 9,451,000
Furniture and fixtures 4,479,000 6,519,000
Leasehold improvements 1,634,000 2,308,000
1,834,000 4,592,000
-------------- --------------
13,998,000 22,870,000
Less--Accumulated depreciation and amortization (6,199,000) (8,825,000)
-------------- --------------
$ 7,799,000 $ 14,045,000
============== ==============
F-15
11. INCOME TAXES
------------
At December 31, 1997, the Company had net operating loss carryforwards for U.S.
income tax purposes of approximately $5,400,000 and for foreign income tax
purposes of approximately $6,900,000. If utilized, $3,200,000 of the U.S.
Federal net operating loss carryforward will not be benefited in the
consolidated statement of operations as it was generated by the exercise of
nonqualified stock options and will be recorded directly to additional paid-in
capital in accordance with SFAS 109. The Federal net operating loss
carryforwards will expire at various dates beginning in 2008, if not utilized.
Pursuant to the Tax Reform Act of 1986, annual use of the Company's U.S. Federal
net operating loss carryforwards may be limited if a cumulative change in
ownership of more that 50% has occurred within a three-year period. Upon
consummation of the Affinity Merger, the availability in any one year of
Affinity's net operating loss carryforward became limited due to a change in
ownership. Such limitation has not had an effect on the Company's ability
ultimately to utilize this carryforward. The Company believes that there has
been no such change in ownership since the Affinity Merger.
The components of income (loss) from continuing operations before income taxes
are as follows:
Year Ended December 31,
-------------------------------------------
1995 1996 1997
------------- ------------ ------------
Domestic $ (1,576,000) $ 4,278,000 $ 6,699,000
Foreign (2,983,000) (2,849,000) (4,959,000)
------------- ------------ ------------
$ (4,559,000) $ 1,429,000 $ 1,740,000
============= ============ ============
The income tax provisions for the years ended December 31, 1996 and 1997 relate
primarily to state income taxes due to profitable operations in the U.S. The
income tax provisions in 1996 and 1997 are composed of current provisions of
$109,000 and $938,000, respectively, offset by a deferred benefit of $49,000 in
1996 and a deferred provision of $45,000 in 1997.
Income taxes computed at the Federal tax rate of 34% are reconciled to the total
income tax provision for continuing operations as follows:
Year Ended December 31,
-------------------------------
1996 1997
-------------- -------------
United States Federal statutory
rate $ 486,000 $ 592,000
Effect of foreign losses not
benefited 484,000 1,466,000
State taxes 60,000 983,000
Nondeductible expenses 428,000 606,000
Net operating loss carryforward
utilized (1,686,000) (2,694,000)
Other 288,000 30,000
------------- -------------
Provision for income taxes $ 60,000 $ 983,000
============= =============
Effective tax rate 4.2% 56.5%
============= =============
F-16
The tax effect of temporary differences as established in accordance with SFAS
109 that give rise to deferred income taxes are as follows:
December 31,
-----------------------------
1996 1997
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 5,800,000 $ 4,855,000
Items deductible in future tax years 1,144,000 817,000
------------ ------------
Total deferred tax assets 6,944,000 5,672,000
Less-valuation allowance (5,818,000) (4,952,000)
------------ ------------
Net deferred tax assets 1,126,000 720,000
------------ ------------
Deferred tax liabilities:
Depreciation (497,000) (318,000)
Cash to accrual adjustment (677,000) (406,000)
------------ ------------
Total deferred tax liabilities (1,174,000) (724,000)
------------ ------------
Net deferred tax assets (liabilities) $ (48,000) $ (4,000)
============ ============
Items deductible in future tax years are as follows:
December 31,
-----------------------------
1996 1997
------------- -------------
Compensation and benefits $ 587,000 $ 374,000
Allowance for doubtful accounts 236,000 231,000
Other accruals 321,000 212,000
------- -------
$1,144,000 $ 817,000
========== =========
Approximately $2.7 million of the deferred tax asset for net operating loss
carryforwards at December 31, 1997 relates to foreign operations, with the
remainder related to U.S. operations. A valuation allowance has been provided
against the foreign net operating loss carryforwards as these operations have
incurred losses since inception. As indicated above, the majority of the U.S.
net operating loss carryforwards ($3.2 million of the net operating loss
carryforward or approximately $1.1 million of the deferred tax asset) relate to
deductions generated by the exercise of non-qualified stock options. The tax
benefit of these deductions will be recorded directly to additional paid-in-
capital when realized, and, therefore, will have no effect on operating results.
A valuation allowance has also been recorded against the remaining net operating
loss carryforwards relating to U.S. operations. Though the U.S. operations were
profitable in 1996 and 1997, these operations were unprofitable in 1993, 1994
and 1995. In addition, as of December 31, 1997, the Company considered its
overall financial resources and other factors which could affect future results.
These factors included, but were not limited to the risks associated with
customer contract terminations or delays, particularly with respect to three
large projects, which have certain atypical attributes. These projects could
substantial affect operating income in 1998. Given the lack of an established
history of U.S. profitability and the uncertainty of future operating results,
the Company believes that the weight of evidence available at December 31, 1997
indicates it is more likely than not these carryforwards will not be realized.
12. LINE OF CREDIT
--------------
The Company maintains a line of credit facility with its bank. In August 1996,
the Company negotiated an increase in its line of credit facility. The current
availability under the facility is equal to $5,000,000 minus the outstanding
balance on the non-revolving equipment loan (see Note 13), or $4,062,000 at
December 31, 1997. Prior to August 1996, the amount of this facility was
$2,000,000.
The line of credit facility, as amended during 1997, carries various terms and
conditions. Interest on amounts borrowed under this line of credit is at the
lender's prime rate (8.5% at December 31, 1997) effective October 1997. Prior
to October 1997, interest was at the lender's prime rate (8.5% and 8.25% at
December 31, 1995 and 1996, respectively) plus 0.25%. Indebtedness under this
facility is secured by substantially all of the Company's assets. The facility
contains financial and operational covenants to maintain specified levels of
working capital, cash level, debt service and debt-to-tangible net worth ratio.
There were no borrowings under the line of credit facility in 1995, 1996 or
1997.
F-17
13. LONG-TERM DEBT
--------------
December 31,
------------------------------
1996 1997
-------------- --------------
Term loans with bank $ - $ 6,737,000
Non-revolving equipment loan 1,563,000 938,000
Note payable on leashold improvements 242,000 126,000
Note payable for THG shareholder buyout 273,000 115,000
Capital lease obligations 1,174,000 1,013,000
Other 9,000 54,000
-------------- --------------
3,261,000 8,983,000
Less--current portion (1,376,000) (3,122,000)
-------------- --------------
$ 1,885,000 $ 5,861,000
============== ==============
Aggregate maturities of long-term debt are as follows:
1998 $ 3,122,000
1999 2,593,000
2000 2,033,000
2001 977,000
2002 258,000
--------------
$ 8,983,000
==============
In August 1997, the Company entered into a new $7,000,000 term loan facility
with its bank. This facility comprises a series of four term loans bearing
interest at rates ranging from 7.90% to 8.05% with terms of 36 to 60 months.
Principal payments are made in equal monthly installments ranging from $25,000
to $62,500. The proceeds of this facility were used to finance new leasehold
improvements and new capital equipment for the Pharmaceutics Services Division
and to enhance the Company's information systems infrastructure. This facility
is subject to the same restrictive covenants as the line of credit discussed in
Note 12. Indebtedness under the facility is secured by substantially all of the
Company's assets and a purchase money security interest in the equipment
purchased.
The Company's non-revolving equipment loan is for capital expenditures made in
1994 and is payable in 48 equal payments of $52,083 plus interest beginning July
1995. It is subject to the same restrictive covenants as stated in Note 12.
Indebtedness under this facility is also secured by substantially all of the
Company's assets and a purchase money security interest in the equipment
purchased. After renegotiations in August 1997, this loan bears interest at the
lender's prime rate plus 0.25%, a decrease from the previous interest rate of
prime plus 0.75%. The lender's prime rate was 8.5%, 8.25% and 8.5% at December
31, 1995, 1996 and 1997, respectively.
The Company's note payable on leasehold improvements is for approximately
$483,000 of improvements made in Germany in 1994. It is payable in 60 equal
payments of approximately $10,000, which includes interest at 7.5%.
In 1993, THG entered into an agreement with a stockholder to terminate his
employment with THG. In conjunction with this termination, THG agreed to pay
$749,000 in 60 monthly payments based on interest at prime plus 2%. This amount
represents the remainder of this liability.
F-18
Capital lease obligations mature from 1997 through 2001 and have interest rates
ranging from 9.0% to 12.2%. Equipment, including computer equipment, consists
of $2,776,000 and $2,495,000 of cost and $1,637,000 and $1,769,000 of
accumulated depreciation for assets held under capital leases at December 31,
1996 and 1997, respectively. At December 31, 1997, the aggregate remaining
lease payments were $1,153,000 including interest of $140,000.
In January 1998, the Company received a commitment from its bank for a
$5,000,000 loan to finance the next phase of expansion at the Pharmaceutics
Services Division. This loan will bear interest at 7.5% and will be repayable
in 47 equal monthly installments beginning six months after the first draw under
the loan.
14. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company maintains insurance coverage against possible liabilities that may
be incurred in connection with the conduct of its worldwide business. While the
Company believes it operates safely and prudently, there can be no assurance
that all possible types of liabilities that may be incurred by the Company are
covered by its insurance or that the dollar amount of such liabilities will not
exceed the Company's policy limits.
In the normal course of business, the Company is a party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determinable, management of the Company, after consultation with legal
counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial condition or results of operations.
However, because this is a forward-looking statement which contains risks and
uncertainties, the actual resolution may be material if, for example, facts are
uncovered which are not currently known by the Company or the Company is subject
to an unforeseen, unfavorable ruling by a court.
15. STOCK OPTIONS AND WARRANTS
--------------------------
In conjunction with the Affinity Merger (see Note 1), the Company's stockholders
approved the 1994 Incentive Stock Plan (the "1994 Plan") which authorizes the
granting of incentive and nonqualified stock options, stock appreciation rights
and stock awards (together the "Incentives") to officers, key employees,
directors and consultants. All previously issued Bio-Pharm options were
converted into the 1994 Plan. A maximum of 2,250,000 shares of common stock are
issuable pursuant to the 1994 Plan. The two predecessor plans of Affinity,
described below, have survived the Affinity Merger.
In January 1992, the Company established its 1992 Incentive Stock Plan (the
"1992 Plan"), which authorizes the granting of Incentives to officers, key
employees, directors and consultants. A maximum of 725,000 shares of common
stock are issuable pursuant to the 1992 Plan. On June 16, 1993, the
stockholders approved the Company's 1993 Incentive Stock Plan (the "1993 Plan").
The 1993 Plan authorizes the granting of Incentives to officers, key employees,
directors and consultants. A maximum of 750,000 shares of common stock are
issuable pursuant to the 1993 Plan. In February 1997, the Company's
stockholders approved the 1997 Equity Compensation Plan (the "1997 Plan"), which
authorizes the granting of Incentives to employees, directors and key advisors.
A maximum of 1,500,000 shares of common stock are issuable pursuant to the 1997
Plan.
The 1992, 1993, 1994 and 1997 Plans (collectively referred to as the "Plans")
are administered by a committee of the Board of Directors, the members of which
are ineligible to participate. The committee determines who will receive
Incentives, the types of Incentives to be granted and the terms and conditions
of such Incentives. To date, the Company has granted only nonqualified stock
options under the Plans, the exercise price of which was determined by the
committee at the time the options were granted. Options issued under the Plans
generally vest over five years, except for those issued under the 1997 Plan
which generally vest over four years. In addition, 350,000 options granted to
certain key employees in 1997 vest at the end of six years and contain a
provision which could accelerate vesting upon achieving individual performance
goals, as defined. All options expire no later than ten years from the date of
the grant.
F-19
During 1995, the Company's stockholders approved the 1994 Non-Employee Director
Stock Option Plan (the "Directors' Plan") which authorizes the granting of
nonqualified stock options to non-employee members of the Board of Directors. A
maximum of 300,000 shares of common stock are issuable pursuant to the
Directors' Plan. Options are granted to eligible Board members each year based
on a formula, as defined in the Directors' Plan.
In addition to options issued under the Plans and the Directors' Plan, certain
other options have been issued. As of December 31, 1995, all options issued
other than pursuant to one of the plans indicated above have been exercised.
In October 1995, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Effective January 1, 1995, the Company has elected
to adopt the disclosure requirement of this pronouncement. The fair value of
Incentives granted to non-employees is charged to earnings in accordance with
SFAS 123. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under SFAS
123, the Company's net income (loss) and net income (loss) per share would have
been as follows:
Year Ended December 31,
---------------------------------------------
1995 1996 1997
-------------- ------------- ------------
Pro forma net income (loss) $(4,835,000) $ 552,000 $(1,993,000)
Pro forma net income (loss)
per share-basic: $ (0.53) $ 0.03 $ (0.09)
Pro forma net income (loss)
per share-diluted: $ (0.53) $ 0.02 $ (0.07)
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost, and
thus pro forma net income (loss), may not be representative of that to be
expected in future years. The weighted average fair value at the date of grant
for options granted during 1995, 1996 and 1997 is estimated as $1.51, $3.09 and
$2.03 per share, respectively, using the Black-Scholes option-pricing model.
The assumptions used in the Black-Scholes model are as follows: dividend yield
of 0%; expected volatility of 40% in 1995 and 1996 and 45% in 1997; risk-free
interest rate of 6.46%, 6.05% and 6.35% in 1995, 1996 and 1997, respectively;
and an expected option life of six years.
Information with respect to the nonqualified stock options granted under the
Plans and the Directors' Plan and options granted separately from any plan is
summarized as follows:
1995 1996 1997
--------------------------- --------------------------- ---------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------------- ----------- -------------- ----------- -------------- -----------
Outstanding at beg. of
year 2,774,780 $ 1.56 2,898,710 $ 1.78 3,082,839 $ 3.09
Granted 501,360 3.02 859,950 6.32 1,501,750 3.85
Exercised (132,866) 1.01 (500,396) 0.77 (74,896) 1.73
Cancelled (244,564) 2.30 (175,425) 3.85 (175,006) 5.32
------------- -------------- --------------
Outstanding at end of
year 2,898,710 1.78 3,082,839 3.09 4,334,687 3.29
============= ============== ==============
Exercisable at end of
year 1,858,886 1.21 1,943,014 1.83 2,107,448 2.17
============= ============== ==============
F-20
The following table summarizes information about options outstanding at December
31, 1997:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Wtd. Avg.
Range of Remaining Wtd. Avg. Wtd. Avg.
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- ------------- ----------- ------------- ---------- ----------- ----------
$0.12-$1.87 1,134,767 3.2 $ 0.65 1,109,236 $ 0.62
$2.19-$3.78 1,603,710 7.8 3.28 597,562 2.91
$3.85-$6.25 1,283,260 8.3 4.71 341,690 5.08
$6.50-$8.13 312,950 8.5 7.06 58,960 7.07
----------- 6.8 3.29 ----------- 2.17
4,334,687 2,107,448
=========== ===========
As of December 31, 1997, 524,435 options were available for future grant under
the Plans and the Directors' Plan.
Upon the closing of the Affinity Merger (see Note 1), warrants to purchase
684,505 shares of common stock at $2.58 were issued to certain institutional
investors of Bio-Pharm in connection with their approval of the Affinity Merger.
In December 1996, warrants underlying 297,223 shares of common stock were
exercised, while the remaining 387,282 warrants were exercised in January
1997.
In connection with the execution of the Merger Agreement, Omnicare and IBAH
entered into a Stock Option Agreement dated as of March 30, 1998. Under this
agreement, IBAH has granted Omnicare an option to purchase up to 4,685,315
newly issued shares of IBAH common stock exercisable (approximately 19.9% of the
outstanding common shares of the Company on March 30, 1998) at $5.75 per share.
This option is exercisable if certain triggering events occur (see Note
20).
16. LEASES
------
The Company entered into a lease in 1989 for its corporate headquarters office
space, which included reduced rental payments in the initial years of the lease.
The accompanying financial statements reflect total rent expense on a straight-
line basis over the term of the lease. The Company also has leases for its
other 18 primary office and laboratory locations. Rent expense for all
operating leases was $2,732,000, $3,182,000 and $3,713,000 in 1995, 1996 and
1997, respectively. The future minimum lease payments as of December 31, 1997,
under the noncancelable operating leases for equipment and office space are as
follows:
1998 $4,284,000
1999 3,612,000
2000 2,175,000
2001 1,145,000
2002 1,006,000
2003 and thereafter 8,609,000
Included in the future minimum lease payments above is a 15 year lease for new
office, laboratory and manufacturing facilities for the Pharmaceutics Services
Division. This lease is for 124,000 square feet of space. During 1997, the
Company began the phase-in of operations in this new facility. The first 40,000
square feet of space has been converted to laboratory and office space. The
next 40,000 square feet of space are scheduled to be occupied in 1998 (see Note
13).
As of December 31, 1997, the Company issued a bank letter of credit for $300,000
to the landlord of its headquarters facility in lieu of a cash security deposit.
F-21
17. EMPLOYEE RETIREMENT PLANS
-------------------------
In January 1991, the Company established a 401(k) Retirement Plan for all
qualified U. S. employees. The employer contributions credited to this plan
were charged to expense and were $91,000, $187,000 and $237,000 in 1995, 1996,
and 1997, respectively. This plan also provides for discretionary contributions
as approved by the Board of Directors. There were no discretionary
contributions in 1995, 1996, or 1997.
In the United Kingdom, the Company operates defined contribution pension plans.
The assets of these plans are held separately from those of the Company in eight
independently administered funds. The employer contributions credited to these
plans were charged to expense and were $132,000, $183,000 and $188,000 in 1995,
1996 and 1997, respectively.
Prior to acquisition, both RBI and THG maintained their own 401(k) Retirement
Plans for qualified employees. These plans have been merged into the IBAH plan
effective January 1, 1997. Since their acquisitions, $34,000 of employer match
contributions have been made to these Plans.
18. RELATED PARTY TRANSACTIONS
--------------------------
During 1997, the Company performed services for a company employing a member of
IBAH's Board of Directors. Revenues recognized during the year for these
services were $1,357,000.
At December 31, 1997, the Company had a mortgage receivable of $79,000 due from
a former stockholder of THG (see Note 3). During 1997 an additional mortgage
receivable of $66,000 from another former stockholder of THG was repaid. The
outstanding mortgage is secured by a personal residence and bears interest at
5.78%. Payments are in monthly installments of $773. This receivable is
included in other assets on the accompanying consolidated balance sheet.
On January 19, 1996, the Company entered into a one-year agreement with Vector
Securities International, Inc. ("Vector Securities"), an affiliate of Vector
Later-Stage Equity Fund, L.P., a fund managed by Sandra Panem, a member of the
Company's Board of Directors. Pursuant to the agreement, Vector Securities will
provide strategic advisory services to the Company in return for standard up-
front fees and fees related to any specific transactions consummated by the
Company. This contract was terminated in July 1997.
In January, 1992, Affinity entered into a five year contract for management
advisory services with an entity controlled by the Chairman of the Company's
Board. This contract provided for quarterly payments. The Company incurred
expenses under this contract of $87,000 in 1995 and $122,000 in 1996. This
contract was terminated effective December 31, 1996.
The Company had a $75,000 demand note from an employee. The demand note was
secured by 25,000 shares of the Company's common stock and bore interest at
prime. The note was repaid in 1995.
F-22
19. OPERATIONS BY BUSINESS SEGMENT AND GEOGRAPHIC AREA
--------------------------------------------------
The Company operates in two business segments: the Clinical Services Division
and the Pharmaceutics Services Division (see Note 1). The following table
presents information about the Company's operations by segment:
Year Ended December 31,
----------------------------------------------
1995 1996 1997
------------- ------------- -------------
Net revenues
Clinical Services Division $ 40,272,000 $ 56,119,000 $ 77,674,000
Pharmaceutics Services
Division 2,594,000 6,001,000 10,377,000
------------- ------------- -------------
$ 42,866,000 $ 62,120,000 $ 88,051,000
============= ============= =============
Operating income (loss)
Clinical Services Division $ (1,523,000) $ 360,000 $ 234,000
Pharmaceutics Services
Division (1,379,000) 594,000 1,307,000
------------- ------------- -------------
$ (2,902,000) $ 954,000 $ 1,541,000
============= ============= =============
Depreciation and Amortization
Clinical Services Division $ 1,590,000 $ 2,411,000 $ 3,819,000
Pharmaceutics Services
Division 413,000 557,000 839,000
------------- ------------- -------------
$ 2,003,000 $ 2,968,000 $ 4,658,000
============= ============= =============
Capital Expenditures
Clinical Services Division $ 1,336,000 $ 2,504,000 $ 4,534,000
Pharmaceutics Services
Division 863,000 911,000 5,022,000
------------- ------------- -------------
$ 2,199,000 $ 3,415,000 $ 9,556,000
============= ============= =============
Identifiable Assets
Clinical Services Division $ 36,370,000 $ 87,510,000 $ 92,206,000
Pharmaceutics Services
Division 3,155,000 4,616,000 10,730,000
------------- ------------- -------------
$ 39,525,000 $ 92,126,000 $ 102,936,000
============= ============= =============
The operating income in the Clinical Services Division in 1996 includes the
$510,000 one-time charge to earnings for acquired research and development (see
Note 3). The operating income in the Clinical Services Division in 1997
includes the $1,208,000 restructuring charge (see Note 8) and merger costs of
$176,000 (see Note 3).
F-23
The following table presents information about the Company's operations by
geographic area:
Year Ended December 31,
----------------------------------------------
1995 1996 1997
-------------- -------------- --------------
Net revenues
United States $ 26,022,000 $ 41,225,000 $ 66,655,000
International 16,844,000 20,895,000 21,396,000
-------------- -------------- --------------
$ 42,866,000 $ 62,120,000 $ 88,051,000
============== ============== ==============
Operating income (loss)
United States $ (466,000) $ 3,642,000 $ 8,064,000
International (2,436,000) (2,688,000) (6,523,000)
-------------- -------------- --------------
$ (2,902,000) $ 954,000 $ 1,541,000
============== ============== ==============
Identifiable Assets
United States $ 19,097,000 $ 69,263,000 $ 83,254,000
International 20,428,000 22,863,000 19,682,000
-------------- -------------- --------------
$ 39,525,000 $ 92,126,000 $ 102,936,000
============== ============== ==============
The International operations are concentrated primarily in western Europe.
The operating income in the United States in 1996 includes the $510,000 one-time
charge to earnings for acquired research and development (see Note 3). The
operating loss in International in 1997 includes the $1,208,000 restructuring
charge (see Note 8). Operating income in the United States in 1997 includes
merger costs of $95,000, while operating loss in International includes $81,000
of merger costs for the same transaction (see Note 3).
20. MERGER WITH OMNICARE, INC. ("OMNICARE")
---------------------------------------
As of March 30, 1998, IBAH entered into the Merger Agreement with Omnicare under
which Omnicare will acquire IBAH in a stock-for-stock merger. In the Merger,
each outstanding IBAH common share will be converted into $5.75 market value of
Omnicare common shares, subject to the terms of the Merger Agreement. Omnicare
expects to issue approximately $169 million in Omnicare stock. The Merger is
contingent on, among other things, approval of IBAH stockholders and certain
regulatory authorities. The transaction is structured as a tax-free pooling of
interests. Omnicare is a leading geriatric pharmaceutical care company serving
approximately 443,000 residents in more than 5,500 long-term care facilities in
37 states. Omnicare is a provider of professional pharmacy and related
consulting and data management services for long-term care, assisted living and
other institutional health care facilities. Omnicare also provides
comprehensive clinical research services for the pharmaceutical and
biotechnology industries through its Coromed subsidiary, which offers clinical
research services in the United States, Canada and Argentina.
F-24
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
IBAH, Inc.
Date: May 22, 1998 By: /s/ Geraldine A. Henwood
--------------------------
Geraldine A. Henwood
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: May 22, 1998 By: /s/ Geraldine A. Henwood
------------------------
Geraldine A. Henwood
Chief Executive Officer
(Principal Executive Officer)
Date: May 22, 1998 By: /s/ Cornelius H. Lansing, II
----------------------------
Cornelius H. Lansing, II
Chief Financial Officer
(Principal Financial Officer)