<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--- ---
Commission file number 0-27750
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IMPATH INC.
------------------------------
(exact name of registrant as specified in its charter)
Delaware 8071 13-3459685
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification
organization) Code Number)
521 West 57th Street, 6th Floor
New York, New York 10019
(212) 698-0300
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
----- --------------------------------
Common Stock, par value 8,480,684
$ .005 per share
1
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INDEX
IMPATH INC. AND SUBSIDIARIES
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997........................................ 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1998
and September 30, 1997....................................... 4
Consolidated Statement of Stockholders' Equity for the
Nine Months Ended September 30, 1998......................... 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and September 30, 1997....... 6
Notes to Consolidated Financial Statements................... 7-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............. 9-14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-k............................. 15-16
Signatures........................................................... 17
2
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Item 1. Consolidated Financial Statements (Unaudited)
IMPATH INC. and Subsidiaries
Consolidated Balance Sheets*
<TABLE>
<CAPTION>
September 30, Dec. 31,
1998 1997
ASSETS (unaudited) (audited)
----------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 52,840,827 $ 587,057
Marketable securities at market value 23,060,881 13,952,148
Accounts receivable, net of allowance for doubtful accounts 17,529,466 12,135,961
Prepaid expenses 585,887 276,073
Prepaid taxes 66,650 -
Deferred tax assets, net 453,427 53,427
Other current assets 1,105,297 703,753
------------ -----------
Total current assets 95,642,435 27,708,419
Fixed assets, less accumulated depreciation and amortization 18,288,379 10,623,004
Deposits and other assets 161,129 345,322
Intangible assets, net of accumulated amortization 11,605,042 8,273,636
------------ -----------
Total assets $125,696,985 $46,950,381
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 1,656,550 $ 1,222,281
Current portion of note payable 1,239,418 700,000
Accounts payable 1,897,166 1,312,237
Deferred revenues 1,670,031 1,247,724
Construction payments payable - 1,542,199
Income taxes payable - 158,094
Accrued expenses 930,588 728,353
------------ -----------
Total current liabilities 7,393,753 6,910,888
------------ -----------
Capital lease obligations, net of current portion 3,173,448 2,451,587
Note payable, net of current portion 528,539 274,000
Stockholders' equity:
Common stock 42,678 30,044
Additional paid-in capital 105,651,287 33,473,320
Retained earnings 9,297,548 4,570,556
Unrealized net appreciation (depreciation) of marketable securities 149,094 (83,881)
------------ -----------
115,140,607 37,990,039
Less:
Cost of 7,088 shares of common stock held in treasury (100) (100)
Deferred compensation (539,262) (676,033)
------------ -----------
Total stockholders' equity 114,601,245 37,313,906
------------ -----------
Total liabilities and stockholders' equity $125,696,985 $46,950,381
============ ===========
</TABLE>
* Restated in accordance with pooling-of-interests accounting.
See accompanying notes to consolidated financial statements.
3
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IMPATH INC. and Subsidiaries
Consolidated Statements of Operations*
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net diagnostic and prognostic services $13,877,438 $ 9,274,313 $38,775,428 $26,348,490
Biopharmaceutical services 350,523 54,415 615,833 110,363
Tumor registry services 1,007,519 767,072 2,818,899 2,493,293
----------- ----------- ----------- -----------
Total revenues 15,235,480 10,095,800 42,210,160 28,952,146
----------- ----------- ----------- -----------
Operating expenses:
Salaries and related costs 5,719,199 4,372,607 16,928,271 12,471,324
Selling, general and administrative 6,795,240 4,343,413 18,667,848 12,857,813
One time charges related to pooling 750,000 0 750,000 0
----------- ----------- ----------- -----------
Total operating expenses 13,264,439 8,716,020 36,346,119 25,329,137
----------- ----------- ----------- -----------
Income from operations 1,971,041 1,379,780 5,864,041 3,623,009
Interest income 1,094,792 273,071 2,471,352 566,499
Interest expense (163,523) (82,610) (414,207) (227,522)
Gain on marketable securities, net 0 0 0 242,726
----------- ----------- ----------- -----------
Income before income tax expense 2,902,310 1,570,241 7,921,186 4,204,712
Income tax expense (681,314) (729,966) (2,677,366) (1,858,574)
----------- ----------- ----------- -----------
Net income available to common stockholders $ 2,220,996 $ 840,275 $ 5,243,820 $ 2,346,138
=========== =========== =========== ===========
Per common and common equivalent share:
Basic:
Net income per common share $ 0.26 $ 0.13 $ 0.67 $ 0.37
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding 8,477,000 6,384,000 7,841,000 6,330,000
=========== =========== =========== ===========
Dilutive:
Net income per common share-assuming dilution $ 0.25 $ .13 $ 0.64 $ 0.37
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding-assuming
dilution 8,766,000 6,406,000 8,213,000 6,385,000
=========== =========== =========== ===========
</TABLE>
* Restated in accordance with pooling-of-interests accounting.
See accompanying notes to consolidated financial statements.
4
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IMPATH INC. and Subsidiaries
Consolidated Statement of Stockholders' Equity*
Nine Months ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Unrealized net
Common Stock Additional (depreciation)
------------- paid-in Retained appreciation of Treasury Deferred
Shares Amount capital Earnings securities stock Compensation Total
------ ------ ----------- ---------- -------------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 6,008,827 $30,044 $33,473,320 $4,570,556 $(83,881) $(100) $(676,033) $37,313,906
Common shares issued upon
exercise of stock options 147,634 738 507,100 507,838
Common shares issued upon
exercise of warrants 29,331 146 102,660 102,806
Common shares issued upon
secondary offering, net 2,300,000 11,500 71,437,995 71,449,495
Common shares issued upon
acquisition of Physicians
Choice, Inc. (PCI) 1,980 250 49,750 50,000
Compensation associated with
issuance of options to non-
employees 80,462 (80,462) -
Distribution to MRS
stockholders (516,828) (516,828)
Amortization of deferred
compensation 217,233 217,233
Change in unrealized net
appreciation of securities 232,975 232,975
Net income for the period
ended September 30, 1998 5,243,820 5,243,820
--------- ------- ------------ ---------- -------- ------ ---------- ------------
Balance at September 30, 1998 8,487,772 $42,678 $105,651,287 $9,297,548 $149,094 $(100) $(539,262) $114,601,245
========= ======= ============ ========== ======== ====== ========== ============
</TABLE>
*Restated in accordance with pooling-of-interests accounting.
See accompanying notes to consolidated financial statements.
5
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IMPATH INC. and Subsidiaries
Consolidated Statements of Cash Flows*
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,243,820 $ 2,346,138
Adjustments to reconcile net income to net cash (used in)
operating activities:
Depreciation and amortization 2,152,178 1,072,950
Provision for uncollectible accounts receivable 4,323,980 3,430,066
Non-cash compensation 217,233 156,591
Changes in assets and liabilities:
(Increase) in accounts receivable (9,717,485) (6,407,245)
(Increase) decrease in deferred tax assets (400,000) 979,779
(Increase) in prepaid expenses and current assets (711,358) (255,646)
Decrease (increase) in deposits and other assets 117,543 (128,509)
Increase (decrease) in accounts payable and accrued expenses 787,164 (905,833)
(Decrease) in construction payments payable (1,542,199) -
(Decrease) in income taxes payable (158,094) (692,193)
Increase in deferred revenues 422,307 348,682
----------- -----------
Total adjustments (4,508,731) (2,401,358)
----------- -----------
Net cash provided by (used in) operating activities 735,089 (55,220)
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities (42,611,949) -
Sales/redemptions of marketable securities 33,736,191 7,569,853
Acquisitions/investments in businesses (2,705,801) (6,009,563)
Capital expenditures (6,854,018) (1,052,319)
----------- -----------
Net cash (used in) provided by investing activities (18,435,577) 507,971
----------- -----------
Cash flows from financing activities:
Issuance of common stock from exercise of options and warrants 610,644 347,304
Issuance of common stock upon acquisition of PCI 50,000 -
Proceeds of secondary offering, net of registration costs to date 71,449,495 -
Payments of notes payable (451,043) -
Payments of capital lease obligations (1,188,010) (676,593)
Payments received on officer loans - 12,586
Distribution to MRS stockholders (516,828) (150,000)
----------- -----------
Net cash provided by (used in) financing activities 69,954,258 (466,703)
----------- -----------
Net increase (decrease) in cash and cash equivalents 52,253,770 (13,952)
Cash and cash equivalents at beginning of period 587,057 1,160,147
----------- -----------
Cash and cash equivalents at end of period $52,840,827 $ 1,146,195
=========== ===========
</TABLE>
*Restated in accordance with pooling-of-interests accounting.
See accompanying notes to consolidated financial statements.
6
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IMPATH INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
GENERAL:
The accompanying unaudited consolidated financial statements have been prepared
by management in accordance with the rules and regulations of the United States
Securities and Exchange Commission.
In the opinion of IMPATH Inc. (the "Company" or "IMPATH"), the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
only of normal recurring adjustments necessary for the fair presentation of the
financial information for all periods presented. Results for the interim periods
are not necessarily indicative of the results for an entire year and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
NET INCOME PER SHARE:
Net income per share, basic is based on the weighted average number of shares of
common stock outstanding. Diluted earnings per share is based on the weighted
average number of shares of common stock and common equivalent shares
outstanding. Common equivalent shares from stock options and warrants are
included in the computation using the treasury stock method to the extent their
effect is dilutive.
COMPREHENSIVE NET INCOME:
Comprehensive net income is equal to the net income reported adjusted for the
unrealized net appreciation or depreciation of marketable securities, net of
related deferred taxes. Comprehensive net income for the three months ended
September 30, 1998 and 1997 was $2,437,482 and $840,275, respectively.
Comprehensive net income for the nine months ended September 30, 1998 and 1997
was $5,476,795 and $2,346,138, respectively.
INVESTMENTS:
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, the Company's investments (consisting primarily of government and corporate
fixed income securities) were classified as available for sale. As a result, the
unrealized net appreciation or depreciation is recorded as a separate component
of stockholder's equity, net of related deferred taxes. Prior to October 1,
1997, the Company's investments were classified as trading securities with
unrealized gains and losses reported in the consolidated statement of
operations. The Company currently has approximately $75,000,000 invested in a
portfolio of short term and fixed income marketable securities, approximately
$70,000,000 of which was generated from the net proceeds of an underwritten
public offering of 2,300,000 shares of common stock in March 1998. At September
30, 1998, approximately $53,000,000 of securities with original maturities of
three months or less were included as cash equivalents. The remaining securities
included in the investment portfolio with original maturities that exceed three
months are included in current assets.
7
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ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS:
In accordance with Generally Accepted Accounting Principles ("GAAP") and
consistent with healthcare industry practices, IMPATH presents its accounts
receivable at net realizable value. Net accounts receivable balances are
comprised of the following as of September 30, 1998 and December 31, 1997:
September 30, 1998 December 31, 1997
------------------ -----------------
Gross accounts receivable ........ $31,233,462 $21,955,958
Allowance for doubtful accounts .. (4,247,590) (4,673,990)
Contractual allowance reserve .... (9,456,406) (5,146,007)
----------- -----------
$17,529,466 $12,135,961
The growth in the contractual allowance reserve (contractual allowances are
provided against revenues) is due to the increasing shift to managed care
contracts from traditional fee for service billing.
ACQUISITIONS
On July 29, 1998 the Company purchased certain assets of Biologic & Immunologic
Science Laboratories, Inc. ("BIS"), a privately held cancer diagnostics
company based in Reseda, California for $3.6 million. The terms provided for an
initial payment of $2.0 million, and $800k payable in three equal semi-annual
installments beginning December 1998, after which another $800k is payable in
three equal semi-annual installments contingent on previously established
revenue targets with interest accruing at 8% per annum. This transaction will
allow IMPATH to expand its core diagnostic and prognostic business and build on
IMPATH's scientific leadership in lymph node and bone marrow micrometastases
detection in early and late stage cancer. Additionally, BIS will further enhance
the Company's ability to provide unique cancer information to physicians for
evaluating and treating cancer patients; to the biopharmaceutical industry in
assessing biologically relevant characteristics for targeted drug development
and in selecting patients for clinical trials; as well as in evaluating the
efficacy of various therapies.
On August 31, 1998 the Company acquired Medical Registry Services, Inc. "(MRS)"
in exchange for 550,000 shares of IMPATH, Inc. common stock. In accordance with
the pooling-of-interests method of accounting, the accompanying consolidated
financial statements have been restated for the current year and prior years.
MRS is a leading developer and marketer of cancer registry software products
that are currently utilized in over 400 hospitals throughout the United States.
The products are used to collect and manage critical diagnostic, treatment,
follow-up and outcomes data on cancer patients. The two companies, which
currently have approximately 200 common clients, began a relationship through a
strategic joint venture in January, 1997. This acquisition will significantly
enhance IMPATH's oncology information capabilities by matching its diagnostic
and prognostic data with treatment and outcomes information from MRS.
Additionally, it provides IMPATH with an ongoing link to its clients as its
ability to supply hospitals and oncologists with critical information for
optimal disease management will continue to expand. MRS's revenues are derived
from licensing fees paid by hospitals utilizing its proprietary tumor registry
software. The Company incurred one-time transaction related banking, legal and
accounting costs of $750,000 in connection with the acquisition of MRS, which
are included in operating expenses in accordance with pooling-of-interests
accounting. Further, the Company's tax provision for the three-months ended
September 30, 1998 includes a one-time credit of $400,000 related to a deferred
tax asset that has been recorded as a result of the MRS acquisition also in
accordance with pooling-of-interests accounting.
On September 2, 1998 the Company acquired Physicians Choice, Inc. (PCI) for the
sum of $1.0 million, with $400,000 payable immediately and an additional
$400,000 payable in four equal semi-annual installments beginning March, 1999
with interest accruing at 8% per annum. In addition, the terms provided for an
issuance of $200,000 in IMPATH, Inc. common stock. An initial 1,980 shares
($50,000 FMV) of common stock were issued on September 2, 1998, with the
remaining shares to be issued in three equal annual installments beginning
September 2, 1999. PCI is a leading provider of post-clinical, pre-marketing,
cost-benefit analyses to pharmaceutical and biotechnology companies in
connection with new oncology drugs entering the marketplace. By focusing on
cancer, and utilizing health care outcomes and other efficacy measures, PCI has
achieved a better understanding of the way healthcare is delivered in that
specialty. PCI's revenues are generated on a per project basis from
pharmaceutical and biotechnology companies.
The excess of the purchase price over the net assets acquired on both the BIS
and PCI acquisitions principally relate to customer lists, which are
included in intangible assets on the accompanying September 30, 1998 balance
sheet and will be amortized over periods of up to fifteen years.
In March 1998, the Company established an unsecured line of credit at an
aggregate amount of $10.0 million with Fleet Bank. Borrowing under the line
will bear interest at LIBOR plus 2.25%. As of September 30, 1998, the Company
had not drawn on the line of credit.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1997
The Company's total revenues for the three months ended September 30, 1998 and
1997 were $15,235,000 and $10,096,000, respectively, representing an increase
of $5,139,000, or 50.9%, in 1998. This growth was primarily attributable to a
58.8% increase in diagnostic and prognostic case volume resulting from increased
sales and marketing activities, as well as the successful integration of recent
acquisitions - certain assets of the GenCare division of Bio Reference
Laboratories, Inc., Aeron Biotechnology, Inc., and Biologic and Immunologic
Science Laboratories, Inc.
Salaries and related costs for the three months ended September 30, 1998 and
1997 were $5,719,000 and $4,373,000, respectively, representing an increase of
$1,346,000, or 30.8%, in 1998. This increase was the result of personnel costs
associated with case volume growth and the Company's expansion. As a percentage
of total revenues, salaries and related costs decreased to 37.5% in 1998 from
43.3% in 1997. This was facilitated by the Company's successful expansion
strategy of incorporating complementary and synergistic technologies, as well as
streamlining operational and administrative duties.
Selling, general and administrative expenses for the three months ended
September 30, 1998 and 1997 were $6,795,000 and $4,343,000, respectively,
representing an increase of $2,452,000, or 56.5%, in 1998. The largest component
of this increase was $665,000 in incremental lab supply and courier costs due to
rapid case volume growth and the logistics required to service the Company's
expanding oncology office based business. Another component of this increase was
$412,000 in incremental bad debt expense resulting from higher revenues. The
Company also incurred an additional $584,000 in depreciation and amortization
costs due to leasehold improvements made at the Company's new facility in New
York and goodwill amortization associated with the Company's recent
acquisitions. Additionally, incremental costs of $266,000 in medical consulting
and lab subcontracting were incurred as a result of the Company's expanding
oncology business, particularly in serum and molecular testing. Effective August
1998, the Company began providing serum tumor marker analysis at its New York
and California facilities, thereby reducing the related laboratory
subcontracting costs. The Company's travel related expenses and professional
fees increased $249,000 due to expanding sales, marketing and investor relations
activities. Selling, general and administrative expenses as a percentage of
total revenues increased to 44.6% in 1998 compared to 43.0% in 1997. This
increase was primarily due to costs associated with the company's recent
relocation, expansion and acquisition activities.
The Company incurred one-time transaction related banking, legal and accounting
costs of approximately $750,000 in connection with its acquisition of Medical
Registry Services, Inc. (MRS). The one-time charges were included in operating
expenses for the period in accordance with pooling-of-interests accounting.
Income from operations for the three months ended September 30, 1998 and 1997
was $1,971,000 and $1,380,000, respectively, representing an increase of
$591,000, or 42.8%, in 1998. As a percentage of total revenues, income from
operations decreased to 12.9% in 1998 from 13.7% in 1997, primarily due to the
one-time transaction related expenses of $750,000. Excluding the one-time costs,
operating margins increased to 17.9% in 1998. The 1998 figure reflects increased
Company operating margins from its core diagnostic and prognostic services, and
the Company's continued expansion of its oncology business, particularly in
molecular and cytogenetics testing for cancer and the addition of tumor marker
analysis.
Interest income, net for the three months ended September 30, 1998 and 1997 was
$931,000 and $190,000, respectively, representing an increase of $741,000 in
1998. The increase was the result of interest income generated from the proceeds
of the Company's secondary public offering of common stock in March 1998,
9
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partially offset by increased interest expense due to additional capital lease
obligations. The proceeds from other income are being used to fund the Company's
expansion and database development activities.
The tax provision for the three months ended September 30, 1998 of approximately
$681,000 reflects federal, state and local income tax expense partially
mitigated by a one-time $400,000 reduction in the tax provision, due to a
deferred tax asset established as a result of the MRS acquisition in accordance
with pooling-of-interests accounting. The Company has estimated its annual
effective tax rate for 1998 to be approximately 39%, exclusive of the one-time
reduction.
Net income for the three months ended September 30, 1998 and 1997 was $2,221,000
and $840,000, respectively, representing an increase of $1,381,000 or 164.4% in
1998. The increase in net income is attributed to the factors described above.
10
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NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1997
The Company's total revenues for the first nine months of 1998 and 1997 were
$42,210,000 and $28,952,000, respectively, representing an increase of
$13,258,000 or 45.8%, in 1998. This growth was primarily attributable to a 55.5%
increase in diagnostic and prognostic case volume resulting from increased sales
and marketing activities, as well as the successful integration of recent
acquisitions-certain assets of the GenCare division of Bio Reference
Laboratories, Inc., Aeron Biotechnology, Inc., and Biologic and Immunologic
Science Laboratories, Inc.
Salaries and related costs for the first nine months of 1998 and 1997 were
$16,928,000 and $12,471,000, respectively, representing an increase of
$4,457,000, or 35.7%, in 1998. This increase was the result of increased
personnel headcount due to the increase in case volume, as well as personnel
costs incurred in connection with the Company's expansion. Salaries and related
costs, as a percentage of total revenues decreased to 40.1% in 1998 from 43.1%
in 1997. This was facilitated by the Company's successful expansion strategy of
incorporating complementary and synergistic technologies, as well as
streamlining operational and administrative duties.
Selling, general and administrative expenses for the first nine months of 1998
and 1997 were $18,668,000 and $12,858,000, respectively, representing an
increase of $5,810,000 or 45.2%, in 1998. The largest component of this increase
was $1,658,000 in incremental courier and laboratory supply costs due to rapid
case volume growth. The Company also incurred an additional $1,079,000 in
amortization and depreciation expenses associated with the leasehold
improvements at the Company's new facility in New York, capital equipment
requirements associated with the Company's growth, as well as goodwill
amortization related to Company acquisitions. Incremental bad debt expense of
$894,000 resulted from higher revenues. Medical consulting and lab
subcontracting costs increased $485,000 due to the expansion of the Company's
oncology business, particularly in serum and molecular testing. In addition, the
Company incurred $372,000 in incremental travel related expenses and
professional fees associated with expanded sales, marketing and investor
relations activities, as well as $164,000 in increased insurance costs related
to the Company's new facility and increased personnel headcount.
Telecommunication expenses increased $292,000 due to the Company's expansion and
relocation to its new facility, as well as increases in data networking costs
associated with the Company's new clinical, financial and database applications.
Selling, general and administrative expenses as a percentage of total revenues
decreased to 44.2% in 1998 from 44.4% in 1997.
The Company incurred one-time transaction related banking, legal and accounting
costs of approximately $750,000 in connection with its acquisition of Medical
Registry Services, Inc. (MRS). The one-time charges were included in operating
expenses for the period in accordance with pooling-of-interests accounting.
Income from operations for the first nine months of 1998 and 1997 was $5,864,000
and $3,623,000, respectively, representing an increase of $2,241,000, or 61.9%,
in 1998. As a percentage of total revenues, income from operations increased to
13.9% in 1998 from 12.5% in 1997. Excluding one-time transaction related costs,
operating margins increased to 15.7% in 1998. The 1998 figure reflects increased
Company operating margins from its core diagnostic and prognostic services, the
Company's continued expansion of its oncology business, particularly in
molecular and cytogenetics testing for cancer and the addition of tumor marker
analysis.
Interest income, net for the first nine months of 1998 and 1997 was $2,057,000
and $582,000, respectively, representing an increase of $1,475,000 in 1998. The
increase was the result of interest income generated from the proceeds of the
Company's secondary public offering of common stock in March 1998, partially
offset by increased interest expense due to additional capital lease
obligations.
11
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The tax provision for the first nine months of 1998 of approximately $2,677,000
reflects federal, state and local income tax expense offset by a one-time
$400,000 reduction in the tax provision, due to a deferred tax asset established
as a result of the MRS acquisition in accordance with pooling-of-interests
accounting. The Company has estimated its annual effective tax rate for 1998 to
be approximately 39%, exclusive of the one-time reduction.
Net income for the first nine months of 1998 and 1997 was $5,244,000 and
$2,346,000, respectively, representing an increase of $2,898,000, or 123.5% in
1998. As a percentage of total revenues, net income increased to 12.4% in 1998
from 8.1% in 1997, which was due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through its February
1996 initial public offering, the private issuance of convertible preferred
stock, secured term loans and operating and capital equipment leases. In March
1998, the Company raised approximately $72,000,000 of capital through an
underwritten secondary public offering of Common Stock. The proceeds will be
used to fund the Company's growth strategy and the continued development of its
outcomes database.
The Company's cash and cash equivalent balances at September 30, 1998 and
December 31, 1997 were $52,841,000 and $587,000, respectively, representing an
increase of $52,254,000 in 1998. The increase was due to the net cash proceeds
generated from the secondary public offering of 2.3 million shares of common
stock.
For the nine months ended September 30, 1998, net cash provided by operating
activities was approximately $735,000. This resulted from higher net income,
offset by an increase in accounts receivable, net of allowance for bad debt of
approximately $5,393,000 due to rapid sales growth. The Company also expended
approximately $1,542,000 in the period for leasehold improvements associated
with the Company's new facility. These expenditures were partially mitigated by
an increase of approximately $787,000 in accounts payable and accrued expenses.
The Company also recorded approximately $422,000 in deferred revenues in the
period, as a result of the pooling-of-interests combination with Medical
Registry Services, Inc. (MRS). This increase was offset by an increase in
deferred tax assets of $400,000, also resulting from the MRS transaction.
For the nine months ended September 30, 1998, the Company invested
approximately $8,876,000 of the proceeds from the secondary offering in
marketable securities, resulting in a balance of approximately $23,061,000 of
marketable securities at September 30, 1998. Additionally the Company incurred
approximately $6,854,000 in capital expenditures, including costs associated
with the Company's relocation of its New York facilities and the continued
development of its outcomes database. The Company also invested approximately
$2,706,000 in new business acquisitions.
The Company received approximately $611,000 for the nine months ended September
30, 1998 through the issuance of Common Stock upon the exercise of Company stock
options and warrants. The Company used approximately $1,188,000 to satisfy its
capital lease obligations and approximately $451,000 to meet its note
obligations resulting from its recent asset acquisitions.
In March 1998, the Company established an unsecured line of credit at an
aggregate amount of $10.0 million with Fleet Bank. Borrowing under the line will
bear interest at LIBOR plus 2.25%. As of September 30, 1998, the Company had not
drawn on the line of credit.
The Company's growth strategy is anticipated to be financed through the net
proceeds from the secondary public offering of 2,300,000 shares of its Common
Stock, its current cash resources and existing third-party credit facilities.
The Company believes the combination of these sources will be sufficient to fund
its operations and satisfy the Company's cash requirements for the next 12
months and the foreseeable future. There may be circumstances, however, that
would accelerate the Company's use of proceeds from the
12
<PAGE>
secondary public offering. If this occurs, the Company may, from time to time,
incur additional indebtedness or issue, in public or private transactions,
equity or debt securities. However, there can be no assurance that suitable debt
or equity financing will be available to the Company.
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation and changing prices on the Company has been primarily
limited to salary, laboratory and operating supplies and rent increases and has
not been material to date to the Company's operations. In the future, the
Company may not be able to raise the prices for its cases by an amount
sufficient to cover the cost of inflation, although the Company is responding to
these concerns by attempting to increase the volume and adjust the product mix
of its business.
ACQUISITIONS
On July 29, 1998 the Company purchased certain assets of Biologic & Immunologic
Science Laboratories, Inc. ("BIS"), a privately held cancer diagnostics company
based in Reseda, California for $3.6 million. The terms provided for an initial
payment of $2.0 million, and $800k payable in three equal semi-annual
installments beginning December 1998, after which another $800k is payable in
three equal semi-annual installments contingent on previously established
revenue target, with interest accruing at 8% per annum. This transaction will
allow IMPATH to expand its core diagnostic and prognostic business and build on
IMPATH's scientific leadership in lymph node and bone marrow micrometastases
detection in early and late stage cancer. Additionally, BIS will further enhance
the Company's ability to provide unique cancer information to physicians for
evaluating and treating cancer patients; to the biopharmaceutical industry in
assessing biologically relevant characteristics for targeted drug development
and in selecting patients for clinical trials; as well as in evaluating the
efficacy of various therapies.
On August 31, 1998 the Company acquired Medical Registry Services, Inc. "(MRS)"
in exchange for $550,000 shares of IMPATH, Inc. common stock. In accordance with
the pooling-of-interests method of accounting, the accompanying consolidated
financial statements have been restated for the current year and prior years.
MRS is a leading developer and marketer of cancer registry software products
that are currently utilized in over 400 hospitals throughout the United States.
The products are used to collect and manage critical diagnostic, treatment,
follow-up and outcomes data on cancer patients. The two companies, which
currently have approximately 200 common clients, began a relationship through a
strategic joint venture in January, 1997. This acquisition will significantly
enhance IMPATH's oncology information capabilities by matching its diagnostic
and prognostic data with treatment and outcomes information from MRS.
Additionally, it provides IMPATH with an ongoing link to its clients as its
ability to supply hospitals and oncologists with critical information for
optimal disease management will continue to expand. MRS's revenues are derived
from licensing fees paid by hospitals utilizing its proprietary tumor registry
software. The Company incurred one-time transaction related banking, legal and
accounting costs of $750,000 in connection with the acquisition of MRS, which
are included in operating expenses in accordance with pooling-of-interests
accounting. Further, the Company's tax provision for the three-months ended
September 30, 1998 includes a one-time credit of $400,000 related to a deferred
tax asset that has been recorded as a result of the MRS acquisition also in
accordance with pooling-of-interests accounting.
On September 2, 1998 the Company acquired Physicians Choice, Inc. (PCI) for the
sum of $1.0 million, with $400,000 payable immediately and an additional
$400,000 payable in four equal semi-annual installments beginning March, 1999
with interest accruing at 8% per annum. In addition, the terms provided for an
issuance of $200,000 in IMPATH, Inc. common stock. An initial 1,980 shares
($50,000 FMV) of common stock were issued on September 2, 1998, with the
remaining shares to be issued in three equal annual installments beginning
September 2, 1999. PCI is a leading provider of post-clinical, pre-marketing,
cost-benefit analyses to pharmaceutical and biotechnology companies in
connection with new oncology drugs entering the marketplace. By focusing on
cancer, and utilizing health care outcomes and other efficacy measures, PCI has
achieved a better understanding of the way healthcare is delivered in that
specialty. PCI's revenues are generated on a per project basis from
pharmaceutical and biotechnology companies.
The excess of the purchase price over the net assets acquired on both the BIS
and PCI acquisitions principally relate to customer lists, which are included
in intangible assets on the accompanying September 30, 1998 balance sheet and
will be amortized over periods of up to fifteen years.
13
<PAGE>
YEAR 2000
The Company is in the process of conducting a review of its business systems,
including its computer systems and laboratory equipment, and will be sending
written inquiries to its customers and vendors as to their progress in
identifying and addressing problems that their systems may face in correctly
interpreting and processing date information as the year 2000 approaches. This
review is expected to be complete by March 1999. Based on this review, the
Company will implement a plan to achieve year 2000 compliance. The Company is in
the final stages of the installation of a newly developed clinical and billing
information system which addresses year 2000 issues. The Company believes that
it will achieve year 2000 compliance in a manner which will be non-disruptive to
its operations. In addition, the Company has commenced work on various types of
contingency planning to address potential problem areas with internal systems,
suppliers and other third parties. Year 2000 compliance should not have a
material adverse effect on the Company, including the Company's financial
condition, results of operations or cash flow. The Company has incurred no costs
to date related to year 2000. The Company estimates the cost of its year 2000
efforts to be approximately $150,000. The total cost estimate is based on
management's current assessment and is subject to change.
However, the Company may encounter problems with supplier and or revenue sources
which could adversely affect the Company's financial condition, results of
operations or cash flow. The Company cannot accurately predict the occurrence
and or outcome of any such problems, nor can the dollar amount of such problems
be estimated. In addition, there can be no assurance that the failure to ensure
year 2000 compliance by a third party would not have a material adverse effect
on the Company.
14
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit Page
Number Description Number
------- ----------- ------
27 Financial Data Schedule 16
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: 11/13/1998 IMPATH INC.
----------------------
(Registrant)
Dated: 11/13/1998 By /s/ ANU D. SAAD
----------------------------
Anu D. Saad, Ph.D.
President and Chief
Executive Officer
Dated: 11/13/1998 By /s/ JOHN P. GANDOLFO
----------------------------
John P. Gandolfo Executive
Vice President, Chief
Financial Officer and
Principal Accounting
Officer
16
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<PAGE>
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<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 52,840,827 52,840,827
<SECURITIES> 23,060,881 23,060,881
<RECEIVABLES> 17,529,466 17,529,466
<ALLOWANCES> (4,247,590) (4,247,590)
<INVENTORY> 573,497 573,497
<CURRENT-ASSETS> 95,642,435 95,642,435
<PP&E> 22,497,125 22,497,125
<DEPRECIATION> 4,208,747 4,208,747
<TOTAL-ASSETS> 125,696,985 125,696,985
<CURRENT-LIABILITIES> 7,393,753 7,393,753
<BONDS> 0 0
0 0
0 0
<COMMON> 42,678 42,678
<OTHER-SE> 114,601,245 114,601,245
<TOTAL-LIABILITY-AND-EQUITY> 125,696,985 125,696,985
<SALES> 15,235,480 42,210,160
<TOTAL-REVENUES> 15,235,480 42,210,160
<CGS> 5,204,300 14,278,363
<TOTAL-COSTS> 13,264,439 36,346,119
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 163,523 414,207
<INCOME-PRETAX> 2,902,310 7,921,186
<INCOME-TAX> 681,314 2,677,366
<INCOME-CONTINUING> 2,220,996 5,243,820
<DISCONTINUED> 0 0
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<NET-INCOME> 2,220,996 5,243,820
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