-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PC+9GyV02HWN5RJlcOpInGTAjOXJGdl05c82xR6p3+W2w1HgmIa/TJbc3aHcMT1B RKT9mnGCU/3of3JitMz7UA== 0000940180-99-000354.txt : 19990413 0000940180-99-000354.hdr.sgml : 19990413 ACCESSION NUMBER: 0000940180-99-000354 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPATH INC CENTRAL INDEX KEY: 0001003114 STANDARD INDUSTRIAL CLASSIFICATION: 8071 IRS NUMBER: 133459685 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27750 FILM NUMBER: 99584017 BUSINESS ADDRESS: STREET 1: 521 WEST 57TH STREET CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2126980300 MAIL ADDRESS: STREET 1: 521 WEST 57TH STREET CITY: NEW YORK STATE: NY ZIP: 10019 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 Commission file number 0-27750 [LOGO OF IMPATH APPEARS HERE] IMPATH INC. (Exact name of registrant as specified in its charter) Delaware 13-3459685 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 521 West 57th Street New York, New York 10019 ------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 698-0300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.005 par value ------------------------------ Title of class 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 as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within the past 60 days. Aggregate market value as of February 26, 1999..... $220,375,034 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock, $.005 par value, as of February 26, 1999..... 8,749,381 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the documents, all or portions of which are incorporated by reference herein and the Part of the Form 10-K into which the document is incorporated: 1999 Proxy Statement-Part III PART I Item 1. Business. Overview IMPATH Inc. ("IMPATH" or the Company") is a leader in providing critical information essential for making medically optimal and cost-effective cancer management decisions for individual cancer patients. The Company is focused exclusively on the analysis of cancer, combining advanced technologies and medical expertise to provide patient-specific diagnostic, prognostic and treatment information to physicians involved in the treatment of cancer. IMPATH believes that it currently performs more specialized analyses for difficult to diagnose cancer cases than any other institution in the world. The Company also believes that it is the leader in providing comprehensive patient- specific prognostic information for cancer. For example, IMPATH provided patient-specific prognostic information on approximately 28% of all breast cancer cases in the U.S. in 1998. The Company's fastest growing business is the analysis of lymphomas and leukemias, with IMPATH analyzing 21,082 of such cases in 1998, representing an increase of 76% over 1997. Lymphoma/leukemia analysis represents an area in which IMPATH's expertise and utilization of sophisticated technologies are integrated to provide information for optimal disease management. The Company believes that its integration of patient-specific information will be essential to a growing list of cancer diagnoses, most notably prostate, colon, lung and bladder cancer. Furthermore, as an increased understanding of the molecular basis of cancer leads to the development of new evaluation methods and therapeutic tools, IMPATH expects that the information it provides will become increasingly significant in optimizing the management of all phases of cancer, including cancer predisposition, diagnosis, prognosis, treatment determination and patient follow-up. The Company believes that there are significant opportunities for increased penetration of the cancer information market. IMPATH's goal is to be the comprehensive information resource to the cancer care community. IMPATH has a growing cancer database consisting of information on over 425,000 cases (the largest database of diagnostic and prognostic cancer information in the world); more than 129,000 of these cases were added in 1998 alone. The Company believes that this database, along with IMPATH's strategy of linking patient-specific information with clinical outcomes, will provide a powerful platform for establishing optimal treatment pathways for patients with cancer. The Company's revenues were $56.3 million in 1998, representing revenue growth of 52% over 1997. In fact, the 1998 fiscal year was IMPATH's ninth consecutive year of annual revenue growth in excess of 40%. Moreover, the fourth quarter of 1998 represented IMPATH's twentieth consecutive quarter of record revenues and case volume. Income from operations and net income for 1998 were $8.5 million and $6.9 million, respectively, an increase of 47% and 92% over 1997. Certain terms relating to the Company's business which are used in this Annual Report on Form 10-K are explained in the Glossary included at the end of this Item 1. This Annual Report on Form 10-K contains forward-looking statements about IMPATH's plans for expansion. IMPATH's ability to achieve its plans for expansion is dependent on a variety of factors, many of which are outside of management's control. Some of the most significant factors, alone or in combination, would be the failure to manage the Company's growth successfully, the failure to integrate the businesses acquired by IMPATH successfully, an unanticipated slowdown in the health care industry (as a result of cost- containment measures, changes in governmental regulation or other factors), an unanticipated failure in the commercialization of IMPATH's cancer information database or an unanticipated loss of business. Accordingly, there can be no assurances that IMPATH will achieve its goals for expansion. Page 1 Cancer Information Market The market for cancer diagnosis, prognosis and treatment is significant and growing. After heart disease, cancer is the leading cause of death in the United States. Approximately eight million Americans alive today have been diagnosed with cancer (excluding certain skin cancers). According to the American Cancer Society, the estimated number of cancer cases diagnosed annually in the United States (excluding certain skin cancers) grew from approximately 530,000 in 1963 to approximately 1.2 million in 1998, an increase of 126%. The growth in the number of cancer cases in the United States is expected to accelerate as the leading edge of the "baby boom" population approaches 55 years of age, the age at which the incidence of cancer begins to rise sharply. Earlier diagnosis and better information have led to more effective treatment and have increased the five-year survival rate of cancer patients from 39% in 1963 to approximately 58% in 1998. The National Cancer Institute estimates that the direct medical costs associated with cancer will be approximately $37 billion in 1999. The Company believes that these costs will increase rapidly as a result of the growth in the number of cancer patients and the high cost of new therapies. Thus, the Company anticipates that the demand for information regarding cancer and cancer management will continue to increase. The diagnosis, prognosis, treatment determination and follow-up of cancer are extremely complex processes which require a multidisciplinary approach. Among the key specialties involved in cancer management are pathology (for diagnosis), surgery (for diagnosis and treatment), oncology (for treatment and follow-up), radiology (for diagnosis and follow-up) and radiation oncology (for treatment), as well as a number of other specialties for which cancer is important, such as urology and gynecology. IMPATH's potential market includes all physicians involved in the diagnosis and treatment of cancer in the United States. This includes approximately 16,000 pathologists and more than 7,000 oncologists (excluding radiation oncologists), as well as other specialists who treat cancer, such as surgeons and gynecologists and transplant centers. Historically, pathologists have been the focus of the Company's marketing efforts because they are responsible for providing the information from which most cancer management decisions flow. IMPATH's primary customers are the pathology departments of small- to medium- sized community hospitals (100 to 500 beds), where most cancer is diagnosed. Based upon statistics compiled by the American Hospital Association, IMPATH believes that there are approximately 2,550 hospitals which are potential users of IMPATH's services. These hospitals generally do not perform their own sophisticated cancer analyses because the low case volume per hospital does not justify establishing and maintaining the required technological capabilities, facilities and expert medical staff. Furthermore, health care providers increasingly are being organized into managed care networks which emphasize cost containment. IMPATH believes that these networks increasingly will outsource sophisticated cancer analysis in order to optimize patient care and control costs. The care of the cancer patient increasingly is being performed in outpatient settings, representing a shift from traditional, hospital-based care. Certain evaluations, surgical procedures and systemic treatments (e.g., chemotherapy) are now being performed at outpatient facilities, and most patient follow-up is being performed in outpatient settings rather than hospitals. These outpatient facilities generally do not have the expertise and resources to provide the information necessary for optimal cancer management. In order to make optimal cancer management decisions, providers and payors require information about the specific characteristics of a patient's cancer (e.g., how aggressive it is and how it can best be treated). In the past, patients have been treated based upon information gathered on entire classes of disease rather than on the individual's cancer. With the development of new targeted cancer therapies, patient-specific information has become critical to cancer treatment decisions. Page 2 Competitive Advantages of IMPATH IMPATH pioneered the marketing of patient-specific diagnostic and prognostic information to medical professionals involved in cancer management. The Company believes that it now performs more analyses of difficult to diagnose cancer cases than any other institution in the world and that it is the leader in providing comprehensive patient-specific prognostic information for cancer. IMPATH has established its leadership and reputation in the cancer information market through its extensive expertise, its integration of technological advances, its emphasis on customer service and education and the cost- effectiveness of its services. IMPATH believes that these factors, which cannot be duplicated without substantial investments of time and capital, provide it with significant advantages over existing and potential competitors. In addition, as the value of the information provided by IMPATH becomes more widely recognized among the participants in the cancer management market, IMPATH expects its role in all phases of this market to become even more important. Expertise. IMPATH specializes in cancer tests that require a level of medical knowledge and technical expertise not found in the average community hospital and not readily accessible in academic medical centers. IMPATH believes that its medical staff has more experience in providing comprehensive tissue- based diagnostic and prognostic analyses of cancer than virtually any other group of practitioners. IMPATH currently receives an average of 500 cases per day. The experience derived from such a volume of cases leads to superior professional and technical expertise. This expertise is reflected in IMPATH's database of more than 425,000 cancer cases analyzed to date, with more than 129,000 cases added during 1998 alone. The Company is linking these data to outcomes and cost information in order to demonstrate the value of IMPATH's services to payors and to provide new cancer information services to providers, payors, biopharmaceutical and large pharmaceutical companies and clinical research organizations. See "--Company Strategy." Comprehensive Technology Integration. IMPATH provides a comprehensive range of cancer analyses using sophisticated technologies, including immunohistochemistry, image analysis and flow cytometry, cytogenetics, molecular pathology and serum analysis. These analyses are integrated through in-house technical and medical expertise to provide a single source for optimal patient- specific diagnostic, prognostic and treatment information, which is not available from clinical laboratories, hospitals or academic centers. In the past decade, many new evaluation methods and treatment regimens have been developed as a result of the increased understanding of the cellular and molecular biology of cancer. As new therapies targeting cancers with specific biological characteristics emerge, IMPATH believes that the demand for cancer information services that identify such characteristics will increase substantially. IMPATH intends to continue to integrate technological advances rapidly and effectively to meet this demand. See "--Technologies." Customer Service and Education. IMPATH's medical staff and customer service representatives emphasize quality of service, accuracy of results and speed of turnaround. The medical staff provides frequent expert consultation and generally returns results within 48 hours of receipt of a specimen. By contrast, academic medical centers often require approximately 14 days to return results and typically provide little consultation. In addition, IMPATH's sales force focuses on educating clients as to the benefits of the Company's services in managing cancer. In contrast, the sales forces of most clinical laboratory companies market hundreds of disparate, cancer and non-cancer test services, and IMPATH believes that sales personnel at these companies have limited familiarity with the individual cancer tests offered. Many academic institutions, which perform some of the same analyses as the Company, typically do not have substantial marketing or customer service resources, and the pathology laboratories at large regional hospitals are generally dedicated to servicing only their affiliated physicians. The success of IMPATH's focus on customer service and education is demonstrated not only by the Company's rapidly growing case volume, but by the fact that IMPATH's case volume from its long-term customers continues to grow. See "--Sales and Marketing." Cost-Effectiveness. IMPATH provides physicians with diagnostic and prognostic information necessary to determine the medically optimal therapy for each patient's specific cancer. As a result, incorrect or unnecessary treatments can often be avoided, along with the associated trauma, risk and cost, and appropriate therapies can be implemented on a timely basis. In addition, because of its high case volume, IMPATH benefits from significant economies of scale which enable the Company to provide hospitals with a valuable, cost-effective and expeditious Page 3 alternative to establishing and maintaining in-house pathology laboratories. IMPATH also believes that it provides managed care networks and other payors with a source of sophisticated cancer analyses which optimize patient care while controlling costs. Company Strategy IMPATH's objective is to be the leading cancer information company and the comprehensive resource for integrating all aspects of the management of cancer information. The Company is pursuing the following strategies to achieve its objective: Increase market penetration of diagnostic and prognostic services. IMPATH believes that it has a significant opportunity to continue to increase its revenues and case volume from existing clients as well as through new relationships with hospitals, physicians and payors. The Company intends to continue to grow its core business by increasing the number of cases received from existing clients, continuing to incorporate new technologies and expanding the services it offers to the oncology outpatient market. Case volume for 1995 was 43,287; in 1998 that figure increased to 129,081, representing an average annual growth rate of 44.5%. In part as a result of the more complex analyses per case required to assess tumor activity, the Company's average revenue realization per case has increased as well. The average revenue realization per case (excluding cytogenetic and serum analyses) has increased from approximately $340 in 1995 to approximately $449 in 1998, representing an average annual increase of 9.8%. Managed care networks represent an important business opportunity for the Company because, in many cases, unnecessary treatment can be avoided and significant cost savings can be achieved through the relatively inexpensive services provided by the Company. An IMPATH case analysis typically costs between $300 and $1,200 and contains information which can be critical for physicians to avoid ineffective courses of therapy costing many thousands of dollars. The Company intends to expand its presence in managed care by aggressively marketing the cost-effectiveness and clinical benefits of its services and assisting managed care companies in developing cancer treatment protocols. In order to implement this strategy, the Company intends to continue to identify and incorporate new technologies and scientific developments and to recruit and train medical, scientific, customer service and sales personnel to meet the demands of its expanding business. Pursue strategic acquisitions and alliances. The Company has successfully completed the acquisition and integration of several complementary regional businesses which have added to the breadth and depth of its technological expertise and services, and believes that there are other similar acquisition candidates, including companies with significant national and international presences. The Company intends to continue to pursue selective acquisitions of companies that will enhance its cancer management information database. These acquisitions also may include companies involved in health care information services and companies that have expertise in the evaluation of medical data and cost analysis. Expand and enhance database. IMPATH believes that it has one of the most significant knowledge bases related to the diagnosis, prognosis and treatment of cancer. With more than 425,000 analyzed cases to date, IMPATH is rapidly incorporating the diagnostic and prognostic information generated from the analysis of these cases into its cancer information database. Through the acquisition of Medical Registry Services' tumor registry products, the Company better understands the natural history of cancer as evidenced by more than 1.5 million patients dating back to 1989. IMPATH has provided the diagnostic or prognostic information on more than 55,000 of these patients. The Company's unique ability to link patient-specific tumor characteristics with outcomes allows us to convert critical cancer data into knowledge. IMPATH expects to continue to link data obtained from diagnostic and prognostic analyses with therapy choices and patient outcomes. The cancer database represents a comprehensive resource for the management and treatment of certain cancers. In addition, as the Company integrates cost information related to patient care into its database, the Company believes that the database will become increasingly valuable to the managed care industry. The Company intends to continue to expand and Page 4 enhance its database through internal analysis and through strategic partnerships and joint ventures with oncology networks, hospital groups, managed care companies and biopharmaceutical and large pharmaceutical companies. Provide information to the biopharmaceutical industry. IMPATH believes that its resources will be valuable to the biopharmaceutical industry for evaluating existing and emerging diagnostic and prognostic indicators for targeted cancer therapies. The data would also permit a comparison of development-stage therapeutics with existing therapies, from an effectiveness and cost perspective. IMPATH's cancer database should also be a valuable resource for pre-clinical drug development, where potential drug therapies are screened and evaluated for specificity and potential market size. Target international expansion. IMPATH believes that foreign markets represent a significant opportunity for the Company to expand its cancer information business. A principal focus of the Company's international strategy will be selective acquisitions of established businesses providing services similar to those provided by the Company. IMPATH also intends to pursue this opportunity by partnering with international physician oncology networks and hospital groups, and involvement in drug development efforts of international pharmaceutical companies. These efforts initially will focus primarily on select markets in Europe and South America and, once these relationships are established, would expand into Southeast Asia, Japan, Canada and Australia. These regions represent areas where sophisticated treatment technologies are currently in use and which the Company believes would benefit from IMPATH's services. IMPATH's Role in the Cancer Management Pathway The management of cancer involves a series of distinct steps which must be integrated in order to define a therapeutic strategy. At each step, information critical to the decision-making process must be obtained in order to make the optimal decision. Traditionally, the type of information applied to the decision-making process has been limited, and related not to an individual's cancer, but rather to an entire class of disease. IMPATH's core business is providing, through the use of integrated advanced technology, information unique to a particular patient with cancer. IMPATH concentrates on the use of advanced technologies to address many of the shortcomings of traditional methods of cancer assessment. The Company believes that its services will be critical to the efficient coordination and optimal implementation of all phases of the cancer management pathway. Predisposition. In the large majority of cancers, genetic defects occur in the course of an individual's life that may lead to the development of cancer. However, in some cases an individual has an inherited predisposition for developing certain types of cancer. It is possible that the genes responsible for this inheritance pattern may be identified prior to the overt manifestation of that cancer. In fact, it is believed that as many as 5% of certain types of cancers are based at least in part on an inherited predisposition. IMPATH currently possesses the technological expertise to detect genetic defects associated with predisposition to certain cancers. While very few predisposition genes have been identified to date (for example, genes responsible for the inherited forms of breast cancer, ovarian cancer, colon cancer and retinoblastoma), this is a very active area of research. As these genes are identified, IMPATH will be in the position to screen for these types of inheritable cancers. Diagnosis. IMPATH's core diagnostic analyses provide information regarding tumors that are difficult to diagnose using conventional pathology procedures. Although most tumors can be diagnosed based on visual examination by the pathologist, as many as 15-20% (more than 180,000 per year in the U.S. alone) of all cancers defy specific classification by this method. This may result in treatment decisions that are approximated, incorrect or ineffective leading to unnecessary treatment, complications and increased cost. Traditionally, the therapeutic approach to a patient with cancer has been based on a purely morphological assessment of the origin of the cancer and the extent of spread, i.e., the tumor's appearance under the microscope (for example, does it look like colon cancer?) and the tumor's presence in various metastatic sites (such as regional lymph nodes and bone marrow). While this type of morphological assessment is well accepted, it has serious and critical limitations. Specifically, morphological assessment is able to provide very little information about the biological aggressiveness of an individual's cancer and can provide virtually no meaningful information regarding the treatment to which the Page 5 patient's specific cancer will respond. IMPATH has shown that in a majority of cases which defy standard classification, the use of advanced technologies and the medical expertise provided by IMPATH lead to an accurate diagnosis, thus ensuring optimization of therapy, greater predictability of outcome, increased survival and decreased overall costs. Prognostic Assessment. IMPATH's prognostic tests provide information to pathologists and oncologists regarding the aggressiveness of a tumor. The increase in knowledge of tumor biology and the development of new technologies have made it increasingly important to determine the aggressiveness of an individual cancer in order to treat that cancer more rationally. One breast cancer may have a low biological aggressiveness, and may therefore have a very low propensity to recur, while another breast cancer (which appears identical under the microscope) may be very aggressive. These tumors should be treated very differently, but may not be if these differences are not identified. For example, post-surgical systemic treatment, such as chemotherapy, for a cancer that has a very low rate of recurrence produces limited beneficial effects, and may only expose the patient to the morbidity and expense of such treatment. On the other hand, an aggressive cancer should be treated aggressively at the earliest possible time in order to achieve maximal therapeutic benefit. IMPATH's prognostic expertise differentiates such difficult cases, providing the oncologist with the critical information necessary to treat patients effectively and to reduce morbidity and costs. Treatment Determination. Traditionally, therapeutic approaches to cancer have been based solely on the diagnosis and stage (or extent) of disease. For example, a patient with breast cancer is treated with a particular combination of chemotherapeutic drugs not because it is known that the cancer in question is likely to respond, but rather because a certain proportion of other breast cancers have responded in the past to similar treatment. In an increasing number of cancer cases, IMPATH provides information that can help to predict the specific types of therapy to which a particular tumor will, or will not, respond. For example, in the case of breast cancer, IMPATH provides critical information for the determination of likely patient responses to specific therapies (e.g., hormonal treatment and chemotherapy) before such therapies are administered. This type of information is becoming increasingly available for other types of tumors as well. Thus, therapies that are most likely to be beneficial can be instituted at the earliest possible time, when the impact will be the greatest. In addition, therapies which will have little effect can be avoided, thus decreasing morbidity and expense and accelerating the implementation of appropriate treatment. The Company believes that this type of patient-specific information will become essential for optimal cancer management. Treatment Follow-up. Once a cancer has been diagnosed, assessed and treated, the patient must often undergo many years of follow-up care involving multiple patient contacts and repeat analyses. This care not only provides for the treatment of therapeutic complications (often resulting from inappropriate therapy due to inaccurate diagnosis and insufficient assessment) but is designed to determine, at the earliest possible time, if a patient has suffered a recurrence. IMPATH has the expertise to provide highly sensitive patient monitoring in an increasing number of cancers. For example, the Company is able to establish whether or not certain types of lymphomas have recurred prior to their detection by any standard method, even sensitive microscopic analysis. The identification of tumor recurrence at the earliest possible time increases the likelihood of a beneficial therapeutic response. Technologies Recent advances in immunology, biochemistry and molecular biology have created new tools with tremendous potential in the management of cancer patients. IMPATH specializes in cancer tests that require a sophisticated level of medical knowledge and technical expertise that is beyond the capability of pathology laboratories in the average community hospital. In fact, the expertise required to develop and maintain a high quality immuno- and molecular pathology laboratory is found in a relatively small number of top level academic institutions. Furthermore, even the most sophisticated medical centers perform only a small fraction of the tests that IMPATH performs every day. This is extremely important, as increased experience generally leads to superior professional and technical expertise. The average community hospital pathologist does not see a substantial volume or range of cases and, therefore, very rarely has the experience to choose the correct testing methodology and to evaluate the data, or the technical support to achieve high quality results. Even when these technologies exist at academic medical centers, they typically exist in different departments (e.g., pathology, genetics and molecular biology). The Company believes that there is Page 6 usually no integration of information by these different departments, making it more difficult for the referring physician to diagnose and provide optimal treatment for a patient's specific cancer. IMPATH addresses these issues by virtue of its extensive experience in applying and performing analyses and by the background and expertise of its medical staff. IMPATH currently receives an average of 500 cases a day. Because of IMPATH's significant case volume, its professionals have been able to expand their considerable experience, and have been able to develop individual areas of expertise. IMPATH's consultants and in-house staff include internationally known experts in immuno- and molecular pathology and highly experienced technologists. IMPATH continues to identify and incorporate sophisticated technologies and analyses, consistent with the Company's goal of remaining at the forefront of scientific advances in cancer analysis. IMPATH integrates these technologies in order to provide comprehensive cancer information critical for optimal cancer management. Importantly, these techniques also allow for the identification of patients who will not benefit from certain types of therapy, thus avoiding the cost, pain and side effects of unnecessary treatment. The following chart summarizes the Company's use of technologies in its analyses of cancer:
Flow Cytometry Category of Analysis and and Immunohisto- Image Molecular Serum Type of Cancer chemistry Analysis Pathology Cytogenetics Analysis -------------- --------- -------- --------- ------------ -------- Predisposition................................. X Diagnosis: Difficult to Diagnose Cancers................ X Lymphoma/Leukemia............................ X X X X Prognosis/Treatment Determination: Breast....................................... X X X Lymphoma/Leukemia............................ X X X X Prostate..................................... X X X Other (e.g., Colon, Bladder, Ovarian)........ X X X Follow-up: Breast....................................... X X Lymphoma/Leukemia............................ X X Prostate..................................... X X Other (e.g., Colon, Bladder, Ovarian)........ X X
Immunohistochemistry Immunohistochemistry (IHC) is a technique wherein a monoclonal antibody is used to identify disease-specific cellular antigens. A primary antibody to an antigen of interest is incubated with test tissue sections followed by a secondary antibody complex. If the antigen is present in tissue, the primary antibody binds and the antigen-antibody reaction can be visually detected by a color product. Because cell antigens are not absolutely tissue- or tumor- specific, the immunopathologist must use panels of antibodies to construct a "fingerprint" for identification. Immunohistochemistry is superior to standard biochemical assays because it provides faster results, can be used on smaller tissue samples, has less stringent requirements for specimen storage, and, most importantly, predicts outcomes more accurately. Page 7 Flow Cytometry and Image Analysis Various components of tumor cells can be quantified by flow cytometry and/or image analysis. In flow cytometry, a cell sample is stained with appropriate fluorochromes and passed through a flow chamber designed to align the stream of cells so that they are individually struck by a focused laser beam. The scattered light and fluorescent emissions are separated according to wavelength by appropriate filters and mirrors and directed to detectors which convert the emissions into electronic signals that are analyzed and stored for future display by a computer. The data are displayed on a graph of frequency (number of cells versus fluorescent energy) for a single parameter analysis or as a scattergraph for a multi-parameter evaluation. The fluorochromes used to stain cells in flow cytometry include compounds that bind to DNA and/or RNA, but fluoresce at different wavelengths for each, or that can attach to antibodies against cell surface antibodies. In image analysis, a pathologist selects the area of the specimen to be examined, and a computerized instrument using a microscope and camera then measures various components of tumor cells based on staining intensity. Molecular Pathology The next generation of commercial diagnostic and prognostic testing is generally expected to be based on molecular biology, since a disease or condition may be associated with the presence of an abnormality in DNA or RNA. A specimen may be tested for a particular disease or condition by finding and marking this abnormality. Currently, the use of molecular pathology is confined predominantly to academic centers. However, IMPATH already performs a wide range of molecular pathology analyses, including in situ hybridization (ISH). Similar to IHC except that a DNA probe is used rather than a monoclonal antibody, in situ hybridization employs recombinant DNA technology with labeled probes to locate and identify nucleic acid sequences within cells. IMPATH also uses a DNA- based technology called Southern blotting that detects genetic rearrangements that confirm abnormalities known to be present in certain tumors. More recently, fluorescence has been used to label probes, replacing the historical use of radioactive isotopes, in a technique called fluorescence in situ hybridization (FISH). Another promising molecular pathology technique already in use at IMPATH is the amplification of specific DNA sequences by thermal cycling and subsequent electrophoresis, the most sensitive method of detecting alteration in DNA. Cytogenetics Cytogenetic analysis evaluates the genetic changes that occur at the chromosome level. Humans have 23 pairs of chromosomes, or 46 individual chromosomes in every cell. Cytogenetic methods provide for the identification of each individual chromosome using DNA-specific staining techniques to produce the unique band pattern that is characteristic of each chromosome, providing for the identification of chromosomal abnormalities like balanced translocations, deletions and gene amplifications that are consistently associated with certain cancers. The analysis involves the utilization of fresh cells obtained from blood, bone marrow or tissue specimens which have been cultured to enhance cell growth and division. The cells are then harvested and prepared in such a manner that the chromosomes and the distinct patterns of each can be seen through a microscope. The identification of chromosome changes has become extremely useful in the diagnosis and prognostic assessment of lymphomas, leukemias, soft tissue cancers (sarcomas) and pediatric cancers. The scope of this technology is expected to expand to carcinomas (such as colon, lung and prostate cancer) in the near future. Serum Analysis Blood serum markers are proteins circulating in the blood which are produced in excess by malignant tumors. These serum proteins serve as an indicator of tumor regression (decreased presence of markers) or tumor progression (increased presence of markers). Because these proteins are present in minute amounts, the technology required for detection relied, until recently, on an immunochemical procedure involving the use of radioactive isotopes. Now, however, a new generation of non-radioactive techniques is available to detect blood serum markers employing, among other methods, chemiluminescence--a novel system based on emitted light as an indicator of Page 8 activity. IMPATH uses its serum technology to assist oncologists in patient follow-up. For example, by monitoring levels of certain known markers, the Company can help to confirm remission or the recurrence of ovarian and prostate cancers. Cancer Management Through Information Optimal management of cancer means the best outcome at the lowest possible cost. At each step along a management pathway, the best choice is not necessarily the lowest cost alternative, but one which leads to the best outcome at the lowest overall cost. A patient with cancer has many treatment options, at widely varying costs, ranging for example from no further intervention to expensive experimental procedures such as bone marrow/stem cell transplants; however, the choice of a more expensive option may lead to a better outcome with fewer recurrences. This not only optimizes patient benefit (an obvious advantage as health care will be increasingly evaluated on the basis of outcome) but can actually lead to lower overall cost; the cost of treating recurrent disease is generally far greater than initial post-surgical interventions. Thus, outcomes and cost-effectiveness should be synergistic, and not mutually exclusive. The key to cost-effectiveness is choosing the most appropriate management pathway for the individual patient. This can only be done through the use of information derived from a patient's tumor that defines its biological uniqueness, and allows for identification of the most appropriate therapeutic options. Finally, cancer management is not static; approaches that represent current best practices may well be added to or modified by new developments, a process that has tremendous impetus in research institutions and biopharmaceutical companies. With more than 425,000 analyzed cases to date, IMPATH is rapidly incorporating the diagnostic and prognostic information generated from its analyses of cases into its cancer database. The demographics of these cases are: 197,178 breast cancer prognostics and treatment profiles; 124,406 complex cancer diagnoses; 61,558 lymphoma and leukemia classifications; and 41,974 analyses of other cancers (e.g., prostate, bladder, uterine). In order to provide high quality and cost-effective cancer care, oncology practices are consolidating into comprehensive coordinated cancer treatment groups and managed care organizations are increasing their presence in the oncology marketplace. IMPATH believes that it can provide these groups with information that is critical in providing such care. IMPATH also believes that the information it provides will become increasingly important to these groups as the Company develops its outcomes-oriented database to provide information for the optimal, cost-effective utilization of resources. IMPATH believes that the use of its services will have two fundamental impacts on cancer management: (1) optimization of patient-specific care, and (2) the cost-effective delivery of that care. As a result, IMPATH expects to become an increasingly significant factor in helping to establish quality standards for these cancer management groups. IMPATH believes that it is well positioned to become a vital component in the integrated management of cancer. Page 9 Applications of IMPATH's Cancer Information Services Presented below are examples of how the information provided by IMPATH can be critical to optimal cancer management. Breast Cancer Management--Risk Assessment and Evaluation of Therapeutic Options Breast cancer is the most common cancer in women in the United States. Annually, more than 175,000 cases are diagnosed and over 44,000 women die of this disease. While the incidence of breast cancer has been increasing, the number of deaths resulting from this disease has been slowly but steadily decreasing. It is now widely recognized that earlier detection (by mammography and self examination) has played a significant role in decreased mortality. However, a significant advancement in the management of breast cancer has been the development of technologies that provide patient-specific information that allows oncologists to optimize treatment for each individual woman's cancer. Traditional analysis of breast cancer only assesses a patient based on what a tumor has already done, i.e., its current size and whether it has metastasized to regional lymph nodes. This approach does not provide information specific to the individual patient, but can only assess how populations of patients will fare. This approach to providing therapy in breast cancer has traditionally been based on how breast cancer generally responds to a particular regimen, and not the potential of a particular tumor to respond to such therapy. IMPATH's approach to breast cancer analysis is based on providing the most patient-specific information possible through the use of sophisticated technology. IMPATH provides information in two fundamental areas, from which virtually all post-surgical management decisions can be based. Risk Assessment. IMPATH provides information necessary to determine the aggressiveness of a tumor, not based on an assessment of the current state of the tumor, but rather on the specific cellular and molecular changes that take place in that individual tumor. This information is critical for optimal cancer management. For example, a patient with a tumor that has a very high likelihood of producing overt metastases must be treated rapidly and aggressively. On the other hand, a patient with a tumor that has very little chance of developing metastasis is not likely to benefit from aggressive systemic treatment, and may only suffer the complications and cost of such treatment. Assessment of Therapeutic Options. IMPATH uses some of the most significant advances in the understanding of cancer to assess more accurately the likelihood of response (or lack of responsiveness) of a tumor to a particular type of systemic therapy. This allows for better, more cost-effective cancer management, as patients can now be treated with the type of therapy to which they are most likely to respond, and can avoid treatments to which they are unlikely to respond. Selected examples of how IMPATH assesses risk and therapeutic options are set forth below: Hormone Receptors. The presence of estrogen and progesterone receptors in breast cancer identifies women who are more likely to respond to hormonal manipulation of the tumor, a commonly used therapy. This important test is now required by the American College of Surgeons. The hormonal receptor status, as examined by IHC, has been shown to be better correlated with clinical outcome than standard biochemical assays. Furthermore, smaller tumor specimens, including fine needle aspirates (FNAs), which are obtained through a less invasive, less painful and less costly procedure, can only be effectively examined by IHC. Oncogene Analyses. The Her-2/neu oncogene identifies tumors that are more biologically aggressive and therefore require more intensive treatment. The Her- 2/neu oncogene may also identify breast cancers that are resistant to certain types of chemotherapy. Page 10 Cell Proliferation/DNA Ploidy Analysis. Proliferative rate and ploidy have been well documented as important prognostic indicators in many cancers, including breast cancer and colon cancer. The ploidy compares the DNA content of a tumor cell with that of a normal cell. The proliferative rate measures the percentage of cells that are actively dividing. High proliferative rates and abnormal DNA content have been strongly correlated with faster progression and earlier recurrences. Using image analysis and flow cytometry, the DNA of the tumor can be examined by IMPATH using tissue specimens, FNAs and other cell specimens. IHC can also be used visually to evaluate cell proliferation. Detection of Occult Bone Marrow and Lymph Node Micrometastases. The single most reliable indicator of outcomes in most cancers is whether or not a tumor has spread (metastasized). However, in many cases the conventional pathologic examination is unable to detect tumor spread, even in patients who will eventually suffer tumor metastases. The basis for the development of cancer metastases is the presence of the undetected spread of tumor. Technology developed by IMPATH's founders allows for the detection of the microscopic spread of cancer prior to detection by conventional methods, including sensitive microscopic examination. The detection of lymph node and bone marrow micrometastases identifies patients at greatest risk for developing overt metastatic disease and may identify those who will most benefit from aggressive adjuvant chemotherapy. Furthermore, identifying those patients who do not have lymph node (or bone marrow) micrometastases may indicate those who will not require such therapy, and who thus can be spared the pain, side effects and substantial costs of chemotherapy. IMPATH believes that it is one of a limited number of companies currently offering tests for the detection of micrometastases, and that the detection of occult lymph node and bone marrow micrometastases will be important in identifying the risk of developing overt metastases for a wide variety of cancers, including breast, lung, colon and prostate cancer. Furthermore, in patients undergoing high-dose chemotherapy followed by stem cell transplants from one location to another within the patient's body, a correct assessment of tumor cells in the patient's bone marrow may be important to evaluate accurately the response to therapy and to avoid reinfusing a patient with cancerous cells. Because of its unique approach to breast cancer, IMPATH believes that it is the leader in providing the most comprehensive prognostic information essential to the management of breast cancer. In 1998, the Company provided patient- specific prognostic information on approximately 28% of all such cases in the U.S, and in and over 35% of cases diagnosed in the New York metropolitan area, California and Florida, the Company's largest markets. The Company's specialized expertise in breast cancer has not only allowed it to play a significant role in optimizing patient-specific breast cancer treatment nationwide but has also allowed it to be well positioned to develop the most comprehensive outcomes- focused database in breast cancer. Lymphoma/Leukemia Management--Integration of Technology in Overall Cancer Management The value of IMPATH's integrated approach to providing cancer information is demonstrated in the clinical management of hematopoietic malignancies, such as lymphomas and leukemias, particularly as scientific advances improve our understanding of these diseases. The clinical management of hematopoietic malignancies requires a comprehensive approach that includes analysis by hematopathologists and the use of advanced diagnostic and prognostic technology. Most community hospitals do not have hematopathologists or the technologies required for such analyses. The Company employs four hematopathologists and uses molecular and cellular technology to diagnose and classify these hematopoietic malignancies. Using the information from an IMPATH analysis, a physician can tailor therapy to optimize the outcome for a patient. These same technologies are applied to evaluate a patient's response to therapy, and to evaluate the progression or remission of the disease. Lymphoma. The clinical significance of IMPATH's diagnostic technology is illustrated by the fact that during 1998, of all the suspected lymphoma cases sent to IMPATH for analysis, approximately 10-15% were found to be an infection or inflammation rather than cancer. Prior to the development of certain technologies used by IMPATH, such cases may have been misdiagnosed as cancer. In the cases identified by IMPATH as not being cancer, patients who were suspected of having a hematopoietic malignancy were spared the trauma, risk and cost associated with unnecessary treatment. Of the cases sent to IMPATH in 1998 that were in fact lymphomas, the technology applied by the Company permitted an assignment of the "grade" of the lymphoma, a process recommended by the Page 11 International Lymphoma Study Group (1994). The grading of lymphomas is an important process that influences the treatment decisions of physicians and can result in better outcomes for a lymphoma patient. Leukemia. Similar to lymphomas, leukemias represent a type of cancer where the classification and grading of the disease provides critical information that influences the selection of therapy, predicts the response to therapy and indicates the likely outcomes for the patient. The characteristics that distinguish the various types of leukemias can be identified by the technology employed by IMPATH. For example, in many cases, chromosome abnormalities identified by this technology permit the unequivocal assignment of the disease to a particular class of leukemia. As new biological characteristics associated with leukemia classes continue to be identified, the Company believes that it is well positioned to incorporate into its analyses additional tests to detect these characteristics. Management of Other Cancers Diagnostic, prognostic and therapeutic information is being integrated increasingly into the management of other cancers. As medical research progresses and as increasing numbers of treatment options evolve, IMPATH believes that its expertise will play an increasing role in the decision making processes for all cancers. For example, prostate cancer, like breast cancer, is a disease that is responsive to hormonal manipulation. As in the case of estrogen receptors in breast cancer, the presence of androgen receptors in prostate cancer can now be evaluated. IMPATH believes that this information will become increasingly important in the treatment and management of prostate cancer. The growth rate of the tumor is also critical; for instance, a 50-year old man with a rapidly growing cancer must be treated differently than a 90-year old man with a very slow-growing prostate cancer. IMPATH provides this information for prostate and other cancers, including breast, colon and bladder cancers. The determination of patient-specific characteristics in optimizing therapy is becoming essential as more outcomes-related biological determinants are defined. Important examples of this are mutations in tumor suppressor genes and oncogenes (such as Her-2/neu). The presence of these mutations in a patient with specific types of tumors (e.g., bladder, breast or colon) identifies the biological aggressiveness of that individual's tumor. Other characteristics help to establish the responsiveness to therapy. For example, if a patient's cancer has the multi-drug resistance (MDR) receptor, his/her tumor will be unresponsive to many forms of drug therapy including, for example, taxol therapy for ovarian and other cancers. Furthermore, the most significant problem in treating cancer is the accurate, early assessment of disease dissemination, i.e., metastases. IMPATH has a special expertise in identifying the presence of lymph node and bone marrow micrometastases, often earlier than practitioners using conventional methods. This analysis is now useful in the correct staging of prostate, colon or lung cancers and increasingly in other types of cancers. Information that establishes the biological aggressiveness of an individual's tumor and predicts response to therapy for that particular patient is crucial to optimizing outcome for that patient. IMPATH believes that its expertise in this area, as well as its access to increasing numbers of cancer specimens, will allow it to continue to expand its comprehensive database for predicting outcomes in various types of cancer. The Company believes that this database will be increasingly important to the medically optimal and cost- effective management of the cancer patient. Sales and Marketing Sales Force. As of December 31, 1998, the Company's sales force consisted of 36 employees, including a Senior Vice President - Sales and Marketing, three Directors, and 32 sales representatives. The IMPATH sales force consists of highly trained individuals with extensive scientific backgrounds and successful sales records with health care companies. The sales force focuses on educating clients about the benefits of the Company's services in managing cancer. IMPATH believes that the technical and clinical knowledge of its sales force distinguishes it from other companies. Page 12 Marketing Support. IMPATH supports its sales force with extensive customer service and marketing programs. Due to the technical and scientific complexity of IMPATH's business, the Company has established a strong interactive relationship with its clients. This relationship serves to increase the reliance of the client on IMPATH and is a significant tool for encouraging business growth within the current customer base. The marketing process emphasizes educating physicians regarding the development of new technologies and the value of the information provided by IMPATH. Customer Service. The Company emphasizes customer service, including the provision of a comprehensive detailed report to the referring physician after each analysis is completed. These reports serve to educate pathologists and clinicians, many of whom may not be familiar with the analyses performed by IMPATH, as well as to provide authoritative support for the accuracy and validity of such analyses. In general, the Company returns its completed analysis and report to the referring physician or clinician within 48 hours of receipt of the tissue specimen, compared with approximately 14 days for academic institutions. Further, the Company's medical staff provides frequent expert consultation. The Company also employs several customer service representatives, who are responsible for inquiries made by referring physicians and provide support for the Company's sales staff. The success of IMPATH's focus on customer service and education is demonstrated not only by the Company's rapidly growing case volume, but by the fact that IMPATH's case volume from its long-term customers continues to grow. Competition The Company provides services in a segment of the health care industry that is highly fragmented and extremely competitive. The Company's actual or potential competitors include large university or teaching hospitals; large clinical laboratories that have substantially greater financial, marketing and logistical resources than the Company; special purpose clinical laboratories that have limited test offerings and a highly focused product and marketing strategy; and the Company's customers or potential customers who may choose to perform services similar to those performed by the Company. It is anticipated that competition will continue to increase due to such factors as the perceived potential for commercial applications of biotechnology and the continued availability of investment capital and government funding for cancer-related research. There are several large clinical laboratory companies which market a broad range of services nationally, and which have substantially greater financial, selling, logistical and laboratory resources than the Company. In addition, management has identified a number of specialized clinical laboratories in the U.S. which have test offerings which are less comprehensive than those of IMPATH and highly focused product and marketing strategies. Reimbursement The Company typically bills third-party payors, such as private insurance plans, managed care plans and Medicare, as well as hospitals, for its services. During 1996, 1997 and 1998, the Company received the following estimated percentages of its total revenues for diagnostic and prognostic services from the respective payors identified below:
Year Ended December 31, ----------------------- Payor 1996 1997 1998 ----- ---- ---- ---- Hospitals ............................................ 37% 26% 21% Private Insurance/Managed Care ....................... 35 44 50 Medicare ............................................. 25 25 25 Individual Patients .................................. 3 5 4 - - - Total ................................................ 100% 100% 100% === ==== ====
For a discussion of the changes in these percentages in 1998, see Item 7 of this Annual Report on Form 10-K. Page 13 Medicare is a federal health insurance program that provides health insurance coverage for certain disabled persons, for persons aged 65 and older and for certain persons with end-stage renal disease. Medicaid is the state-administered and state- and federally-funded program for certain low-income individuals. To date, the Company has derived no revenues from the Medicaid program. As a participating provider, the Company bills Medicare for covered services and accepts Medicare reimbursement as payment in full for its services, subject to applicable co-payments and deductibles. Prior to the passage of the Balanced Budget Act of 1997, Medicare beneficiaries could (i) receive services on a fee-for-service basis pursuant to which Medicare generally pays providers based on a national fee schedule subject to the applicable copayment or (ii) elect to enroll with a managed care organization which had entered into a direct contract with Medicare whereby the organization is paid a predetermined amount for each covered Medicare beneficiary without regard to the frequency, extent or nature of services delivered. The Balanced Budget Act of 1997 reforms Medicare in a number of respects, including the phase out of existing Medicare risk contracts and the creation of the Medicare+Choice program. The Medicare+Choice program allows Medicare beneficiaries, in addition to traditional fee-for-service Medicare, to have access to a wide array of private health plan choices beyond the previously existing managed care arrangements. These additional plan options include "Coordinated Care Plans" which an HMO with or without point of service option; a Provider-Sponsored Organization plan; a Preferred Provider Organization plan; and a demonstration Medical Savings Account project. Given the infancy of the Medicare+Choice program, the Company cannot predict what effect, if any, the program will have on the Company's future Medicare revenues. Revenues from analyses performed for other patients are derived principally from other third-party payors, including commercial insurers, Blue Cross/Blue Shield plans, health maintenance and preferred provider organizations and from hospitals (who in turn usually bill any third-party payors or patients). With respect to third-party payors, management has elected, to date, not to accept reimbursement rates set by such non-governmental third-party payors as payment in full. With respect to hospitals, management negotiates the terms applicable to each arrangement. The Company currently receives Medicare reimbursement through three Medicare carriers. Reimbursement rates for some services of the type or similar to the type performed by the Company have been established by Medicare and some other third-party payors, but have not been established for all services or by all carriers with respect to any particular service. Most carriers, including Medicare, do not cover services they determine to be experimental or investigational, or otherwise not reasonable and necessary for diagnosis or treatment. However, a formal coverage determination is made with respect to relatively few new procedures. When such determinations do occur for Medicare purposes, they most commonly are made by the local Medicare carrier which processes claims for reimbursement within the carrier's geographic jurisdiction. Medicare may retroactively audit and review its payments to the Company, and may determine that certain payments for services must be returned. With respect to other third-party payors, a positive coverage determination, or reimbursement without such determination, by one or more third-party payors does not assure reimbursement by other third-party payors. Significant disapprovals of payment for any of the Company's services by various carriers, reductions or delays in the establishment of reimbursement rates, and carrier limitations on the coverage of the Company's services or the use of the Company as a service provider could have a material adverse effect on the Company's future revenues. Most services furnished by the Company are characterized for the purposes of the Medicare program as physician pathology services. As of January 1, 1992, all physician services, including pathology services, have been reimbursed by Medicare based on a new methodology known as the resource-based relative value scale ("RBRVS"), which was phased in over a four-year period. A Final Notice updating the RBRVS payment methodology, published November 25, 1992, as well as updates issued subsequently, have not had any significant effect on the Company's reimbursement rates. Under the Balanced Budget Act of 1997, Congress revised the RBRVS system to use a single conversion factor, rather than the previous three, and to change the manner in which fees are updated. The Company cannot predict what the potential impact of the change to the RBRVS system will be on the Company's future Medicare reimbursement. A small portion of the services furnished by the Company are characterized for purposes of the Medicare program as clinical laboratory services and reimbursed by Medicare under its clinical laboratory fee Page 14 schedule. The Balanced Budget Act of 1997 froze the clinical laboratory fee schedule payments for the years 1998-2002. Such freeze is not expected to have a material adverse effect on the Company's revenues. Quality Assurance IMPATH engages in a number of quality control procedures, many of which the Company believes exceed industry norms. For instance, the Company does not buy untested commercially available reagent test kits. Instead, each of IMPATH's reagents is selected from various suppliers based on an exhaustive in-house test of purity, batch-to-batch variability, potency and performance. IMPATH believes that its quality review procedures are superior to other centers performing similar analyses. In addition, the quality assurance program of the Company's facilities includes close attention to the Company's Standard Operating Procedures, continuing education and technical training of technologists, statistical quality control of all analytical processes, instrument maintenance, and regular inspection by governmental agencies and the College of American Pathologists (the "CAP"). The CAP is an independent non-governmental organization of board-certified pathologists which offers an accreditation program to which facilities can voluntarily subscribe. The CAP accreditation program involves both periodic inspections of the Company's facilities and participation in the CAP's proficiency testing program for all categories in which its facilities seek to attain or maintain accreditation. The Company's facilities are CAP accredited, certified by Medicare, licensed by New York State, the City of New York and the States of California and Arizona and holds a certificate of accreditation under the Clinical Laboratories Improvement Act of 1967 ("CLIA"). The Company believes it has obtained all licenses and permits required to operate its facilities. IMPATH follows the quality control and quality assurance procedures established by CLIA, the CAP and various New York State, California, Arizona and New York City agencies. The Company's New York and California facilities are supervised by medical directors whose qualifications meet all regulatory requirements. The Company's Arizona facility is supervised by a laboratory director whose qualifications meet all regulatory requirements governing the cytogenetics testing which is performed at the facility. The primary role of the Company's medical directors and laboratory director is to ensure the accuracy and quality of the Company's analyses. As a further quality assurance procedure, the Company periodically undergoes peer review with third-party facilities, including Norris Cancer Center and Memorial Sloan-Kettering Cancer Center. In peer review, particularly challenging diagnostic cases are referred by the Company to these cancer centers for verification of antibody tests and IMPATH's diagnostic conclusions. The results of these consultations are tabulated and discussed at monthly quality assurance meetings at the Company's offices. The Company also participates in a number of proficiency testing programs under which, in general, the testing body submits pre-tested samples to a facility in order to measure the facility's results against the known proficiency test value. The proficiency programs are conducted by groups such as the CAP and state and federal government regulatory agencies. Government Regulation As a provider of health care related services, the Company is currently subject to extensive and frequently changing federal, state and local regulations governing licensure, billing, financial relationships, referrals, conduct of operations, purchases of existing businesses, cost containment, direct employment of licensed professionals by business corporations and other aspects of the Company's business relationships. The various types of regulatory activity affect the Company's business either by controlling its growth, restricting licensure of the business entity or by controlling the reimbursement for services provided. Laboratory Licensure. The Company's facilities are certified or licensed under the federal Medicare program and CLIA, as amended by the Clinical Laboratory Improvement Amendments of 1988 ("CLIA '88"). Licensure is maintained under the clinical laboratory licensure laws of New York, California and Arizona, where the Company's facilities are located. The Company believes it has obtained all material laboratory licenses required for its Page 15 operations. In addition, the California facility is licensed by the federal Nuclear Regulatory Commission and all three facilities are accredited by the CAP. The federal and state certification and licensure programs establish standards for the day-to-day operation of facilities, including, but not limited to, personnel and quality control. Compliance with such standards is verified by periodic inspections by inspectors employed by federal or state regulatory agencies. The Health Care Financing Administration conducts an on-site survey every two years. In addition, federal regulatory authorities require participation in a proficiency testing program approved by the Department of Health and Human Services ("HHS") for each of the specialties and subspecialties for which a facility seeks approval from Medicare and accreditation under CLIA '88 requires participation in proficiency testing programs which involve actual testing of specimens by the facility that have been prepared by an entity running an approved program for testing. The Final Rule implementing CLIA '88, published by HHS on February 28, 1992, became effective September 1, 1992. This Final Rule covers all laboratories in the United States, including the Company's facilities. The Company has reviewed the Final Rule (and subsequent revisions thereto), including, among other things, the rule's requirements regarding facility administration, participation in proficiency testing, patient test management (including patient preparation, proper specimen collection, identification, preservation, transportation, processing and result reporting), quality control, quality assurance and personnel, for the types of analyses undertaken by the Company, and believes that it complies with these requirements. However, no assurances can be given that the Company's facilities will pass all future inspections conducted to ensure compliance with CLIA '88 or with any other applicable licensure or certification laws. Anti-Kickback/Self-Referral Regulations. The Social Security Act imposes criminal penalties and exclusions from federal health care programs (including Medicare) upon persons who make or receive kickbacks, bribes or rebates in connection with a federal health care program (including Medicare). The anti- kickback rules prohibit providers and others from soliciting, offering, receiving or paying, directly or indirectly, any remuneration in return for either making a referral for a service or item covered by a federal health care program (including Medicare) or ordering any such covered service or item. In order to provide guidance with respect to the anti-kickback rules, the Office of the Inspector General ("OIG") issued final regulations outlining certain "safe harbor" practices, which although potentially capable of inducing prohibited referrals, would not be prohibited if all applicable requirements are met. A relationship which fails to satisfy a safe harbor is not necessarily illegal, but could be scrutinized on a case-by-case basis. The OIG has issued final rules regarding its recently mandated proposals for accepting and issuing advisory opinions on the anti-kickback rules. Because the anti-kickback rules have been broadly interpreted, they could limit the manner in which the Company conducts its business. The Company believes that it currently complies with the anti-kickback rules in planning its activities, and believes that its activities, even if not within a safe harbor, do not violate the anti-kickback statute. However, no assurance can be given regarding compliance in any particular factual situation. Exclusion of the Company from the Medicare program could result in a significant loss of reimbursement and have a significant adverse effect on the Company. Under another provision, known as the "Stark" law or "self-referral" prohibition, physicians who have an investment or compensation relationship with an entity furnishing clinical laboratory services (including pathology services) may not, subject to certain exceptions, refer clinical laboratory analyses for Medicare patients to that entity. Similarly, facilities may not bill Medicare or any other party for services furnished pursuant to a prohibited referral. Violation of these provisions may result in disallowance of Medicare claims for the affected analysis services, as well as the imposition of civil monetary penalties and program exclusion. Under the Stark law and the regulations implementing the law, a physician may make payments to a clinical laboratory in exchange for the facility's provision of clinical laboratory services and continue to refer Medicare patients to that laboratory. A number of states, including New York and California, have enacted prohibitions similar to the Stark law covering referrals of non-Medicare as well as Medicare business. These rules are very restrictive, prohibit submission of claims for payment for prohibited referrals and provide for the imposition of civil monetary and criminal penalties. The Company has no prohibited relationships with any of its referrers. However, the Company is Page 16 unable to predict how these laws may be applied in the future, or whether the federal government or states in which the Company operates will enact more restrictive legislation or restrictions that could under certain circumstances impact the Company's operations. Any exclusion or suspension from participation in the Medicare program, any loss of licensure or accreditation, or any inability to obtain any required license or permit, whether arising from any action by HHS, any state or any other regulatory authority, would have a material adverse effect on the Company's business. Any significant civil monetary or criminal penalty resulting from such proceedings could have a material adverse effect on the Company. Fee-Splitting; Corporate Practice of Medicine. The laws of many states prohibit physicians from sharing professional fees with non-physicians and prohibit non-physician entities, such as the Company, from practicing medicine (including pathology) and from employing physicians to practice medicine (including pathology). The laws in most states regarding the corporate practice of medicine have been subjected to limited judicial and regulatory interpretation. The Company believes its current and planned activities do not constitute fee-splitting or violate any prohibition against the corporate practice of medicine. However, there can be no assurance that future interpretations of such laws will not require structural or organizational modifications of the Company's existing business. In addition, statutes in certain states in which the Company does not currently operate could require the Company to modify its structure. Food and Drug Administration. The Food and Drug Administration ("FDA") regulates certain monoclonal antibodies purchased by the Company but does not currently regulate the analytical services which are the Company's principal business. However, the FDA is currently reviewing issues concerning the use of monoclonal antibodies for analytical services and the decisions the FDA ultimately makes could impact the Company. Other. Certain federal and state laws govern the handling and disposal of medical specimens, infectious and hazardous wastes and radioactive materials. Failure to comply could subject an entity covered by these laws to fines, criminal penalties and/or other enforcement actions. Pursuant to the Occupational Safety and Health Act, facilities have a general duty to provide a workplace to their employees that is safe from hazard. Over the past few years, the Occupational Safety and Health Administration ("OSHA") has issued rules relevant to certain hazards that are found in facilities such as the Company's. Failure to comply with these regulations, other applicable OSHA rules or with the general duty to provide a safe work place could subject an employer, including a facility employer such as the Company, to substantial fines and penalties. The confidentiality of patient medical records is subject to substantial regulation by the state and federal governments. State and federal laws and regulations govern both the disclosure and the use of confidential patient medical record information. Legislation governing the dissemination and use of medical record information is continually being proposed at both the state and federal levels. Additional legislation may require that holders or users of confidential patient medical information implement measures to maintain the security of such information and may regulate the dissemination of even anonymous patient information. Furthermore, physicians and other persons providing patient information to the Company are also required to comply with these laws and regulations. If a patient's privacy is violated, or if the Company is found to have violated any state or federal statute or regulation with regard to confidentiality, dissemination or use of patient medical information, the Company could be liable for damages, or for fines or penalties. The Company believes that it is in material compliance with all applicable state and federal laws and regulations governing the confidentiality, dissemination and use of medical record information. However, there can be no assurance that differing interpretations of existing laws and regulations or the adoption of new laws and regulations would not have a material adverse effect on the ability of the Company to obtain or sue patient information which, in turn, could have a material adverse effect on the Company's plans to develop and market its cancer information database. Page 17 Insurance The Company is presently covered by general liability insurance in the amount of $6.0 million per occurrence and $7.0 million in the aggregate, professional liability insurance in the amount of $6.0 million per occurrence and $8.0 million in the aggregate for the Company's Medical Directors and other physicians, and Directors and Officers liability insurance in the amount of $3.0 million per occurrence and in the aggregate. The Company's liability insurance covers claims relating to the handling and disposal of medical specimens and infectious and hazardous waste, except in the event of malfeasance or fraud by the Company. Management believes that these amounts and types of coverage are adequate to protect the Company and its property against material loss. Employees As of December 31, 1998, the Company had 429 full-time and 31 permanent part- time employees, of which 108 were management, administrative and clerical personnel, 45 were engaged primarily in marketing and sales activities and 307 were engaged in laboratory and related operations. None of the Company's employees is covered by collective bargaining agreements. The Company believes its employee relations are good. GLOSSARY Adjuvant Chemotherapy: Therapeutic drugs used to inhibit and destroy cancer cells in addition to conventional treatment (e.g., surgery). Antibody: A protein molecule produced by the immune system that specifically binds with an antigen. Antigen: Any of a variety of materials that induce the body's immune system to produce antibodies. Cancer: A generic term for any kind of malignant tumor. Clinical: Pertaining to the sign, symptoms and course of a disease. Diagnosis: The process for deciding what disease is present. DNA: Deoxyribonucleic acid. The biochemical constituents of genes in chromosomes. Electrophoresis: A method of analysis in which chemicals, usually proteins, are separated one from another by their respective electrical charges. Fine Needle Aspirate or FNA: Specimen acquired through insertion of a thin needle into a lesion whereby cells are withdrawn using negative pressure. Flow Cytometry: Method of analysis used to examine the staining of single cell suspensions by focusing a laser beam on each cell and measuring the emitted fluorescence. Fluorochrome: Fluorescent light generated by excitation and emission of light of specific wavelengths using molecules with fluorescent properties. Hematopathologist: A pathologist specializing in the study of hematolymphoid diseases, including hematopoietic malignancies. Hematopoietic Malignancies: Cancer of the blood, lymph nodes, bone marrow and related structures. Page 18 Her-2/neu: Oncoprotein (product of an oncogene); overexpression is a negative prognostic and predictive indicator in certain cancers (primarily breast cancer). Hormone: A chemical substance produced by an organ which has a specific regulatory effect on the activity of organs. Immunohistochemistry or IHC: Technique that uses antibodies to identify and mark antigens expressed by cells in tissues using specific enzymes (e.g., peroxidase alkaline phosphatase). In Situ Hybridization: Use of labeled fragments of DNA (probes) that can bind (hybridize) to specific, complementary sequences. Lymph Nodes: Nodular structures scattered along the path of lymphatics. They produce and store white blood cells and filter harmful substances out of the system. They are often the first site of cancer metastases. Lymphoma: Any neoplasm of lymphoid tissue origin. Marker: A characteristic of any cell or cellular structure (e.g., a gene, chromosome or enzyme). Metastases: The spread of cancerous cells from the primary site of the disease. Micrometastases: Presence of a small number of tumor cells, particularly in the lymph nodes and bone marrow, not readily detected by microscopic examination. Monoclonal Antibody: An antibody produced by a single clone of cells comprising a single species of antibody molecules. Reacts with only one antigen (epitope). Mutation: An event which changes the structure of DNA in chromosomes; mutations can often be seen in cancer cells. Neoplasm: The uncontrolled growth of cells resulting in a mass (tumor); often refers to cancer. Nucleic Acid Sequences: A family of substances of large molecular weight, found in chromosomes, nucleoli, mitochondria and cytoplasm of all cells. Occult Tumor: Clinically unidentified primary tumor with recognized metastases. Oncogene: Abnormal genes derived from proto-oncogenes (normal counterparts); are associated with many cancers. Oncology: The study of cancer. Pathology: That branch of medicine which studies essential nature of disease, especially the structural and functional changes in tissues and organs of the body which cause or are caused by disease. Ploidy: The number of chromosomal sets. Prognostic: Referring to potential outcome of a disease. Proliferation: Cell cycle kinetics, reproduction or multiplication of a cell. Reagent: A substance used to detect, measure or react with another substance. Receptor: A protein which specifically binds to another and mediates the biological activity of the other. Page 19 Recombinant DNA: DNA resulting from the insertion into the chain, by chemical or biological means, of a sequence of DNA (in whole or partial) not originally in that chain. RNA: Ribonucleic acid. A nucleic acid found in all living cells and one of the major chemical constituents of nucleoli and ribosomes; involved in the transmission of genetic information from DNA to proteins. Sarcoma: A malignant neoplasm derived from connective tissues. Scattergraph: A density graph of flow cytometry data where individual cells are displayed as positive or negative for two antigens. The graph is divided by x and y axes to define positive and negative. The density of dots, color warmth and intensity is proportional to the number of cells per unit area. Serum: Fluid component of blood (noncellular). Southern Blotting: A technique in which DNA is fragmented, electrophoresed and reacted with labelled fragments of DNA (probes). Specimen: Material sent in for evaluation, either tissue or cell suspensions (i.e., body fluids). Staining: To apply reagents to cells in order to impart color to specific components. Stem Cell Transplant: Progenitor (precursor) cells used for the bone marrow rejuvenation. Taxol: A chemotherapeutic agent (derived from the bark of the yew tree) having broad anti-tumor activity. Thermal Cycling: Cyclical heating and cooling in the presence of target DNA and specific DNA primers. Tumor: A swelling or enlargement; a growth or neoplasm, often referring to cancer. Tumor Suppressor Gene: A gene involved in the normal growth regulation of cells. Abnormalities (mutations) of tumor suppressor genes are associated with the cause and progression of cancer based on abnormal cell growth. Page 20 Item 2. Properties. The Company's main facility and executive offices are located at 521 West 57th Street, New York, New York, where the Company leases approximately 28,700 square feet of space under a 12 1/2-year lease expiring in November 2010. The lease provides for minimum aggregate annual rental payments of approximately $344,000. The Company is also required to pay for repairs, property taxes and insurance relating to this facility. The Company's California facility and offices are located at 5230 Pacific Concourse Drive, Los Angeles, California, where the Company has entered into a lease expiring November 2000 for approximately 22,750 square feet of space. This facility commenced operations in December 1995. The lease provides for minimum annual rental payments of approximately $381,000. The Company is also required to pay for repairs, property taxes and insurance relating to this facility. The Company's Arizona facility and offices are located at 810 E. Hammond Avenue, Phoenix, Arizona, where the Company leases approximately 11,200 square feet of space under a lease which expires September 2006. The Company commenced operations at this facility in January 1997, when it completed the acquisition of certain assets of Oncogenetics, Inc. The lease provides for minimum annual rental payments of approximately $70,000. The Company is also responsible for all maintenance, property taxes and insurance relating to the facility. The facility and offices of the Company's BIS division are located at 19231 Victory Boulevard, Reseda, California, where the Company leases approximately 3,046 square feet of space under a month-to-month lease. The lease provides for minimum aggregate annual rental payments of approximately $38,640. The Company is also required to pay for repairs, property taxes and insurance relating to this facility. The facility and offices of the Company's Medical Registry Services subsidiary is located at One University Plaza, Hackensack, New Jersey, where the Company has entered into a lease expiring July 2000 for approximately 3,792 square feet of space. The lease provides for minimum annual rental payments of approximately $62,040. The Company is also required to pay for repairs, property taxes and insurance relating to this facility. The office of the Company's Physician Choice subsidiary is located at 3 Bethesda Metro, Bethesda, Maryland, where the Company leases two small offices under a month to month lease. The lease provides for minimum annual rental payments of approximately $26,760. The Company is also responsible for all maintenance, property taxes and insurance relating to this space. Item 3. Legal Proceedings. From time to time, the Company is a party to various legal proceedings incidental to its business. The Company believes that none of these legal proceedings will have a material adverse effect on the Company's financial position, results of operations or liquidity. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Page 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock trades on the Nasdaq National Market under the symbol "IMPH." The following table sets forth the range of high and low bid prices per share for the Common Stock for the period from January 1, 1997 through March 15, 1999. High Low -------- -------- Fiscal 1997 First Quarter.................................... $20 7/8 $15 3/4 Second Quarter................................... 27 5/8 17 1/4 Third Quarter.................................... 32 1/2 21 7/8 Fourth Quarter................................... 34 5/8 22 1/2 Fiscal 1998 First Quarter.................................... 40 3/8 29 3/4 Second Quarter................................... 39 5/8 22 1/2 Third Quarter.................................... 31 3/4 18 3/8 Fourth Quarter................................... 40 1/8 20 7/8 Fiscal 1999 First Quarter (through March 15, 1999)........... 28 5/8 22 7/8 On March 15, 1999, the last sale price of the Common Stock as reported on the Nasdaq National Market was $25.00. As of January 31, 1999, there were approximately 67 record holders of the Common Stock. Page 22 Item 6. Selected Financial Data. The following table sets forth selected consolidated financial and operating data of the Company as of December 31 in each of 1994 through 1998 and for each of the years in the five-year period ended December 31, 1998. The consolidated statement of operations and consolidated balance sheet data have been derived from the Company's consolidated financial statements, which have been audited by KPMG LLP, independent certified public accountants. Such consolidated balance sheets as of December 31, 1997 and 1998 and statements of operations for each of the years in the three-year period ended December 31, 1998 and the notes thereto are included in Item 14(a) of this Annual Report on Form 10-K. The historical consolidated financial data should be read in conjunction with and are qualified in their entirety by reference to the consolidated financial statements of the Company and the related notes thereto and to Item 7 of this Annual Report on Form 10-K.
(in thousands, except per share data) Year Ended December 31, ----------------------- 1994 1995 1996 1997 1998 ----------- ----------- ----------- ---------- ---------- Consolidated Statement of Operations Data: Total revenues.................................... . $10,014 $14,714 $21,965 $37,063 $ 56,259 Salaries and related costs...................... . 4,682 6,830 9,432 15,056 21,532 Selling, general and administrative............. . 4,196 6,467 9,108 14,701 22,714 Depreciation and amortization................... . 155 396 787 1,521 3,492 ------- ------- ------- ------- -------- Total operating expenses.......................... . 9,033 13,693 19,327 31,278 47,738 ------- ------- ------- ------- -------- Income from operations............................ . 981 1,021 2,638 5,785 8,521 Other income (expense)............................ . (15) 22 1,030 716 3,002 ------- ------- ------- ------- -------- Income before income tax expense.................. . 966 1,043 3,668 6,501 11,523 Income tax expense................................ . 98 -- 1,621 2,852 4,575 ------- ------- ------- ------- -------- Net income........................................ . 868 1,043 2,047 3,649 6,948 Accrued dividends on Preferred Stock(1)........... . (427) (478) (82) -- -- ------- ------- ------- ------- -------- Net income available to common stockholders..................................... . $ 441 $ 565 $ 1,965 $ 3,649 $ 6,948 ======= ======= ======= ======= ======== Per common and common equivalent share: Basic: Net income per common share(1)................ . $ 0.36 $ 0.41 $ 0.68 $ 0.91 ======= ======= ======= ======== Weighted average common and common equivalent shares outstanding(2)............. . 2,921 4,961 5,398 7,635 ======= ======= ======= ======== Dilutive: Net income per common share assuming dilution(1).................................. . $ 0.31 $ 0.38 $ 0.63 $ 0.87 ======= ======= ======= ======== Weighted average common and common equivalent shares outstanding assuming dilution(2).................................. . 3,371 5,404 5,809 8,002 ======= ======= ======= ======== Year Ended December 31, ----------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- --------- Consolidated Selected Operating Data: Number of cases reported.......................... . 33,618 43,287 55,539 87,884 129,081 Number of hospitals served........................ . 1,021 1,118 1,360 1,670 1,740 Number of oncology practices served............... . -- -- -- 141 290
Page 23
Year Ended December 31, ----------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- ---------- (In thousands) Consolidated Balance Sheet Data: Working capital................................ . $ 2,500 $3,622 $30,768 $21,951 $ 80,696 Total assets................................... . 4,144 9,261 37,581 46,342 150,033 Long-term obligations, net of current portion.. . 249 1,130 1,430 2,726 4,026 Redeemable preferred stock..................... . 6,407 -- -- -- -- Total stockholders' equity (deficiency)........ . (3,266) 5,655 33,638 38,309 124,587
(1) Reflects dividends accrued on the Preferred Stock. Dividends accrued prior to February 10, 1995 were forgiven in conjunction with the issuance of Series D Preferred Stock. Dividends accrued from February 10, 1995 in the amount of $560,000 were paid and ceased to accrue upon conversion of the Preferred Stock on February 26, 1996. (2) Weighted average shares outstanding give effect to the conversion of the outstanding shares of Preferred Stock into shares of Common Stock in accordance with the terms thereof on February 26, 1996 and reflect the 1- for-2.8218735 reverse split of the outstanding shares of Common Stock. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto included in Item 14(a) of this Annual Report on Form 10-K. Overview IMPATH was founded in 1988 and has become a leader in providing critical information essential for making medically optimal and cost-effective cancer management decisions for individual cancer patients. The Company is focused exclusively on the analysis of cancer, combining advanced technologies and medical expertise to provide patient-specific diagnostic, prognostic and treatment information to physicians involved in the treatment of cancer. With expected medical cost increases attributable to the growth in the number of cancer patients and the high cost of new therapies, the Company anticipates significant and growing demand for cancer management information. IMPATH has established its leadership and reputation through its extensive expertise, its integration of technological advances, its emphasis on customer service and education and the cost-effectiveness of its services. The Company's revenues, which have increased an average of approximately 54% annually since 1994, have been derived from performing specialized cancer analyses for which IMPATH typically bills various third-party payors, such as private insurance plans, managed care plans and governmental programs (e.g., Medicare), as well as hospitals and individual patients. Over the last few years, the Company has experienced increased pressures on reimbursement and expects such pressures to cause reduced unit pricing for diagnostic and prognostic analyses in future periods. The revenue generated from private insurance and managed care has increased significantly as a percentage of total revenue in the last two years as a result of increased focus by the Company's sales force on oncology officers as well as a desire by the Company's hospital clients to have the Company bill third parties directly. Despite those pressures, the Company has experienced increasing average reimbursement trends due to changes in its product mix and application of new technologies. The Company also derives revenues by licensing its tumor registry software to community hospitals and state agencies as well as providing contract laboratory services and cancer database and pharmacoeconomic information to pharmaceutical companies. Page 24 The following table sets forth the percentages of total revenues represented by certain items reflected in the Company's consolidated statements of operations. The Company's business generally has been unaffected by seasonality, except for slower growth in revenues during the third quarter of its fiscal year due to reduced summertime activity.
Years Ended December 31, ------------------------------------ 1996 1997 1998 ----------- ----------- ---------- Total revenues............................ 100.0% 100.0% 100.0% Operating expenses: Salaries and related costs.............. 42.9 40.6 38.3 Selling, general and administrative..... 41.5 39.8 40.4 Depreciation and amortization........... 3.6 4.0 6.2 ----- ----- ----- Total operating expenses.................. 88.0 84.4 84.9 ----- ----- ----- Operating income.......................... 12.0 15.6 15.1 ----- ----- ----- Net income................................ 9.3 9.8 12.4 ===== ===== =====
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, 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 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 Page 25 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 respective acquisition dates. 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 December 31, 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 December 31, 1998 balance sheet and will be amortized over periods of 5 to 20 years. Year Ended December 31, 1998 Compared with Year Ended December 31, 1997 The Company's total revenues in 1998 and 1997 were $56.3 million and $37.1 million, respectively, representing an increase of $19.2 million, or 51.8%, in 1998. This growth was primarily due to a 47% increase in case volume resulting from increased sales and marketing activities and increases in contract laboratory and information services provided to biopharmaceutical companies. In addition, the Company recorded revenues of approximately $1.4 million from licensing fees for its tumor registry products since the acquisition of MRS in August 1998. Salaries and related costs in 1998 and 1997 were $21.5 million and $15.1 million, respectively, representing an increase of $6.4 million, or 42.4% in 1998. This increase was primarily due to personnel costs associated with the Company's product case volume growth as well as increases in personnel headcount resulting from the Company's acquisitions during 1998. As a percentage of total revenues, salaries and related costs decreased to 38.3% in 1998 from 40.6% in 1997. This decrease 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 in 1998 and 1997 were $22.7 million and $14.7 million, respectively, representing an increase of $8.0 million, or 54.4%, in 1998. This increase was due to an increase in bad debt expense of approximately $1.7 million associated with higher revenues, as well as the continuing payor mix shift from direct hospital billings to private insurance resulting in higher revenues and patient co-payments that generate higher bad debt. In addition, the Company incurred over $2.7 million in incremental supply and courier costs due to increased volume and the logistics required to service the Company's rapidly growing oncology office-based business. The Company also incurred additional travel-related expenses and professional fees associated with expanded sales, marketing and investor relations activities of $620,000. Additionally, as a direct result of growth, the Company incurred an additional $670,000 in telecommunications expense and repair and maintenance of equipment. As a percentage of total revenues, selling, general and administrative expenses increased to 40.4% in 1998 compared to 39.8% in 1997. Depreciation and amortization in 1998 and 1997 was $3.5 million and $1.5 million, respectively, representing an increase of $2.0 million, or 133.3%, in 1998. This increase was primarily the result of an additional $1.2 million amortization associated with leasehold improvements made at the Company's new facility in New York during the first quarter of 1998. Additionally, the Company also incurred an increase in intangible amortization of $775,000 associated with the Company's recent acquisitions. As a percentage of total revenues, depreciation and amortization expenses increased to 6.2% in 1998 compared to 4.0% in 1997. Income from operations in 1998 and 1997 was $8.5 million and $5.8 million, respectively, representing an increase of $2.7 million, or 46.6%, in 1998. The 1998 figure reflects a slight decrease in operating margin due to Page 26 increased depreciation and amortization expense associated with capital expenditures and goodwill associated with the Company's acquisitions. As a percentage of total revenues, income from operations decreased to 15.1% in 1998 from 15.6% in 1997. Other income, net for 1998 and 1997 was $3.0 million and $716,000, respectively, representing an increase of approximately $2.2 million in 1998. This 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 1998 of approximately $4.6 million reflects federal, state and local income tax expense. The effective tax rate for 1998 was 39.7% compared to 43.9% in 1997. This decrease resulted from a reduction in the Company's state and local tax provision associated with tax exempt interest income, as well as expansion of the Company's operations outside of New York, which has a lower effective state tax rate. Net income in 1998 and 1997 was $6.9 million and $3.6 million, respectively, representing an increase of $3.3 million, or 91.7%, in 1998 due to the factors described above. As a percentage of total revenues, net income increased to 12.4% in 1998 from 9.8% in 1997. Year Ended December 31, 1997 Compared with Year Ended December 31, 1996 The Company's total revenues in 1997 and 1996 were $37.1 million and $22.0 million, respectively, representing an increase of $15.1 million, or 68.7%, in 1997. This growth was primarily due to a 58% increase in case volume resulting from increased sales and marketing activities and to the successful integration of the Company's acquisitions of certain assets of Oncogenetics, Immunodiagnostic, GenCare and Aeron. In addition, revenue realization per case increased as a result of product mix changes towards cases which yield higher reimbursement rates and payor mix shifts away from direct hospital billing towards private insurance. Salaries and related costs in 1997 and 1996 were $15.1 million and $9.4 million, respectively, representing an increase of $5.7 million, or 59.6%, in 1997. This increase was primarily due to direct personnel costs associated with existing product case volume growth as well as the Company's acquisitions during 1997. As a percentage of total revenues, salaries and related costs decreased to 40.6% in 1997 from 42.9% in 1996. Selling, general and administrative expenses in 1997 and 1996 were $14.7 million and $9.1 million, respectively, representing an increase of $5.6 million, or 61.5%, in 1997. This increase was due to an increase in bad debt expense of approximately $2.0 million associated with higher revenues, as well as a payor mix shift from direct hospital billings to private insurance resulting in higher revenues and patient co-payments that generate higher bad debt. The Company also incurred $1.5 million in additional selling, general and administrative expenses associated with the Company's Arizona-based cancer cytogenetics testing facility which was acquired from Oncogenetics in January 1997. In addition, the Company incurred over $1.4 million in incremental supply and courier costs due to increased volume and the logistics required to service the Company's rapidly growing oncology office-based business. The Company also incurred higher travel-related expenses and professional fees associated with expanded sales, marketing and investor relations activities. As a percentage of total revenues, selling, general and administrative expenses decreased to 39.6% in 1997 compared to 41.4% in 1996. Depreciation and amortization in 1997 and 1996 was $1.52 million and $787,000, respectively, representing an increase of $734,000, or 93.3%, in 1997. This increase was primarily due to additional capital expenditures, intangible amortization associated with the Company's acquisitions and amortization of third-party development costs for the outcomes database. As a percentage of total revenues, depreciation and amortization expenses increased to 4.0% in 1997 compared to 3.6% in 1996. Income from operations in 1997 and 1996 was $5.8 million and $2.6 million, respectively, representing an increase of $3.2 million, or 119.3%, in 1997. The 1997 figure reflects increased Company operating margins from its core diagnostic and prognostic services. As a percentage of total revenues, income from operations increased to 15.6% in 1997 from 12.0% in 1996. Page 27 Other income, net for 1997 and 1996 was $716,000 and $1.0 million, respectively, representing a decrease of approximately $300,000 in 1997. This decrease was the result of lower investment returns resulting from the use of the Company's cash and cash equivalents in order to fund the Company's expansion and database development activities. The tax provision for 1997 of approximately $2.9 million reflects federal, state and local income tax expense. The 44% effective tax rate is consistent with the 1996 rate. Net income in 1997 and 1996 was $3.6 million and $2.0 million, respectively, representing an increase of $1.6 million, or 78.2%, in 1997 which was due to the factors described above. As a percentage of total revenues, net income increased to 9.8% in 1997 from 9.1% in 1996. Liquidity and Capital Resources Since its inception, the Company has raised approximately $103.9 million of capital through the public offerings of its Common Stock and $6.6 million from private placements of Preferred Stock, all of which was converted into Common Stock at the closing of the Company's initial public offering in February 1996. 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. See "Business--Company Strategy." The Company's cash and cash equivalent balances at December 31, 1998 and 1997 were approximately $45.6 million and $325,000, respectively, representing a increase of $45.3 million in 1998. The Company also had approximately $30.0 million invested in a portfolio of investment-grade fixed-income securities at December 31, 1998, representing a $16.0 million increase over the $14.0 million which was invested in this portfolio at December 31, 1997. The significant increase related to the Company's secondary offering of securities in March 1998 which raised $71 million in net proceeds. For 1998, net cash generated from operating activities was approximately $1.7 million. This was the result of cash inflows from the Company's net income, partially offset by increases in accounts receivable, net of allowance for bad debt provisions of $6.1 million due to rapid sales growth. The Company also increased its accounts payable and accrued expenses by approximately $2.1 million. The Company's net accounts receivable at December 31, 1998 comprised 34.9% of sales, up from 32.2% in 1997. This increase is due to the additional time required to obtain information essential to billing third party payors which now comprise 75% of sales in 1998, compared to 69% in 1997. During 1998, the Company used approximately $2.8 million of cash to fund its growth strategy through the acquisition of certain assets of BIS and PCI. See "--Recent Acquisitions." In addition, the Company used $9.5 million of cash during 1998 for the continuing development of the Company's clinical and billing systems, as well as its data warehouse and other proprietary software products, and used approximately $3.6 million of cash to purchase fixed assets through capital lease financing and expansion of its facilities. The Company received approximately $917,000 during 1998 through the issuance of Common Stock upon the exercise of incentive stock options and warrants. In addition, the Company used approximately $1.8 million to satisfy its capital lease obligations. The Company repurchased 306,600 shares of common stock for $7.9 million through December 31, 1998. In addition, through March 26, 1999, the Company repurchased an additional 316,350 shares for $8.1 million. In March 1998, the Company increased its line of credit to an aggregate amount of $10.0 million. Borrowing under the line will bear interest at the prime rate. The availability of a $10.0 million replacement line of credit, which was approved in November 1998 and will bear interest at LIBOR plus 2.25%. In December 1998, the Company drew $10.0 million against such line. Approximately $4.5 million was repaid in January 1999, with the Page 28 remainder paid in February 1999. The line of credit has certain financial covenants with which the Company was in compliance with at December 31, 1998. The Company's growth strategy is anticipated to be financed through its current cash resources, cash flow from operations and existing third-party credit facilities. The Company believes the combination of these sources will be sufficient to fund its operations and to 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 its liquid 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 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. Year 2000 The Company is finalizing its review of 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 is expected to be completed by April 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. All subsidiaries purchased in 1998 are year 2000 compliant. 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. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which becomes effective for our financial statements beginning January 1, 2000. SFAS No. 133 requires a company to recognize all derivative instruments as assets or liabilities in its balance sheet and measure them at fair value. The Company does no expect the adoption of this Statement to have a material impact on the financial statements. The American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up activities, which is effective for the 1999 financial statements. The Company does not expect adoption of this SOP to have a material impact on the financial statements. Page 29 Item 7A. 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. Our 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. We do not invest in portfolio equity securities or commodities or use financial derivatives for trading purposes. Our debt security portfolio represents funds held temporarily pending use in our business and operations. We manage these funds accordingly. We seek reasonable assuredness 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 or return. Our market risk exposure consists principally of exposure to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit quality of issuers. We typically invest in the shorter-end of the maturity spectrum, and at December 31, 1998, more than 76% of our holdings were in instruments maturing in two years or less and more than 82% of such holdings matured in one year or less. Item 8. Financial Statements and Supplementary Data. For information concerning this item, see Item 14(a) below. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. For information concerning this item, see text under the captions "Election of Directors" and "Executive Officers" in the 1999 Proxy Statement of the Company (the "Proxy Statement") to be filed subsequent to the filing of this Annual Report on Form 10-K, which information is incorporated herein by reference. Item 11. Executive Compensation. For information concerning this item, see text under the captions "Executive Compensation," "Employment-Related Agreements with Executive Officers," "Compensation of Directors," "Compensation Committee Interlocks and Insider Participation," "Section 16(a) Beneficial Ownership Reporting Compliance," "Performance Graph" and "Report of the Compensation Committee" in the Proxy Statement, which information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. For information concerning this item, see text under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Executive Officers" in the Proxy Statement, which information is incorporated herein by reference. Page 30 Item 13. Certain Relationships and Related Transactions. For information concerning this item, see text under the caption "Certain Relationships and Related Transactions" in the Proxy Statement, which information is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements: The financial statements of the Company contained in this Annual Report on Form 10-K are listed in the attached Index to Financial Statements. (2) Financial Statement Schedules: All schedules have been omitted because they are inapplicable or the information is provided in the consolidated financial statements, including the notes thereto. (3) Exhibits: The exhibits required to be filed as part of this Annual Report on Form 10- K are listed in the attached Index to Exhibits. Exhibits 10.2, 10.3, 10.13, 10.14, 10.15, 10.16 and 10.17 are the management contracts and compensatory plans or arrangements required to be filed as part of this Annual Report on Form 10-K. (b) Current Reports on Form 8-K: (1) Report on Form 8-K filed November 12, 1998 which report was amended by Amendment No. 1 on Form 8-K/A filed March 26, 1999. Page 31 POWER OF ATTORNEY The Registrant and each person whose signature appears below hereby appoint each of Anu D. Saad, Ph.D. and John P. Gandolfo as attorneys-in-fact with full power of substitution, severally, to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, one or more amendments to this Annual Report on Form 10-K, which amendments may make such changes in this Report as the attorney-in-fact acting in the premises deems appropriate and to file any such amendment to this Report with the Securities and Exchange Commission. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 1999 IMPATH Inc. By /s/ Anu D. Saad ----------------------------------------------- Anu D. Saad, Ph.D. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: March 29, 1999 By /s/ Anu D. Saad ----------------------------------------------- Anu D. Saad, Ph.D. President, Chief Executive Officer and Director Dated: March 29, 1999 By /s/ John P. Gandolfo ----------------------------------------------- John P. Gandolfo Executive Vice President, Chief Operating Officer, Chief Financial Officer and Principal Accounting Officer Dated: March 29, 1999 By /s/ John L. Cassis ----------------------------------------------- John L. Cassis Chairman of the Board and Director Page 32 Dated: March 29, 1999 By /s/Richard J. Cote ----------------------------------------------- Richard J. Cote, M.D Director Dated: March 29, 1999 By ----------------------------------------------- George Frazza Director Dated: March 29, 1999 By /s/Richard Kessler ----------------------------------------------- Richard Kessler Director Dated: March 29, 1999 By /s/Joseph A. Mollica ----------------------------------------------- Joseph A. Mollica, Ph.D Director Dated: March 29, 1999 By /s/Marcel Rozencweig ----------------------------------------------- Marcel Rozencweig, M.D Director Page 33 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report ..................................................................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 ..................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 ....... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998 ...................................................................................... F-5 to F-7 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 ....... F-8 Notes to Consolidated Financial Statements ....................................................... F-9 to F-22
Page 1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders IMPATH Inc.: We have audited the accompanying consolidated balance sheets of IMPATH Inc. and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IMPATH Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Short Hills, New Jersey February 18, 1999 Page 2 IMPATH INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1998
1997 1998 ----------- ------------ Assets Current assets: Cash and cash equivalents ............................................ $ 325,285 $ 45,556,005 Marketable securities, at market value ............................... 13,952,148 29,971,456 Accounts receivable, net of allowance for doubtful accounts of $4,760,117 in 1997 and $3,958,235 in 1998 .......................... 11,948,229 19,619,451 Prepaid expenses ..................................................... 276,073 442,480 Prepaid taxes ........................................................ -- 1,758,407 Deferred tax assets .................................................. 53,427 1,334,591 Other current assets ................................................. 703,753 1,306,653 ----------- ------------ Total current assets ........................................... 27,258,915 99,989,043 Fixed assets, less accumulated depreciation and amortization ........... 10,475,575 21,239,884 Deposits and other non-current assets .................................. 334,167 203,491 Intangible assets, net of accumulated amortization of $383,534 in 1997 and $1,462,204 in 1998 ............................................... 8,273,636 28,600,749 ----------- ------------ Total assets ................................................... $46,342,293 $150,033,167 =========== ============ Liabilities and Stockholders' Equity Current liabilities: Current portion of capital lease obligations ......................... $ 1,222,281 $ 1,622,366 Current portion of note payable ...................................... 700,000 1,271,915 Short term borrowings ................................................ -- 10,000,000 Accounts payable ..................................................... 956,648 2,713,228 Deferred revenues .................................................... -- 1,866,241 Construction payments payable ........................................ 1,542,199 -- Income taxes payable ................................................. 158,094 -- Accrued expenses .................................................... 728,353 1,819,752 ----------- ------------ Total current liabilities ...................................... 5,307,575 19,293,502 ----------- ------------ Capital lease obligations, net of current portion ...................... 2,451,587 3,792,833 Note payable, net of current portion ................................... 274,000 233,333 Deferred tax payable ................................................... -- 2,126,531 Stockholders' equity: Preferred stock, $.005 par value, authorized 2,000,000 shares; 0 and 0 shares issued in 1997 and 1998 respectively Common stock, $.005 par value, authorized 20,000,000 shares; 5,458,827 and 8,538,345 shares issued in 1997 and 1998, respectively; 5,451,739 and 8,224,657 shares outstanding in 1997 and 1998 ...................................................... 27,294 42,690 Additional paid-in capital ........................................... 33,893,774 120,904,861 Retained earnings .................................................... 5,148,077 12,095,622 Accumulated other comprehensive income (loss) ........................ (83,881) (48,602) ----------- ------------ 38,985,264 132,994,571 Less: Cost of 7,088 and 313,688 shares of common stock held in treasury in 1997 and 1998, respectively ........................... (100) (7,908,841) Deferred compensation ............................................. (676,033) (498,762) Commitments and contingencies ----------- ------------ Total stockholders' equity ..................................... 38,309,131 124,586,968 ----------- ------------ Total liabilities and stockholders' equity ..................... $46,342,293 $150,033,167 =========== ============
See accompanying notes to consolidated financial statements. Page 3 IMPATH INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1996, 1997 and 1998
1996 1997 1998 ----------- ----------- ----------- Revenues: Net diagnostic and prognostic services ................... $21,755,193 $36,821,738 $53,183,356 Biopharmaceutical services ............................... 210,270 241,743 1,685,984 Tumor registry services .................................. -- -- 1,390,106 ----------- ----------- ----------- Total revenues ........................................ 21,965,463 37,063,481 56,259,446 ----------- ----------- ----------- Operating expenses: Salaries and related costs ............................... 9,432,397 15,056,221 21,532,443 Selling, general and administrative ...................... 9,108,232 14,701,081 22,713,156 Depreciation and amortization ............................ 786,852 1,521,251 3,492,482 ----------- ----------- ----------- Total operating expenses .............................. 19,327,481 31,278,553 47,738,081 ----------- ----------- ----------- Income from operations ................................ 2,637,982 5,784,928 8,521,365 Interest income ............................................ 506,086 677,109 3,661,063 Interest expense ........................................... (224,112) (339,903) (659,078) Gains on marketable securities, net ........................ 747,903 379,001 -- ----------- ----------- ----------- Income before income tax expense ...................... 3,667,859 6,501,135 11,523,350 Income tax expense ......................................... 1,620,309 2,851,936 4,575,805 ----------- ----------- ----------- Net income ............................................ 2,047,550 3,649,199 6,947,545 Accrued dividends on preferred stock ....................... (82,346) -- -- ----------- ----------- ----------- Net income available to common stockholders ................ $ 1,965,204 $ 3,649,199 $ 6,947,545 =========== =========== =========== Per common and common equivalent share: Basic: Net income per common share .............................. $ 0.41 $ 0.68 $0.91 =========== =========== =========== Weighted average common shares outstanding ............... 4,961,000 5,398,000 7,635,000 =========== =========== =========== Dilutive: Net income per common share--assuming dilution ........... $ 0.38 $ 0.63 $0.87 =========== =========== =========== Weighted average common and common equivalent shares outstanding--assuming dilution .................. 5,404,000 5,809,000 8,002,000 =========== =========== ===========
See accompanying notes to consolidated financial statements. Page 4 IMPATH INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1996, 1997 and 1998
Nonredeemable Additional Accumulated ------------- ---------- ----------- Convertible Paid-in (deficit) ----------- ------- -------- Common stock Preferred stock Capital retained ------------ --------------- ------- -------- Shares Amount Shares Amount (deficiency) earnings ------ ------ ------ ------ ------------ -------- Balance at December 31, 1995 ............... 455,007 $ 2,275 7,192,724 $ 6,565,285 $ 11,447 $ (548,672) Common shares issued upon exercise of stock options ............................ 75,846 379 -- -- 124,302 -- Accrual of preferred stock dividends on redeemable preferred stock ............... -- -- -- -- (82,346) -- Conversion of redeemable preferred stock into common stock ........................ 2,548,933 12,745 (7,192,724) (6,565,285) 6,552,540 -- Common shares issued in the initial public offering ................................. 2,242,500 11,212 -- -- 25,726,054 -- Compensation associated with issuance of options to non-employees .............. -- -- -- -- 25,263 -- Amortization of deferred compensation ...... -- -- -- -- -- -- Repayments of loans to stockholders ........ -- -- -- -- -- -- Net income for the year ended December 31, 1996 ........................ -- -- -- -- -- 2,047,550 --------- ------- ---------- ----------- ----------- ---------- Balance at December 31, 1996 ............... 5,322,286 26,611 -- -- 32,357,260 1,498,878 Common shares issued upon exercise of stock options ............................ 125,357 627 -- -- 474,862 -- Common shares issued upon exercise of warrants ................................. 11,184 56 -- -- 39,086 -- Compensation associated with issuance of options to non-employees ................. -- -- -- -- 679,752 -- Issuance of options related to Immunopath acquisition .............................. -- -- -- -- 191,218 -- Tax benefit related to stock option exercises ................................ -- -- -- -- 171,531 -- Repayment of officer loans ................. -- -- -- -- -- -- Amortization of deferred compensation ...... -- -- -- -- (19,935) -- Comprehensive income: Change in unrealized net depreciation of securities ............................... -- -- -- -- -- -- Net income for the year ended December 31, -- -- -- -- -- 3,649,199 1997 ..................................... --------- ------- ---------- ----------- ----------- ---------- Total comprehensive income ................. Balance at December 31, 1997 ............... 5,458,827 27,294 -- -- 33,893,774 5,148,077 Accumulated ----------- other Notes ----- ----- comprehensive receivable Deferred ------------- ---------- -------- income Treasury from compen- ------ ------- ----- ------- (expense) stock stockholders sation Total --------- ----- ------------ ------ ----- Balance at December 31, 1995 ............... $ -- $(100) $(31,335) $ (343,907) $ 5,654,993 Common shares issued upon exercise of stock options ............................ -- -- -- -- 124,681 Accrual of preferred stock dividends on redeemable preferred stock ............... -- -- -- -- (82,346) Conversion of redeemable preferred stock into common stock ........................ -- -- -- -- -- Common shares issued in the initial public offering ................................. -- -- -- -- 25,737,266 Compensation associated with issuance of options to non-employees .............. -- -- -- -- 25,263 Amortization of deferred compensation ...... -- -- -- 127,584 127,584 Repayments of loans to stockholders ........ -- -- 2,914 -- 2,914 Net income for the year ended December 31, 1996 ........................ -- -- -- -- 2,047,550 --------- ------- ---------- ----------- ----------- Balance at December 31, 1996 ............... -- (100) (28,421) (216,323) 33,637,905 Common shares issued upon exercise of stock options ............................ -- -- -- -- 475,489 Common shares issued upon exercise of warrants ................................. -- -- -- -- 39,142 Compensation associated with issuance of options to non-employees ................. -- -- -- (679,752) -- Issuance of options related to Immunopath acquisition .............................. -- -- -- -- 191,218 Tax benefit related to stock option exercises ................................ -- -- -- -- 171,531 Repayment of officer loans ................. -- -- 28,421 -- 28,421 Amortization of deferred compensation ...... -- -- -- 220,042 200,107 Comprehensive income: Change in unrealized net depreciation of securities ............................... (83,881) -- -- -- (83,881) Net income for the year ended December 31, 1997 ..................................... -- -- -- -- 3,649,199 --------- ------- ---------- ----------- ----------- Total comprehensive income ................. 3,565,318 Balance at December 31, 1997 ............... (83,881) (100) -- (676,033) 38,309,131
Page 5 (Continued) Page 6 IMPATH INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued) Years ended December 31, 1996, 1997 and 1998
Nonredeemable ------------- convertible ----------- Common stock preferred stock Paid-in Accumulated ------------ --------------- ------- ----------- Shares Amount Shares Amount capital earnings ------ ------ ------ ------ ------- -------- Balance at December 31, 1997 ................. 5,458,827 $27,294 -- -- $ 33,893,774 $ 5,148,077 Common shares issued upon exercise of stock -- -- options ................................... 198,207 990 814,120 -- Common shares issued upon exercise of -- -- warrant ................................... 29,331 146 102,660 -- Common shares issued upon secondary offering, -- -- -- net ...................................... 2,300,000 11,500 71,437,994 Common shares issued upon acquisition of -- -- -- Physicians Choice, Inc. (PCI).............. 1,980 10 49,990 Compensation associated with issuance of -- -- options to non-employees .................. -- -- 80,462 -- Common shares issued upon acquisition of -- -- Medical Registry Service, Inc. (MRS) ..... 550,000 2,750 13,747,250 -- Repurchase of common shares .................. -- -- -- -- -- -- Amortization of deferred compensation ........ -- -- -- -- -- -- Tax benefit related to stock option exercises.. -- -- -- -- 778,611 -- Comprehensive income: Change in unrealized net depreciation of securities ............................... -- -- -- -- -- -- Net income for the year ended December 31, 1998 ...................................... -- -- -- -- -- 6,947,545 --------- ------- -------------- ------------ ------------ ------------ Total comprehensive income..................... Balance at December 31, 1998 ................. 8,538,345 $42,690 -- -- $120,904,861 $12,095,622 ========= ======= ============== ============ ============ ============ Accumulated Deferred ----------- -------- Other comprehensive Treasury compen- ------------------- -------- ------- income (expenses) stock sation Total ----------------- ----- ------ ----- Balance at December 31, 1997 ................. $(83,881) $(100) $(676,033) $ 38,309,131 Common shares issued upon exercise of stock options ................................... -- -- -- 815,110 Common shares issued upon exercise of warrant ................................... -- -- -- 102,806 Common shares issued upon secondary offering, -- -- -- net ...................................... 71,449,494 Common shares issued upon acquisition of -- -- -- Physicians Choice, Inc. (PCI).............. 50,000 Compensation associated with issuance of options to non-employees .................. -- -- (80,462) -- Common shares issued upon acquisition of Medical Registry Service, Inc. (MRS) ..... -- -- -- 13,750,000 Repurchase of common shares .................. -- (7,908,741) -- (7,908,741) Amortization of deferred compensation ........ -- -- 257,733 257,733 Tax benefit related to stock option exercises.. -- -- -- 778,611 Comprehensive income: Change in unrealized net depreciation of securities ............................... 35,279 -- -- 35,279 Net income for the year ended December 31, 1998 ...................................... -- -- -- 6,947,545 ----------------- ------------- --------- ------------ Total comprehensive income..................... 6,982,824 Balance at December 31, 1998 ................. $(48,602) $(7,908,841) $(498,762) $124,586,968 ================= ============= ========= ============
See accompanying notes to consolidated financial statements. Page 7 IMPATH INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1997 and 1998
1996 1997 1998 ------------ ----------- ------------ Cash flows from operating activities: Net income .................................................................. $ 2,047,550 $ 3,649,199 $ 6,947,545 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ........................................... 786,852 1,521,251 3,492,482 Provision for uncollectible accounts receivable ......................... 2,434,511 4,390,581 6,100,789 Deferred taxes .......................................................... (854,285) 1,305,858 (395,164) Non-cash compensation ................................................... 152,847 200,107 257,733 Changes in assets and liabilities (net of the effects from acquisitions of business): Increase in accounts receivable, net .................................. (5,686,947) (8,803,998) (13,683,381) Increase in prepaid expenses and other current assets ................. (251,238) (455,227) (718,396) (Increase) decrease in deposits and other non-current assets .......... (18,917) (235,289) 130,676 (Decrease) increase in accounts payable/accrued expenses .............. (381,951) (381,729) 2,073,948 Decrease in construction payments payable ............................. -- -- (1,542,199) Increase (decrease) in income taxes payable ........................... 613,778 (362,568) (1,137,890) Increase in deferred revenues ......................................... -- -- 196,210 ------------ ----------- ------------ Net cash provided by (used in) operating activities ........................... (1,157,800) 828,185 1,722,353 ------------ ----------- ------------ Cash flows from investing activities: (Purchases) of marketable securities ........................................ (23,395,398) (1,122,368) (49,989,700) Sales/maturities of marketable securities ................................... -- 10,481,737 34,005,671 Acquisitions of businesses, net of cash acquired ............................ (800,000) (6,185,030) (2,775,393) Capital expenditures ........................................................ (434,324) (4,063,195) (9,491,394) ------------ ----------- ------------ Net cash (used in) investing activities ....................................... (24,629,722) (888,856) (28,250,816) ------------ ----------- ------------ Cash flows from financing activities: Issuance of common stock .................................................... 25,861,947 514,631 917,916 Decrease in registration costs .............................................. 746,462 -- -- Payment of dividends on preferred stock ..................................... (560,346) -- -- Repurchase of common stock .................................................. -- -- (7,908,741) Proceeds of secondary offering, net of registration costs ................... -- -- 71,449,494 (Repayments) proceeds from bank loans ....................................... (283,333) -- 10,000,000 Payments of notes payable ................................................... -- -- (863,752) Payments of capital lease obligations ....................................... (550,914) (1,098,999) (1,835,734) Repayments of loans to stockholders ......................................... 2,914 28,421 -- ------------ ----------- ------------ Net cash provided by (used in) financing activities ........................... 25,216,730 (555,947) 71,759,183 ------------ ----------- ------------ Net increase (decrease) in cash and cash equivalents .......................... (570,792) (616,618) 45,230,720 Cash and cash equivalents at beginning of period .............................. 1,512,695 941,903 325,285 ------------ ----------- ------------ Cash and cash equivalents at end of period .................................... $ 941,903 $ 325,285 $ 45,556,005 ============ =========== ============ Supplemental disclosures of cash flow information: Cash paid during the period for income taxes ................................ $ 1,941,013 $ 1,771,044 $ 6,108,858 ============ =========== ============ Cash paid during the period for interest .................................... $ 224,112 $ 339,963 $ 581,278 ============ =========== ============ Fixed assets acquired pursuant to capital leases ............................ $ 1,417,569 $ 2,638,364 $ 3,577,065 ============ =========== ============ Note payable related to acquisition of business ............................. $ -- $ 974,000 $ 1,395,000 ============ =========== ============ Accrual of dividends on preferred stock ..................................... $ 82,346 $ -- $ -- ============ =========== ============ Common stock issued for acquisitions ........................................ $ -- $ -- $ 13,800,000 ============ =========== ============
See accompanying notes to consolidated financial statements. Page 8 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Organization IMPATH Inc. (the "Company") was incorporated on March 1, 1988 under the laws of the State of Delaware. The Company was organized for the purpose of establishing a specialized facility dedicated to the use of the most sophisticated technologies to provide diagnostic and prognostic information to physicians specializing in cancer. The Company conducts these analyses by utilizing immunohistochemistry, flow cytometry and image analysis, molecular pathology, cytogenetics and serum analysis technologies. The consolidated financial statements include the accounts of all the majority-owned subsidiaries. All intercompany balances have been eliminated in consolidation. The Company's revenues are derived through: Diagnostic and prognostic analytical services to hospitals, medical centers, clinical laboratories and physicians; and Monoclonal antibody and molecular probe characterization services to biotechnology companies and other researchers; and Licensing of tumor registry software to community hospitals and state agencies. The Company submits its invoices for diagnostic and prognostic analytical services to its clients, primary and secondary insurers, or individual patients. The Company does not require collateral from its clients as security for payment of its invoices. (2) Significant Accounting Policies (a) Cash Equivalents Cash equivalents consist principally of money market funds at December 31, 1997 and 1998. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cost approximates fair market value for these instruments. (b) Marketable Securities In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 through September 30, 1997 the Company's investments (consisting primarily of government and corporate fixed income securities) were classified as trading securities and were stated at fair market value at each balance sheet date with unrealized gains, net, in the amount of $80,720 for the year ended December 31, 1996 (and unrealized gains, net, of $404,970 for the nine-month period ended September 30, 1997) reported in the accompanying consolidated statements of operations. Effective October 1, 1997, due to a change in the Company's investment strategy, the portfolio of securities are now considered available for sale as prescribed by SFAS No. 115. As a result, unrealized depreciation since October 1, 1997 is recorded as an accumulated other comprehensive income (expense) in stockholders' equity, net of related deferred taxes. At December 31, 1997 and 1998, the Company's marketable securities were again primarily government, municipal and corporate fixed income securities. At December 31, 1998, approximately $23 million of the securities are redeemable in one to two years (of which approximately $17.5 million are corporate fixed income securities, $5.0 million are municipal securities and $500,000 are government securities), and approximately $7 million are due between three to four years (of which approximately $6.5 million are corporate fixed income securities and $500,000 are government securities). Page 9 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (c) Fixed Assets Fixed assets are stated at cost. Depreciation of furniture, fixtures, laboratory equipment and personal computers is provided over their estimated useful lives (which range from three to seven years) using the straight-line method, and leasehold improvements are being amortized over the shorter of the related lease term or the lives of the improvements using the straight-line method. Software development costs primarily represent external costs capitalized for software developed to meet the specific needs of the Company. These costs are being amortized over a five- to seven-year period using the straight-line method. Effective January 1, 1998, the Company adopted the provisions of AICPA statement of position 98-1 "Accounting for Software Costs". The adoption of the statement resulted in approximately $500,000, or approximately $0.04 per diluted share after taxes, of internal payroll costs being capitalized in 1998 as they related directly to system implemenation. (d) Revenue Recognition Revenues are recognized on an accrual basis as earned at such time as the Company has completed performance of its diagnostic or prognostic services. Revenue is reported at the estimated net realizable amounts from patients, third-party and government payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with certain payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Revenue from the license of tumor registry software is deferred and recognized on a straight-line basis over the term of the agreement. All license agreements have support and maintenance obligations by the Company. Laws and regulations related to government programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation. (e) Intangible Assets Goodwill, which represents the excess of purchase price over fair value of identifiable net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Other acquired intangibles, the majority being customer lists, are being amortized over their estimated useful lives of between five to twenty years. (f) Income Taxes Income taxes are provided pursuant to the asset and liability method as described in SFAS No. 109. SFAS No. 109 requires that the Company recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under SFAS No. 109, deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts ("temporary differences") at enacted tax rates in effect for the years in which the differences are expected to reverse. Page 10 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (g) Concentration of Credit Risks The Company invests its cash, cash equivalents and marketable securities in deposits with money market funds of major U.S. financial institutions, and fixed income securities. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. To date, the Company has not experienced any significant losses on its cash, cash equivalents and marketable securities. (h) Equity Security Transactions From inception through the Company's initial public offering in February 1996 (the "IPO"), the Board of Directors had established the fair value of common shares, Series A, B, C and D mandatorily redeemable convertible preferred stock, stock options and warrants based on facts and circumstances existing at the dates such equity transactions occurred, including the price at which equity instruments were sold to independent third parties. Subsequent to the IPO, fair market value of equity instruments is determined based on the quoted market price of the Company's stock. (i) Stock-Based Compensation In accordance with SFAS No. 123,"Accounting for Stock-Based Compensation," the Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Such amounts are amortized over the respective vesting periods of the option grant. The Company uses the fair value-based method of accounting for stock-based compensation to non- employees. Under the fair value-based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the vesting period. (j) Net Income Per Common Share "Basic" earnings per common share equal net income divided by weighted average common shares outstanding during the period. "Dilutive" earnings per common share equal net income divided by the sum of weighted average common shares outstanding during the period plus common stock equivalents. Common stock equivalents are shares assumed to be issued if outstanding stock options and warrants were exercised. Common stock equivalents that are anti-dilutive are excluded from net income per common share. The calculation of shares used in computing net income per common share for both the basic and dilutive calculations has included all series of mandatory redeemable preferred stock assuming conversion into shares of common stock from their respective original dates of issuance. For periods prior to the Company's IPO, net income per common share--assuming dilution is based on the weighted average number of shares of common stock outstanding including common equivalent shares from stock options and warrants. All stock options and warrants issued during the one-year period prior to the IPO at prices below the anticipated IPO price are presumed to have been issued in contemplation of the IPO and have been included in the calculation of net income per common share as if they were outstanding for all periods presented. Page 11 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Following is a reconciliation of the shares used in calculating basic and dilutive net income per common share (net income available to common stockholders as reported is the numerator in each calculation):
1996 1997 1998 --------- --------- --------- Weighted average common shares outstanding ............. 4,536,000 5,398,000 7,635,000 Effect of assumed conversion of preferred stock ........ 425,000 -- -- --------- --------- --------- Weighted average common and common equivalent shares outstanding ................................... 4,961,000 5,398,000 7,635,000 Effect of dilutive securities--options ................. 443,000 411,000 367,000 --------- --------- --------- Weighted average common and common equivalent shares outstanding--assuming dilution ................ 5,404,000 5,809,000 8,002,000 ========= ========= =========
(k) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (l) Long-Lived Assets The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount on fair value less costs to sell. (m) Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statements of stockholders' equity. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. (3) Fair Value of Financial Instruments SFAS No. 107,"Disclosure about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of all financial instruments except investments in marketable securites approximate fair value because of the short maturity of those instruments. Fair values of investments in marketable securities are based on quoted market prices. Page 12 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (4) Accounts Receivable 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 December 31, 1997 and 1998.
1997 1998 ---- ---- Gross accounts receivable $21,854,353 $ 35,138,046 Allowance for doubtful accounts (4,760,117) (3,958,235) Contractual allowance reserve (5,146,007) (11,560,360) ----------- ------------ $11,948,229 $ 19,619,451 =========== ============
Accounts receivable, by payor class, as a percentage of total net receivables at December 31, 1997 and 1998 are as follows:
1997 1998 ---- ---- Medicare .............................................. 17% 12% Commercial insurance .................................. 42 44 Hospitals, clinics and other institutions ............. 24 25 Patients .............................................. 17 19 ---- ---- 100% 100% ==== ====
(5) Fixed Assets At December 31, 1997 and 1998, fixed assets consist of the following:
1997 1998 ----------- ----------- Personal computers ................................. $ 2,150,760 $ 4,571,227 Software development costs ......................... 3,937,576 10,508,280 Furniture, fixtures and laboratory equipment ....... 3,402,770 5,990,837 Leasehold improvements ............................. 764,202 5,316,091 Construction in progress ........................... 2,953,006 - ----------- ----------- 13,208,314 26,386,435 Less accumulated depreciation and amortization ..... 2,732,739 5,146,551 ----------- ----------- $10,475,575 $21,239,884 =========== ===========
Included in the above at December 31, 1997 and 1998 are gross assets under capital leases of approximately $5,532,841 and $9,109,906, respectively, and the related accumulated amortization at such dates is approximately $1,500,515 and $2,427,255, respectively. Page 13 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (6) Acquisitions In October 1996, the Company entered into an agreement with Oncogenetics Inc. to purchase customer lists pertaining to its diagnostic and prognostic cancer business for a sum of $800,000. In conjunction with this purchase the Company obtained the option to purchase the cytogenetics business of the seller for $1, plus assumption of a $750,000 note payable (which was paid just after the transaction). The option was exercised in January 1997. In February 1997, the Company purchased certain assets of Immunodiagnostic Laboratories, Inc. ("Immunodiagnostic"), which operates an oncology division specializing in sophisticated cancer analytical assays, in order to provide diagnostic and prognostic information to pathologists, oncologists and others specializing in cancer. The purchase price included an initial payment at closing of $425,000 plus the issuance of options to purchase 20,000 shares of the Company's common stock at $17.44 per share (estimated value of $191,218). In September 1997, the Company acquired certain assets of GenCare for an initial payment of $4,600,000. GenCare is a New Jersey-based cancer laboratory specializing in tissue-based testing and tumor marker analyses. In October 1997, the Company purchased certain assets of Aeron Biotechnology, Inc. ("Aeron"), a California-based cancer testing facility specializing in breast cancer prognostic analysis. The purchase price for Aeron included an initial payment of $376,000 made at closing. Additionally, the Company paid $180,000 for certain other assets owned by Aeron. The acquisitions of Immunodiagnostic, GenCare and Aeron all have an individual contingent purchase price arrangement based on the future operating results of the respective business. Such payments could range up to approximately $1,000,000 and bear interest at 9% per annum. The aggregate acquisitions in 1997 were all treated as purchases with the results of operations of each transaction being included in the consolidated results from the respective acquisition date. The incremental operating results were not material to the results of operation of the Company. The purchase prices represented primarily payments for customer lists, which are included in intangible assets on the accompanying consolidated balance sheets and will be amortized over periods of up to fifteen years. In July 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 $2,000,000, 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 previously established revenue targets with interest accruing at 8% per annum. In August 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 (includes approximately $12 million of goodwill). 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. 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 unaudited proforma results would have been reflected for the year ended December 31, 1997 and 1998. Page 14 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 1998 ---- ---- Revenues $40.5 million $59.1 million Net income $3.0 million $6.6 million Net income per common share-assuming dilution $ 0.47 $ 0.79 ---------- ---------- Weighted average share-assuming dilution 6,359,000 8,369,000 ========== ==========
These proforma results are not neccesarily indicitive of the results that would have actually occurred had the transaction been completed at that time. 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. 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 accompany December 31, 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 December 31, 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. (7) Accrued Expenses Accrued expenses are comprised of the following as of December 31, 1997 and 1998:
1997 1998 ---- ----- Salaries and related costs ....... $345,000 $ 756,000 Other accrued expenses ........... 383,353 1,063,752 -------- ---------- $728,353 $1,819,752 ======== ==========
(8) Indebtedness The Company increased its line of credit to an aggregate amount of $10,000,000 with Fleet Bank. Borrowing under the line will bear interest at LIBOR plus 2.25%. In December 1998, the Company drew $10,000,000 against such line. Approximately $4.5 million was repaid in January 1999, with the remainder paid in full during February 1999. The line of credit has certain financial covenants for which the Company was in compliance with at December 31, 1998. Page 15 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (9) Stockholders' Equity (a) Common Stock On October 13, 1995, the Board of Directors authorized the Company to file a registration statement with the Securities and Exchange Commission to register shares of its common stock in connection with an initial public offering. Such offering was consummated on February 26, 1996 for a total of 2,242,500 common shares at an offering price of $13 per share. The net proceeds to the Company amounted to approximately $25,737,000. In March 1998, the Company raised approximately $71,000,000 of additional capital through an underwritten secondary public offering of 2,300,000 common shares of stock. (b) Treasury Stock In December 1998, the Company initiated a share buyback program to acquire up to $25,000,000 worth of stock. As of December 31, 1998, the Company acquired 306,600 shares of common stock for approximately $7.9 million. (c) Preferred Stock Effective February 10, 1995, the Company sold 1,612,904 shares of its 8% Series D Convertible Participating Preferred Stock and warrants to purchase 42,529 shares of its common stock at $3.50 per share for an aggregate sales price of $2,000,000 (before issuance costs). The warrants are exercisable for a period of six years. In 1997, 11,184 of such warrants were exercised and in 1998 another 29,331 were exercised. The holders of this preferred stock had the right to convert their shares into shares of common stock, subject to certain adjustments. Concurrent with the issuance of the 8% Series D Convertible Participating Preferred Stock and common stock warrants, the terms of the outstanding Series A, B and C Redeemable Preferred Stock were revised, resulting in the elimination of all previously existing redemption rights, elimination of all previously accrued dividends in the amount of $1,799,909 and a change in the future dividend rate from 9% to 8%. In June 1988 and March 1990, the Company sold 1,776,318 and 100,000 shares, respectively, of its Series A 9% Convertible Preferred Stock (subsequently amended to 8%) with a par value of $.01 per share for $1,350,000 (before issuance costs) and $76,000, respectively. In March 1990, the Company issued 668,182 shares of its Series B 9% Convertible Preferred Stock (subsequently amended to 8%; terms are substantially identical to those of the Series A 8% Convertible Preferred Stock) for an aggregate consideration of $587,998 (before issuance costs). In March 1991, the Company issued 1,638,887 shares of its Series C 9% Convertible Preferred Stock (subsequently amended to 8%; terms are substantially identical to those of the Series A 8% Convertible Preferred Stock) for an aggregate consideration of $1,475,000 (before issuance costs). In June and July 1993, the Company issued 1,396,433 additional shares of its Series C 9% Convertible Preferred Stock (subsequently amended to 8%) for an aggregate consideration of $1,256,789. Upon the consummation of the Company's IPO on February 26, 1996, all preferred shares were converted into 2,548,933 shares of common stock and all accrued dividends commencing February 10, 1995, totaling approximately $560,000, were paid. Page 16 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (d) Stock Option Plans In February 1989, the Company adopted (and subsequently amended) a Stock Option Plan (the "Plan") which provides for granting to certain key employees of the Company, directors and consultants, options to purchase up to 884,688 shares of common stock. Options granted are exercisable over a period not to exceed ten years and generally vest over five years. In August 1995, four directors were granted options to purchase a total of 42,528 shares of common stock at an exercise price of $3.50 per share under the Company's Stock Option Plan, which vest ratably over 36 months. Management of the Company estimated the fair market value of the underlying common stock to be approximately $8.00 per share and, accordingly, recorded deferred compensation of $191,000, which amount is being amortized ratably over the vesting period. In October 1995, three additional directors were granted options to purchase a total of 31,896 shares of common stock at an exercise price of $3.50 per share, which vest ratably over 36 months. Management of the Company estimated fair market value of the underlying common stock to be approximately $9.50 per share and, accordingly, recorded deferred compensation of $191,000, which amount is being amortized ratably over the vesting period. In April 1997, the Company adopted the IMPATH Inc. 1997 Long-Term Incentive Plan (the "Incentive Plan"), which provides for granting to certain key employees of the Company, directors and consultants, options to purchase up to 300,000 shares of common stock. Options granted are exercisable over a period not to exceed ten years and generally vest over four years. Options to purchase 79,000 shares were granted to consultants under the Incentive Plan in 1997. Options to purchase 69,000 shares were granted to consultants under the Incentive Plan in 1998. Compensation cost will be amortized per these grants over the vesting period of the options. The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose the pro forma net income and earnings per share as if such method had been used to account for stock-based compensation cost as described in SFAS No. 123 in the Statement. The per share weighted-average fair value of stock options granted during 1996, 1997 and 1998 was $8.10, $14.88 and $16.68, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted- average assumptions: 1996--expected dividend yield 0%, risk-free interest rate of 7.0%, expected volatility 60% and an expected life of 7 years; 1997--expected dividend yield 0%, risk-free interest rate of 7.0%, expected volatility of 60% and an expected life of 7 years; 1998--expected dividend yield 0%, risk-free interest rate of 7.0%, expected volatility of 60% and an expected life of 7 years. The Company applies APB Opinion No. 25 in accounting for its options and, accordingly, no compensation cost has been recognized for its stock options issued at exercise prices equal to the fair market value of the stock on the grant date, with the exception of certain stock options issued in 1996 through 1998 to nonemployees as previously described. Page 17 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1996 1997 1998 ---------- ---------- ---------- Net income available to common stockholders........ As reported $2,047,550 $3,649,199 $6,947,545 Pro forma $1,903,858 $3,211,328 $5,879,393 Net income per share--assuming dilution............ As reported $ 0.38 $ 0.63 $ 0.87 Pro forma $ 0.37 $ 0.55 $ 0.73
Pro forma net income reflects only options granted in 1995 through 1998. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. The following is a summary of option activity during the years ended December 31, 1996, 1997 and 1998:
Weighted Shares average under Price exercise options Range ($) price ($) ------------ ------------- ---------- Options outstanding at December 31, 1995 ......... 533,357 0.28-8.00 2.57 Granted .......................................... 247,077 11.13-18.38 14.05 Exercised ........................................ (75,846) 0.28-13.00 1.66 Canceled ......................................... (14,962) 2.15-13.00 5.62 -------- Options outstanding at December 31, 1996 ......... 689,626 0.28-18.38 6.72 Granted .......................................... 342,612 17.25-31.38 23.12 Exercised ........................................ (125,357) 0.28-25.25 3.84 Canceled ......................................... (28,705) 2.54-25.25 16.53 -------- Options outstanding at December 31, 1997 ......... 878,176 0.28-31.38 13.21 Granted .......................................... 189,698 20.50-37.25 25.47 Exercised ........................................ (198,207) 0.28-26.88 4.29 Canceled ......................................... (41,399) 2.54-31.88 22.20 -------- Options outstanding at December 31, 1998 ......... 828,268 0.28-37.25 17.70 ======== =========== =====
Page 18 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information about stock options outstanding and exercisable as of December 31, 1998:
Weighted ----------- Number average Weighted Number Weighted ----------- ----------- --------- --------- --------- Range of out- remaining average exercis- average - - -------------- ----------- ----------- --------- --------- --------- exercise standing at contractual exercise able at exercise - - -------------- ----------- ----------- --------- --------- --------- Prices 12/31/98 life price 12/31/98 price - - -------------- ----------- ----------- --------- --------- --------- $ 0.28-0.34 887 2.3 years $ 0.33 887 $ 0.33 0.56 1,773 2.31 years 0.56 1,773 0.56 2.12- 3.50 147,043 5.68 years 3.05 135,278 3.01 8.00-12.63 41,208 7.32 years 10.25 14,145 9.05 13.00-13.75 102,905 7.06 years 13.07 56,523 13.06 16.75-18.38 97,677 7.87 years 17.19 43,640 17.19 18.50-24.75 208,117 8.99 years 21.39 53,085 20.15 25.13-26.88 163,058 8.97 years 26.87 39,560 26.88 27.25-31.38 50,400 9.44 years 27.91 6,802 28.09 32.13-35.50 8,200 9.74 years 32.87 380 33.99 36.88-37.25 7,000 9.31 years 36.99 1,062 37.00 -------- -------- 0.28-37.25 828,268 353,135 =========== ======== ========
At December 31, 1998, the Company had 852,934 shares reserved for options and warrants outstanding, as well as future option grants. (10) 401(k) Retirement Savings Plan Effective June 1, 1995, the Company adopted the IMPATH Inc. 401(k) Retirement Savings Plan (the "Plan") benefiting certain employees. Employees who are over the age of 21 and have completed six months of service are eligible for voluntary participation in the Plan. Employees may contribute 1% to 20% of their total salaries on a before tax basis, and the Company will match up to 50% of the first 4% of employee contributions. Plan participants who were employees as of June 1, 1996 are 100% vested in all contributions. Any employees hired subsequent to June 1, 1996 are 100% vested in their own contributions and will become vested in employer contributions over a three-year period. Employer contributions for the year ended December 31, 1996, 1997 and 1998 were $50,990, $70,439 and $133,842, respectively. Page 19 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (11) Income Taxes The components of the provision (benefit) for income taxes for 1996, 1997 and 1998 are as follows:
1996 1997 1998 ------------ ----------- ------------ Current: Federal ................................... $1,566,987 $ 972,484 $3,345,462 State and local ........................... 907,607 573,594 1,625,507 ---------- ---------- ---------- 2,474,594 1,546,078 4,970,969 ---------- ---------- ---------- Deferred: Federal ................................... (541,047) 1,015,667 (255,671) State and local ........................... (313,238) 290,191 (139,493) ---------- ---------- ---------- (854,285) 1,305,858 (395,164) ---------- ---------- ---------- $1,620,309 $2,851,936 $4,575,805 ========== ========== ----------
Deferred tax components at December 31, 1997 and 1998 are as follows:
1997 1998 -------------- -------------- Assets: Allowance for doubtful accounts .. $ -- $ 405,035 Deferred compensation ............ 169,882 244,110 Depreciation ..................... 263,359 -- Deferred revenue ................. -- 640,000 --------- ----------- 433,241 1,289,145 Liabilities: Intangible assets - acquisitions... -- (1,880,531) Other.............................. (379,814) (200,554) --------- ----------- (379,814) (2,081,085) --------- =========== Deferred tax assets (liabilities), $ 53,427 $ (791,940) net ............................. ========= ===========
Management of the Company believes that it is more likely than not that future tax benefits will be realized as a result of the recent operating performance of the Company. A reconciliation of the Federal statutory income tax rate to the effective tax rate for the years ended December 31, 1996, 1997 and 1998 follows:
1996 1997 1998 --------- --------- --------- Federal statutory income tax rate ......................... 34.0% 34.0% 35.0% State and local taxes, net of Federal income tax benefit .. 10.7 10.2 7.3 Tax exempt interest income.................................. -- -- (2.9) Change in valuation allowance ............................. (2.3) -- -- Other ..................................................... 1.8 (0.3) 0.3 ---- ---- ---- 44.2% 43.9% 39.7% ==== ==== ====
The Company recognized a tax benefit for stock options exercised as a reduction in taxes payable and a corresponding increase in additional paid in capital totaling $171,531 and $778,611 in 1997 and 1998, respectively. Page 20 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (12) Leases The Company utilizes laboratory and office facilities and leases equipment pursuant to the terms of operating and capital leases, which expire through 2009 (certain leases expiring in 1999 are cancelable at the Company's option). The present value of future minimum lease payments (including those cancelable at the Company's option and subject to increases in the Consumer Price Index and real estate taxes) for the capital leases and the future minimum lease payments for operating leases are as follows:
Operating Capital --------- ------- Year ending December 31, leases leases - - ------------------------ ------ ------ 1999................................................................... $1,459,496 $ 2,058,408 2000 ................................................................. 1,272,038 2,000,550 2001 ................................................................. 800,728 1,524,807 2002 ................................................................. 679,215 676,084 2003 ................................................................. 665,511 8,811 Thereafter ........................................................... 3,807,638 -- ---------- ----------- $8,684,626 6,268,660 ========== Less amount representing interest (rates range from 5.75% to 9.75%).... (853,461) ----------- Present value of minimum lease payments .............................. 5,415,199 Less current portion ................................................. (1,622,366) ----------- $ 3,792,833 ===========
For the years 1996, 1997 and 1998, rent expense was $749,168, $1,169,763, and $1,272,661 respectively. (13) Related Party Transactions The Company paid $93,112, $128,329 and $104,000 in the years ended December 31, 1996, 1997 and 1998, respectively, to a Director who also performs certain consulting services to the Company. (14) Commitments and Contingencies The Company is involved in various legal actions in the normal course of business, some of which seek monetary damages. The Company believes any ultimate liability associated with these contingencies would not have a material adverse effect on the Company's consolidated financial position or results of operations. Certain executive officers of the Company have entered into agreements which provide severance of up to one year's salary in the event of termination without cause. Page 21 IMPATH INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (15) Quarterly Financial Data (unaudited) (dollars in thousands except per share data)
Per Share of Common Stock Net Income ---------- Quarter Revenues Net Income Basic Diluted ------- -------- ---------- ----- ------- 1998 Fourth $16,540 $2,014 $0.24 $0.23 Third 14,571 2,067 0.26 0.25 Second 13,435 1,789 0.23 0.22 First 11,713 1,078 0.18 0.17 - - ----------------------------------------------------------------------------------------------------------- Total $56,259 $6,948 $0.91 $0.87 - - ----------------------------------------------------------------------------------------------------------- 1997 Fourth $10,605 $1,295 $0.25 $0.22 Third 9,328 923 0.16 0.16 Second 9,285 868 0.16 0.15 First 7,845 563 0.11 0.10 - - ----------------------------------------------------------------------------------------------------------- Total $37,063 $3,649 $0.68 $0.63 - - -----------------------------------------------------------------------------------------------------------
Page 22 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION PAGE - - ------ ----------- ---- 3.1 Restated Certificate of Incorporation, as amended * 3.2 Form of Certificate of Amendment regarding authorization * of additional preferred stock 3.3 By-laws * 4.1 Regulation Rights Agreement dated February 10, 1995 among * IMPATH Inc. and certain of its shareholders * 10.1 Master Lease Agreement dated April 11, 1995 between IMPATH * Inc. and Financing For Science International, Inc. 10.2 Employment letter dated October 26, 1993 between Bruce C. * Horten, M.D., and IMPATH Inc. 10.3 Employment letter dated March 7, 1994 between John P. * Gandolfo and IMPATH Inc. 10.4 Space Lease dated August 29, 1988, as amended, between * 166 East 61st Street Associates and IMPATH Inc. (formerly known as BioPath, Inc.) 10.5 Sublease dated April 1992, between Zeller 1010 Formals, * Inc. and IMPATH Inc. 10.6 Space Lease dated September 27, 1991, as amended, between * 166 East 61st Street Associates and IMPATH Inc. (formerly known as Impath Laboratories Inc.) 10.7 Assignment and Assumption of Lease Agreement dated August 1, * 1990, as amended, between Mitchell Manning Associates, Inc. and IMPATH Inc. 10.8 Space Lease Agreement dated April 20, 1995 between OMA Del * Aire Properties and IMPATH Inc. (formerly known as Impath Laboratories Inc.) 10.9 Floating Rate Promissory Note in the principal amount of * $300,000 made by IMPATH Inc. in favor of Chemical Bank 10.10 1989 Stock Option Plan * 10.11 Form of Indemnification Agreement with directors * 10.12 Lease Modification Agreement dated as of April 24, 1995 * between 166 East 61st Street Associates and IMPATH Inc. (formerly known as Impath Laboratories Inc.) 10.13 Letter Agreement dated December 12, 1997 between Anu D. ** Saad, Ph.D., and IMPATH Inc. 10.14 Letter Agreement dated December 12, 1997 between John P. ** Gandolfo and IMPATH Inc. 10.15 Letter Agreement dated December 12, 1997 between Bruce C. ** Horten, M.D., and IMPATH Inc. 10.16 Letter Agreement dated December 12, 1997 between Moacyr ** Da Silva, M.D., and IMPATH Inc. 10.17 Letter Agreement dated December 12, 1997 between Richard P. ** Adelson and IMPATH Inc. 10.18 1997 Long Term Incentive Plan *** 10.19 Agreement of Lease dated as of June 26, 1997 between ** International Flavors & Fragrances Inc. and IMPATH Inc. 23 Consent of KPMG Peat Marwick LLP 24 Power of Attorney (see "Power of Attorney" in Form 10-K) 27 Financial Data Schedule - - -------- * Incorporated by reference to the exhibit of the same number filed with the Registration Statement on Form S-1 of IMPATH Inc. (File No. 33-98916). ** Incorporated by reference to the exhibit of the same number filed with the Annual Report on Form 10-K for the year ended December 31, 1997. *** Incorporated by reference to Exhibit A to the Proxy Statement of IMPATH Inc. dated April 25, 1997 (File No. 000-27750). EX-23 2 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23 Independent Auditors' Consent The Board of Directors IMPATH Inc.: We consent to the incorporation by reference in Registration Statements on Form S-3 (no.'s 33-98916, 333-08553, 333-45921 and 333-62563) and on Form S-8 (no.'s 333-09469 and 333-47689) of IMPATH Inc. of our report dated February 18, 1999, relating to the consolidated balance sheets of IMPATH Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of IMPATH Inc. KPMG LLP Short Hills, New Jersey March 31, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS 12-MOS DEC-31-1998 DEC-31-1998 OCT-01-1998 JAN-01-1998 DEC-31-1998 DEC-31-1998 45,556,005 45,556,005 29,971,456 29,971,456 23,577,686 23,577,686 (3,958,235) (3,958,235) 796,127 796,127 99,989,043 99,989,043 26,386,435 26,386,435 5,146,551 5,146,551 150,033,167 150,033,167 19,293,502 19,293,502 0 0 0 0 0 0 42,690 42,690 124,544,278 124,544,278 150,033,167 150,033,167 16,541,512 56,259,446 16,541,512 56,259,446 5,027,419 19,394,284 14,138,852 47,738,081 0 0 0 0 244,871 659,078 3,339,908 11,523,350 1,326,304 4,575,805 2,013,604 6,947,545 0 0 0 0 0 0 2,013,604 6,947,545 0.24 0.91 0.23 0.87
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