<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, 1999
OR
[X] 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
-------
IMPATH INC.
(exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 8071 13-3459685
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
521 West 57th Street
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, 1999
- ----- ---------------------------------
Common Stock, par value 7,887,192
$ .005 per share
<PAGE>
Index
IMPATH INC. and Subsidiaries
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE NUMBER
-----------
<S> <C> <C>
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets at September 30, 1999
and December 31, 1998....................................... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and September 30, 1998...... 4
Consolidated Statement of Stockholders' Equity for the
Nine Months Ended September 30, 1999........................ 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and September 30, 1998...... 6
Notes to Consolidated Financial Statements.................. 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............ 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 16
Signatures........................................................... 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 18-19
</TABLE>
<PAGE>
Item 1. Consolidated Financial Statements (Unaudited)
IMPATH INC. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
ASSETS ------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,926,417 $ 45,556,005
Marketable securities, at market value 30,915,162 29,971,456
Accounts receivable, net of allowance for doubtful accounts 31,505,654 19,619,451
Prepaid expenses 995,467 442,480
Prepaid taxes - 1,758,407
Deferred tax assets, net 1,334,591 1,334,591
Other current assets 4,839,072 1,306,653
------------ ------------
Total current assets 76,516,363 99,989,043
Fixed assets, less accumulated depreciation and amortization 30,238,264 21,239,884
Deposits and other assets 266,379 203,491
Investment in preferred stock 5,000,000 -
Intangible assets, net of accumulated amortization 35,421,174 28,600,749
------------ ------------
Total assets $147,442,180 $150,033,167
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 3,355,590 $ 1,622,366
Current portion of note payable 1,616,872 1,271,915
Short term borrowings - 10,000,000
Accounts payable 3,395,480 2,713,228
Deferred revenue 2,107,761 1,866,241
Income taxes payable 1,824,792 -
Accrued expenses 1,788,741 1,819,752
------------ ------------
Total current liabilities 14,089,236 19,293,502
------------ ------------
Capital lease obligations, net of current portion 8,239,616 3,792,833
Note payable, net of current portion 800,000 233,333
Deferred tax payable 2,126,531 2,126,531
Stockholders' equity:
Common stock 43,107 42,690
Common stock to be issued 1,735,000 -
Additional paid-in capital 121,311,727 120,904,861
Retained earnings 18,589,369 12,095,622
Accumulated other comprehensive (loss) (597,769) (48,602)
------------ ------------
141,081,434 132,994,571
Less:
Cost of 734,538 and 313,688 shares of common stock
held in treasury in 1999 and 1998, respectively (18,553,675) (7,908,841)
Deferred compensation (340,962) (498,762)
------------ ------------
Total stockholders' equity 122,186,797 124,586,968
------------ ------------
Total liabilities and stockholders' equity $147,442,180 $150,033,167
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
IMPATH INC. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
September 30 September 30
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net diagnostic and prognostic services $19,182,042 $13,877,438 $54,504,040 $38,775,426
Biopharmaceutical services 1,364,392 350,523 1,916,623 599,952
Tumor registry services 996,878 342,556 2,938,537 342,556
----------- ----------- ----------- -----------
21,543,312 14,570,517 59,359,200 39,717,934
----------- ----------- ----------- -----------
Operating expenses:
Salaries and related costs 8,035,154 5,337,734 22,597,940 15,463,400
Selling, general and administrative 7,986,774 5,913,373 22,461,982 15,956,372
Depreciation and amortization 1,864,972 926,318 4,839,808 2,179,457
----------- ----------- ----------- -----------
Total operating expenses 17,886,900 12,177,425 49,899,730 33,599,229
----------- ----------- ----------- -----------
Income from operations 3,656,412 2,393,092 9,459,470 6,118,705
Interest income 644,233 1,094,792 2,107,236 2,478,944
Interest expense (290,158) (163,523) (704,169) (414,207)
----------- ----------- ----------- -----------
Income before income tax expense 4,010,487 3,324,361 10,862,537 8,183,442
Income tax expense (1,604,194) (1,257,278) (4,368,790) (3,249,501)
----------- ----------- ----------- -----------
Net income available to common stockholders $ 2,406,293 $ 2,067,083 $ 6,493,747 $ 4,933,941
=========== =========== =========== ===========
Per common and common equivalent share:
Basic:
Net income per common share $0.30 $0.26 $0.81 $0.67
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding 7,932,000 8,106,000 7,974,000 7,354,000
=========== =========== =========== ===========
Diluted:
Net income per common share-assuming
dilution $0.30 $0.25 $0.79 $0.64
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding-assuming
dilution 8,141,000 8,395,000 8,192,000 7,731,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
IMPATH INC. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Accumulated
Stock Common Additional Other
--------------------- Stock to Paid-in Retained Comprehensive
Shares Amount be Issued Capital Earnings (loss)
-------- --------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 8,538,345 $42,690 $ 0 $120,904,861 $12,095,622 ($48,602)
Common shares issued upon
exercise of stock options 83,085 416 406,121
Common shares issued upon
exercise of warrants 213 1 745
Repurchase of common shares
shares
Common stock to be issued 1,735,000
Amortization of deferred
compensation
Comprehensive income(loss):
Change in accumulated other
comprehensive (loss) (549,167)
Net income for the period
ended September 30, 1999 6,493,747
--------- ------- ---------- ------------ ----------- ---------
Total comprehensive income
--------- ------- ---------- ------------ ----------- ---------
Balance at September 30, 1999 8,621,643 $43,107 $1,735,000 $121,311,727 $18,589,369 ($597,769)
========= ======= ========== ============ =========== =========
</TABLE>
<TABLE>
<CAPTION>
Treasury Deferred
Stock Compensation Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1998 ($7,908,841) ($498,762) $124,586,968
Common shares issued upon
exercise of stock options 406,537
Common shares issued upon
exercise of warrants 746
Repurchase of common shares (10,644,834) (10,644,834)
Common stock to be issued 1,735,000
Amortization of deferred
compensation 157,800 157,800
Comprehensive income(loss):
Change in accumulated other
comprehensive (loss) (549,167)
Net income for the period
ended September 30, 1999 6,493,747
------------ --------- ------------
Total comprehensive income 5,944,580
------------ --------- ------------
Balance at September 30, 1999 ($18,553,675) ($340,962) $122,186,797
============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
IMPATH INC. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,493,747 $ 4,933,941
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 4,839,808 2,179,457
Provision for uncollectible accounts receivable 6,575,728 4,323,980
Non-cash compensation 157,800 217,233
Changes in assets and liabilities:
(Increase) in accounts receivable (18,461,932) (10,247,776)
(Increase) in prepaid expenses and current assets (4,085,406) (861,359)
(Increase) decrease in deposits and other assets (62,888) 173,038
Increase in accounts payable and accrued expenses 651,242 1,947,914
(Decrease) in construction payments payable - (1,542,199)
Increase (decrease) in income taxes payable 3,583,199 (48,574)
Increase in deferred revenues 241,520 1,670,031
Increase in deferred tax payables - 1,240,531
------------ ------------
Total adjustments (6,560,929) (947,724)
------------ ------------
Net cash (used in) provided by operating activities (67,182) 3,986,217
------------ ------------
Cash flows from investing activities:
Purchases of marketable securities (40,650,189) (42,611,949)
Sales/maturities of marketable securities 39,157,316 33,736,191
Acquisitions of businesses, net of cash acquired (4,343,058) (19,871,332)
Investment in preferred stock (5,000,000) -
Capital expenditures (4,150,103) (6,944,670)
------------ ------------
Net cash (used in) investing activities (14,986,034) (35,691,760)
------------ ------------
Cash flows from financing activities:
Issuance of common stock 407,283 610,644
Issuance of common stock upon acquisition of PCI - 50,000
Issuance of common stock upon acquisition of MRS - 13,750,000
Repurchase of common stock (10,644,834) -
Proceeds of secondary offering, net of registration costs - 71,449,495
Payments of capital lease obligations (2,097,544) (1,188,011)
(Repayment) of bank loans (10,000,000) -
Payments of notes payable (1,241,277) (451,043)
------------ ------------
Net cash (used in) provided by financing activities (23,576,372) 84,221,085
------------ ------------
Net (decrease) increase in cash and cash equivalents (38,629,588) 52,515,542
Cash and cash equivalents at beginning of period 45,556,005 325,285
------------ ------------
Cash and cash equivalents at end of period $ 6,926,417 $ 52,840,827
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
IMPATH INC.
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, 1998.
Net Income Per Share:
Net income per share, basic is based on the weighted average number of shares of
common stock outstanding and includes shares to be issued from the date the
commitment to issue was consummated. Diluted earnings per share is based on the
weighted average number of shares of common stock, shares to be issued and
common equivalent shares outstanding. Common equivalent shares from stock
options and warrants are included in the computation assuming the related
options and warrants had been exercised to the extent their effect is dilutive.
Comprehensive net income is equal to the net income reported adjusted for the
unrealized net depreciation of marketable securities, net of related deferred
taxes. Comprehensive net income for the three months ended September 30, 1999
and 1998 was $2,328,508 and $2,283,569, respectively. Comprehensive net income
for the nine months ended September 30, 1999 and 1998 was $5,944,580 and
$5,166,916, respectively.
Investment:
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 depreciation is recorded as a separate component of stockholders'
equity, net of related deferred taxes. At September 30, 1999, approximately
$5,000,000 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.
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, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Gross accounts receivable ................ $ 54,639,947 $ 35,138,046
Allowance for doubtful accounts .......... (6,391,164) (3,958,235)
Contractual allowance reserve .......... (16,743,129) (11,560,360)
------------ ------------
$ 31,505,654 $ 19,619,451
============ ============
</TABLE>
7
<PAGE>
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.
Recent 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 $800,000 payable in three equal semi-annual
installments beginning December 1998, after which another $800,000 is payable in
three equal semi-annual installments contingent on achievement of 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 and to the
biopharmaceutical industry in assessing biologically relevant characteristics
for targeted drug development and in selecting patients for clinical trials and
in evaluating the efficacy of various therapies.
On August 31, 1998 the Company acquired Medical Registry Services, Inc. ("MRS")
for the issuance of 550,000 shares of IMPATH common stock valued at
$13,750,000. After the consideration of certain other expenses related to the
acquisition and after recording net tangible assets of MRS, the Company recorded
approximately $17.3 million in intangibles. 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 Company and MRS, which at the time of the acquisition
had approximately 200 common clients, began a relationship through a strategic
joint venture in January, 1997. The acquisition of MRS significantly enhances
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.
On September 2, 1998 the Company acquired Physician Choice, Inc. ("PCI") for
the sum of $1.0 million, and the issuance of shares of IMPATH common stock
valued at $100,000, with $400,000 payable immediately, an additional $400,000
payable in four equal semi-annual installments beginning March, 1999 with
interest accruing at 8% per annum and $200,000 payable in IMPATH common stock.
An initial 1,980 shares of common stock, having a fair market value of $50,000,
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.
On August 30, 1999 the Company acquired certain assets of BioClinical Partners,
Inc., ("BCP"), a privately held Massachusetts corporation, for $6.9 million and
the obligation to issue 60,000 shares of IMPATH common stock valued at
$1,635,000 which is included in the September 30, 1999 balance sheet as common
stock to be issued. The terms provided for an initial payment of $4.8 million,
and $2,100,000 payable in three equal annual installments beginning August 30,
2000, $600,000 of which is contingent on achievement of previously established
revenue targets, with interest accruing at 6% per annum. The shares of IMPATH
common stock are to be issued in two installments, 40,000 shares on January 3,
2000, and 20,000 shares on January 2, 2001. BCP is a global medical research
network that obtains and provides access to benign and malignant tissue and
clinically relevant peripheral blood specimens to support oncology research and
product development. This strategic acquisition provides IMPATH with another
critical component in the oncology drug discovery process and extends the range
of services provided by IMPATH'S BioPharmaceutical Services division.
8
<PAGE>
The aforementioned acquisitions have been accounted for using the purchase
method with results of operations of the respective entities being included with
the results of the Company since the respective acquisition dates. The excess
of the purchase price over the net assets acquired on BIS, PCI and BCP
acquisitions principally relate to customer lists, which are included in
intangible assets on the Company's consolidated balance sheet and are being
amortized over periods of up to fifteen years. The excess of the purchase price
over the net assets acquired for the MRS purchase primarily relates to the
customer list, trade name, software and goodwill which are included in
intangible assets on the accompanying balance sheets and are being amortized
over periods of 5 to 20 years.
Recent Investment
On September 27, 1999, the Company completed a $5,000,000 private placement
investment in preferred stock of ILEX Oncology Service, Inc., a subsidiary of
ILEX Oncology, Inc. ("ILEX"), to be accounted for using the cost method of
accounting for investments. ILEX is a drug development company focused
exclusively on accelerated development of drugs for the treatment and prevention
of cancer. The preferred stocks of ILEX may be converted to common stocks of
ILEX Oncology Inc. at the discretion of IMPATH. IMPATH will be accruing dividend
on its investment at the stated rate of 6%.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1999
Compared with Three Months Ended September 30, 1998
The Company's total revenues for the three months ended September 30, 1999 and
1998 were $21,543,000 and $14,571,000, respectively, representing an increase of
$6,972,000, or 47.9%, in 1999. This growth was primarily attributable to a
12.6% increase in case volume resulting from increased sales and marketing
activities, and a $1,014,000, or 289.2% increase in biopharmaceutical services
billings. Revenue growth was also facilitated by the successful integration of
the Company's 1998 acquisitions of certain assets of BIS, PCI and the purchase
of MRS. Additionally, revenue realization per case increased as a result of
product mix changes toward more highly reimbursed lymphoma/ leukemia products
and a continuing payor mix shift towards third-party billing.
Salaries and related costs for the three months ended September 30, 1999 and
1998 were $8,035,000 and $5,338,000, respectively, representing an increase of
$2,697,000, or 50.5%, in 1999. 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 Company acquisitions. As a percentage of total
revenues, salaries and related costs increased to 37.3% in 1999 from 36.6% in
1998. This increase was largely due to increasing personnel requirements
associated with the support and maintenance of the Company's new information
systems.
Selling, general and administrative expenses for the three months ended
September 30, 1999 and 1998 were $7,987,000 and $5,913,000, respectively,
representing an increase of $2,074,000 or 35.1 %, in 1999. The largest component
of this increase was $689,000 in incremental laboratory supplies and courier
costs due to increasing case volume growth. The Company also incurred an
additional $884,000 in bad debt expense associated with increased revenues.
Additionally, operating expenses increased by $472,000 in connection with
Company acquisitions. As a percentage of total revenues, selling, general and
administrative expenses decreased to 37.1% in 1999 from 40.6% in 1998 due to the
implementation of certain operating efficiencies combined with a higher revenue
realization per case.
Depreciation and amortization expense for the three months ended September 30,
1999 and 1998 was $1,865,000 and $926,000, respectively, representing an
increase of $939,000, or 101.4%, in 1999. This increase was primarily due to an
additional $180,000 in depreciation and amortization expense associated with
increased capital equipment requirements, $165,000 in connection with leasehold
improvements and $339,000 related to the second phase of the Company's
internally developed information systems. The Company also incurred an
additional $254,000 in amortization of intangible assets associated with the
Company's 1998 acquisitions. Due to the incremental depreciation associated with
the Company's new information systems and increasing amortization of intangible
assets, depreciation and amortization increased as a percentage of total
revenues to 8.7% in 1999 from 6.4% in 1998.
Income from operations for the three months ended September 30, 1999 and 1998
was $3,656,000 and $2,393,000, respectively, representing an increase of
$1,263,000, or 52.8%, in 1999. The 1999 figure reflects an increase in Company
operating margins from its core diagnostic and prognostic services, as well as
an increase in higher profit biopharmaceutical services and recent Company
acquisitions, partially diminished by increased depreciation and amortization.
As a percentage of total revenues, income from operations increased to 17.0% in
1999 from 16.4% in 1998.
10
<PAGE>
Other income, net for the three months ended September 30, 1999 and 1998, was
$354,000 and $931,000, respectively, representing a decrease of $577,000, or
62.0%, in 1999. The decrease was the result of increased interest expense due to
additional capital lease obligations and acquisition-related debt, as well as
reduced interest income due to the sale of interest bearing securities, the
proceeds of which were used to finance the Company's stock buyback program, the
acquisition of BCP and the Company's preferred stock investment in ILEX.
The tax provision for the three months ended September 30, 1999 of $1,604,000
reflects federal, state and local income tax expense. The Company has estimated
its annual effective tax rate for 1999 to be approximately 40.0%.
Net income for the three months ended September 30, 1999 and 1998 was $2,406,000
and $2,067,000, respectively, representing an increase of $339,000, or 16.4 %,
in 1999. As a percentage of total revenues, net income decreased to 11.2% in
1999 from 14.2% in 1998. The decrease was primarily due to increased goodwill
amortization associated with the Company's 1998 purchase of MRS, the acquisition
of certain assets of BIS and PCI, the recent acquisition of certain assets of
BCP and to a decrease in non-operating income.
11
<PAGE>
Nine Months Ended September 30, 1999
Compared with Nine Months Ended September 30, 1998
The Company's total revenues for the first nine months of September 30, 1999 and
1998 were $59,359,000 and $39,718,000, respectively, representing an increase
of $19,641,000, or 49.5%, in 1999. This growth was primarily attributable to a
20.6 % increase in diagnostic and prognostic case volume resulting from
increased sales and marketing activities, as well as to the successful
incorporation of the Company's 1998 acquisitions of certain assets of BIS and
PCI, the purchase of MRS and the recent acquisition of BCP. Additionally,
revenue realization per case increased as a result of product mix changes toward
cases which carry higher reimbursement rates, an increase in biopharmaceutical
services billings and a continuing payor mix shift towards third party billing.
Salaries and related costs for the first nine months of September 30, 1999 and
1998 were $22,598,000 and $15,463,000, respectively, representing an increase of
$7,135,000, or 46.1%, in 1999. 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 38.1% in 1999 from 38.9%
in 1998. This decrease was facilitated by the Company's successful expansion
strategy of incorporating complementary and synergistic technologies, combined
with a higher revenue realization per case and the streamlining of operational
and administrative duties.
Selling, general and administrative expenses for the first nine months of
September 30, 1999 and 1998 were $22,462,000 and $15,956,000, respectively,
representing an increase of $6,506,000, or 40.8%, in 1999. The largest component
of this increase was $3,217,000 in incremental laboratory supply and courier
costs due to the rapid case volume growth and product mix shift. The Company
also incurred an additional $2,252,000 of bad debt expense associated with
higher revenues. Additionally, operating expenses increased approximately
$1,043,000 in connection with Company acquisitions. As a percentage of total
revenues, selling, general and administrative expenses decreased to 37.9 % in
1999 from 40.2% in 1998 due to the implementation of certain operating
efficiencies combined with a higher revenue realization per case.
Depreciation and amortization expense for the first nine months of September 30,
1999 and 1998 was $4,840,000 and $2,179,000, respectively, representing an
increase of $2,661,000 or 122.1%, in 1999. This increase was primarily due to an
additional $759,000 in depreciation and amortization expense associated with
increased capital equipment requirements, $311,000 in connection with leasehold
improvement activities, and $679,000 related to the second phase of the
Company's internally developed information systems. The Company also incurred an
additional $912,000 in amortization of intangible assets associated with the
Company's acquisitions. Due to the incremental depreciation associated with the
Company's new information systems and increasing amortization of intangible
assets, depreciation and amortization increased as a percentage of total
revenues to 8.2% in 1999 from 5.5% in 1998.
Income from operations for the first nine months of September 30, 1999 and 1998
was $9,459,000 and $6,119,000, respectively, representing an increase of
$3,340,000, or 54.6%, in 1999. The 1999 figure reflects increased company
operating margins from its core diagnostic and prognostic services and recent
acquisitions, partially mitigated by increased depreciation and amortization.
As a percentage of total revenues, income from operations increased to 15.9% in
1999 from 15.4% in 1998.
Other income, net for the first nine months of September 30, 1999 and 1998 was
$1,403,000 and $2,065,000, respectively, representing a decrease of $662,000, or
32.1%, in 1999. The decrease was the result of increased interest expense
primarily due to additional capital lease obligations and acquisition-related
debt, as well as the sale of interest bearing securities, the proceeds of which
were used to finance the Company's Treasury stock buyback program, the
acquisition of BCP and the Company's preferred stock investment in ILEX.
12
<PAGE>
The tax provision for the first nine months of September 30, 1999 of
approximately $4,369,000 reflects federal, state and local income tax expense.
The Company has estimated its annual effective tax rate for 1999 to be
approximately 40.0%.
Net income for the first nine months of September 30, 1999 and 1998 was
$6,494,000 and $4,934,000, respectively, representing an increase of $1,560,000,
or 31.6%, in 1999. As a percentage of total revenues, net income decreased to
10.9% in 1999 from 12.4% in 1998. This decrease was primarily due to increased
goodwill amortization associated with the Company's 1998 purchase of MRS, the
1998 acquisition of certain assets of BIS and PCI, the recent acquisition of
certain assets of BCP and to a decrease in non-operating income.
13
<PAGE>
Liquidity and Capital Resources
Since inception, the Company has financed its operations through public
offerings of common stock, 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
follow on public offering of Common Stock. The Company's working capital and
capital expenditure needs have increased and are expected to continue to
increase as the Company expands its existing facilities and pursues its growth
strategy.
The Company's cash and cash equivalent balances at September 30, 1999 and
December 31, 1998 were $6,926,000 and $45,556,000, respectively, representing a
decrease of $38,630,000 in 1999. This decrease was primarily due to the
repayment of short term line of credit bank borrowings of $10,000,000, the
repurchase by the Company of common stock for approximately $10,645,000 under
the share buyback program initiated in December 1998, $5,000,000 for its
investment in ILEX and the acquisition of BCP for $4,343,000. The Company also
invested approximately $1,493,000 in marketable securities and used
approximately $2,098,000 to satisfy its capital lease obligations and
approximately $1,241,000 to meet its note obligations.
For the nine months ended September 30, 1999, net cash used in operating
activities was approximately $67,000. This was primarily due to an increase in
accounts receivable net of allowance for bad debt of approximately $11,886,000.
The increase in net accounts receivable was primarily due to rapid sales growth
as well as claims filing delays associated with the transition to the Company's
new billing system. The continuing shift away from direct hospital billing and
towards private insurance, which carries a higher revenue realization per case
and requires additional time for obtaining patient billing information, also
contributed to this increase. In addition, as a result of increased case volume
growth, the introduction of several new products and changes in corporate
purchasing methods, laboratory supply inventory increased approximately
$2,379,000. These activities were partially offset by higher net income, as well
as an increase in income taxes payable of $3,583,000 and an increase in accounts
payable and accrued expenses of $651,000.
The Company incurred approximately $4,150,000 in capital expenditures associated
with the development of the Company's outcomes database, network infrastructure
and the Company's expansion of its laboratory and office facilities. The Company
received approximately $407,000 for the nine months ended September 30, 1999
through the issuance of common stock upon the exercise of Company stock options
and warrants.
In March 1998, the Company established an unsecured line of credit for an
aggregate principal amount of $10,000,000 with Fleet Bank. Borrowing under the
line bears interest at LIBOR plus 2.25%. In June 1999, the aggregate principal
amount of this line was increased to $15,000,000. The new unsecured line bears
interest at LIBOR plus 2.0%. As of September 30, 1999, the Company had no
outstanding balance under this line. The line of credit has certain financial
covenants which the Company was in compliance with at September 30, 1999. In
July 1999, the Company established a $6,000,000 credit line for financing
equipment, leasehold improvements and computer hardware and software with
Newcourt Financial. Lease terms are based on 48 monthly payments at a rate
equal to .35% above four year treasury notes. As of September 30, 1999, the
Company had drawn $4,700,000 against this line of credit. Also, in September
1999, the Company established a $6,000,000 credit line for financing equipment,
leasehold improvements and computer hardware and software with Fleet Bank. Lease
terms are based on 48 monthly payments at a rate equal to .20% above four year
treasury notes. As of September 30, 1999, none of this line of credit had been
utilized.
14
<PAGE>
The Company's growth strategy is anticipated to be financed through 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 cash resources. 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's revenue realization per case may not be 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.
Year 2000
The Company has reviewed its business systems, including its computer systems
and laboratory equipment, and has been 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 was completed in April
1999. Based on this review, the Company has implemented a plan to achieve year
2000 compliance. The Company recently finalized the installation of an
internally developed clinical and billing information system which addresses
year 2000 issues. 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. Based on the review and testing
performed to date, the Company believes that year 2000 issues will have a
negligible impact on its operations, financial condition or cash flow. The
Company has incurred approximately $35,000 to date related to year 2000. The
Company estimates the cost of its year 2000 efforts to be approximately $50,000.
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.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
The Company's holdings of financial instruments are comprised of U.S. corporate
debt, U.S. government debt and commercial paper. All such instruments are
classified as securities available for sale. The Company does not invest in
portfolio equity securities or commodities or use financial derivatives for
trading purposes. The Company's debt security portfolio represents funds held
temporarily pending use in our business and operations. The Company manages
these funds accordingly. The Company seeks reasonable assurance of the safety
of principal and market liquidity by investing in rated fixed income securities
while at the same time seeking to achieve a favorable rate of return. The
Company's market risk exposure consists principally of exposure to changes in
interest rates. The Company's holdings are also exposed to the risks of changes
in the credit quality of issuers. The Company typically invests in the shorter-
end of the maturity spectrum, and at December 31, 1998, more than 80% of the
Company's holdings were in instruments maturing in two years or less and more
than 65% of such holdings matured in one year or less.
16
<PAGE>
INDEX TO EXHIBITS
-----------------------------
Exhibit Page
Number Description Number
- --------------------------------------------------------------------------------
27 Financial Data Schedule 19
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 6,926,417 6,926,417
<SECURITIES> 30,915,162 30,915,162
<RECEIVABLES> 37,896,818 37,896,818
<ALLOWANCES> (6,391,164) (6,391,164)
<INVENTORY> 3,146,703 3,146,703
<CURRENT-ASSETS> 76,516,363 76,516,363
<PP&E> 38,487,225 38,487,225
<DEPRECIATION> (8,248,961) (8,248,961)
<TOTAL-ASSETS> 147,442,180 147,442,180
<CURRENT-LIABILITIES> 14,089,236 14,089,236
<BONDS> 0 0
0 0
0 0
<COMMON> 43,107 43,107
<OTHER-SE> 122,143,690 122,143,690
<TOTAL-LIABILITY-AND-EQUITY> 147,442,180 147,442,180
<SALES> 21,543,312 59,359,200
<TOTAL-REVENUES> 21,543,312 59,359,200
<CGS> 8,201,579 21,900,669
<TOTAL-COSTS> 17,886,900 49,899,730
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 290,158 704,169
<INCOME-PRETAX> 4,010,487 10,862,537
<INCOME-TAX> 1,604,194 4,368,790
<INCOME-CONTINUING> 2,406,293 6,493,747
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,406,293 6,493,747
<EPS-BASIC> 0.30 0.81
<EPS-DILUTED> 0.30 0.79
</TABLE>
