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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-28328
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UROCOR, INC.
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A DELAWARE IRS EMPLOYER IDENTIFICATION
CORPORATION NO. 75-2117882
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800 RESEARCH PARKWAY
OKLAHOMA CITY, OKLAHOMA 73104
Telephone Number (405) 290-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate 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. [ ]
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Aggregate market value of the voting stock (Common Stock) held by
non-affiliates of registrant as of March 21, 1997 $70,591,706
Number of shares of registrant's Common Stock outstanding as of March 21, 1997 10,153,998
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TABLE OF CONTENTS
DESCRIPTION
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ITEM PAGE
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PART I...................................................................................................... 1
1. BUSINESS......................................................................................... 1
2. PROPERTIES....................................................................................... 16
3. LEGAL PROCEEDINGS................................................................................ 17
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 17
PART II..................................................................................................... 17
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................ 18
6. SELECTED FINANCIAL DATA.......................................................................... 19
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 20
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 24
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............. 24
PART III.................................................................................................... 25
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 25
11. EXECUTIVE COMPENSATION........................................................................... 28
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................... 31
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 33
PART IV..................................................................................................... 34
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K....................................................................................... 34
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PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
UROCOR, INC.'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "BUSINESS", "BUSINESS--RISK FACTORS", "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS
ANNUAL REPORT ON FORM 10-K.
ITEM 1. BUSINESS
OVERVIEW
UroCor, Inc. ("UroCor" or the "Company") provides a broad range of
diagnostic services for the clinical management of certain urological cancers
and diseases. The Company's goal is to complement its diagnostic services with
therapeutic products and information services in order to become an integrated
disease management company serving the urology market. The Company has
established four business groups, UroDiagnostics, UroSciences, UroTherapeutics
and Disease Management Information Systems, to serve the needs of urologists and
managed care organizations for the diagnostic, prognostic and therapeutic care
of patients throughout the entire course of their diseases. The Company's
UroDiagnostics Group provides comprehensive diagnostic services to detect major
urological diseases, predict prognosis of the patient's condition, monitor the
patient's therapy and identify recurrence of the disease. The primary purpose of
the UroSciences Group is to develop additional diagnostic products and
technologies for the UroDiagnostics Group. The UroTherapeutics Group was
established to acquire rights to sell through the Company's urology-focused
sales force urological pharmaceutical products for use in the urologist's
office. The Company's Disease Management Information Systems group is designed
to provide urologists and managed care organizations with access to the
Company's proprietary urological disease databases, disease management models
and practice support services in order to improve the diagnosis and treatment of
patients.
UROLOGY MARKET
The urology market differs from most other medical care markets, primarily
because of the distinctive characteristics of urological diseases and the
multiple roles of the urologist. The urologist often serves as the primary
diagnostician, oncologist and surgeon for the treatment of prostate cancer,
bladder cancer, kidney stone disease and other complex urological diseases.
Patients with prostate or bladder cancer generally require management of the
disease by the urologist throughout a disease cycle ranging from three to ten
years. The urologist requires sophisticated diagnostic and information services
throughout that period. Despite the urologist's need for comprehensive services,
currently, diagnostic services, therapeutic products and information resources
are provided primarily by local hospitals, pathology groups and other companies
that do not focus exclusively on urological disease.
UroCor serves the segment of the United States urology market consisting of
over 7,500 office-based urologists, including those affiliated with managed care
organizations. These urologists diagnose and treat patients who generally are
referred to them by another physician for prostate cancer, bladder cancer,
kidney stone disease and other complex urological diseases.
DISEASE MANAGEMENT BUSINESS
URODIAGNOSTICS GROUP--PRODUCTS
The UroDiagnostics Group provides comprehensive diagnostic services to
office-based urologists to detect and diagnose certain major urological
diseases, make a prognosis of the patient's disease, monitor the patient's
therapy and identify recurrence of the disease. The UroDiagnostics Group
generated
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revenues of approximately $26.2 million in 1996, constituting approximately
98.9% of the Company's revenue for 1996.
The Company emphasizes enhanced service, including the provision of a
comprehensive detailed report to the referring physician after completion of
each specimen analysis. The Company's relations with its clients are supported
through its regional customer service representatives, who are responsible for
handling inquiries made by referring physicians and providing support for the
Company's sales force.
The following chart sets forth the principal products and services currently
offered through the UroDiagnostics Group.
UROLOGICAL DIAGNOSTIC SERVICES
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PRODUCT APPLICATION
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PROSTATE CANCER
SERUM BASED
PSA and PSA velocity................................ Detects and monitors disease
Free/Total PSA*..................................... Increases specificity of detection
TISSUE BASED
Sextant biopsy...................................... Increases diagnostic accuracy
UroScore-Registered Trademark-...................... Improves clinical staging and treatment selection
BLADDER CANCER
CELLULAR BASED
Cellular pathology and DNA analysis................. Detects and diagnoses disease
Antibody markers.................................... Detects and diagnoses disease
SOLUBLE ANTIGEN
Antibody markers.................................... Monitors disease
TISSUE BASED
Pathological examination............................ Provides definitive diagnosis and prognosis
Antibody markers.................................... Provides definitive diagnosis and prognosis
MICROHEMATURIA
Urine protein chemistry analysis.................... Differentiates between upper and lower tract disease
Microscopic examination............................. Differentiates between upper and lower tract disease
KIDNEY STONES
Stone analysis...................................... Determines stone structure and chemistry
Serum chemistry..................................... Identifies underlying disease
24-hour soluble urine chemistry..................... Assesses recurrence risk
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* Currently, for investigational use only and not reimbursed by third-party
payors, including Medicare.
PROSTATE CANCER PRODUCTS. Management of prostate cancer requires the
urologist to screen, detect, diagnose, prognose and treat the patient and
monitor progression of the disease. UroCor has developed and markets products
and services that assist the urologist in each of the diagnostic steps in this
disease cycle.
UroCor's PSA product is used in screening for the disease to improve the
urologist's ability to identify true positive cancer patients. The Company's
Free/Total PSA product is used for the same purpose and increases the
urologist's ability to differentiate prostate cancer from benign disease. UroCor
currently is using the Free/Total PSA product on a limited clinical trial basis
to validate its results prior to seeking reimbursement approval from third-party
payors.
The current preferred method for diagnosis of the disease after the
screening stage is the prostate biopsy. The Company introduced its sextant
biopsy product as a tool to increase the possibility of finding
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small, localized tumor tissue in the prostate. The Company's specimen collection
techniques and reporting capabilities assist the urologist in identifying the
location of the disease.
After screening and diagnosis of prostate cancer, the urologist must
accurately "stage" or classify the disease to determine whether the cancer has
spread beyond the prostate gland. UroCor developed its
UroScore-Registered Trademark- test to assist the urologist in this step. As a
result of staging the disease, the urologist and patient determine whether to
treat the disease with surgery, radiation or drug therapy or simply to monitor
its progress. UroCor utilizes its expertise and capabilities to provide the
urologist with additional information regarding the aggressiveness of a
patient's cancer. This information is enhanced by the Company's pathologists who
interpret the prognostic information in conjunction with the patient's
diagnostic pathology report.
After reaching a treatment decision, the urologist can monitor the patient
for evidence of recurrence or eradication of the disease by using the Company's
PSA test results.
BLADDER CANCER PRODUCTS. Some of the difficulties that the urologist faces
in the diagnosis and management of bladder cancer include detecting tumors at an
early stage, assessing the aggressiveness of tumors and monitoring for
recurrence after treatment. UroCor's bladder cancer products provide the
urologist with analysis and information capabilities in all significant aspects
of the diagnosis and management of the disease. In addition, UroCor's bladder
cellular analysis incorporates a multi-modality approach that the Company
believes provides, compared to its competitors, increased levels of analysis and
corresponding improvements in specificity and sensitivity of test results. The
Company's complete bladder cancer detection program combines the information
from microscopic examinations of a patient's specimen combined with two
different techniques, an analysis of the DNA in cell nuclei and the use of one
or more specific biomarkers to assist in the pathologist's assessment for the
presence of cancer.
MICROHEMATURIA PRODUCTS. Microhematuria, or the presence of small amounts
of blood in the urine, is one of the conditions that may relate to a number of
urinary tract diseases and infections. The initial challenge faced by the
urologist in diagnosing the underlying cause of the microhematuria is to
identify the source of the bleeding. UroCor's microhematuria diagnostic
evaluation combines a microscopic examination of cells and urine sediment by
pathologists with a urine protein chemistry analysis to provide the urologist
with information on the probable location of the bleeding.
KIDNEY STONE PRODUCTS. Kidney stone disease typically requires physical and
chemical analysis of the stone, and, in many cases, analysis of patients' urine
and serum specimens to assess the risk of disease recurrence and treatment
options. Traditionally, the urologist was required to send each of the kidney
stone, urine and serum specimen to different testing service providers. UroCor's
kidney stone products offer a program in which the urologist delivers all
specimens to UroCor and the Company provides an integrated analysis and report.
URODIAGNOSTICS GROUP--SALES AND MARKETING
The Company markets its diagnostic services to the segment of the urology
market consisting of more than 7,500 office-based urologists in the United
States, many of whom are affiliated with one or more managed care organizations.
UroCor has developed a sales force dedicated and trained to market solely to
urologists including representatives specializing solely in marketing to managed
care organizations.
The Company also focuses on securing managed care contracts to permit UroCor
to provide products and services to patients enrolled in these health care
organizations. The Company intends to increase its penetration of the managed
care market by developing products and services specifically designed to meet
the cost control, quality assurance and other requirements imposed by managed
care organizations.
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In addition to its focus on the individual urologist client and managed care
organizations, the Company is concentrating its marketing efforts on identifying
and marketing products to the growing number of group practices and independent
practice associations forming to specialize in urology.
The Company intends to focus its efforts on expanding its client base and
adding additional products and services to its product line for existing and
future customers. The Company also intends to use its wide area network link
with its client base to enhance the regular two-way communication between the
Company and its customers.
UROSCIENCES GROUP
The UroSciences Group combines access to external resources at academic
centers and research institutes with the Company's internal development and
assessment capabilities to develop and launch new technologies and products.
The UroSciences Group has created unique disease specific databases from the
diagnostic specimens of patients of the Company's clients in order to enhance
current services and validate current products. In addition, all tissue and
cellular specimens received and reviewed by the UroDiagnostics Group are stored
for future reference and test results are entered into the central client
patient database. The Company is currently working with urologists to obtain
additional outcomes information to add to its existing databases. The
UroSciences Group has also established working relationships with leading
academic centers and research institutions which provide surgical pathology
specimens and pathology and clinical information on their patients to be used
for collaborative research and product development. Using the Company's combined
specimen repository and patient databases, UroCor's scientists evaluate new
technologies or techniques under development, facilitating determination of the
clinical contribution of potential new products and services.
The primary purpose of the UroSciences Group is to develop additional
diagnostic products and technologies for commercialization by the UroDiagnostics
Group. The following table sets forth the current principal development programs
of the UroSciences Group.
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UROSCIENCES DEVELOPMENT PROGRAMS
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DEVELOPMENT PROGRAM PROPOSED APPLICATION
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PROSTATE CANCER
SERUM BASED
Quantitative RT-PCR PSA............................. Assists in pre-treatment clinical staging and disease
progression monitoring
Gene discovery--new biomarkers...................... Enhances cancer-specific diagnosis and prognosis
TISSUE BASED
Antibody or gene probes............................. Assesses tumor aggressiveness and response to therapy
Computer assisted image analysis.................... Quantifies tissue and cellular features that predict tumor
stage and post-surgery progression risk
PROSTATITIS
URINE/TISSUE BASED
Microbiological techniques.......................... Diagnoses acute infectious prostatitis
Gene probes......................................... Identifies novel non-culturable microorganisms
BENIGN PROSTATIC HYPERPLASIA
URINE/SERUM/TISSUE BASED
Antibody or gene probes Selects and monitors medical therapy
Gene discovery--new biomarkers Characterizes relative gland size and changes in prostate
disease state
BLADDER CANCER
URINE/TISSUE CELLULAR BASED
Antibody and gene probes............................ Enhances detection, diagnosis and prognosis and monitors
change in disease progression
Computer assisted image analysis.................... Quantifies tissue and cellular features that predict tumor
aggressiveness
URINE--SOLUBLE BASED
Antibody-based antigen detection systems............ Provides non-invasive detection, diagnosis and prognosis
INTERSTITIAL CYSTITIS
URINE--CELLULAR AND SOLUBLE BASED
Antibody or gene probes............................. Assists in definitive diagnosis and monitors response to
conventional and new therapies
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PROSTATE CANCER. UroCor is developing a technology called quantitative
reverse transcriptase/ polymerase chain reaction ("RT-PCR") to detect prostate
cells circulating in the blood which could be relevant to early events in the
metastatic process of this disease. UroCor is sponsoring three investigational
collaborations to determine the clinical significance and the potential for
commercial applications of the information provided by this technology. The
Company also has discovered and is evaluating the application of novel genes
that are differentially expressed in prostate cancer and benign prostatic
hyperplasia ("BPH") that may provide better prostate disease management tools.
The UroSciences Group has developed computer-assisted image analysis of
individual cancer cells and is expanding the application to assess tissue
architecture in order to create statistical models, mathematical formulae and
artificial neural network systems for facilitating disease management decisions
in prostate and bladder cancer. The Company's UroScore-Registered Trademark-
product is based on these technologies.
PROSTATITIS. The Company is evaluating the possibility of introducing
microbiological services for the detection, diagnosis and monitoring of acute
and persistent prostatitis, a disease characterized by painful
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inflammation of the prostate. This disease has complex causes and poses
difficulties in disease management.
BENIGN PROSTATIC HYPERPLASIA. UroCor is developing a product for the
differential diagnosis of BPH, a common prostate disease associated with the
aging process. The Company has licensed molecular and antibody-based
technologies that it believes may provide the capability to monitor the response
to current and new medical therapies. The Company is also utilizing its prostate
disease gene discovery program to identify new genes and gene products that may
assist in the diagnosis, clinical staging and choice of the optimal medical
therapies for this disease.
BLADDER CANCER. The Company is developing a combination of technologies
which it believes will further enhance its ability to detect early-stage bladder
cancer and provide the urologist with diagnostic and prognostic information to
assist in more effective management of the patient's care. The Company is
developing an application of computer-assisted image analysis and new biomarkers
intended to permit more accurate prediction of bladder cancer presence based
upon a cytology specimen collected by the urologist. In addition, the
UroSciences group plans to apply its gene discovery technology to identify
potential new biomarkers and tools for use by the urologist and the bladder
cancer patient for the detection of low grade disease, early recurrence and
genetic defects predictive of tumor progression.
INTERSTITIAL CYSTITIS. The Company is developing a product to improve the
diagnosis of interstitial cystitis, a debilitating bladder disorder primarily
afflicting women. UroCor's product development efforts are directed at providing
a definitive diagnosis for the disease based upon a simple urine test.
OTHER DEVELOPMENT EFFORTS. UroCor believes that some of the technologies
acquired or developed in the Company's development programs may have
applications in diagnostic products outside the scope of the UroDiagnostics
Group's service business and may be applicable to therapeutics. The Company is
seeking potential partners for further development of such products.
UROTHERAPEUTICS GROUP
UroCor intends to provide through its UroTherapeutics Group selected
therapies to urologists for the care of their patients. The Company plans to
license, acquire from others or co-market urological pharmaceutical products
used or prescribed by the urologist and to capitalize on its urology-focused
sales force to market these products to its existing and future client base. The
Company also plans to offer ancillary products and services such as computerized
order entry, just-in-time inventory, procedure trays to accompany therapeutic
interventions, database access and oncologist case consultation as well as
reimbursement assistance.
In December 1994, the Company entered into an agreement with IAF BioVac Inc.
("BioVac"), a subsidiary of BioChem Pharma, Inc., granting the Company exclusive
distribution rights in the United States for PACIS BCG, a therapeutic product
for treating certain types of superficial bladder cancer. BCG is delivered
directly into a patient's bladder by the urologist using a catheter, generally
in an office-based procedure. The current BCG treatment procedure includes an
initial series of six such doses over a six-week period, and recent studies have
indicated that additional maintenance doses of BCG delivered at lengthening
intervals may be effective in delaying or eliminating recurrence of bladder
cancer.
Pursuant to the distribution agreement, BioVac is responsible for obtaining
approvals from the United States Food and Drug Administration (the "FDA") for
marketing the product in the United States. UroCor may not commence selling the
product in the United States until BioVac has obtained such FDA approval. In
April 1995, BioVac filed its initial applications with the FDA. In April 1996,
the FDA advised BioVac that its product license application was not approvable
at that time and requested additional data regarding certain aspects of
manufacturing and testing of the product. BioVac provided the FDA with the
additional data through an amended application in August 1996. BioVac has
advised the Company that notwithstanding the receipt of the non-approvable
letter from the FDA, it believes it can satisfy FDA
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requirements and procure approval for marketing the product in the United
States. There can be no assurance, however, that such approval will be obtained.
The Company has the right to terminate the agreement if FDA approval is not
obtained within a specified time period. In the event the FDA approves marketing
of the BCG product in the United States, the Company's ability to maintain its
exclusive distribution rights is conditioned upon meeting certain minimum sales
requirements.
In addition to the proposed BCG product, the Company plans to pursue the
license or acquisition of other therapeutic products for distribution through
its sales force. The Company has no current plans to internally develop or
manufacture therapeutic products.
DISEASE MANAGEMENT INFORMATION SYSTEMS
UroCor believes that useable, relevant information provides one of the most
important components of disease management services. The Company intends to
capitalize on its existing relationships with its urologist clients and managed
care organizations and its existing information resources to help improve the
clinical management of patients as well as its clients' productivity and
profitability.
SECURE WIDE AREA NETWORK. The Company's Disease Management Information
Systems group has developed and currently is testing a secure wide area network
that is intended to enhance two-way communication between UroCor and its
physician client base, with an initial focus on the services of the
UroDiagnostics Group. Through this network, it is intended that a physician
client will be able to receive advanced case reports on current diagnostic
findings, request a status update for any specimens currently in the processing
queue, request a consultation with one of the Company's pathologists and send
patient and billing information to the Company in advance of a specimen. The
Company also intends to develop applications for this network that would permit
its clients to access the Company's database and integrate the use of the
information produced into their clinical decisions and practice management.
CLINICAL DECISION SUPPORT SYSTEMS. The Company is developing disease
specific medical databases. Building from the UroSciences and UroDiagnostics
Groups' databases with delivery over the secure wide area network, the Company
intends to provide answers to the urologists' questions about a patient or a
group of patients. UroCor anticipates that urologists will use standard software
tools and apply their questions about the disease progression of their patients
against their patients' histories, aggregated disease trends within their own
patient population or aggregated disease trends within regional and national
criteria specific groupings. The Company believes that this application of
information technologies will provide both the foundation and direct customer
feedback for the Company's development of proprietary software applications in
decision analysis and support.
The Company initiated development of the first generation of its proprietary
disease pathway computer models for prostate cancer and bladder cancer during
1993, compiling information from published literature on medical practice,
technologies and various costs and claims databases. The Company used this
integrated information pool to model diagnostic and therapeutic intervention
points in prostate and bladder cancer from the detection stage through the point
at which the disease is either cured or is determined to be incurable.
UROLOGY SUPPORT SERVICES. Building upon existing relationships with
urologists, the Company intends to offer a broad range of business management
services to urologists. In early 1997, the Company introduced technical
consulting services for communications and network management and configuration,
including customization of software and system functions. The Company intends to
develop and offer other business management services, including accounts
receivable management, cost accounting and capitation modeling.
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COMPETITION
The market for providing urologists and managed care organizations with
disease management systems and services is still emerging. The Company is not
aware of any other company that currently is providing the comprehensive
approach pursued by the Company in urology.
The market for providing urologists with specialized diagnostic services for
detection, diagnosis, prognosis and monitoring is highly competitive and
fragmented. The majority of this market is served by hundreds of local
free-standing or hospital-pathology services that compete for the cellular and
tissue diagnostic services offered by the Company. Other hospital laboratories,
specialty laboratories and general reference laboratories provide some of the
serum and other testing provided by the Company. The main competitive advantage
of local hospital pathology service providers is long-established local
physician referral practices. The general reference laboratories' competitive
strength is attributable primarily to their service capabilities to provide
local couriers for specimen pickup and broad-based contracting ability with
managed care organizations. Other companies that already market diagnostic
products and medical supplies in other fields have begun marketing systems and
kits for performing certain tests in the urologist's office. The Company
believes that it will be able to compete with these diagnostic product and
service providers because of its disease management approach, its broad range of
diagnostic products and services, its urology-dedicated sales force and its
focused product research and development and information development efforts.
The Company also competes with many biotechnology companies, manufacturers
of diagnostic systems and kits as well as other producers and distributors of
medical products for the acquisition of technology for research and product
development. The Company believes its own product and technology development and
evaluation capabilities together with its expertise in urological diseases and
market access provide it with the ability to compete successfully in this area.
In the therapeutics segment of the urology market, surgery performed by the
urologists as well as a number of chemotherapeutic drugs will compete with the
Company's anticipated BCG therapy product for bladder cancer. Two other
companies, Connaught Laboratories, Inc. and Organon, Inc., already are marketing
BCG products in the United States. Many major and other pharmaceuticals
companies which can deploy larger sales organizations and research and
development efforts than the Company compete for sales of other urological
drugs. Because of its existing relationships with urologists through its
UroDiagnostics Group and sales force, the Company believes that it has the
ability to compete in this market.
Information systems companies provide services and software products that
will compete with proposed Company products and services. In addition, other
companies are building regional or national databases focused on improving
clinical and economic disease outcomes similar to the Company's application of
its urological disease database. The main competitive advantage of these
companies is their knowledge and focus on software and system development. Many
of these companies have considerably greater resources and experience than the
Company in the development of software and information systems. The Company
believes that the principal competitive factors for clinical outcomes database
software are the quality and depth of the underlying clinical outcomes database,
the usefulness of the data and reports generated by the software, customer
service and support, ease-of-use, compatibility with the customer's existing
information systems, potential for product enhancements and vendor reputation.
The Company believes that it can compete in this area because of its established
relationships with urologists and its expertise in and focus on urology.
Many of the Company's competitors are significantly larger and have
significantly greater financial, technical and administrative resources than the
Company. Many such competitors also have long-established relationships with the
Company's current and prospective customers.
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GOVERNMENT REGULATION
The health care industry in the United States is highly regulated, and the
diagnostic service segment, which includes the Company's UroDiagnostics Group,
is no exception. The Company's diagnostic operations currently are not regulated
by the FDA. While the FDA now indicates that it does not plan to regulate assays
developed by laboratories for in-house use, the FDA in the past has considered
drafting guidelines for regulation of such assays. If in the future the FDA were
to issue guidelines for the clinical laboratory market sector, such guidelines
might require the Company to meet certain FDA requirements for the Company's
in-house assays. The FDA currently regulates some of the tests and systems
purchased by the Company from third parties and used in the Company's
diagnostics business. The manufacturers of such products are responsible for
compliance with the approval and marketing regulations of the FDA. If the
UroSciences Group should decide to market any of its diagnostic technology as
test kits to be used by third parties, such test kits would require FDA
approval. The Company performs extensive internal validation procedures and
selected independent clinical trials on new tests and markers which it intends
to market. While no assurances may be given in such regard, the Company believes
that it could adjust to any reasonable changes in applicable FDA requirements
without significant disruption or financial impact. In the event that any such
changes are more extensive than anticipated, these changes would increase the
cost of development and approval of new products, slow their introduction to the
market and could have a material adverse effect on the Company's financial
condition and results of operations.
The Company's business also is subject to a variety of governmental
regulations at the federal, state and local levels. The Company's clinical
laboratory is certified under the federal Clinical Laboratory Improvement Act of
1976, as amended in 1988 ("CLIA") and participates in the federal Medicare
program and certain state Medicaid programs. The Company also is licensed under
the clinical laboratory licensure laws of Oklahoma, where the Company's clinical
laboratory is located. Because the Company provides clinical testing services to
patients nationwide, its laboratory also is licensed under the laws of those
state or local governments which the Company is aware have clinical laboratory
regulation programs applicable to out-of-state laboratories. The Company
believes that it has obtained all such licenses required for its operations and
is in compliance in all material respects with all such applicable regulations.
In addition, certain regulatory authorities require participation in a
proficiency testing program approved by the United States Department of Health
and Human Services ("DHHS") for each of the specialties and subspecialties for
which a laboratory seeks approval from Medicare or Medicaid and licensure under
CLIA. Proficiency testing programs involve actual testing of specimens that have
been prepared by an entity running an approved program for testing by the
laboratory. The Company believes it is in compliance in all material respects
with all such applicable regulations.
The federal Social Security Act prohibits the offering, payment,
solicitation or receipt of remuneration (including any kickback, bribe or
rebate), for (i) the referral of patients or arranging for the referral of
patients to receive services for which payment may be made under a health care
program that provides health benefits, which is funded directly, in whole or in
part, by the United States government and any state health care program, or (ii)
the purchase, lease, order or arranging for the purchase, lease or order of any
good, facility, service or item for which payment may be made under a federal
health care program. The applicable provisions of the Social Security Act
contain both criminal and civil sanctions, which are enforced by the Office of
Inspector General ("OIG") of the DHHS and the United States Department of
Justice.
There is ever-increasing scrutiny by federal and state law enforcement
authorities, OIG, DHHS, the courts and Congress of arrangements between health
care providers and potential referral sources to ensure that the arrangements
are not designed as a mechanism to exchange remuneration for patient care
referrals and opportunities. Enforcement actions have increased, as evidenced by
recent federal court decisions and activities initiated by the OIG, and,
generally, courts have taken a broad interpretation of the scope of the
applicable provisions of the Social Security Act. Because of such increased
scrutiny and such
9
<PAGE>
broad interpretations, these provisions could limit the manner in which the
Company conducts its business. Although the Company believes that it currently
complies with any such provisions, no assurance can be given regarding
compliance in any particular factual situation.
Another federal provision, the Stark self-referral and payment prohibition,
generally forbids, absent any applicable exception, a physician from making
referrals for the furnishing of certain designated health services for which
payment may be made under the Medicare or Medicaid programs, to any entity with
which the physician (or an immediate family member) has a "financial
relationship." A "financial relationship" under the Stark provision includes
certain compensation arrangements with an entity for payment of any
remuneration, and certain ownership or investment interests in the entity.
Penalties for violating the Stark provision include denial of payment for any
service rendered by an entity in violation of the prohibition, civil money
penalties and exlcusion from the Medicare and Medicaid programs. A number of
states, including New York and California, have enacted similar prohibitions to
the Stark law covering referrals of non-Medicare as well as Medicare business.
These state rules are very restrictive, prohibit submission of claims for
payment for prohibited referrals and provide for the imposition of civil
monetary and criminal penalties. Although the Company believes it has no
prohibited relationships with any of its referrers, it is unable to predict how
these laws may be applied or interpreted in the future, or whether the federal
government or states in which the Company operates will enact more restrictive
legislation or restrictions that could affect the Company's operations under
certain circumstances.
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 DHHS or 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's
financial condition and results of operations.
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. Although the Company believes its current and planned
activities do not constitute prohibited fee splitting or violate any prohibition
against the corporate practice of medicine, there can be no assurance that
future interpretations of such laws will not require structural or
organizational modifications of the Company's existing business.
Pursuant to the federal Occupational Safety and Health Act, laboratories
have a general duty to provide a work place for their employees that is safe
from hazard. The United States Occupational Safety and Health Administration
("OSHA") has issued rules relevant to certain hazards that are found in the
laboratory. In addition, OSHA issued a standard in 1992 applicable to protection
of workers from blood-borne pathogens. Failure to comply with this standard
relating to blood-borne pathogens, other applicable OSHA rules or with the
general duty to provide a safe work place could subject an employer, including a
laboratory employer such as the Company, to substantial fines and penalties.
THIRD-PARTY REIMBURSEMENT
In 1994, 1995 and 1996, the Company received approximately 58%, 58% and 52%,
respectively, of its revenue from services performed principally for
beneficiaries of the Medicare program. Under law and regulation, for most of the
services performed for Medicare beneficiaries, the Company must accept
reimbursement from Medicare as payment in full, subject to applicable
co-payments and deductibles. In 1987, 1989 and 1990, federal budget legislation
instituted changes in Medicare's fee schedule relating to reimbursement for
laboratory services. Each such change lowered Medicare reimbursement schedules.
Other legislative proposals have been made which, if enacted, could have an
adverse effect on reimbursement of laboratory services.
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<PAGE>
Reimbursement rates for most of the Company's services have been established
by Medicare and some third-party payors, but have not been established by all
insurance carriers. Although substantially all of the Company's routine,
non-investigational services receive reimbursement at various rates or on a
case-by-case basis, some of the services that the Company may provide in the
future may not be approved by Medicare or some other third-party payors and
reimbursement rates on such services cannot be predicted. The Company cannot
collect from Medicare or any other third-party payor for services not approved
by them for reimbursement. Approval by Medicare or other federal agencies does
not assure approval by other third-party payors. Most third-party payors,
including Medicare, do not reimburse for services that they determine to be
experimental, investigational or otherwise not reasonable and necessary for
diagnosis or treatment. A formal coverage determination is made, however, 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 audit and review its prior payments to the Company,
and may determine that certain of those payments must be refunded.
INTELLECTUAL PROPERTY
The Company has entered into license and option agreements with academic
centers and biotechnology companies covering technologies it believes may be of
utility in the future in improving urological disease management. Most of these
arrangements provide the Company exclusive worldwide commercial rights in all
human diagnostics and several also provide the option for therapeutic
applications.
The Company licenses patents and seeks patents when appropriate on
inventions concerning new products and improvements as part of its ongoing
research, development and marketing efforts. While the Company believes these
technologies and any patent protection which may become available should help
the Company improve its competitive position in its market, the Company
presently is not dependent on any such patents and does not expect to become
dependent on patents in the future.
The Company attempts to protect its proprietary products by relying on trade
secrets and on non-disclosure and confidentiality agreements. The Company
requires its employees, consultants, outside scientific collaborators and
sponsored researchers and other advisors to execute confidentiality agreements
upon the commencement of employment or consulting relationships with the
Company. There can be no assurance that these agreements will provide meaningful
protection for any of the Company's trade secrets in the event of unauthorized
use or disclosure of such information.
The Company intends to seek copyright protection when appropriate for any
information systems products it may develop.
The Company has registered the service marks UROCOR-REGISTERED TRADEMARK-,
URODIAGNOSTICS-REGISTERED TRADEMARK-, UROSCIENCES-REGISTERED TRADEMARK- and
UROSCORE-REGISTERED TRADEMARK- with the United States Patent and Trademark
Office.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials, biological
specimens and wastes. Although the Company believes that it has complied in all
material respects with these laws, regulations and policies and has not been
required to take any action to correct any noncompliance, there can be no
assurance that the Company will not be required to incur significant costs to
comply with environmental and health and safety regulations in the future.
The Company's research and development activities involve the controlled use
of hazardous materials, including certain hazardous chemicals and infectious
biological specimens. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these
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<PAGE>
materials cannot be eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
exceed the resources of the Company.
EMPLOYEES
At December 31, 1996, the Company had 222 full-time and 44 part-time
employees, of which 95 were employed in diagnostic services operations and
support, 97 in sales and marketing, 20 in scientific research and development,
17 in information systems operations and development and 37 in general and
administrative. At December 31, 1996, the Company employed, full time, 12
persons with M.D. degrees and 7 persons with Ph.D. degrees.
RISK FACTORS
THE COMPANY'S EXPECTATIONS WITH RESPECT TO FUTURE RESULTS OF OPERATIONS THAT
MAY BE EMBODIED IN ORAL AND WRITTEN FORWARD-LOOKING STATEMENTS, INCLUDING ANY
FORWARD-LOOKING STATEMENTS THAT MAY BE CONTAINED IN THIS ANNUAL REPORT ON FORM
10-K, ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MUST BE CONSIDERED WHEN
EVALUATING THE LIKELIHOOD OF THE COMPANY'S REALIZATION OF SUCH EXPECTATIONS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW.
HISTORY OF LOSSES; LIMITED HISTORY OF PROFITABLE OPERATIONS
The Company recorded net losses of approximately $1.5 million, $1.5 million,
$2.2 million and $2.3 million for the years ended December 31, 1991, 1992, 1993
and 1994, respectively. While the Company reported net income of approximately
$533,000 and $2.4 million for the years ended December 31, 1995 and 1996,
respectively, the Company may experience losses in the future until such time,
if ever, as its operations consistently generate sufficient revenue to cover its
costs. At December 31, 1996, the Company had an accumulated deficit of
approximately $12.0 million. There can be no assurance that the Company will
ever be consistently profitable.
NEED FOR FUTURE FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
The Company's growth since 1991 has required, and any future growth will
require, significant amounts of working capital. Although the Company believes
that its existing capital resources will be adequate to fund its present level
of operations and implement its currently planned growth strategy, there may be
circumstances or new business opportunities that would require additional
resources. In such event, the Company may be required to seek additional
financing, and there is no assurance that the Company would be able to obtain
such financing on acceptable terms.
UNCERTAINTIES RELATED TO THIRD-PARTY REIMBURSEMENT; POTENTIAL HEALTH CARE
REFORM
The Company typically bills governmental programs such as Medicare and other
third-party payors such as private insurance and managed care plans for its
products and services. Such third-party payors are increasingly negotiating
prices with the goal of lowering reimbursement rates, which may result in lower
profit margins for the Company. Reimbursement rates have been established for
most but not all of the services performed by the Company. The Company cannot
collect from Medicare or other third-party payors for services that those payors
have not approved for reimbursement. There can be no assurance that the
Company's Free/Total PSA product or any other products under development will be
approved for reimbursement by Medicare or other third-party payors.
From time to time, the public and the federal government focus significant
attention on reforming the health care system in the United States. Any future
changes in Medicare and other third-party payor reimbursement which may result
from health care reform or deficit reduction legislation will likely continue
the downward pressure on prices. A number of legislative proposals have been
introduced in
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<PAGE>
Congress and state legislatures in recent years that would effect major reforms
of the health care system and otherwise reduce health care spending. The Clinton
Administration's recently proposed fiscal year 1998 federal budget contains many
provisions, which if enacted, will substantively affect Medicare reimbursement.
Because of the uncertainties surrounding the nature, timing and extent of any
such reform initiatives, the Company is unable to predict the effects of any
such changes on the Company.
DEPENDENCE ON CERTAIN PRODUCT LINES
A significant portion of the Company's revenue has been, and is expected to
continue to be, dependent upon the Company's prostate tissue analysis and
bladder cellular analysis product lines. Any negative event related to these
product lines, such as increased competition, pricing pressures and clinical or
technological obsolescence would have a material and adverse effect on the
Company's financial condition and results of operations.
NO ASSURANCE OF SUCCESSFUL ACQUISITION OF DISTRIBUTION RIGHTS FOR
THERAPEUTIC PRODUCTS
Through its UroTherapeutics Group, the Company is developing a therapeutic
products distribution business. The Company currently has acquired distribution
rights for only one therapeutic product. There can be no assurance that the
Company will be successful in negotiating any additional distribution or other
agreements related to therapeutic products in the future. Additionally, the
Company has never marketed or distributed any therapeutic products, and there
can be no assurance that the Company's efforts in this regard will be
successful.
UNCERTAINTY RELATED TO GOVERNMENT REGULATION
The Company's diagnostic laboratory operations currently are required to be
certified or licensed under CLIA, the Medicare and Medicaid programs and various
state and local laws. In some instances, the Company is also subject to
licensing or regulation under federal and state laws relating to the handling
and disposal of medical specimens, infectious and hazardous waste and
radioactive materials, as well as to the safety and health of laboratory
employees. The sanctions for failure to comply with these regulations may
include denial of the right to conduct business, significant fines and criminal
penalties. The loss of a license, imposition of a fine or an increase in the
complexity or substantive requirements of such federal, state and local laws and
regulations could have a material adverse effect on the Company's financial
condition and results of operations.
The Company's diagnostic laboratory operations currently are not regulated
by the FDA. While the FDA now indicates that it does not plan to regulate assays
developed by laboratories for in-house use, the FDA has in the past considered
drafting guidelines for regulation of such assays. If in the future the FDA were
to issue guidelines for the clinical laboratory market sector, such guidelines
might require the Company to meet certain FDA requirements for the Company's
in-house assays. Such regulations, if enacted in a way that affects the Company,
would increase the cost of development and approval of new products, slow their
introduction to the market and could have a material adverse effect on the
Company's financial condition and results of operations.
The FDA currently regulates a number of the products which the Company
purchases from third parties for use in its diagnostic services. The
manufacturers of such products are responsible for compliance with FDA
regulations relating to such products. There can be no assurance, however, that
action by the manufacturers or by the FDA would not impair the Company's ability
to obtain and offer certain services. The unavailability of certain services and
materials used in the Company's diagnostics business would have a material
adverse effect on the Company's financial condition and results of operations.
Although the Company's existing and proposed information services products
currently are not subject to regulation by the FDA, the FDA could determine in
the future that the predictive applications
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<PAGE>
of these products are deemed to be medical devices subject to FDA regulation. In
that event, the Company could experience delays in developing and marketing new
services and increases in research and development costs.
As a provider of health care related services, the Company is subject to
extensive and frequently changing federal, state and local laws and regulations
governing licensure, billing, financial relationships, referrals, conduct of
operations, purchase of existing businesses, cost-containment, direct employment
of licensed professionals by business corporations and other aspects of the
Company's business relationships. The Company cannot predict the timing or
impact of any changes in such laws and regulations or their interpretation by
regulatory bodies, and no assurance can be given that any such changes will not
have a material adverse effect on the Company's financial condition and results
of operations.
UNCERTAINTIES RELATED TO THE FDA APPROVAL OF THERAPEUTIC PRODUCT
The Company has a distribution agreement with BioVac for a therapeutic
product for use in treating certain types of bladder cancer. Pursuant to the
distribution agreement, BioVac is responsible for obtaining approvals from the
FDA for marketing the therapeutic product in the United States. In April 1995,
BioVac filed its initial applications with the FDA. In April 1996, the FDA
advised BioVac that its application was not approvable at that time and
requested additional data regarding certain aspects of manufacturing and testing
of the product, which BioVac filed with the FDA through an amended application
in August 1996. Although BioVac has advised the Company that it believes it can
satisfy FDA requirements and procure approval for marketing the product in the
United States, there can be no assurance that approval will be obtained.
UNCERTAINTIES RELATED TO MANAGED CARE
Managed care organizations are gaining increasing control over the access to
health care for an increasing number of patients with urological diseases. There
can be no assurance that the Company will be able to maintain its existing
contracts with managed care organizations or that it will be able to obtain
additional contracts with such organizations in the future which could preclude
the Company from serving large groups of patients in certain markets. The
Company has experienced increased pricing pressure from managed care
organizations, and such pressure is expected to continue. There can be no
assurance that such pricing pressure and any contract restrictions will not have
a material adverse effect on the Company's financial condition and results of
operations.
NO ASSURANCE OF ACCESS TO AND DELIVERY OF NEW DIAGNOSTIC TECHNOLOGY
The markets for the Company's diagnostic products are characterized by
rapidly changing technology, frequent new product introductions and enhancement
and, therefore, rapid product obsolescence. There can be no assurance that the
Company will be able to identify new products, trends or opportunities, develop
and bring to market new products, respond effectively to new technological
changes or product announcements by others, develop or obtain access to advanced
materials or receive commercial acceptance for its products.
UNCERTAINTIES RELATED TO INVESTMENTS IN DISEASE MANAGEMENT INFORMATION
SYSTEMS
The Company has been and expects to continue investing in the development of
information-based capabilities and services which it plans to introduce in the
future related to the clinical management of urologists' patients and the
business management of their practices. Development and delivery of these new
services will require substantial additional investment and represents an
expansion of the type of services the Company presently provides to urologists.
There can be no assurance that any future revenues from these services will be
sufficient to cover or otherwise justify the costs of development and
introduction.
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<PAGE>
SUBSTANTIAL COMPETITION
The industry in which the Company's diagnostics business operates is
characterized by intense competition with many different types of competitors
including specialty laboratories, diagnostic kit and instrumentation
manufacturers, local and regional pathology services, hospital laboratories and
large general reference clinical laboratories. Many of the Company's competitors
are significantly larger and have significantly greater financial, technical and
administrative resources than the Company; many also have long established
relationships with the Company's current and prospective customers and with
managed care organizations. There can be no assurance that the Company will be
able to compete successfully with such entities in the marketing of products and
services and in the acquisition of new technologies.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH
The Company recently has experienced substantial growth and expanded its
operational capabilities. The Company also is planning to offer a therapeutic
product line and information and business management services. This growth and
expansion has placed, and will continue to place, a significant strain on the
Company's management, production, technical, financial and other resources. To
date, the Company has experience primarily in managing a diagnostics service
business. There can be no assurance that the Company will be able to manage
expansion into and operation of therapeutics, business management or information
services businesses.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly and annual operating results are affected by a wide
variety of factors, many of which are outside the Company's control, which have
in the past and could in the future materially and adversely affect revenue,
operating expenses and income. These factors include seasonality, the quantities
and timing of specimens received, competitive pricing pressures, availability
and cost of diagnostic supplies, changes in the mix of products sold, timing and
costs of new product and technology introductions by the Company or its
competitors, retention and expansion of the sales force and timing of payments
from Medicare and other third-party payors. The need for continued investment in
research and development and expansion of its product lines could limit the
Company's ability to reduce expenses quickly. As a result of these factors, the
Company expects its operating results to continue to fluctuate.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company's business depends in part upon intellectual property,
internally developed and licensed from others, including patents, copyrights,
trade secrets, know-how and continuing technology innovation. There can be no
assurance that any steps taken by the Company to protect its intellectual
property will be adequate to prevent misappropriation, that any patents issued
to or licensed by the Company will not be invalidated, circumvented or
challenged or that the rights granted thereunder will provide a competitive
advantage. Furthermore, there can be no assurance that others will not
independently develop technologies that are similar or superior to the Company's
technology and obtain patents or copyrights relating to such technologies. In
such event, the Company may not be able to license such technologies on
acceptable terms. Although the Company believes that its products and technology
do not infringe upon the proprietary rights of others, there can be no assurance
that third parties will not assert infringement claims in the future. Moreover,
litigation may be necessary in the future to enforce the Company's patents,
copyrights and other intellectual property rights, to protect the Company's
trade secrets, to determine the validity and scope of the proprietary rights of
others or to defend against claims of infringement or invalidity.
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<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's ability to market and deliver its products and services and to
achieve and maintain a competitive position is dependent in large part upon the
efforts of its senior management. The loss of the services of one or more
members of its senior management could have a material adverse effect on the
Company's financial condition and results of operations. The Company's future
success also will depend upon its ability to attract and retain qualified
management, scientific, technical and manufacturing employees to support its
future growth. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The failure to attract and retain such persons could materially
adversely affect the Company's financial condition and results of operations.
POTENTIAL LIABILITIES; LIMITED INSURANCE COVERAGE
Employees of the Company, like those of all companies that provide
diagnostic services dealing with human blood specimens, may be exposed to risks
of infection from AIDS, hepatitis and other blood-borne diseases if appropriate
laboratory practices are not followed. Although no infections of this type have
been reported in the Company's history, no assurance can be provided that such
infections will not occur in the future. The Company could also be subject to
legal actions arising out of the misperformance of its testing services or the
malpractice of professional physician services. Any such legal actions could
have a material adverse effect on the Company's financial condition and results
of operations.
Although the Company presently is covered by medical malpractice and general
liability insurance, there can be no assurance that the insurance coverage will
provide sufficient funds to satisfy any judgments which could be entered against
the Company in the future or that liability insurance in such amounts will be
available or affordable in the future. In addition, there can be no assurance
that all of the activities encompassed within the Company's business are covered
under the Company's insurance policies. Moreover, although the Company maintains
personal property and business interruption insurance and has taken what it
believes to be adequate safeguards, the catastrophic loss of the Company's
tissue or cell library could have a material adverse effect on the continued
development of its database in a manner which would not be compensated fully by
insurance.
The Company currently has no product liability insurance, and although it
plans to obtain such insurance prior to marketing any therapeutic product, there
can be no assurance that the Company will be able to obtain or maintain such
insurance on acceptable terms or that such insurance will provide adequate
coverage against potential liabilities.
RISKS ASSOCIATED WITH HAZARDOUS MATERIALS
The Company's diagnostic services and research and development activities
involve the controlled use of hazardous materials, chemicals and various
radioactive compounds. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
ITEM 2. PROPERTIES
The Company leases approximately 51,000 square feet of administration, sales
and marketing, operations and research and development space in Oklahoma City,
Oklahoma. The Company's initial lease term expires in June 2005 and may be
extended at the Company's option for an additional five years. The Company has
rights of first refusal to lease additional space in the rest of the 110,000
square foot building as well as a purchase option on the building. The Company's
monthly rental obligation for its facilities currently is approximately $37,000.
The Company believes that its leased facilities are adequate for its
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current needs and that suitable, additional space will be available on
acceptable terms for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET FOR THE COMMON STOCK
The Company's Common Stock is listed on the Nasdaq National Market under the
symbol "UCOR". The table below sets forth the high and low sales prices of the
Common Stock for the second, third and fourth quarters of 1996 and the first
quarter of 1997 through March 21, 1997, as reported by The Nasdaq Stock Market.
The quotations reflect inter-dealer prices, without retail mark-down or
commission, and may not represent actual transactions. Prior to the Company's
initial public offering of the Common Stock in May 1996, there was no market for
the Common Stock.
<TABLE>
<CAPTION>
1996 1997
PRICE RANGE PRICE RANGE
---------------------- ----------------------
HIGH LOW HIGH LOW
----- --------- --------- ---
<S> <C> <C> <C> <C>
First Quarter (1)................................................. -- -- 11 1/2 7 7/8
Second Quarter (2)................................................ 18 10 1/4 -- --
Third Quarter..................................................... 16 8 1/4 -- --
Fourth Quarter.................................................... 14 8 1/4 -- --
</TABLE>
- ------------------------
(1) Through March 21, 1997.
(2) From May 17, 1996 through June 30, 1996.
As of March 21, 1997, the last sales price per share of UroCor's Common
Stock, as reported by The Nasdaq Stock Market, was $9.
As of March 21, 1997, the Company's 10,153,998 shares of Common Stock
outstanding were held by 111 stockholders of record.
DIVIDEND POLICY
UroCor has not paid a cash dividend to its holders of Common Stock and does
not anticipate paying cash dividends to the holders of its Common Stock in the
foreseeable future. Under the General Corporation Law of the State of Delaware,
a corporation's board of directors may declare and pay dividends only out of
surplus or current net profits.
RECENT SALES OF UNREGISTERED SECURITIES
From January 1996 through November 1996, the Company issued a total of
17,150 shares of Common Stock for an aggregate consideration of $17,163 to
various employees and a director of the Company pursuant to the exercise of
options granted under the Company's stock option plan. Also, during 1996, the
Company issued a total of 63,059 shares of Common Stock for an aggregate
consideration of $182,533 to various stockholders of the Company pursuant to the
exercise of certain stock purchase warrants.
None of the foregoing transactions involved underwriters. The Company
considers these securities to have been offered and sold in transactions not
involving a public offering and, therefore, to be exempted from registration
under Section 4(2) or Regulation D of the Securities Act of 1933, as amended.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data of UroCor for
each of the years in the five-year period ended December 31, 1996, derived from
the Company's audited financial statements. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and notes thereto
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................. $ 4,813 $ 9,348 $ 14,531 $ 19,758 $ 26,522
Operating expenses:
Direct cost of services and products................ 2,019 3,893 5,891 7,354 9,966
Selling, general and administrative expenses........ 3,796 6,308 8,765 9,423 12,735
Research and development............................ 552 1,252 1,969 2,267 2,448
---------- ---------- ---------- ---------- ----------
Total operating expenses.......................... 6,367 11,453 16,625 19,044 25,149
---------- ---------- ---------- ---------- ----------
Income (loss) from operations....................... (1,554) (2,105) (2,094) 714 1,373
---------- ---------- ---------- ---------- ----------
Other income (expense)................................ 42 (63) (203) (181) 990
---------- ---------- ---------- ---------- ----------
Net income (loss)..................................... $ (1,512) $ (2,168) $ (2,297) $ 533 $ 2,363
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss) per share(1).............. $ (.37) $ (.41) $ (.38) $ .07 $ .24
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Shares used in computing pro forma net income (loss)
per share (1)........................................ 4,093 5,233 6,104 7,296 9,832
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments....................... $ 3,002 $ 1,193 $ 1,823 $ 3,125 $ 21,771
Working capital....................................... 2,875 1,618 2,911 5,904 27,917
Marketable investments, long-term..................... -- -- -- -- 11,704
Total assets.......................................... 4,777 5,017 7,946 12,494 50,270
Long-term debt........................................ 63 1,009 2,063 1,666 659
Accumulated deficit................................... (10,421) (12,590) (14,887) (14,355) (11,991)
Total stockholders' equity............................ 3,536 1,367 3,869 8,425 45,687
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2 to the Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS ANNUAL REPORT
ON FORM 10-K.
OVERVIEW
UroCor provides a broad range of diagnostic services for the clinical
management of certain urological cancers and diseases. The Company's goal is to
complement its diagnostic services with therapeutic products and information
services in order to become an integrated disease management company serving the
urology market. The Company has established four business groups,
UroDiagnostics, UroSciences, UroTherapeutics and Disease Management Information
Systems, to serve the needs of urologists and managed care organizations for the
diagnostic, prognostic and therapeutic care of patients throughout the entire
course of their diseases.
The Company currently derives substantially all of its revenue from
diagnostic products and services that its UroDiagnostics Group provides to the
urology market to assist in the diagnosis, prognosis and management of prostate
cancer, bladder cancer and kidney stones disease. The Company recognizes revenue
when products are sold or services are rendered. The Company typically bills
various third-party payors for its products and services, including governmental
programs such as Medicare, private insurance and managed care plans, as well as
individual patients. For the year ended December 31, 1996, approximately 52%,
35%, 8% and 5% of the Company's revenue was attributable to Medicare, private
insurance and managed care, individual patients and physicians and hospitals,
respectively.
RESULTS OF OPERATIONS
The following table sets forth certain operating data expressed as a
percentage of revenue for each period indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................................................. 100.0% 100.0% 100.0%
Operating expenses:
Direct cost of services and products.................................... 40.5 37.2 37.6
Selling, general and administrative expenses.......................... 60.3 47.7 48.0
Research and development.............................................. 13.6 11.5 9.2
----- ----- -----
Total operating expenses............................................ 114.4 96.4 94.8
----- ----- -----
Income (loss) from operations........................................... (14.4) 3.6 5.2
Other income (expense).................................................. (1.4) (0.9) 3.7
----- ----- -----
Income (loss) before income taxes....................................... (15.8) 2.7 8.9
Income taxes............................................................ -- -- --
----- ----- -----
Net income (loss)....................................................... (15.8)% 2.7% 8.9%
----- ----- -----
----- ----- -----
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. Revenue increased 34.2%, from approximately $19.8 million in 1995
to approximately $26.5 million in 1996. This increase was due primarily to a
71.2% increase in case volume attributable to expansion of the Company's client
base from 1,320 to 1,895 urologists in December 1995 and 1996, respectively,
increased utilization of the Company's diagnostic products and services by
existing clients, and the introduction of the Company's new kidney stone product
line in February 1996. Case volume increased at a higher rate than revenue
primarily due to the shift in product and price mix resulting from the
20
<PAGE>
introduction of the kidney stone product line and an increase in serum based
tests, each of which generally have average selling prices below those of most
of the Company's other services.
DIRECT COST OF SERVICES AND PRODUCTS. Direct cost of services and products
increased 35.5%, from approximately $7.4 million in 1995 to approximately $10.0
million in 1996. This increase was due principally to higher personnel, supply
and shipping costs resulting from increased case volume. As a percentage of
revenue, direct expenses increased to 37.6% for 1996 compared to 37.2% in 1995.
This increase is due principally to the introduction of the Company's new kidney
stone product line in early 1996 and an increase in serum based tests, each of
which have lower profit margins than most of the Company's other services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 35.1%, from approximately $9.4 million in 1995
to approximately $12.7 million in 1996. This increase was due principally to
increased personnel costs related to marketing, sales staff and information
services personnel, increases in insurance, taxes and professional services and
increases in promotional expenses related to new product introductions. As a
percentage of revenue, selling, general and administrative expenses were 48.0%
for 1996 compared to 47.7% in 1995.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 8.0%,
from approximately $2.3 million in 1995 to approximately $2.4 million in 1996.
This increase was due principally to increased internal research laboratory
personnel costs, offset by a decrease in costs associated with certain external
collaborative research projects that were sponsored and funded by the Company
and completed in 1996. As a percentage of revenue, research and development
expenses were 9.2% for 1996 compared to 11.5% in 1995.
OTHER INCOME (EXPENSE). Interest income increased from approximately
$109,000 in 1995 to approximately $1.2 million in 1996 due principally to the
increased cash, cash equivalents, and investments that resulted from the
proceeds from the Company's initial public offering of Common Stock in May 1996.
Interest expense decreased 22.4%, from approximately $290,000 in 1995 to
approximately $226,000 in 1996, due primarily to a decrease in average principal
balance of a bank credit facility during 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE. Revenue increased 36.0%, from approximately $14.5 million in 1994
to approximately $19.8 million in 1995. This increase was due primarily to a
19.3% increase in case volume combined with expansion of the Company's client
base from 1,250 to 1,320 urologists in December, 1994 and 1995, respectively,
increased utilization of the Company's diagnostic products and services by
existing clients, increased average revenue per case resulting from changes in
product mix, and the effect of the marketing of prostate histology sextant
testing services for the full year in 1995 compared to ten months in 1994.
DIRECT COST OF SERVICES AND PRODUCTS. Direct cost of services and products
increased 24.8%, from approximately $5.9 million in 1994 to approximately $7.4
million in 1995. This increase was due principally to higher personnel, supply
and shipping costs resulting from increased case volume. As a percentage of
revenue, direct expenses were 37.2% for 1995 compared to 40.5% in 1994,
reflecting a favorable change in revenue mix to higher margin services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 7.5%, from approximately $8.8 million in 1994
to approximately $9.4 million in 1995. This increase was due principally to
increased costs of sales force personnel and marketing staff for the full year
in 1995, as the managed care sales group and several other positions were filled
in mid-1994. Promotional expenses related to the managed care sales effort also
increased due to activity for the full year in 1995 compared to the
approximately six months following the deployment of the managed care sales
force in mid-1994. As a
21
<PAGE>
percentage of revenue, selling, general and administrative expenses were 47.7%
for 1995 compared to 60.3% in 1994.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
15.1%, from approximately $2.0 million in 1994 to approximately $2.3 million in
1995. This increase was due principally to additional collaborative research
projects for the development of potential new products and services, as well as
internal research laboratory personnel costs. As a percentage of revenue,
research and development expenses were 11.5% for 1995 compared to 13.6% in 1994.
OTHER INCOME (EXPENSE). Interest income increased 4.8%, from approximately
$104,000 in 1994 to approximately $109,000 in 1995. Interest expense decreased
5.5%, from approximately $307,000 in 1994 to approximately $290,000 in 1995, due
to a decrease in average principal balances of capital leases and a bank credit
facility during 1995.
QUARTERLY RESULTS OF OPERATIONS
The following table presents the Company's results of operations for the
last 12 calendar quarters. This data is unaudited and includes, in the opinion
of the Company's management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the data in accordance with
generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future results of operations.
The Company's quarterly operating results are affected by a wide variety of
factors, many of which are outside the Company's control, that could materially
and adversely affect revenue, operating expenses and income. These factors
include the volume and timing of cases received, seasonality related to the
timing of patient visits to the urologist's office as affected by weather and
insurance deductible status, competitive pricing pressures, availability and
cost of diagnostic supplies, changes in the mix of products sold, the timing and
costs of new product and technology introductions by the Company or its
competitors and retention and expansion of the Company's sales force.
<TABLE>
<CAPTION>
1994 1995 1996
------------------------------------------ ------------------------------------------ ---------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 2,786 $ 3,487 $ 3,741 $ 4,517 $ 4,619 $ 4,824 $ 4,784 $ 5,531 $ 5,908
Operating Expenses:
Direct costs of services
and products.......... 1,193 1,346 1,559 1,793 1,658 1,749 1,849 2,098 2,138
Selling, general and
administrative
expenses.............. 1,873 2,041 2,383 2,468 2,255 2,342 2,276 2,550 2,862
Research and
development........... 404 457 517 591 558 540 540 629 644
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from
operations............ (684) (357) (718) (335) 148 193 119 254 264
Other income
(expense)............. (66) (37) (41) (59) (56) (63) (40) (22) (33)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes.......... (750) (394) (759) (394) 92 130 79 232 231
Income taxes............ -- -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)....... $ (750) $ (394) $ (759) $ (394) $ 92 $ 130 $ 79 $ 232 $ 231
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
Q2 Q3 Q4
--------- --------- ---------
<S> <C> <C> <C>
Revenue................. $ 6,449 $ 6,476 $ 7,689
Operating Expenses:
Direct costs of services
and products.......... 2,390 2,576 2,861
Selling, general and
administrative
expenses.............. 3,104 3,159 3,611
Research and
development........... 649 540 615
--------- --------- ---------
Income (loss) from
operations............ 306 201 602
Other income
(expense)............. 161 434 428
--------- --------- ---------
Income (loss) before
income taxes.......... 467 635 1,030
Income taxes............ -- -- --
--------- --------- ---------
Net income (loss)....... $ 467 $ 635 $ 1,030
--------- --------- ---------
--------- --------- ---------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents of
approximately $15.8 million, short-term investments of approximately $6.0
million, long-term investments of approximately $11.7 million and working
capital of approximately $27.9 million.
22
<PAGE>
Accounts receivable, net of allowance for doubtful accounts, totaled
approximately $8.2 million at December 31, 1996, an increase of approximately
$3.8 million from December 31, 1995. At December 31, 1996, the Company's average
number of days sales in receivables was approximately 97 compared to
approximately 71 at December 31, 1995. During 1995 and 1996, the Company's
Medicare intermediary and certain other third-party payors continued a general
trend of increased time between receipt of claims for reimbursement and payment
to the Company. The Company's revenue attributable to Medicare decreased from
approximately 58% in 1995 to approximately 52% in 1996. Revenue attributable to
managed care and private insurance plans, which generally have longer payment
times than Medicare, increased from approximately 31% in 1995 to approximately
35% in 1996. These trends have resulted in a lengthening of the overall
collection cycle and the Company's accounts receivable increasing at a rate
greater than the revenue growth rate. Such delays also have affected the
Company's cash flow from operations.
The Company monitors the collection quality of its accounts receivable
through analytical review of aging categories by payor group and collections
performance compared to historical trends. The Company maintains what it
believes to be an adequate level of an allowance for doubtful accounts through
charges to operations which are included in selling, general and administrative
expenses. The Company historically has not experienced any material write-off or
collection problems for which adequate reserves had not been established through
its regular provision for doubtful accounts.
Operating activities provided net cash of approximately $480,000 in 1996,
and used net cash of approximately $533,000 and $2.4 million in 1995 and 1994,
respectively. The net cash provided by operating activities in 1996 was
primarily the result of net income of approximately $2.4 million, depreciation
and amortization of approximately $1.1 million, and an approximately $1.4
million increase in accounts payable offset in part by an approximately $3.8
million increase in accounts receivable, an approximately $449,000 increase in
laboratory supplies, and an approximately $411,000 increase in other current
assets. Laboratory supplies increased primarily due to increased case volume and
the introduction of new products. Other current assets increased primarily due
to accrued interest income on investments. Accounts payable increased due to the
timing of payments at the end of the calendar year.
The Company received approximately $34.5 million (net of expenses and
underwriting discount) from an initial public offering of the Company's Common
Stock in May 1996. Net cash provided by financing activities was approximately
$33.1 million for 1996, consisting primarily of the net proceeds from the
initial public offering, offset by net payments on a bank credit facility of
$700,000 and principal payments under capital leases and other indebtedness of
approximately $927,000. Net cash used in investing activities for 1996 was
approximately $21.0 million and consisted primarily of net purchases of
short-term investments of approximately $6.0 million, purchases of long-term
marketable investments of approximately $11.7 million and capital expenditures
of approximately $3.4 million.
The Company's capital expenditures of approximately $3.4 million in 1996
were primarily for computer hardware and software, office equipment and software
development for the Company's information services. While future capital
expenditures will depend upon a number of factors, the level of expenditures is
expected to continue to increase over the historical level of such expenditures
as the Company endeavors to expand to deliver therapeutics and information
services and enhance current diagnostic services. The Company intends to finance
the majority of these capital expenditures with existing cash and investment
balances.
In December 1994, the Company obtained distribution rights to a therapeutic
product currently under review for marketing approval by the United States Food
and Drug Administration (the "FDA"). The total cost of the distribution rights
is $3.0 million, which is being paid in installments based on achievement of
certain milestones by the manufacturer. The Company made an initial payment of
$750,000 in December 1994 and a second installment of $500,000 in 1995 after the
product was submitted for FDA review in April 1995. The Company is obligated to
pay an additional milestone payment of $1.75 million if and when
23
<PAGE>
the product is approved by the FDA for marketing in the United States. The
Company expects to make this payment in 1997 and intends to make any such
payment from existing cash and investment balances.
No income tax expense was recorded for 1995 or 1996, due to utilization of
the Company's net operating loss carryforwards. At December 31, 1996, the
Company estimated net operating loss carryforwards of approximately $6.6 million
were available to reduce future taxable income after considering certain annual
limitations.
The Company believes that its existing capital resources will be sufficient
to provide the funds necessary to maintain its present level of operations and
implement its currently planned growth strategy. However, there may be
circumstances or new business opportunities that would require additional
resources. In such event, the Company may be required to seek additional
financing and there is no assurance that the Company would be able to obtain
such financing on acceptable terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required to
be filed under this Item are presented on pages F-3 through F-14 of this Annual
Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of March 21, 1996, regarding
the directors and executive officers of UroCor.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ---------------------------------------------------------------------
<S> <C> <C>
William A. Hagstrom.................. 39 Chairman of the Board, President and Chief Executive Officer
Socrates H. Choumbakos............... 52 Vice President Corporate Development, Chief Financial Officer and
Secretary
Mark G. Dimitroff.................... 49 Vice President and General Manager UroDiagnostics Group
Robert W. Veltri, Ph.D............... 55 Vice President and General Manager UroSciences Group
Kathyrn L. W. Ingerly................ 37 Vice President Disease Management Information Systems
Gerard J. O'Dowd, M.D................ 46 Medical Director
Michael N. McDonald.................. 39 Director of Finance and Administration, Treasurer and Assistant
Secretary
Paul A. Brown, M.D(1),(2),(3)........ 58 Director
Herbert J. Conrad(1),(2),(3)......... 64 Director
Michael E. Herbert(1),(3)............ 52 Director
Louis M. Sherwood, M.D............... 60 Director
Don E. Spyrison...................... 51 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Nominating Committee
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
WILLIAM A. HAGSTROM. Mr. Hagstrom has been a director of the Company and
served as President and Chief Executive Officer of the Company since November
1989. Mr. Hagstrom was appointed Chairman of the Board of Directors in September
1994. Before joining the Company, Mr. Hagstrom was Vice President of the
Scientific Products Division of Baxter-Travenol, a medical products company,
where he served in various marketing, sales, product planning and general
management positions from November 1985 to November 1989. Prior to joining
Baxter-Travenol, he spent three years at American Hospital Supply Corp. until it
was acquired by Baxter-Travenol and three years at Becton Dickinson & Co. in
various management positions.
SOCRATES H. CHOUMBAKOS. Mr. Choumbakos joined the Company in June 1992 as
Vice President, Corporate Development, Chief Financial Officer and Secretary.
Before joining the Company, Mr. Choumbakos was President of Venture Development
Group, a corporate and business development consulting firm, from March 1988 to
June 1992. From March 1988 to December 1990, Mr. Choumbakos was also Vice
President and Chief Financial Officer of Creative Business Strategies, Inc., a
business development consulting firm. From August 1979 to March 1988, Mr.
Choumbakos was Director of Corporate Development at Becton Dickinson & Co., a
medical products company. Prior to 1979, he was a Senior Manager with Price
Waterhouse & Co. where he worked for 13 years.
MARK G. DIMITROFF. Mr. Dimitroff joined the Company in April 1990 as Vice
President, Marketing and Sales and became Vice President and General Manager
UroDiagnostics Group in October 1994. Before joining the Company, Mr. Dimitroff
served as Vice President, Marketing and Sales for Dianon
25
<PAGE>
Systems, Inc., an oncology specialty reference laboratory, from 1984 to April
1990. Prior to 1984, he held senior marketing and sales management positions
with MetPath Inc., a large general reference laboratory, and American Hospital
Supply Corp.
ROBERT W. VELTRI, PH.D. Dr. Veltri joined the Company in October 1990 as
Vice President, Product Planning and Technology Development and Chief Scientific
Officer, and became Vice President and General Manager UroSciences Group in
October 1994. Before joining the Company, Dr. Veltri was the Executive Vice
President and Chief Technical Officer at Theracel, Inc., a therapeutics
development company, from 1988 to October 1990. From 1984 to 1988, he was a
founder and President and Chief Executive Officer of American Biotechnology
Company, the predecessor to Theracel, Inc. Prior to 1984, Dr. Veltri held
various positions with Cooper Biomedical Inc., a diagnostic products company,
and West Virginia University Medical School.
KATHRYN L. W. INGERLY. Ms. Ingerly joined the Company in April 1996 as Vice
President Disease Management Information Systems. Before joining the Company,
Ms. Ingerly was the President and Chief Executive Officer of Ingerly Alliance
Partners, L.L.C., an information technology consulting company since January
1995. From September 1988 through December 1994, Ms. Ingerly held various
positions with Market Investment Solutions, a software development and services
company, most recently as President and Chief Executive Officer. Prior to 1988,
Ms. Ingerly was the Financial and Systems Manager of the Cleo Wallace Center, a
regional health care provider in Denver, Colorado.
GERARD J. O'DOWD, M.D. Dr. O'Dowd joined the Company in August 1990 as
Medical Director. Before joining the Company, Dr. O'Dowd was in private practice
specializing in fine needle aspiration cytology and served as a pathologist for
a regional reference laboratory in the Washington, D.C. area from January 1988
to August 1990. From 1983 to December 1987, Dr. O'Dowd served on the staff of
George Washington Medical Center where he was Chief Pathologist for the Division
of Cytopathology and Hematopathology. He received his medical degree from
Georgetown University School of Medicine, completed a pathology residency at the
University of Utah and was a Cytopathology Fellow at the Medical College of
Virginia.
MICHAEL N. MCDONALD. Mr. McDonald joined the Company in June 1992 as
Controller and Assistant Secretary and became Director of Finance and
Administration and Treasurer in October 1994. Before joining the Company, Mr.
McDonald was a Manager in the Accounting and Audit Division at Arthur Andersen
LLP where he served in various capacities from December 1980 to June 1992.
PAUL A. BROWN, M.D. Dr. Brown has been a director since November 1988. He
has been Chairman of the Board and Chief Executive Officer of HEARx Ltd., a
hearing care organization, for the past six years. Prior to founding HEARx, Dr.
Brown was founder and Chairman of the Board of MetPath Inc. Dr. Brown is an
emeritus member of the Board of Trustees of Tufts University, past Chairman of
the Board of Overseers of the Tufts University School of Medicine, a member of
the visiting committee of Boston University School of Medicine and a part-time
member of the Columbia University College of Physicians and Surgeons.
HERBERT J. CONRAD. Mr. Conrad has been a director since October 1993. Until
his retirement in August 1993, Mr. Conrad worked for 33 years at
Hoffman-LaRoche, Inc., a pharmaceutical company. He held senior management
positions in marketing, business and strategic planning and public affairs. For
the last 16 years of his career at Roche he was President of the United States
Pharmaceuticals Division and Senior Vice President of Hoffman LaRoche and a
member of its Executive Commitee and Board of Directors. Mr. Conrad is also a
director of several pharmaceutical and biotechnology companies, including Dura
Pharmaceuticals, Biotechnology General, Gensia, and Gen-Vec.
MICHAEL E. HERBERT. Mr. Herbert has been a director since July 1994. Mr.
Herbert was the founder of Physicians Health Services, Inc., an individual
practice association health maintenance organization ("IPA/ HMO"), and served as
President and Chief Executive Officer through August 1996, at which time he
26
<PAGE>
became Co-Chief Executive Officer and Vice Chairman. Mr. Herbert has been
associated with Physicians Health Services since 1976, prior to which he was
Vice President of InterStudy, a national health policy research firm. Mr.
Herbert is Chairman of the American Association of Health Plans and is past
Chairman of American Managed Care and Review Association.
LOUIS M. SHERWOOD, M.D. Dr. Sherwood has been a director since October
1993. Since 1992, Dr. Sherwood has been Senior Vice President, U.S. Medical and
Scientific Affairs, of Merck & Co., a pharmaceutical company which he joined in
1987. His previous academic appointments include seven years as Baumritter
Professor and Chairman of the Department of Medicine at Albert Einstein College
of Medicine, Professor of Biochemistry and Physician in Chief at Montefiore
Medical Center, as well as, eight years as Chairman of Medicine at the Michael
Reese Medical Center and Professor of Medicine at the University of Chicago. He
also served as Chief of Endocrinology at Beth Israel Hospital and Associate
Professor of Medicine at Harvard Medical School.
DON E. SPYRISON. Mr. Spyrison has been a director since November 1989. From
October 1988 to November 1989, he served as President, and from November 1990 to
September 1994, he served as Chairman of the Board. Mr. Spyrison has been a
general partner of The Woodlands Venture Partners, L.P., the general partner of
The Woodlands Venture Fund, L.P., a venture capital firm and a principal
stockholder of the Company, since November 1988. Since September 1994, he also
has served as special limited partner of the Woodlands-Essex Venture Partners,
L.P., a venture capital firm. From September 1995 to January 1997, he served as
Chief Executive Officer and director of Protocol Work Systems, Inc., an
information systems company. Mr. Spyrison was a director and President and Chief
Executive Officer of Optex Biomedical, Inc., a medical device company, from
April 1992 to December 1995, at which time Optex filed for relief under Chapter
7 of the federal bankruptcy laws.
CLASSIFIED BOARD
The Restated Certificate of Incorporation provides for the classification of
the Board of Directors into three classes of directors (Class I, Class II and
Class III), with the term of each class expiring at successive annual
stockholders' meetings. At and after the 1997 Annual Meeting of Stockholders,
all nominees of the class standing for election will be elected for three-year
terms. The term of office for Mr. Spyrison expires at the 1997 Annual Meeting of
Stockholders, the terms of office of Mr. Conrad and Dr. Sherwood expire at the
1998 Annual Meeting of Stockholders and the terms of office of Dr. Brown, Mr.
Herbert and Mr. Hagstrom expire at the 1999 Annual Meeting of Stockholders.
There is currently one vacancy in the Class I directorships on the Board of
Directors. The Board of Directors does not plan to fill this vacancy prior to
the 1997 Annual Meeting of Stockholders.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has established an Audit Committee, a
Compensation Committee and a Nominating Committee. The Audit Committee is
charged with recommending to the Board of Directors the appointment of the
Company's independent auditors, reviewing the compensation of such auditors and
reviewing with such accountants the plans for and the results and scope of their
auditing engagement. The Compensation Committee reviews the performance and
compensation of directors, executive officers and key employees and makes
recommendations to the Board of Directors with respect thereto. The Compensation
Committee also administers the Company's stock option plan. The Nominating
Committee recommends nominees for election as directors and persons to fill
director vacancies and newly created directorships, selects the individuals to
vote solicited proxies at stockholder meetings, reviews proxy comments received
from stockholders relating to the Board of Directors, reviews stockholders'
suggestions of nominees for director that are submitted in accordance with the
provisions of the Bylaws of the Company and reviews and makes recommendations to
the Board of Directors regarding the organization and structure of the Board.
27
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Section 16(a)")
requires the Company's officers, directors and persons who own more than 10% of
a registered class of the Company's equity securities to file statements on Form
3, Form 4 and Form 5 of ownership and change in ownership with the Securities
and Exchange Commission. Officers, director and greater than 10% stockholder are
required to furnish the Company with copies of all Section 16(a) reports which
they file.
Based solely on a review of reports on Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, reports on Form 5
and amendments thereto furnished to the Company with respect to its most recent
fiscal year and written representations from reporting person that no report on
Form 5 was required, the Company believes that, except as set forth below, no
person who, at any time during 1996, was subject to the reporting requirements
of Section 16(a) with respect to the Company failed to meet such requirements on
a timely basis. Mr. Conrad, a director of the Company, purchased shares of
Common Stock on May 17, 1996, and was required to file a Form 4 on or before
June 10, 1996. The Form 4 was filed on July 10, 1996. Dr. O'Dowd, the Company's
Medical Director, purchased shares of Common Stock on May 16, 1996, and was
required to file a Form 4 on or before June 10, 1996. A Form 4 was filed on June
5, 1996, that described other transactions but omitted this purchase. An amended
Form 4 was filed on December 10, 1996 describing this transaction.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION
The following table summarizes compensation information concerning the Chief
Executive Officer and each of the Company's most highly compensated executive
officers as to whom the total annual salary and bonus for the fiscal year ended
December 31, 1996, exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPEN-
SATION
-----------
ANNUAL COMPENSATION SECURITIES
--------------------------------------- UNDERLYING
NAME AND SALARY OTHER ANNUAL OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR ($) BONUS ($) COMPENSATION ($) (#)(1) COMPENSATION ($)
- ------------------------------------------- --------- --------- --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
William A. Hagstrom ....................... 1996 181,774 38,532 -- -- --
Chairman of the Board, President and 1995 160,202 31,522 -- 60,000 --
Chief Executive Officer 1994 151,550 46,648 -- 106,646 --
Socrates H. Choumbakos .................... 1996 134,820 24,851 -- -- --
Vice President Corporate Development, 1995 129,585 15,700 -- 30,000 --
Chief Financial Officer and Secretary 1994 125,816 23,250 -- 20,200 --
Mark G. Dimitroff ......................... 1996 144,116 23,451 -- -- --
Vice President and General Manager 1995 129,909 18,435 -- 40,000 --
UroDiagnostics Group 1994 120,495 26,195 -- 32,818 --
Robert W. Veltri, Ph.D. ................... 1996 139,258 19,324 -- -- --
Vice President and General Manager 1995 126,404 15,431 -- 30,000 --
UroSciences Group 1994 118,700 23,446 -- 44,300 --
Kathyrn L. W. Ingerly ..................... 1996 84,923(2) -- -- 40,000 --
Vice President Disease Management 1995 -- -- -- -- --
Information Systems 1994 -- -- -- -- --
</TABLE>
- ------------------------
(1) Represents shares issuable pursuant to stock options granted under a stock
option plan.
(2) Employment began March 31, 1996. Current base salary is $120,000 per year.
28
<PAGE>
OPTION GRANTS AND EXERCISES
The following table sets forth information concerning individual grants of
stock options made during the year ended December 31, 1996, to each of the
executive officers named in the Summary Compensation Table.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZED
INDIVIDUAL GRANTS(1) VALUE AT ASSUMED
- ------------------------------------------------------------------------------------------------ ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL EXERCISE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OR BASE OPTION TERM
OPTIONS GRANTED TO EMPLOYEES IN PRICE EXPIRATION --------------------
NAME (#)(2) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- --------------------------------- --------------- --------------- ----------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kathryn L.W. Ingerly............. 40,000 26.8 9.00 May 1, 2006 226,402 573,747
</TABLE>
- ------------------------
(1) No options were granted to the Chief Executive Officer and the Company's
most highly compensated officers during the fiscal year ended December 31,
1996, except for options granted to Ms. Ingerly.
(2) Represents shares of Common Stock issuable pursuant to an incentive stock
option granted under a stock option plan. Options vest in 20% annual
increments beginning May 1, 1997.
The following table sets forth information concerning the value of
unexercised options held by each of the executive officers named in the Summary
Compensation Table at December 31, 1996. None of such executive officers
exercised any stock options during the year ended December 31, 1996.
OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
1996 (# SHARES) DECEMBER 31, 1996 ($)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William A. Hagstrom....................................... 105,316 61,330 908,097 500,471
Socrates H. Choumbakos.................................... 89,120 28,080 802,170 227,455
Mark G. Dimitroff......................................... 39,587 33,231 335,527 266,181
Robert W. Veltri,Ph.D..................................... 45,440 28,860 390,440 234,329
Kathryn L.W. Ingerly...................................... -- 40,000 -- 22,500
</TABLE>
EMPLOYMENT AGREEMENTS
Mr. Hagstrom entered into an employment agreement with the Company in
January 1990. Under the terms of such agreement, Mr. Hagstrom serves as
President and Chief Executive Officer. The term of the agreement is for one
year, with automatic renewals indefinitely for further successive one-year
periods unless terminated by either party. The Company may terminate the
agreement upon Mr. Hagstrom's death or disability or for cause (as that term is
defined therein). The Company may terminate the agreement at any time without
cause, provided that the Company continues to pay Mr. Hagstrom at his then
current base salary rate, on a monthly basis, for six months following the
effective date of termination. Pursuant to the terms of the agreement, the
Company may pay Mr. Hagstrom bonuses in such amounts as the Board of Directors
in its sole discretion may determine.
Messrs. Choumbakos and Dimitroff, Dr. Veltri and Ms. Ingerly each have
entered into agreements with the Company regarding the respective terms of their
employment. None of such agreements provide for fixed periods of employment. The
agreement with Mr. Choumbakos provides for a current base salary of $146,954,
subject to annual review, a bonus of up to 25% of his annual base salary and a
severance
29
<PAGE>
obligation of six months upon termination without cause. The agreement with Mr.
Dimitroff provides for a current base salary of $148,480, subject to annual
review, and a bonus of up to 30% of his annual base salary. In April 1996, the
Company's Board of Directors approved a severance obligation for Mr. Dimitroff
of six months upon termination of employment without cause. The agreement with
Dr. Veltri provides for a current base salary of $144,155, subject to annual
review, a bonus of up to 25% of his annual base salary and a severance
obligation of three months upon termination without cause. In April 1996, the
Company's Board of Directors approved an increase in Dr. Veltri's bonus to up to
30% of his annual base salary and an increase in his severance obligation to six
months upon termination of employment without cause. The agreement with Ms.
Ingerly provides for a current base salary of $120,000, subject to annual
review, a bonus of up to 30% of her annual base salary and a severance
obligation of three months upon termination without cause.
BONUS PLAN
In 1991, the Company established a management incentive compensation program
under which most full-time employees, including executive officers, are eligible
to receive cash bonuses, subject to the Company achieving certain sales and
operating income levels as well as achievement of individual performance
criteria. Bonus levels are established for each individual, ranging from a
minimum of up to $1,000 per employee to a maximum of up to 40% of annual salary.
In March and April 1994, the Company paid a total of $281,070 under the plan for
the 1993 plan year, of which an aggregate of $119,539 was paid to the executive
officers named in the Summary Compensation Table other than Ms. Ingerly whose
employment commenced in March 1996. In April 1995, the Company paid a total of
$251,932 under the plan for the 1994 plan year, of which an aggregate of $81,088
was paid to such executive officers. In April 1996, the Company paid a total of
$399,529 under the plan for the 1995 year, of which an aggregate of $100,157 was
paid to such executive officers. In February 1997, the Company paid a total of
$652,346 under the plan for the 1996 year, of which an aggregate of $182,379 was
paid to the five executive officers named in the Summary Compensation Table.
COMPENSATION OF DIRECTORS
Each director receives reimbursement for expenses related to attendance at
Board meetings. Mr. Conrad, Mr. Herbert and Dr. Sherwood each receive $1,500 for
each meeting of the Board of Directors attended.
STOCK OPTION PLAN
The Company's Amended and Restated 1992 Stock Option Plan (the "1992 Stock
Option Plan") is administered by the Compensation Committee of the Board of
Directors. Pursuant to the plan, options to acquire an aggregate of 1,400,000
shares of Common Stock may be granted to individuals who are employees,
officers, directors or independent contractors performing services for the
Company. As of March 20, 1997, options to purchase 1,095,969 shares of Common
Stock were outstanding and 145,453 shares remained reserved for grants of
options under the plan.
The 1992 Stock Option Plan authorizes the Board of Directors to issue
options intended to qualify as incentive stock options ("ISOs"), as defined in
Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), and
stock options that are not intended to conform to the requirements of such Code
section ("non-qualified options"). The exercise price of each ISO may not be
less than the fair market value of the Common Stock at the time of grant, and,
in the case of a grant to an employee who owns 10% or more of the outstanding
shares of voting stock of the Company (a "10% Stockholder"), the exercise price
may not be less than 110% of the fair market value on the date of grant. The
exercise price of each non-qualified option granted under the plan may not be
less than the fair market value of the Common Stock on the date of grant.
Options granted under the plan may not be exercised after the tenth anniversary
(or the fifth anniversary in the case of an option granted to a 10% Stockholder)
of their grant.
30
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 21, 1996, with
respect to (i) persons known to the Company to be beneficial holders of five
percent or more of the outstanding shares of Common Stock, (ii) named executive
officers and directors of the Company and (iii) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL
OWNERSHIP(2)
---------------------
BENEFICIAL OWNER(1) SHARES %
- ------------------------------------------------------------------------------------ ---------- ---------
<S> <C> <C>
Concord Partners II, L.P. and related entities(3)................................... 1,717,708 16.7
535 Madison Avenue
New York, NY 10022
The Capital Group Companies, Inc.(4)................................................ 775,000 7.6
333 South Hope Street
Los Angeles, CA 90071
Kummell Investments Limited(5)...................................................... 530,698 5.2
Suite 922C
Europort, Gibraltar (via London)
ML Oklahoma Venture Partners, Limited Partnership(6)................................ 509,174 5.0
5100 East Skelly Drive, Suite 1060
Tulsa, OK 74135
Paul A. Brown, M.D.................................................................. -- --
Director
Herbert J. Conrad................................................................... 18,375 *
Director(7)
Michael E. Herbert.................................................................. 6,250 *
Director(8)
Louis M. Sherwood, M.D.............................................................. 12,375 *
Director(9)
Don E. Spyrison..................................................................... 419,263 4.1
Director(10)
William A. Hagstrom(11)............................................................. 338,358 3.3
Chairman of the Board, President and
Chief Executive Officer
Socrates H. Choumbakos(12).......................................................... 123,120 1.2
Vice President Corporate Development, Chief
Financial Officer and Secretary
Mark G. Dimitroff(13)............................................................... 116,631 1.2
Vice President and General Manager
UroDiagnostics Group
Robert W. Veltri, Ph.D.(14)......................................................... 119,274 1.2
Vice President and General Manager
UroSciences Group
Kathryn L.W. Ingerly(15)............................................................ 8,000 *
Vice President Disease Management
Information Systems
All executive officers, directors and nominees as a
group (11 persons)(16)............................................................ 1,192,979 11.3
</TABLE>
- ------------------------
* Less than 1%.
31
<PAGE>
(l) Each beneficial owner's percentage ownership is determined by assuming that
options, warrants and other convertible securities that are held by such
person (but not those held by any other person) and that are exercisable or
convertible within 60 days have been exercised or converted.
(2) Unless otherwise noted, the Company believes that all persons named in the
above table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them.
(3) Includes 1,124,028 shares held by Concord Partners II, L.P., which include
86,527 shares issuable upon the exercise of certain stock purchase warrants,
and 256,700 shares held by Concord Partners Japan, Limited, which include
5,170 shares issuable upon the exercise of certain stock purchase warrants,
each of which is a private venture capital fund managed by Dillon, Read &
Co., Inc. ("Dillon Read"). Also includes 28,290 shares held by Lexington
Partners III, L.P., and 13,143 shares held by Lexington Partners IV, L.P.,
which include 800 shares issuable upon the exercise of certain stock
purchase warrants, each of which is a private investment fund for certain
Dillon Read affiliated persons, managed by Dillon Read, and 295,547 shares
held by Dillon Read as agent for certain affiliated persons of which 13,226
shares are issuable upon the exercise of certain stock purchase warrants.
Information with respect to such beneficial owners was obtained from their
report on Schedule 13G dated February 13, 1997, as received by the Company,
and from the Company's stock records.
(4) Information with respect to the ownership of such beneficial owner was
obtained from its report on Schedule 13G dated February 12, 1997, as
received by the Company.
(5) The beneficial owner's shares set forth in the table include 40,000 shares
of Common Stock issuable upon exercise of certain stock purchase warrants.
Information with respect to the ownership of such stockholder was obtained
from its report on Schedule 13G dated February 14, 1997, as received by the
Company.
(6) The beneficial owner's shares set forth in the table include 12,539 shares
of Common Stock issuable upon the exercise of certain stock purchase
warrants. Joe D. Tippens, who served as a director of the Company from May
1991 through February 17, 1997, is a limited partner of the general partner
of ML Oklahoma Venture Partners, Limited Partnership ("ML Oklahoma"), and a
consultant to MLVC Inc., the management company to ML Oklahoma, and may be
deemed to be the beneficial owner of the 509,174 shares held by ML Oklahoma
set forth in the table. Mr. Tippens disclaims beneficial ownership of such
shares. Information with respect to such stockholder was obtained from its
report on Schedule 13G dated February 13, 1997, as received by the Company.
(7) The beneficial owner's shares set forth in the table include 9,375 shares of
Common Stock issuable upon the exercise of certain stock options.
(8) The beneficial owner's shares set forth in the table include 6,250 shares of
Common Stock issuable upon the exercise of certain stock options.
(9) The beneficial owner's shares set forth in the table include 9,375 shares of
Common Stock issuable upon the exercise of certain stock options.
(10) The Woodlands Venture Partners, L.P. is the general partner of The
Woodlands Venture Fund, L.P, a stockholder of the Company. Don E. Spyrison
is a general partner of The Woodlands Venture Partners, L.P. Because of
these relationships, Mr. Spyrison may be deemed to be the beneficial owner
of the 403,859 shares held by The Woodlands Venture Fund, L.P., which
include 39,244 shares of Common Stock issuable upon exercise of certain
stock purchase warrants, and 2,646 shares held by The Woodlands Venture
Partners, L.P. Mr. Spyrison disclaims such beneficial ownership.
(11) The beneficial owner's shares set forth in the table include 105,316 shares
of Common Stock issuable upon the exercise of certain stock options.
32
<PAGE>
(12) The beneficial owner's shares set forth in the table include 89,120 shares
of Common Stock issuable upon the exercise of certain stock options.
(13) The beneficial owner's shares set forth in the table include 39,587 shares
of Common Stock issuable upon the exercise of certain stock options.
(14) The beneficial owner's shares set forth in the table include 45,440 shares
of Common Stock issuable upon the exercise of certain stock options.
(15) The beneficial owner's shares set forth in the table include 8,000 shares
of Common Stock issuable upon the exercise of certain stock options.
(16) See notes (7) through (15) to this table. The beneficial owners' shares set
forth in this table include an aggregate of 373,040 shares of Common Stock
issuable upon the exercise of certain stock options and warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company paid consulting fees to Dr. Paul A. Brown, a director of the
Company, for consultation on business and scientific matters totaling $36,000
for 1996.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS INCLUDED IN THIS REPORT:
<TABLE>
<CAPTION>
1. FINANCIAL STATEMENTS PAGE
-----
<S> <C>
Report of Independent Public Accountants...................................... F-2
Balance Sheets as of December 31, 1996 and 1995............................... F-3
Statements of Operations for the years ended December 31, 1996, 1995 and
1994........................................................................ F-4
Statements of Stockholders' Equity for the years ended December 31, 1996, 1995
and 1994.................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994........................................................................ F-6
Notes to Financial Statements................................................. F-7
</TABLE>
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
(C) EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on
Form 10-K. All exhibits not so designated are incorporated by reference to a
prior filing as indicated.
Exhibits designated by the symbol + are management contracts or compensatory
plans or arrangements that are required to be filed with this report pursuant to
this Item 14.
UroCor undertakes to furnish to any stockholder so requesting a copy of any
of the following exhibits upon payment to the Company of the reasonable costs
incurred by Company in furnishing any such exhibit.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-3182), filed with the Commission on April 3, 1996).
3.2 Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (Reg. No. 333-3182), filed with the Commission on April 3, 1996).
10.1+ The UroCor, Inc. Amended and Restated 1992 Stock Option Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (Reg. No. 333-3182), filed with the Commission on
April 3, 1996).
10.2 Distribution Agreement dated December 30, 1994, between IAF Biovac Inc. and UroCor, Inc., and Letter
Agreement dated December 30, 1994, between IAF Biovac Inc. and UroCor, Inc. (Confidential Treatment
granted pursuant to Rule 406 under the Securities Act) (incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-3182), filed with the Commission on April 3, 1996).
10.3 Lease Agreement dated April 15, 1994, between Presbyterian Health Foundation and UroCor, Inc.
(incorporated by reference to the Registrant's Registration Statement on Form S-1 (Reg. No.
333-3182), filed with the Commission on April 3, 1996).
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.4* Letter dated May 9, 1996, amending Lease Agreement dated April 15, 1994, between Presbyterian Health
Foundation and UroCor, Inc.
10.5+ Employment Agreement dated January 1, 1990, between William A. Hagstrom and UroCor, Inc. (incorporated
by reference to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-3182), filed with
the Commission on April 3, 1996).
10.6+ Employment Agreement dated April 23, 1990, between Mark Dimitroff and UroCor, Inc. (incorporated by
reference to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-3182), filed with the
Commission on April 3, 1996).
10.7+ Employment Agreement dated September 4, 1990, between Robert Veltri and UroCor, Inc. (incorporated by
reference to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-3182), filed with the
Commission on April 3, 1996).
10.8+ Employment Agreement dated June 1, 1992, between Socrates Choumbakos and UroCor, Inc. (incorporated by
reference to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-3182), filed with the
Commission on April 3, 1996).
10.9+ Employment Agreement dated April 5, 1996, between Kathryn L.W. Ingerly and Urocor, Inc. (incorporated
by reference to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (Reg. No.
333-3182), filed with the Commission on May 10, 1996).
10.10+ Form of Indemnification Agreement between UroCor, Inc. and each of the individuals named in Schedule
10.9 thereto (incorporated by reference to the Registrant's Registration Statement on Form S-1 (Reg.
No. 333-3182), filed with the Commission on April 3, 1996).
10.11+* 1996 Management Incentive Compensation Plan.
10.12 Registration Rights Agreement dated June 2, 1995, among UroCor, Inc. and the stockholders named therein
(incorporated by reference to the Registrant's Registration Statement on Form S-1 (Reg. No.
333-3182), filed with the Commission on April 3, 1996).
10.13 Master Equipment Lease dated May 17, 1995, between Financing for Science International, Inc. and
UroCor, Inc., and Commitment Letter dated March 18, 1996, between Financing for Science
International, Inc. and UroCor, Inc. (incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Reg. No. 333-3182), filed with the Commission on April 3, 1996).
10.14 Master Lease Agreement dated June 26, 1993, between Linc Capital Management Services, Ltd. and
CytoDiagnostics, Inc., as amended by Addendum No. 001 to Master Lease Agreement dated June 26, 1993
between Linc Capital management Services, Ltd. and CytoDiagnostics, Inc., Addendum No. 002 to Master
Lease Agreement dated July 19, 1993, between Linc Capital Management Services, Ltd. and
CytoDiagnostics, Inc., Addendum No. 003 to Master Lease Agreement dated October 8, 1993, between Linc
Capital Management Services, Ltd. and CytoDiagnostics, Inc., and Addendum No. 004 to Master Lease
Agreement dated December 22, 1994, between Linc Capital Management Services, Ltd. and UroCor, Inc.
(incorporated by reference to the Registrant's Registration Statement on Form S-1 (Reg. No.
333-3182), filed with the Commission on April 3, 1996).
11.1* Statement Regarding Computation of Per Share Earnings.
23.1* Consent of Arthur Andersen LLP.
</TABLE>
35
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of December 31, 1996 and 1995............................................................ F-3
Statements of Operations for the years ended December 31, 1996, 1995 and 1994.............................. F-4
Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994.................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994.............................. F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
UroCor, Inc.:
We have audited the accompanying balance sheets of UroCor, Inc. (a Delaware
corporation) as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of UroCor, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
January 24, 1997
F-2
<PAGE>
UROCOR, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 15,796,070 $ 3,125,296
Short-term marketable investments................................................ 5,975,500 --
Accounts receivable, net of allowance for doubtful accounts of $1,123,562 in 1996
and $982,046 in 1995........................................................... 8,188,715 4,405,100
Prepaid expenses................................................................. 666,662 421,648
Laboratory supplies, at average cost............................................. 683,408 234,145
Other current assets............................................................. 530,796 119,862
------------- -------------
Total current assets......................................................... 31,841,151 8,306,051
------------- -------------
LONG-TERM MARKETABLE INVESTMENTS................................................... 11,703,521 --
PROPERTY AND EQUIPMENT, net........................................................ 4,745,662 2,443,737
INTANGIBLE AND OTHER ASSETS, net................................................... 1,979,575 1,743,722
------------- -------------
Total assets................................................................. $ 50,269,909 $ 12,493,510
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 1,960,446 $ 553,489
Accrued compensation............................................................. 1,225,976 873,590
Other accrued liabilities........................................................ 114,352 114,862
Current installments of obligations under capital leases......................... 623,446 860,088
------------- -------------
Total current liabilities.................................................... 3,924,220 2,402,029
LINE OF CREDIT, long-term.......................................................... -- 700,000
OBLIGATIONS UNDER CAPITAL LEASES, net of current installments...................... 659,131 966,485
------------- -------------
Total liabilities............................................................ 4,583,351 4,068,514
------------- -------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value--authorized 6,000,000 shares at
December 31, 1996 and 10,132,791 shares at December 31, 1995; issued in series;
no shares outstanding at December 31, 1996 and 5,706,395 shares outstanding at
December 31, 1995.............................................................. -- 57,064
Class A stock, $.01 par value--no shares authorized at December 31, 1996 and
590,674 shares at December 31, 1995; no shares issued and outstanding at
December 31, 1996 and 513,093 shares issued and outstanding at December 31,
1995........................................................................... -- 5,131
Class B stock, $.01 par value--authorized, issued and outstanding shares; no
shares at December 31, 1996 and 66,666 shares at December 31, 1995............. -- 667
Common stock, $.01 par value, authorized 20,000,000 shares at December 31, 1996
and 8,700,000 shares at December 31, 1995; 10,101,307 shares issued and
outstanding at December 31, 1996 and 69,188 shares issued and outstanding at
December 31, 1995.............................................................. 101,013 692
Additional paid-in capital....................................................... 57,576,724 22,716,005
Accumulated deficit.............................................................. (11,991,179) (14,354,563)
------------- -------------
Total stockholders' equity................................................... 45,686,558 8,424,996
------------- -------------
Total liabilities and stockholders' equity................................... $ 50,269,909 $ 12,493,510
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
UROCOR, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE............................................................. $ 26,522,205 $ 19,758,170 $ 14,531,008
OPERATING EXPENSES:
Direct cost of services and products.............................. 9,965,639 7,353,676 5,891,487
Selling, general and administrative expenses...................... 12,735,294 9,423,216 8,764,598
Research and development.......................................... 2,447,501 2,267,102 1,969,076
------------- ------------- -------------
Total operating expenses........................................ 25,148,434 19,043,994 16,625,161
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS....................................... 1,373,771 714,176 (2,094,153)
OTHER INCOME (EXPENSE):
Interest income................................................... 1,215,144 108,983 103,992
Interest expense.................................................. (225,531) (290,473) (307,239)
------------- ------------- -------------
Total other income (expense).................................... 989,613 (181,490) (203,247)
------------- ------------- -------------
Income (loss) before income taxes................................. 2,363,384 532,686 (2,297,400)
Income taxes...................................................... -- -- --
------------- ------------- -------------
NET INCOME (LOSS)................................................. $ 2,363,384 $ 532,686 $ (2,297,400)
------------- ------------- -------------
NET INCOME (LOSS) PER SHARE....................................... $ .24 $ .07 $ (.38)
------------- ------------- -------------
------------- ------------- -------------
SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE.............. 9,831,546 7,295,548 6,104,035
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
UROCOR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK--ISSUED IN SERIES
CLASS A STOCK CLASS B STOCK COMMON STOCK
----------------------- ---------------------- ---------------------- ------------------------
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE
---------- ----------- --------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993... 3,728,678 $ 37,287 513,093 $ 5,131 66,666 $ 667 -- $ --
Stock issuance--Series D....... 1,154,397 11,544 -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- --------- ----- ----------- -----------
BALANCE AT DECEMBER 31, 1994... 4,883,075 $ 48,831 513,093 $ 5,131 66,666 $ 667 -- $ --
Stock issuance--Series E/EG.... 823,320 8,233 -- -- -- -- -- --
Exercise of stock options...... -- -- -- -- -- -- 69,188 692
Net income..................... -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- --------- ----- ----------- -----------
BALANCE AT DECEMBER 31, 1995... 5,706,395 $ 57,064 513,093 $ 5,131 66,666 $ 667 69,188 $ 692
Stock issuance--Conversion of
Preferred, Class A, and Class
B............................ (5,706,395) (57,064) (513,093) (5,131) (66,666) (667) 6,482,360 64,824
Initial Public Offering........ -- -- -- -- -- -- 3,450,000 34,500
Exercise of warrants........... -- -- -- -- -- -- 63,059 630
Exercise of stock options...... -- -- -- -- -- -- 36,700 367
Stock Option--Compensation
Expense...................... -- -- -- -- -- -- -- --
Net income..................... -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- --------- ----- ----------- -----------
BALANCE AT DECEMBER 31, 1996... -- $ -- -- $ -- -- $ -- 10,101,307 $ 101,013
---------- ----------- --------- ----------- --------- ----- ----------- -----------
---------- ----------- --------- ----------- --------- ----- ----------- -----------
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
------------ ------------- ------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993... $ 13,913,988 $ (12,589,849) $1,367,224
Stock issuance--Series D....... 4,787,326 -- 4,798,870
Net loss....................... -- (2,297,400) (2,297,400)
------------ ------------- ------------
BALANCE AT DECEMBER 31, 1994... $ 18,701,314 $ (14,887,249) $3,868,694
Stock issuance--Series E/EG.... 3,989,567 -- 3,997,800
Exercise of stock options...... 25,124 -- 25,816
Net income..................... -- 532,686 532,686
------------ ------------- ------------
BALANCE AT DECEMBER 31, 1995... $ 22,716,005 $ (14,354,563) $8,424,996
Stock issuance--Conversion of
Preferred, Class A, and Class
B............................ (1,962) -- --
Initial Public Offering........ 34,515,359 -- 34,549,859
Exercise of warrants........... 181,903 -- 182,533
Exercise of stock options...... 35,812 -- 36,179
Stock Option--Compensation
Expense...................... 129,607 -- 129,607
Net income..................... -- 2,363,384 2,363,384
------------ ------------- ------------
BALANCE AT DECEMBER 31, 1996... $ 57,576,724 $ (11,991,179) $45,686,558
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
UROCOR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ 2,363,384 $ 532,686 $ (2,297,400)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................... 1,115,994 875,557 681,261
Stock option compensation expense............................................... 129,607 -- --
Conversion of accrued interest on convertible promissory note................... -- -- 37,333
Other........................................................................... 711 4,480 5,789
Changes in current assets and liabilities:
Increase in accounts receivable............................................... (3,783,615) (1,944,991) (744,191)
Increase in prepaid expense................................................... (245,014) (142,600) (77,745)
(Increase) decrease in laboratory supplies.................................... (449,263) 89,188 (216,097)
Increase in other current assets.............................................. (410,934) (79,901) (37,761)
Increase in accounts payable.................................................. 1,406,957 101,249 46,031
Increase in accrued compensation.............................................. 352,386 188,776 14,735
Increase (decrease) in other accrued liabilities.............................. (516) (157,219) 151,548
------------- ------------ ------------
Net cash provided by (used in) operating activities......................... 479,697 (532,775) (2,436,497)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term marketable investments, net of maturities............... (5,975,500) -- --
Purchases of long-term marketable investments................................... (11,703,521) -- --
Capital expenditures............................................................ (3,414,678) (1,362,599) (987,261)
Proceeds from capital leases.................................................... 385,511 845,238 700,065
Intangible and other assets..................................................... (242,278) (692,973) (923,181)
------------- ------------ ------------
Net cash used in investing activities....................................... (20,950,466) (1,210,334) (1,210,377)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock issuances............................................... 34,549,859 3,997,800 3,734,076
Proceeds from exercise of stock options......................................... 36,179 25,816 --
Proceeds from exercise of warrants.............................................. 182,533 -- --
Principal payments under capital lease obligations and other indebtedness....... (927,028) (678,135) (456,991)
Proceeds from line of credit.................................................... 600,000 1,200,000 1,000,000
Payments on line of credit...................................................... (1,300,000) (1,500,000) --
------------- ------------ ------------
Net cash provided by financing activities................................... 33,141,543 3,045,481 4,277,085
------------- ------------ ------------
Net increase in cash and cash equivalents......................................... 12,670,774 1,302,372 630,211
CASH AND CASH EQUIVALENTS, beginning of year...................................... 3,125,296 1,822,924 1,192,713
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.......................................... $ 15,796,070 $ 3,125,296 $ 1,822,924
------------- ------------ ------------
------------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................................... $ 198,476 $ 262,896 $ 237,620
Cash paid for income taxes...................................................... 48,000 18,000 --
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
1994--Conversion of convertible promissory notes into Series D Preferred Stock
in the amount of $1,075,940, including accrued interest.
1996--Conversion of all outstanding shares of the Company's Convertible
Preferred Stock, Class A Stock and Class B Stock into Common Stock prior to the
closing of the Company's initial public offering.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE COMPANY:
UroCor, Inc. ("the Company"), a Delaware corporation, provides a broad array
of diagnostic services and expects to provide information services and
therapeutic products to urologists and managed care organizations across the
U.S. The Company assists its customers to better manage their patients with
urological cancers and other complex urological diseases.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) USE OF ESTIMATES. The preparation of these financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
(b) CASH EQUIVALENTS AND MARKETABLE INVESTMENTS. The Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. Pursuant to the Company's investment policy, idle and
excess funds are invested in high grade, fixed income securities generally for
no more than two years. These securities are classified as Available-for-Sale as
of December 31, 1996. Marketable securities at December 31, 1996 consist
primarily of debt securities with maturities as great as two years. The
aggregate cost of marketable securities at December 31, 1996 was approximately $
17.7 million. The Company considers any net unrealized gain or loss on these
investments to be temporary, and reflects such gains or losses as a component of
stockholders' equity. As of December 31, 1996, there was not a material net
unrealized gain or loss on these investments.
(c) PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at the inception of the lease.
Depreciation on property and equipment is calculated on the straight-line
basis over the estimated useful lives of the assets. Equipment held under
capital leases and leasehold improvements are amortized on the straight-line
basis over the shorter of the remaining lease term or the economic useful life
of the asset. The Company assesses impairment under the Financial Accounting
Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be disposed of".
(d) SOFTWARE DEVELOPMENT COSTS. Certain internal costs for software
development relating to the Company's information services are capitalized as
property and equipment when incurred. Capitalization begins when the project
reaches technological feasibility and ceases when the product is ready for
release. Amortization of capitalized software development costs is provided over
the estimated economic life of the software, generally two or more years, using
the straight-line method. Capitalized software development costs are reviewed
annually for impairment. Internal software development costs which were
capitalized during the years ended December 31, 1996, 1995 and 1994 were
$346,000, $35,000, and $0, respectively.
(e) INTANGIBLE AND OTHER ASSETS. The Company has acquired options,
licenses, and distribution rights and applied for patents for various diagnostic
and therapeutic technologies or products. The costs related to such rights are
capitalized and included in intangible and other assets in the accompanying
balance sheets. Such costs are amortized over the estimated economic life of the
related technologies or products.
(f) RESEARCH AND DEVELOPMENT. The Company conducts research and
development activities internally and also engages scientists and clinicians at
major academic and research institutions to conduct
F-7
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
certain product development and clinical evaluations work for specific
diagnostic products and technologies. Contracts covering external research
specify periodic payment terms and the nature of the work required and, in some
cases, may extend for a year or more. Internal research and development costs
are expensed as incurred, and external research and development contract costs
are recognized as such amounts are payable over the contract period. At December
31, 1996 the Company had commitments under external research contracts totaling
approximately $378,000 for 1997 and $101,000 for 1998.
(g) INCOME TAXES. The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes".
Under the provisions of SFAS No. 109, deferred income taxes are recorded, where
appropriate, to reflect the estimated future tax effects of differences between
financial statement and tax bases of assets and liabilities.
(h) REVENUE. Revenue is recognized when products are sold or services are
rendered. Revenue subject to Medicare or third-party reimbursement is recorded
at estimated reimbursable amounts. The Company receives a significant portion of
its revenue from tests performed principally for beneficiaries of the Medicare
program. In 1996, 1995 and 1994 , approximately 52%, 58% and 58%, respectively,
of the Company's revenue was derived from tests performed principally for
beneficiaries of the Medicare program. Under law and regulation, for most of the
tests performed for Medicare beneficiaries, the Company must accept
reimbursement allowed by Medicare as payment in full. Substantially all of the
Company's current services receive reimbursement at various rates or on a
case-by-case basis. The Company is not aware of any material claims, disputes or
unresolved matters relating to Medicare or other third-party payors.
(i) NET INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT. Net
income (loss) per common share and common share equivalents has been computed
based upon the weighted average number of common shares and common share
equivalents outstanding during each period. Common share equivalents recognize
the potential dilutive effects of the conversion of preferred stock to common
stock and the impact of outstanding options and warrants to acquire common stock
using the treasury stock method and the Company's estimate of the fair value of
common stock at the end of each year. Pursuant to the rules of the Securities
and Exchange Commission, common and common share equivalent shares issued in the
12 months prior to March 29, 1996, have been included in the computation of
common equivalent shares as if they were outstanding for all periods presented,
including loss years where the impact of the incremental shares is antidilutive.
(j) ACCRUED COMPENSATION. Accrued compensation consists of quarterly
commissions for sales representatives (usually paid the month following the
quarter's end), bonus accruals for non-sales personnel (usually paid annually
following the end of the year), and recurring monthly accruals.
(j) RECLASSIFICATIONS. Certain reclassifications have been made in the
1995 balance sheet to conform with the 1996 presentation. Total assets and net
income for 1995 were not affected by the reclassifications.
F-8
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. PROPERTY AND EQUIPMENT:
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Laboratory equipment.............................................. $ 2,068,774 $ 1,606,846
Computer equipment and software................................... 3,996,853 1,586,961
Office furniture, equipment and improvements...................... 1,590,672 1,064,970
------------ ------------
7,656,299 4,258,777
Less--Accumulated depreciation and amortization................... (2,910,637) (1,815,040)
------------ ------------
$ 4,745,662 $ 2,443,737
------------ ------------
------------ ------------
</TABLE>
The depreciable lives for property and equipment are as follow:
<TABLE>
<CAPTION>
YEARS
----------
<S> <C>
Laboratory equipment.............................................................. 3.5 to 5
Computer equipment and software................................................... 3.5 to 5
Office furniture, equipment and improvements...................................... 3.5 to 10
</TABLE>
4. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Licenses, options, patents and trademarks......................... $ 591,036 $ 342,807
Less--Accumulated amortization.................................... (9,740) (3,000)
------------ ------------
581,296 339,807
Distribution agreement (Note 7)................................... 1,250,000 1,250,000
Deposits and other................................................ 148,279 153,915
------------ ------------
$ 1,979,575 $ 1,743,722
------------ ------------
------------ ------------
</TABLE>
5. LINE OF CREDIT:
In March 1994, the Company obtained a $1.5 million line of credit secured by
accounts receivable and a lien on all other tangible assets of the Company,
which excluded equipment under capital leases. In February 1996 this line of
credit was renewed to February 1997 and expanded to $3.0 million at an annual
interest rate of prime plus 1.5%. There was no balance outstanding on the line
of credit at December 31, 1996. Average balances outstanding under this line of
credit have been $55,000 and $882,000 during 1996 and 1995, with an average
interest rate of 9.80% and 10.58% respectively. Interest was paid monthly at
prime (8.25% at December 31, 1996) plus 1.5%. The Company does not intend to
renew this line of credit.
6. LEASES:
The Company has used capital lease financing arrangements to acquire certain
equipment. The agreements provide for the Company to arrange for the equipment
purchase, pay the vendor and receive
F-9
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. LEASES: (CONTINUED)
reimbursement from the lessor. The lease payments paid by the Company are
generally for four years and provide for repayment of the equipment cost plus an
interest charge. The Company accounts for these arrangements as capital leases
with the capital asset amortized over the lease term. At December 31, 1996 and
1995, the gross amount of property and equipment and related amortization
recorded under capital leases was as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Laboratory equipment.............................................. $ 1,694,941 $ 1,490,575
Computer equipment................................................ 954,282 913,639
Office furniture and equipment.................................... 748,140 629,304
------------ ------------
3,397,363 3,033,518
Less--Accumulated depreciation and amortization................... (2,233,152) (1,337,647)
------------ ------------
$ 1,164,211 $ 1,695,871
------------ ------------
------------ ------------
</TABLE>
The Company also has noncancelable operating leases for laboratory
facilities, office space and equipment that expire over the next nine years,
with options to extend. Rental expense for operating leases during 1996, 1995
and 1994 approximated $503,000, $352,000 and $236,000, respectively.
Future minimum lease commitments as of December 31, 1996 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------ ------------
<S> <C> <C>
1997.............................................................. $ 729,582 $ 547,533
1998.............................................................. 486,795 602,142
1999.............................................................. 219,771 670,489
2000.............................................................. 8,722 685,843
2001.............................................................. -- 660,096
Thereafter (laboratory and office space to 2005).................. -- 2,890,618
------------ ------------
Total minimum lease payments...................................... 1,444,870 $ 6,056,721
------------
------------
Less--Amount representing interest................................ (162,295)
------------
Total obligations under capital leases............................ 1,282,575
Less--Current installments of obligations under capital leases.... (623,444)
------------
Obligation under capital leases, net of current installments...... $ 659,131
------------
------------
</TABLE>
In June 1995, the Company consolidated all of its operations, research,
marketing and administrative functions into a new building constructed by and
leased from a shareholder of the Company. The Company's 10 year lease on this
facility currently covers 56,000 square feet with options available on
additional space up to the entire 110,000 square feet of the building. Future
monthly rentals are included in the operating lease commitments above.
In March 1996, the Company received a commitment for a new $1.5 million
lease financing arrangement for capital expenditures through March 1997. There
has been only one financing under this
F-10
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. LEASES: (CONTINUED)
arrangement since its inception for approximately $214,000. The Company does not
intend to renew this leasing facility.
7. COMMITMENTS AND CONTINGENCIES:
(a) Distribution Agreement. On December 30, 1994, the Company entered into a
product distribution agreement which grants the Company exclusive marketing
rights in the United States covering a therapeutic product for bladder cancer
currently undergoing regulatory review by the U.S. Food and Drug Administration
("FDA"). In connection with this agreement, the Company made payments to the
product's manufacturer of $750,000 and $500,000 in 1994 and 1995, respectively.
These payments, totaling $1.25 million, are included in intangible and other
assets in the accompanying balance sheets at December 31, 1996 and 1995. The
Company will be required to make a milestone payment of $1.75 million when and
if regulatory approval by the FDA is received. If the product is not approved by
the FDA within a specified time period, the manufacturer must repay the Company
an amount equivalent to all amounts previously paid by the Company.
The aggregate payments of $3.0 million to be paid under the agreement,
assuming FDA approval, will be amortized over the shorter of the expected
economic life of the product or the distribution agreement, based on expected
unit sales of the product. Assuming and upon approval of the product by the FDA,
the Company will be required to conduct specified sales, marketing and certain
other activities with respect to the product and meet certain minimum unit sales
levels. The initial term of the distribution agreement is for five years, and
the Company has an option to renew for an additional five years, at no cost, if
the minimum sales levels are attained.
(b) Employment Agreements. Certain key employees of the Company have entered
into arrangements regarding their terms of employment. While none of such
arrangements provide for fixed periods of employment, they do provide for
continued payment of salaries for up to six months following termination without
cause, aggregating approximately $440,000.
8. RELATED PARTY TRANSACTIONS:
The Company paid fees for consulting services to certain members of the
Board of Directors or their affiliates. These fees are included in expenses and
total approximately $36,000, $42,000 and $59,000 in 1996, 1995 and 1994,
respectively. In addition, the Company recognized rent expense totaling
$414,000, $167,000 and $0 for 1996, 1995 and 1994 respectively, related to its
facilities which are leased from a shareholder. In management's opinion, these
transactions were conducted on terms no less favorable than those which could
have been obtained from unrelated third parties.
9. STOCKHOLDERS' EQUITY:
The Company's initial public offering was consummated on May 22, 1996,
pursuant to which the Company sold a total of 3,450,000 common shares at an
offering price to the public of $11 per share. The net proceeds to the Company
were approximately $34.5 million after deducting expenses and underwriting
discount. All outstanding shares of the Company's Convertible Preferred Stock,
Class A Stock and Class B Stock were automatically converted into shares of
common stock immediately prior to the closing of the offering.
F-11
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
9. STOCKHOLDERS' EQUITY: (CONTINUED)
Capital Stock. In March 1996, the Company restated its Certificate of
Incorporation increasing the number of authorized shares of common stock from
8,700,000 to 20,000,000 and authorizing 6,000,000 shares of Convertible
Preferred Stock. At December 31, 1996, the Company had 10,101,307 shares of
common stock outstanding.
Warrants. At December 31, 1996, there were warrants outstanding for the
purchase of an aggregate of 425,251 of the Company's common stock exercisable at
prices ranging from $1.25 to $5.50 per share and expiring from October 1998 to
May 2001. No value was attributed to these warrants in connection with their
issuances in 1994 through 1995. A summary of the warrants outstanding is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ------------------------
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
WARRANTS PER SHARE WARRANTS PER SHARE WARRANTS PER SHARE
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.... 486,310 $ 1.25 - 5.50 321,646 $ 1.25 - 5.50 85,600 $ 1.25
Granted........................... -- 164,664 $ 5.00 236,046 $ 4.30 - 5.50
Exercised......................... 63,059 $ 1.25 - 4.30 -- --
--------- --------- ---------
Outstanding, end of year.......... 423,251 $ 1.25 - 5.50 486,310 $ 1.25 - 5.50 321,646 $ 1.25 - 5.50
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. STOCK OPTION PLAN:
The Company has adopted a stock option plan, the "1992 Stock Option Plan".
The Company accounts for this plan under APB Opinion No. 25, under which no
compensation cost has been recognized except for the December 1995 stock grant
described below.
Under the Plan 1,400,000 shares of common stock were reserved as incentive
and non-incentive options for employees and officers and non-incentive options
for directors and independent contractors of the Company. These options vest
over three to five years, expire ten years after issuance and have an exercise
price equal to the stock's fair market value on the date of grant.
A summary of the status of the plan is presented below:
<TABLE>
<CAPTION>
1996
------------------------- 1995 1994
WTD-AVERAGE -------------------------- ----------------------------
EXERCISE WTD-AVERAGE WTD-AVERAGE
SHARES PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ------------- --------- --------------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year... 982,344 $ 1.10 706,994 $ .67 284,000 $ .44
Granted.......................... 149,000 10.83 403,250 1.66 423,494 .82
Exercised........................ (36,700) .99 (69,187) .37 -- --
Cancellations.................... (41,100) 2.52 (58,713) .54 (500) .75
---------- --------- ----- --------- ---
Outstanding, end of year......... 1,053,544 $ 2.43 982,344 $ 1.10 706,994 $ .67
---------- --------- ---------
---------- --------- ---------
Exercisable, end of year......... 520,091 $ 1.04 341,870 $ .68 269,320 $ .57
---------- --------- ---------
---------- --------- ---------
</TABLE>
In December 1995, the Company issued options to employees covering 295,000
shares of common stock exercisable at the then estimated fair market value of
$1.75 per share. Considering the Company's
F-12
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. STOCK OPTION PLAN: (CONTINUED)
anticipated public offering price per share and other events, in April 1996 the
Company estimated that the adjusted fair value of the common stock at the date
of grant of these options exceeded the exercise price of the options.
Accordingly, the Company will recognize imputed compensation expense as a
non-cash charge to operations, aggregating approximately $443,000 over the
actual vesting period of these options of three to five years. During 1996 and
1995 the Company recognized approximately $129,000 and $0, respectively of
compensation expense related to these options.
Had compensation cost for this plan been determined consistent with FASB
Statement No. 123., the Company's net income and earnings per share would have
been reduced to the following proforma amounts:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C> <C>
Net Income......................................... As Reported $ 2,363,384 $ 532,686
Proforma 2,244,765 518,486
Net Income per Share............................... As Reported $.24 $.07
Proforma .23 .07
Weighted-average fair value of options granted..... $5.87 $1.57
</TABLE>
The option pricing model used to determine an option's fair market value
considers six factors. Statement 123 allows non-public companies to omit the
volatility factor in determining an option's fair market value. Options granted
prior to May 22, 1996 were valued without the volatility factor because the
Company was not a public company prior to that time. Because of this pricing
convention and because the Statement 123 method of accounting has not been
applied to options granted prior to January 1, 1995, the resulting proforma
compensation cost impact on net income and net income per share may not be
representative of what might be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of 0%
for both years; expected volatility 73% for options granted after the initial
public offering and 0% for options granted while the Company was a not a public
company; risk-free interest rates of 6.4% and 5.6%, and expected life of 6 years
for both years.
11. EMPLOYEE BENEFIT PLAN:
The Company has established a 401(k) employee benefit plan in which
substantially all employees may participate. The Plan is funded through
voluntary employee salary deferrals. Although the Company has the discretion to
make contributions to the Plan, no such amounts have been contributed to date.
F-13
<PAGE>
UROCOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
12. INCOME TAXES:
The tax effects of the temporary differences which gave rise to deferred tax
assets and liabilities at December 31, 1996 and 1995 were:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Net operating loss carryforward................................. 2,498,410 3,642,906
Depreciation and amortization................................... (24,797) (17,889)
Allowance for doubtful accounts................................. 426,954 373,177
Alternative minimum tax carryforward............................ 80,000 24,000
Other........................................................... (73,363) (187,014)
------------- -------------
Net deferred tax asset.......................................... 2,907,204 3,835,180
Valuation allowance............................................. (2,827,204) (3,811,180)
------------- -------------
Total net deferred tax asset.................................. $ 80,000 $ 24,000
------------- -------------
------------- -------------
</TABLE>
The Company's income tax provision differed from the federal statutory rate
due to the utilization of the Company's tax net operating loss carryforward. The
annual utilization of this carryforward will be limited by Internal Revenue Code
Section 382 due to the fact that a cumulative change in ownership of more than
50% has previously occurred. Therefore, the future utilization of this net
operating loss carryforward will be limited to approximately $6.6 million of
which approximately $4.0 million, $1.5 million and $1.1 million will be
available in 1997, 1998 and subsequent years, respectively.
A valuation allowance against the net deferred tax asset has been recorded
on the basis that significant uncertainty exists regarding the realizability of
such assets, except for the amount attributable to the alternative minimum tax
credit which can be carried forward indefinitely. The net deferred tax asset is
included in other assets in the accompanying balance sheets.
F-14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UROCOR, INC.
(Registrant)
By: /s/ WILLIAM A. HAGSTROM
-----------------------------------------
William A. Hagstrom,
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: March 27, 1997.
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ WILLIAM A. HAGSTROM President and Chief
- ------------------------------ Executive Officer March 27, 1997
(William A. Hagstrom) (Principal Executive
Officer)
Vice President Corporate
/s/ SOCRATES H. CHOUMBAKOS Development, Chief
- ------------------------------ Financial Officer and March 27, 1997
(Socrates H. Choumbakos) Secretary (Principal
Financial Officer)
Director of Finance and
/s/ MICHAEL N. MCDONALD Administration and
- ------------------------------ Treasurer (Principal March 27, 1997
(Michael N. McDonald) Accounting Officer)
/s/ PAUL A. BROWN, M.D.
- ------------------------------ Director March 27, 1997
(Paul A. Brown, M.D.)
/s/ HERBERT J. CONRAD
- ------------------------------ Director March 27, 1997
(Herbert J. Conrad)
/s/ MICHAEL E. HERBERT
- ------------------------------ Director March 27, 1997
(Michael E. Herbert)
/s/ LOUIS M. SHERWOOD, M.D.
- ------------------------------ Director March 27, 1997
(Louis M. Sherwood, M.D.)
/s/ DON E. SPYRISON
- ------------------------------ Director March 27, 1997
(Don E. Spyrison)
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
UroCor, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of UroCor, Inc. included in this 1996 Annual Report to
Shareholders on Form 10-K and have issued our report thereon dated January 24,
1997. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation and qualifying
accounts for each of the three years in the period ended December 31, 1996, is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
January 24, 1997
S-1
<PAGE>
SCHEDULE II
UROCOR, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
CHARGE TO
BEGINNING COST AND CHARGE TO OTHER ENDING
DESCRIPTION BALANCE EXPENSE ACCOUNTS DEDUCTION(1) BALANCE
- --------------------------------------------------- ----------- ---------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31, 1996:
Allowance for Doubtful Accounts.................. 982,046 1,296,649 -- (1,155,133) 1,123,562
For the Year Ended December 31, 1995:
Allowance for Doubtful Accounts.................. 670,845 934,482 -- (623,281) 982,046
For the Year Ended December 31, 1994:
Allowance for Doubtful Accounts.................. 392,522 706,074 -- (427,751) 670,845
</TABLE>
- ------------------------
(1) Represents write-offs of uncollectible accounts receivable against the
allowance for doubtful accounts.
S-2
<PAGE>
EXHIBIT 10.4
(Price Edwards & Company Logo)
Oklahoma Tower
210 Park Avenue, Suite 1000
Oklahoma City, OK 73102
405/843-7474 -- FAX 405/840-2137
May 9, 1996
Mr. Michael McDonald
UroCor Corporation
800 Research Parkway
Suite 200
Oklahoma City, OK 73104
Dear Mike:
In reviewing your lease document, it appears that any space in excess of 50,000
rentable square feet should be billed back to you at $10.00 per square foot
during the first year of your lease agreement. We have measure that your
rentable square feet should be as follows:
1st Floor 2,283
2nd Floor 22,800
3rd Floor 25,975
------
51,058
------
------
Based upon our phone conversation of yesterday, it is agreed that this excess
space became effective January 1, 1996. In that these measurements exceed
50,000 square feet by 1,058 square feet and we have been charging for base
rent only, we are now billing you for excess rent on 1,058 square feet at
$10.00 per square foot, calculated as follows:
1,058 excess rentable square feet
$ 10.00 per square foot
-------
$10,580
365
-------
$ 28.99 per diem
x 121 day occupied (1/01/96 through 4/30/96)
-------
$ 3,507.79
----------
----------
We will also adjust your monthly rent by $881.67 beginning with your May
billing.
Should you have any questions, please contact me.
Sincerely,
/s/ James J. Fiedler
- ------------------------
Vice President
Accounting and Reporting
JJF/kka
cc: Randy Hogan
Dennis McGrath
<PAGE>
EXHIBIT 10.11
UROCOR, INC.
1996 MICP
- - Target parameters to include net clinical revenues at 33.3% weighting,
operating income at 33.3% and performance to strategic parameters (ex.
capital formation, new products, corporate partnerships, new ventures, etc.)
at 33.3%.
- - Provision for over achievement included as additional incentive.
- - Monthly accruals targeted to coincide with actual performance to plan.
<PAGE>
EXHIBIT 11.1
UROCOR, INC.
STATEMENT OF COMPUTATION RE PER SHARE EARNINGS
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
---------- ---------- -----------
Net income (loss) $2,363,384 $ 532,686 $(2,297,400)
---------- ---------- -----------
Divided by:
Weighted average shares outstanding (1) 9,734,331 6,725,673 5,376,042
Plus:
Supplemental shares (2) 97,215 569,875 727,993
---------- ---------- -----------
Total weighted average shares outstanding 9,831,546 7,295,548 6,104,035
---------- ---------- -----------
Earnings per share $ 0.24 $ 0.07 $ (0.38)
---------- ---------- -----------
---------- ---------- -----------
(1) Convertible Preferred Stock, Class A Stock and Class B Stock are
reflected on an "as if converted" basis for periods prior to the Company's
initial public offering. Common Stock issuable upon exercise of outstanding
options and warrants is reflected using the treasury stock method.
(2) Reflects common and common stock equivalent shares issued in the 12 months
prior to the Company's initial public offering at an exercise price below the
public offering price of $11.00 per share. After the first three months of
1996, such common stock equivalent shares are included in the calculation of
the "weighted average shares outstanding" above.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated January 24, 1997, included on pages F-2 and S-1 of the
1996 Annual Report to Shareholders on Form 10-K, into the previously filed
Registration Statement on Form S-8 (File No. 333-16075).
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET FOR DECEMBER 31, 1996 AND THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,796,070
<SECURITIES> 5,975,500
<RECEIVABLES> 9,312,277
<ALLOWANCES> 1,123,562
<INVENTORY> 683,408
<CURRENT-ASSETS> 31,841,151
<PP&E> 7,656,299
<DEPRECIATION> 2,910,637
<TOTAL-ASSETS> 50,269,909
<CURRENT-LIABILITIES> 3,924,220
<BONDS> 0
0
0
<COMMON> 101,013
<OTHER-SE> 45,585,545
<TOTAL-LIABILITY-AND-EQUITY> 50,269,909
<SALES> 0
<TOTAL-REVENUES> 26,522,205
<CGS> 0
<TOTAL-COSTS> 9,965,639
<OTHER-EXPENSES> 13,888,430
<LOSS-PROVISION> 1,294,365
<INTEREST-EXPENSE> 225,531
<INCOME-PRETAX> 2,363,384
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,363,384
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,363,384
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
