<PAGE>
FORM 10-QA
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)
<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, 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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
- ----- ---------------------------------
<S> <C>
Common Stock, par value 8,480,684
$ .005 per share
</TABLE>
1
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INDEX
IMPATH INC. AND SUBSIDIARIES
The registrant hereby amends its Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 as a result of changing from the pooling-of-interest
accounting method (the registrant initiated a share repurchase program in
December 1998 which is not permitted under pooling-of-interest rules) to the
purchase accounting method as it relates to the purchase of Medical Registry
Services, Inc. "(MRS)". The accompanying Consolidated Financial Statements at
Item 1 and Management's Discussion and Analysis included at Item 2 have been
restated for the current and prior year in accordance with the purchase
accounting method.
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..................... 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............... 10-15
PART II OTHER INFORMATION
Signatures.............................................................. 16
2
<PAGE>
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 $ 325,285
Marketable securities at market value 23,060,881 13,952,148
Accounts receivable, net of allowance for doubtful accounts 17,529,466 11,948,229
Prepaid expenses 585,887 276,073
Deferred tax assets 693,427 53,427
Other current assets 1,105,298 703,753
------------ -----------
Total current assets 95,815,786 27,258,915
Fixed assets, less accumulated depreciation and amortization 18,285,044 10,475,575
Deposits and other assets 161,129 334,167
Intangible assets, net of accumulated amortization 28,777,250 8,273,636
------------ -----------
Total assets $143,039,209 $46,342,293
============ ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
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 1,897,166 956,648
Deferred revenues 1,670,031 -
Construction payments payable - 1,542,199
Income taxes payable 109,520 158,094
Accrued expenses 1,330,588 728,353
------------ -----------
Total current liabilities 7,903,273 5,307,575
------------ -----------
Capital lease obligations, net of current portion 3,173,448 2,451,587
Note payable, net of current portion 528,539 274,000
Deferred tax payable 1,880,531 -
Stockholders' equity:
Common stock 42,438 27,294
Additional paid-in capital 119,819,230 33,893,774
Retained earnings 10,082,018 5,148,077
Unrealized net appreciation (depreciation) of marketable
securities 149,094 (83,881)
------------ -----------
130,092,780 38,985,264
Less:
Cost of 7,088 shares of common stock held in treasury (100) (100)
Deferred compensation (539,262) (676,033)
------------ -----------
Total stockholders' equity 129,553,418 38,309,131
------------ -----------
Total liabilities and stockholders' equity $143,039,209 $46,342,293
============ ===========
</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,
1998 1997 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net diagnostic and prognostic services $13,877,438 $9,274,313 $38,775,427 $26,348,490
Biopharmaceutical services 350,523 54,415 599,951 110,363
Tumor registry services 342,556 - 342,556 -
---------- --------- ---------- ----------
Total revenues 14,570,517 9,328,728 39,717,934 26,458,853
---------- --------- ---------- ----------
Operating expenses:
Salaries and related costs 5,337,734 3,809,526 15,463,400 10,884,128
Selling, general and administrative 6,839,691 4,053,405 18,135,829 11,935,824
---------- --------- ---------- ----------
Total operating expenses 12,177,425 7,862,931 33,599,229 22,819,952
---------- --------- ---------- ----------
Income from operations 2,393,092 1,465,797 6,118,705 3,638,901
Interest income 1,094,792 265,484 2,478,944 550,279
Interest expense (163,523) (82,610) (414,207) (227,522)
Gain on marketable securities, net - - - 242,726
---------- --------- ---------- ----------
Income before income tax expense 3,324,361 1,648,671 8,183,442 4,204,384
Income tax expense (1,257,278) (725,412) (3,249,501) (1,849,925)
---------- --------- ---------- ---------
Net income available to common stockholders $ 2,067,083 $ 923,259 $ 4,933,941 $ 2,354,459
=========== ========== =========== ===========
Per common and common equivalent share:
Basic:
Net income per common share $0.26 $0.16 $0.67 $0.41
=========== ========== =========== ===========
Weighted average common and common
equivalent shares outstanding 8,106,000 5,834,000 7,354,000 5,780,000
=========== ========== =========== ===========
Dilutive:
Net income per common share-assuming
dilution $0.25 $.16 $0.64 $0.40
=========== ========== =========== ===========
Weighted average common and common
equivalent shares outstanding-assuming
dilution 8,395,000 5,856,000 7,731,000 5,835,000
=========== ========== =========== ===========
</TABLE>
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 5,458,827 $27,294 $ 33,893,774 $ 5,148,077 $(83,881) $(100) $(676,033) $38,309,131
31, 1997
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 71,437,994 71,449,494
Common shares issued
upon acquisition
of Physicians
Choice, Inc. (PCI) 1,980 10 49,990 50,000
Common shares issued
upon acquisition
of Medical Registry
Registry Services,
Inc. (MRS) 550,000 2,750 13,747,250 13,750,000
Compensation
associated with
issuance of
options to non-
employees 80,462 (80,462) --
Amortization of
deferred
compensation 217,233 217,233
Change in unrealized
net appreciation
securities 232,975 232,975
Net income for the
period ended
September 30, 1998 4,933,941 4,933,941
---------- -------- ----------- ------------ -------- --------- --------- -------------
Balance at September
30, 1998 8,487,772 $42,438 $119,819,230 $10,082,018 $149,094 $(100) $(539,262) $129,553,418
========== ======== ============ =========== ======== ========= ========= ============
</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,
------------------------------
1998 1997
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,933,941 $ 2,354,459
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,179,457 1,015,945
Provision for uncollectible accounts 4,323,980 3,430,066
Non-cash compensation 217,233 156,591
Changes in assets and liabilities:
(Increase) in accounts receivable (9,816,587) (6,425,715)
Increase in deferred tax assets - 979,779
(Increase) in prepaid expenses and other current assets (660,448) (255,646)
Decrease (increase) in deposits and other non-current assets 173,038 (128,509)
Increase (decrease) in accounts payable/accrued expenses 768,723 (1,072,611)
(Decrease) in construction payments payable (1,542,199) -
(Decrease) in income taxes payable (48,574) (692,193)
------------ -----------
Total adjustments (4,405,377) (2,992,293)
------------ -----------
Net cash provided by (used in) operating activities 528,564 (637,834)
------------ -----------
Cash flows from investing activities:
(Purchase) of marketable securities (42,611,949) -
Sales/ maturities of marketable securities 33,736,191 7,569,853
Acquisitions of businesses (2,773,340) (6,009,563)
Capital expenditures (6,835,009) (1,022,562)
------------ -----------
Net cash (used in) provided by investing activities (18,484,107) 537,728
------------ -----------
Cash flows from financing activities:
Issuance of common stock 610,644 347,304
Issuance of common stock upon acquisition of PCI 50,000 -
Proceeds of secondary offering, net of registration costs 71,449,494 -
Payments of notes payable (451,043) -
Payments of capital lease obligation (1,188,010) (676,593)
Payments received on officer loans - 12,586
------------ -----------
Net cash provided by (used in) financing activities 70,471,085 (316,703)
------------ -----------
Net increase (decrease) in cash and cash equivalents 52,515,542 (416,809)
Cash and cash equivalents at beginning of period 325,285 941,903
------------ -----------
Cash and cash equivalents at end of period $ 52,840,827 $ 525,094
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
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.
Restatements:
The Company hereby amends its Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 as a result of changing from pooling-of-interest
accounting method to the purchase accounting method as it relates to the
purchase of Medical Registry Services, Inc. "(MRS)". The accompanying
Consolidated Financial Statements and Management's Discussion and Analysis have
been restated for the current and prior year in accordance with the purchase
accounting method. The Company is restating its financial statements to utilize
purchase accounting for the MRS acquisition as a result of a decision to
initiate a share repurchase program in December 1998, which is not permitted
under pooling-of-interest rules. The three and nine months period operating
results ended September 30, 1997 and the December 31, 1997 balance sheet have
been reinstated at their historical IMPATH only amounts and the 1998 results of
operations data includes only the results of MRS since the acquisition on August
31, 1998 (as prescribed by purchase accounting). Total assets and net
stockholders equity have increased to approximately $143 million and $130
million, respectively, as of September 30, 1998, as restated, compared to
approximately $126 million and $115 million, respectively as previously filed.
The increase relates to purchase accounting and an increase in intangible assets
from the acquisition and the value of the shares of IMPATH stock issued as
consideration for the purchase of MRS.
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 $2,283,569 and $923,259, respectively.
Comprehensive net income for the nine months ended September 30, 1998 and 1997
was $5,166,916 and $2,354,459, respectively.
7
<PAGE>
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.
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:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------ -----------------------
<S> <C> <C>
Gross accounts receivable ................ $31,233,462 $21,854,353
Allowance for doubtful accounts .......... (4,247,590) (4,760,117)
Contractual allowance reserve .......... (9,456,406) (5,146,007)
----------- -----------
$17,529,466 $11,948,229
</TABLE>
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")
for the issuance of 550,000 shares of IMPATH Inc. 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 two companies, which currently have approximately 200
8
<PAGE>
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. Had the MRS
acquisition been effected as a purchase as of the beginning of 1998 and 1997,
respectively, the following proforma results would have been reflected for the
nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
September 30,
1998 1997
---- ----
<S> <C> <C>
Revenues $42.2 million $29.0 million
Net income available to common stockholders 4.6 million 1.7 million
Net income per common share-assuming dilution $0.56 $0.27
====== =====
Weighted average shares-assuming dilution 8,213,000 6,385,000
========= =========
</TABLE>
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 aforementioned acquisitions will all be accounted for using the purchase
method with results of operations of the respective entities being included with
the results of the company since the acquisition date.
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. 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 September 30, 1998 balance sheet and will
be amortized over periods of 5 to 20 years. Had the BIS and PCI acquisitions
described above been effected as of the beginning of 1998, the company's
operating results would not have been materially different.
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.
9
<PAGE>
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 $14,571,000 and $9,329,000, respectively, representing an increase of
$5,242,000, or 56.2%, 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.,Biologic and Immunologic Science
Laboratories, Inc. and Medical Registry Services, Inc.
Salaries and related costs for the three months ended September 30, 1998 and
1997 were $5,338,000 and $3,810,000, respectively, representing an increase of
$1,528,000, or 40.1%, 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 36.6% in 1998 from
40.8% 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 $6,840,000 and $4,053,000, respectively,
representing an increase of $2,787,000, or 68.8%, 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 $668,000 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 46.9% in 1998 compared to 43.4% in
1997. This increase was primarily due to costs associated with the Company's
recent relocation, expansion and acquisition activities.
Income from operations for the three months ended September 30, 1998 and 1997
was $2,393,000 and $1,466,000, respectively, representing an increase of
$927,000, or 63.2%, in 1998. As a percentage of total revenues, income from
operations increased to 16.4% in 1998 from 15.7% in 1997. 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 $183,000, respectively, representing an increase of $748,000 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. 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
$1,257,000 reflects federal, state and local income tax. The Company has
estimated its annual effective tax rate for 1998 to be approximately 39%.
10
<PAGE>
Net income for the three months ended September 30, 1998 and 1997 was $2,067,000
and $923,000, respectively, representing an increase of $1,144,000 or 123.9% in
1998. The increase in net income is attributed to the factors described above.
11
<PAGE>
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
$39,718,000 and $26,459,000, respectively, representing an increase of
$13,259,000 or 50.1%, 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., Biologic and Immunologic Science
Laboratories, Inc . and Medical Registry Services, Inc.
Salaries and related costs for the first nine months of 1998 and 1997 were
$15,463,000 and $10,884,000, respectively, representing an increase of
$4,579,000, or 42.1%, 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 38.9% in 1998 from
41.1% 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 $18,136,000 and $11,936,000, respectively, representing an
increase of $6,200,000 or 51.9%, 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 $1,164,000 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 $219,000 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.
Due to the factors described above, selling, general and administrative expenses
as a percentage of total revenues increased to 45.7% in 1998 from 45.1% in 1997.
Income from operations for the first nine months of 1998 and 1997 was $6,119,000
and $3,639,000, respectively, representing an increase of $2,480,000, or 68.2%,
in 1998. As a percentage of total revenues, income from operations increased to
15.4% in 1998 from 13.8% in 1997. 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 $2,064,000
and $565,000, respectively, representing an increase of $1,499,000 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.
The tax provision for the first nine months of 1998 of approximately $3,250,000
reflects federal, state and local income tax expense. The Company has estimated
its annual effective tax rate for 1998 to be approximately 39%.
Net income for the first nine months of 1998 and 1997 was $4,934,000 and
$2,354,000, respectively, representing an increase of $2,580,000, or 109.6% in
1998. As a percentage of total revenues, net income increased to 12.4% in 1998
from 8.9% in 1997, which was due to the factors described above.
12
<PAGE>
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 $325,000, respectively, representing an
increase of $52,516,000 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 $529,000. This resulted from higher net income,
offset by an increase in accounts receivable, net of allowance for bad debt of
approximately $5,581,000 due to rapid sales growth. The Company also had an
increase of approximately $769,000 in accounts payable and accrued expenses.
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 $6,945,000
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 $2,773,000 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 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.
13
<PAGE>
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)"
for the issuance of 550,000 shares of IMPATH Inc. 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 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.
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 aforementioned acquisitions will all be accounted for using the purchase
method with results of operations of the respective entities being included with
the results of the company since the acquisition date.
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. 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 September 30, 1998 balance sheet and will
be amortized over periods of 5 to 20 years.
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
14
<PAGE>
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.
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: IMPATH INC.
-----------
(Registrant)
Dated: By /s/ ANU D. SAAD
----------------------------
Anu D. Saad, Ph.D.
President and Chief
Executive Officer
Dated: By /s/ JOHN P. GANDOLFO
----------------------------
John P. Gandolfo
Executive Vice President,
Chief Financial Officer
and Principal Accounting
Officer
16
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit Page
Number Description Number
------- ---------- ------
27 Financial Data Schedule 18
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<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> 21,777,056 21,777,056
<ALLOWANCES> (4,247,590) (4,247,590)
<INVENTORY> 573,497 573,497
<CURRENT-ASSETS> 95,815,786 95,815,786
<PP&E> 22,874,295 22,874,295
<DEPRECIATION> 4,589,251 4,589,251
<TOTAL-ASSETS> 143,039,209 143,039,209
<CURRENT-LIABILITIES> 7,903,273 7,903,273
<BONDS> 0 0
0 0
0 0
<COMMON> 42,438 42,438
<OTHER-SE> 129,510,980 129,510,980
<TOTAL-LIABILITY-AND-EQUITY> 143,039,209 143,039,209
<SALES> 14,570,517 39,717,934
<TOTAL-REVENUES> 14,570,517 39,717,934
<CGS> 5,292,802 14,366,965
<TOTAL-COSTS> 12,177,425 33,599,229
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 163,523 414,207
<INCOME-PRETAX> 3,324,361 8,183,442
<INCOME-TAX> 1,257,278 3,249,501
<INCOME-CONTINUING> 2,067,083 4,933,941
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,067,083 4,933,941
<EPS-PRIMARY> 0.26 0.67
<EPS-DILUTED> 0.25 0.64
</TABLE>